BiggerPockets Real Estate Podcast - 10 Hidden Ways to Buy Properties with Huge “Upside”

Starting point is 00:00:00 If you want to buy real estate but can't find deals that work right now, there is another option. Design your own. And I'm not talking about designing your own property. Talking about designing your own deals. Today, I'm going to share a super helpful framework for how to take a deal that looks okay or even bad on paper and turn it into a home run in the long term. This is all about finding ways to add hidden upside to your numbers. And in this episode, I'm going to show you 10. 10 different ways to do that.

Starting point is 00:00:36 Hey, everyone, Dave Meyer here, head of real estate investing at BiggerPockets. Excited to be back with you talking about some of these frameworks that I've been developing over the last couple of years that I think are particularly helpful right now. Because let me guess, you probably want to buy real estate, but no deals that you're finding online or ones that you're getting sent from your agents are really making sense. and you find yourself not sure what to do. Do you keep looking? Do you sit on the sidelines?

Starting point is 00:01:05 I think most people are in this situation because honestly, I'm in this situation too. I get it. And as I've been planning my own real estate investing for the coming year or two, I've developed and sort of refined a way of thinking about what deals make sense in today's market that has really helped me personally. It's helped me make a couple of offers already this year and get super clear about what I should and shouldn't be buying. So today I'm going to share some of these ideas with you as we discuss how to build your own deals in 2025. So the first thing you need to know, the first framework that we're

Starting point is 00:01:40 going to talk about here is what I call deal design. I talk about this in my book, start with strategy, but the general concept is that you don't actually find deals. I know in real estate, we always are talking about finding deals, but that's not really what you do. In my opinion, you find properties. You do go out and look for the physical structure that you're going to purchase. But when you talk about deals, there's actually way more to it than that. You never just go online and find this perfectly curated, designed deal that has everything that you need in it. You instead actually have to go out and make those deals.

Starting point is 00:02:18 You need to design a deal for yourself. And thinking about deal design and acquiring new properties in this way, has always been true, but I think it's more important than it has ever been. Because I'm sorry to say this. I wish this wasn't the case, but you're not going to go on the MLS or just have your agent call you up one day and have this amazing home run deal just delivered to you. If your version of being an investor is looking at Zillow doing a quick rent to price calculation and expecting a deal to pencil, you're probably going to be very disappointed. You have to build it yourself. You have to be strategic.

Starting point is 00:02:55 you have to be tactical and you need to think about the long-term operating plan for each deal you do. The question that becomes, what is a good deal design in today's day and age? So here are the things that I am personally doing. And I'm going to split this sort of into two sections. The first I'm going to share with you four philosophical ideas on my deal design, sort of like the overarching strategy of what I'm targeting when I talk to my agents and property managers and tell them what I'm looking for in deals. I'm sort of giving them these big guidelines.

Starting point is 00:03:28 And after I explain that, I'm going to get more specific about literally the things that I'm going to try and implement in my deals, the exact types of deals that I am going to be targeting, the business plans that I'm going to be using. So I'll get to that in just a minute. But first, let's talk about sort of the big overarching strategy. Number one, main focus is I'm looking for strong assets that are sitting on the market a little bit longer due to market forces. We see this in a lot of parts of the country, but the housing market is returning to some semblance of balance. It's still not where we were. It's not a healthy

Starting point is 00:04:05 housing market, but we're starting to see inventory go up. So there are more things to look at. We're also starting to see a metric called days on market increase, which is exactly what it sounds like, how long it takes to sell a property. And with these two things happen, it means that you as a buyer have more negotiating power. And that means you have an opportunity to get yourself a deal. So that's the number one thing that I'm looking for is really good assets. I'm not looking for the cheapest asset I can find. I'm not looking for the best of cash flow I can find.

Starting point is 00:04:37 I am a long-term investor. So what I want is an asset that's going to be valuable well into the future, regardless of what happens in the next year or two. That's number one. The second thing is looking at the market. I want a metro area and a neighborhood. with great fundamentals. I am not worrying too much about short-term fluctuations.

Starting point is 00:04:58 Now, I don't want to be quote-unquote catch a falling knife. I don't want to buy something and have the value immediately drop. But if my property value is flat for a year or two, I honestly, I don't care. I'm going to hold on to it for longer. I want a market that is going to be poised for growth for the next five to 10 years. And this is really important in this upside error right now because you see market. where there are great fundamentals that are experiencing some of the biggest corrections right now. So this is the opportunity.

Starting point is 00:05:30 This is the upside that I'm talking about is that you are able to perhaps buy things that have been sitting on the market and are in the midst of a correction in some of the best long-term potential cities out there. Again, don't go out and buy anything. You need to be diligent. Find those great assets. But those opportunities are starting to exist. So those are the first two things.

Starting point is 00:05:51 The third thing, and I'm curious what everyone else thinks about this, but for me, the third thing I look for is break even within the first year. It doesn't need to break even on day one, but I want to come close to break even cash flow within the first year. If I need to raise rents, if I need to do a little renovation and it takes six months for me to break even, personally, I am fine with that. And even if it's not after a renovation going to have huge sorts of cash. flow and be this amazing cash flowing asset, I'm still okay with that because again, my strategy here is looking for long-term appreciation and growth, long-term rent growth. I'm not super concerned about what happens in year one. If I were, I would just flip houses if I was just trying to make money in the current year, but I'm a long-term investor. So that's what I'm looking

Starting point is 00:06:41 for. And then the fourth thing, and this is going to be the main thing that we talk about through the remainder of this episode is that it has to have significant upside in the next two to five years, right? Because I just said that I'd care about break even in year one. I don't want it to break even for the lifetime of this investment. I wanted to really start to accelerate in growth from years two to five. It doesn't necessarily need to be in the second year. It can be the third year. It can be the fourth year.

Starting point is 00:07:09 But I need to see a path to really good performance in the first like two, three, four kind of years for. my deals to be good. So just as a reminder, the four things I just said, strong assets that you can find deals on and negotiate on. Number two was looking for markets with great fundamentals. Three is deals that can come close to break even cash flow within the first year. And then four was looking for upside in years two to five. Those are my four criteria that I'm sort of looking at right now. And I'll talk a little bit more about different upsides that you can use for your deal in just a minute. But first, let me just give you an example of what this all means. So last year, I bought a deal in the Midwest for, I think it was like $375,000. And the rents

Starting point is 00:07:56 should have been, if you were doing market rents, like $3,800 to $4,000. So in theory, it should be a 1% rule deal, which if you know anything about the 1% rule deal, that's awesome. But the listing had the rents at just $2,900 with long-term rule. renters. So when I bought this deal, was it going to cash flow? No, probably not. But within that first deal, I felt very confident that I was going to be able to break even. And actually, it is a year later, more than break even already. So that part worked out. But I also know that the rent growth upside is going to last me several more years. I know that I'm not just going to get it to 3,500 where I'm at right now. I knew last year it could get to 3,800 to 4,000. And rents are probably going to start

Starting point is 00:08:42 growing again in another year. So that gets me to 4,200. And this long-term upside of rent growth is really what I'm after. I bought a strong asset. It was built in the last 30 or 40 years, so there's relatively low capex. It has a great layout in a good school district, in a good neighborhood. And I don't need it to cash flow this year. I just wanted to be continuing to improve its performance over the next five years, 10 years, 15 years. I just went and visited this deal. I'm very happy with it. And this is the kind of deal design that I would do again and again and again. So that's just one example. You know, I talked about sort of the upside in this deal being rent growth. But I want to sort of shift our focus here to talking about the other types of upside.

Starting point is 00:09:30 If you're like me and you're looking for deals that are strong long term assets, you need to figure out your business plan for how you're going to generate that upside over the next five, 10 or 15 years. We're going to get to that, but first, we do need to take a quick break. We'll be right back. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy? Just use Indeed.

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Starting point is 00:12:45 Start your free trial and lock in 50% off your first month at resimply.com slash bigger pockets. That's R-E-S-I-M-P-L-I dot com slash bigger pockets. Hey, everyone, welcome back to the Bigger Pockets podcast. We're here talking about how to design good deals here in 2025. Before the break, we were talking about the overarching strategy, or at least my overarching strategy, you can have a different one, but I'm just sharing with you the way I'm thinking about real estate right now. And as I said, it's to find good assets that

Starting point is 00:13:21 I feel like are going to perform over the long run, and then implementing a business plan that allows you to maximize the upside of that deal over the next five or 10 years. And I mentioned earlier that rent growth is one of my personal favorite upsides, but there are nine other ones that I actually want to share with you. So let's go through each of these 10 upsides and talk about them. Number one is rent growth. I already talked a little bit about this, but I personally believe, as I read the macroeconomic tea leaves,

Starting point is 00:13:52 that there is a very strong case that macroeconomic forces are going to push rents up over the next couple of years. Of course, this isn't going to happen everywhere. It's not going to happen in every market. But if you're able to identify places with strong dynamics, I think there's a very good case that rents are going to go up. I say this for a couple of reasons. The number one is because there is just a housing shortage in the United States,

Starting point is 00:14:19 anywhere between $3 and $7 million, depending on who you ask. And even though there is sort of this glut of multifamily supply in the market right now, that is going to end. The pendulum is going to swing back in the other direction, and rent growth is likely going to continue. The other thing beyond just supply is also that houses are relatively, unaffordable and I don't think that's going to change, meaning that some people that would normally want to buy a single family home are going to keep renting and that's going to create demand for

Starting point is 00:14:48 rental properties. And so those are the reasons I think one good business plan is to find places where you think there's going to be great opportunity through rent growth, either through market forces or your own forced depreciation, which we'll talk about in just a minute. I just want to caveat, I don't necessarily think it's going to be 20, 25 where the strongest growth comes. It could be 26. It could be 27. But this is why it's an upside investment, right? You have to find that upside that might not be super obvious today, but we'll come next year or the year after.

Starting point is 00:15:20 So that was number one, rent growth. The second one is value ad. This should be no surprise to anyone, but value ad still works really well. You may heard value ad is called forced appreciation. I like calling it value ad because you could do it across a bulk. bunch of different strategies. But the basic idea is finding properties that are not being put to their highest and best use and putting them to better use. So the most obvious example of this is flipping, but you can also do this with burr. You could also do the delayed burr, which is something

Starting point is 00:15:51 I've been doing myself. Or you could just do value add just to increase the value of your rental to increase your rents even without a refinance. All of these things are possible. Most people do not want to renovate a house. They don't want to do the work. And if you're willing to do that work yourself, then I think you're going to be able to find great profits in real estate. Just to be perfectly candid, I've done a bit of value ad in my career. It's not the thing I am best at, but it is the thing I am starting to focus more on and I am trying to learn more about because I really believe that this is going to remain an excellent way to drive both short term and long term value in your portfolio over the next couple of years. So that's the second upside. First one was rent growth.

Starting point is 00:16:36 The second one is value add. The third one is owner occupied strategy. We talk about this on the show a lot about house hacking. I won't get into it into too much detail, but that is still great upside. You know, if you go and look at a property on Zillow, it may not make sense as a traditional renter. Think if it might make sense for you as house hacking or the other option for owner occupied, which I am doing for the first time right now is a live-in flip. This is basically you buy a fixer-upper, you live in it and make the improvements around you, and it can be an amazing investment because you get better financing deals than a traditional flip, and especially when it comes to flipping, way better tax benefits.

Starting point is 00:17:18 So that's the third. The fourth is not really for everyone. I totally understand not everyone is in a position to do this, but I think that buying for cash or a lower L-Elegal, LTV, a lower loan to value ratio, can be a great strategy right now. With the cost of capital as high as it is, mortgage rates remain high. Hopefully they'll come down, but they're probably going to stay relatively high for a while. Putting down more than 5%, more than 10%, more than 20%, even, can be a way to get an asset under

Starting point is 00:17:50 control and have it break even. Remember, I said that my sort of overarching philosophy is that I wanted to get close to break even over the next year or so because I want to be able to hold onto that asset for the long term. And if I'm not breaking even, I might be tempted to sell it if things get hard or one of my properties doesn't do well or whatever. You know, life just happens. And so I am willing to put 30% on a deal if it's a great asset. If I'm in a market that experience a little bit of a correction, but a straight, great fundamentals, and I can find a really good property that I am going to want to own for 20 to 30 years, and I'm in a position to be able to put 25% down, 30% down,

Starting point is 00:18:33 35, 40% down to be able to control that asset. It's going to, one, at least help me break even or potentially produce some solid cash flow on an asset that I normally wouldn't be able to do. Now, again, all of these upsides that I'm sharing with you aren't for everyone. Not everyone's going to have owner occupied. Not everyone wants to do value ad. Not everyone's going to have the cash available to put more down on their properties. What I'm trying to share with you is different plans, different strategies that you can use

Starting point is 00:19:04 to take a deal from what on paper on the MLS might look okay and turn it into a really good deal. This is the fourth one that I would consider if you have the option. The fifth one that I'm going to share with you is a little woo-woo. It's probably not what you're expecting me to say. But the fifth upside is learning. And this is a real upside. This might be the best of all upsides. But look for a deal that you can learn a lot on.

Starting point is 00:19:33 I really think that the next year or two is going to be a proving ground for a lot of investors to test your skills, to build your skills as we sort of enter this new era of the housing market. I am personally doing this. Like I just talked about how I'm doing a live and flip. I also talked about how value add isn't my strongest skill set. those two things might seem at odds with each other, but I am doing it with a partner so that I can learn. And I am giving up 50% of the profit in this deal because I care that much about learning

Starting point is 00:20:05 the business and how to do it the right way. And I think this is an enormous upside because over the next five years, 10 years, 20 years of my investing career, I am hopefully now going to have a better value add skill. I'm going to learn construction. I'm going to round out my skills as an investor. I'm going to hopefully plug one of my biggest gaps as an investor, and hopefully I'm going to do it on a deal that is fundamentally sound and has other upsides in addition. So just to review, we have talked about five upsides so far. We've talked about trying to find future rent growth, number one, value out investing, owner occupied investing, lower LTV investing, and learning. Those are five that I am personally focusing on in 2025.

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Starting point is 00:24:28 but I'm going to share five more that you can also consider if perhaps you have a different strategy or approach than I do. So number six overall upside is path of progress. You've probably heard this before, but this is trying to find neighborhoods or opportunities that are likely to appreciate. Now, investors have different feelings about quote unquote appreciation and market appreciation. This is not forced appreciation where you're doing value at. This is more like just the value of your whole neighborhood, the whole market goes up. And this is inherently a little bit riskier because a lot of it is outside of your control. You can't force the comps in your neighborhood to go up.

Starting point is 00:25:08 You can't force rents from other landlords to go up. But if you do your research and really understand a market well and study a market really, really well, and you nail it, it can be amazing. It could be one of the most dramatic ways to build equity and build well through real estate is understanding the path of progress and buying in locations where everything is going to be going up. Now, I've talked about this on other episodes. We'll talk about in the future about how to do this.

Starting point is 00:25:35 But this is things like looking where infrastructure spending. is going, where businesses are relocating to, areas that have constrained supply, but really strong demand. If you are sort of an analyst type like I am and want to take this stuff on, trying to find the path of progress and buying a deal that, again, has all the fundamentals and is in the path of progress, that is some upside that you can get pretty excited about. Number seven is something that I'm so curious about. I've thought about it so much, but I haven't really pulled the trigger on it just yet, but it's zoning upside. Now, if you're not familiar with zoning, it's basically what the city and the local government allows you to build on your plot. But a lot of

Starting point is 00:26:19 cities are changing zoning right now to allow for more density. So this means that if you own a single family home, maybe you can put an accessory dwelling unit or a tiny home in your backyard. Or maybe you can cordon off your basement and turn it into an Airbnb. Maybe if you own a rental property or a single family home, but it's zoned for multifamily or it's zoned for commercial, you can redevelop that property. I think this is a huge, huge opportunity over the next 10 to 20 years as we try as a nation to solve the affordability problem, increasing density is going to be a really big component of that.

Starting point is 00:26:59 I am almost positive about that. And so if you could find properties that have upside to increase density and you know how to handle this right and you're, you know, following all the fundamentals, this could be really good. Just as an example, I bought a property last year in the Midwest. It's a solid deal. It's similar to what I described before, but I've been able to raise rents. I did a cosmetic renovation. It is throwing off decent cash flow right now.

Starting point is 00:27:25 But it's in an A neighborhood and it's zoned commercial and I could build six to eight units on this. And it's a duplex currently. It doesn't make sense to develop it right now. The numbers don't work. but it has other upside. It's in the path of progress. The rent growth opportunity is really good. I think zoning upside on this is just a cherry on top. The other ones that I personally don't have experience with, but just looking at the market conditions, I think are worth considering. One is the idea of rent by the room. I know this is not everyone's favorite topic, but if you have the property management experience and willingness to do this, you can really get a lot of rent growth and cash flow upside if you're willing to do this co-living or rent by the room option. The other one is creative finance.

Starting point is 00:28:12 This has become extremely popular over the last couple of years. And there's a broad spectrum of creative finance. If you can find seller financing, that can be a really good option. If you could assume someone's mortgage at a lower interest rate, that can be really good. Some people are really into the subject to strategy. Personally, for me, the legality gray area. I don't understand it well enough to take that on. But if you really want to do that, dedicate yourself and do that one right and do that legally. It can be a really good strategy. So that's another thing that you should be thinking about.

Starting point is 00:28:45 The last one is buying deep. And this is being able to find off market deals and buying deals under their true market value. You hear people like Henry on the show talking about this all the time. He's really an expert at it. I am not. I've had some success with it. It's not something I'm focusing on this year for myself personally because it's time

Starting point is 00:29:06 consuming, but if it is something that you are interested in, it's an awesome way to find upside in a deal. If you could buy under market value, that's just instant upside. That is just an amazing way to do it. So, highly recommend buying deep if you have the skill set and the time to take that on. So just as a review of our 10 upsides that you can consider, number one was long-term rent growth. Two was value ad. Three was owner-occupied. Four was lower LTV or cash purchases. Five, learning. Don't forget about that one. Six was path of progress. Seven is zoning upside.

Starting point is 00:29:41 Eight is seller finance. Nine was rent by the room. And 10 is buying deep. And I just want to, before we go, revisit something that I was saying a little bit before. When I design these deals, I take those four sort of principles about finding great assets in good markets that can break even within the first year. And then I don't just pick one upside. because as you know, the economy is changing a lot. The market is changing constantly.

Starting point is 00:30:08 And it's hard to say for certain which upside is going to be the best. And I personally would not buy a deal that only has one upside. I want to find deals that have two, ideally three, maybe even four upsides because one, it mitigates risk the best, but also it gives you the most upside, right? Like imagine if two or three of your upsides all come true, that's how you genuinely get a home run. And I really think that this is how you need to operate your business. You need to buy an asset that is low risk.

Starting point is 00:30:41 That's basically what that overarching strategy is about in the beginning, is mitigating risk, making sure that you can hold on to your assets and that you're buying good assets. And then the second part is operating that business super efficiently and trying to hit as many of those upside as possible. So just returning to that example that I said before, I bought this duplex in the Midwest last year. The rents were at about 2,200.

Starting point is 00:31:06 I thought I could get them to 2,700 or 3,000, but I needed to do not a huge, but a fairly significant renovation on the property. And so what I saw from this deal is one rent upside, number two, value add upside. I already told you that it has zoning upside. And the fourth upside was learning. I have done rehabs in my own market where I was living and I could go look at it.

Starting point is 00:31:34 I had never done more than just a basic cosmetic rehab in an out-of-state market. And I took this on and I learned about it. And this was a year ago. So I'm telling you the story because I sort of take the year to look back at this deal. And it worked really well. I bought a deal at pretty good market value. I'll just tell you about it for about $250,000. When I first bought it, it wasn't going to cash flow.

Starting point is 00:31:58 It was not too far off, but I was going to lose like $100 or $200 a month on it. I knew that even without a renovation, if I really needed to, I could increase the rents to market value and at least break even. So that mitigated my risk. I had very little risk because it was also in a great neighborhood in a good market. Then I started operating my business and shooting for these upside. So the first thing I did was I did the renovation and added value. I spent about $22, $23,000 something to upgrade this. deal. So I was in it for, let's just call it, 275. And as of recently, I think that the ARV is somewhere

Starting point is 00:32:36 around $310, $315,000. So I've built equity by doing the value ad. And I was able to get my rents from about that $2,02100 to about $2,600. And now, even though I put more money into the deal, I have positive cash flow. Still, well into the future, I have more upside. Rents can continue to grow. It is in the path of progress and I have this zoning upside. So this is to me the formula that has worked and I think I'm going to continue focusing on. If you looked at this deal that I bought on paper, on the market, you probably wouldn't have thought it was going to be good. But as of right now, it's still delivering me 12, 13 percent annualized return, so well better than the stock market. And there's great long-term upside, which as a long-term buy-and-hold

Starting point is 00:33:23 investor is really the only thing I could possibly ask for. That to me is how you design a deal in 2025. And I hope this framework, both the overarching strategy of trying to mitigate risk on the buy and then exploiting all these upsides over the long run is helpful, as well as the 10 different upsides that I shared with you that you can use to build value and see the performance of your deal improve year after year after year over the lifetime of your hold. Hopefully all of that is super helpful to you. That's all I got for you guys today. Thank you so much for listening. We'll see you again soon for another episode of the Bigger Pockets Podcast. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all

Starting point is 00:34:05 our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K. Copywriting is by Calicoe content. And editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www. www.biggerpockets.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only

Starting point is 00:34:39 risk capital you can afford to lose. And remember, past performance is not indicative of future results. Bigger Pocket's LLC disclaims all liability for direct, indirect, consequential, or other damages arising from a reliance on information presented in this podcast.

BiggerPockets Real Estate Podcast - 10 Hidden Ways to Buy Properties with Huge “Upside”

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