The Massive Opportunity of Overlooked On-Market Deals

Summary

BiggerPockets Real Estate Podcast

Episode: The Massive Opportunity of Overlooked On-Market Deals
Release Date: November 13, 2024
Host: Dave Meyer
Guest: Dan Nelson, Real Estate Agent and Investor in Chicago

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Introduction

In this episode of the BiggerPockets Real Estate Podcast, host Dave Meyer delves into the often-overlooked potential of on-market real estate deals. Contrary to the prevailing trend that emphasizes off-market transactions, Dave brings in Dan Nelson—a seasoned real estate agent and investor from Chicago—to explore why the Multiple Listing Service (MLS) remains a valuable resource for investors.

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Guest Background

[01:02]
Dave Meyer welcomes Dan Nelson to the podcast, initiating a discussion about Dan's journey into real estate. Dan recounts how his entry into the market was somewhat serendipitous, driven by his wife's decision to flip properties after they purchased their first home.

[01:12] Dan Nelson:
"We just bought a house. It was... my wife started flipping properties, and I reluctantly began my real estate career."

With over two decades of experience, Dan transitioned from a career in learning and development to real estate, eventually focusing on rental properties to create a more stable income stream.

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On-Market vs. Off-Market Deals

The conversation pivots to the core topic: the advantages of on-market deals over off-market ones. Dan highlights that while off-market properties can offer unique opportunities, they often come with hidden problems that can offset potential gains.

[04:30]
Dan Nelson:
"Generally, off-market properties come with a problem. Now, this isn't true of every single one, but they come with a problem and it's a problem that no one's going to pay you for."

Dave and Dan discuss how on-market listings on platforms like the MLS are typically more reliable, as sellers are more likely to maintain their properties to avoid issues that could deter potential buyers.

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Advantages of On-Market Deals

Dan emphasizes that on-market properties generally undergo more scrutiny, making it easier to identify and assess their true value.

[05:02] Dan Nelson:
"If you buy something on the market, you could still have a cracked foundation, but you're not going to buy that property. You're going to buy something else."

He provides an example from Evanston, Illinois, where a property fetched $600,000 by addressing layout issues, demonstrating that on-market deals can be lucrative when properly managed.

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Challenges with Off-Market Deals

Dave acknowledges the scenarios where off-market deals might be beneficial but concurs with Dan that they require a higher skill set. The rapid decision-making and networking necessary to capitalize on off-market opportunities can be overwhelming, especially for novice investors.

[25:03] Dan Nelson:
"If you're thinking, 'I don't love to make phone calls where I'm having to be in really tense conversations every day,' off-market might not be what you want to do."

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Strategies for Cash Flow and Property Acquisition

The discussion shifts to cash flow strategies, particularly concerning properties sold below market rent. Dan explains that many sellers of rental properties maintain rents below market value for various reasons, including being former landlords unfamiliar with current market trends.

[13:04] Dan Nelson:
"Any property that's selling as a rental is likely to have rents below market. Once you turn over those tenants and bring it up to market, there are lots of opportunities in Chicago."

He outlines a three-tier strategy for different property types, emphasizing long-term appreciation and cash flow over immediate returns.

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Recommendations for Beginners

Dan advises beginner investors to focus on on-market deals due to their accessibility and the reduced complexity compared to off-market transactions. He suggests starting with properties that require minimal upgrades to achieve market rents, thereby ensuring steady cash flow without excessive initial investment.

[22:29] Dan Nelson:
"If you're an experienced person, the thing about experience is you're going to build your network. People are going to get everything off market. But the best thing is just to start."

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Tools and Resources for Deal Analysis

Dave highlights the importance of utilizing tools like the BiggerPockets rental calculator, which helps investors accurately assess rental potential beyond median values.

[35:24]
Dan Nelson:
"Most people look at average or median rent, but you need to look at the top third to understand true market rent."

He stresses the necessity of analyzing where a property stands within the rental distribution to make informed investment decisions.

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Final Thoughts and Advice

In wrapping up, Dan encourages investors to overcome their fears and seize the abundant opportunities available in the real estate market. He underscores that owning a property transforms one’s perspective, enhancing their ability to identify and leverage investment potentials.

[39:58] Dan Nelson:
"There are opportunities all over the place. The hardest thing about buying your first property is getting over your own fear."

Dave complements this by noting the cumulative benefits of real estate investing, where each additional property becomes progressively easier to manage and expand.

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Conclusion

This episode provides a compelling case for reconsidering the reliance on off-market deals by showcasing the untapped potential within on-market properties. Through Dan Nelson’s insights and real-world examples, listeners gain a deeper understanding of how to effectively navigate the MLS for profitable investments. Whether you're a seasoned investor or just starting, the strategies discussed offer valuable guidance for building a robust and sustainable real estate portfolio.

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Notable Quotes:

• Dan Nelson [05:02]:
  "If you buy something on the market, you could still have a cracked foundation, but you're not going to buy that property. You're going to buy something else."

• Dan Nelson [13:04]:
  "Any property that's selling as a rental is likely to have rents below market. Once you turn over those tenants and bring it up to market, there are lots of opportunities in Chicago."

• Dan Nelson [22:29]:
  "If you're an experienced person, the thing about experience is you're going to build your network. People are going to get everything off market. But the best thing is just to start."

• Dan Nelson [39:58]:
  "There are opportunities all over the place. The hardest thing about buying your first property is getting over your own fear."

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This comprehensive summary encapsulates the key discussions and insights from the episode, providing a valuable resource for real estate investors looking to optimize their deal-finding strategies.

Transcript

[Dave Meyer]

You don't need to send mail, you don't need to knock on doors, you don't even need to work with wholesalers.

[Dan Nelson]

There are great deals sitting on the.

[Dave Meyer]

MLS right now just waiting for you to come by them. Hey everyone, it's Dave. And recently I realized that we talk.

[Dan Nelson]

A lot about off market deals on.

[Dave Meyer]

This show, but personally I actually rarely buy off market deals and unless you're a full time professional investor, you probably don't either.

[Dan Nelson]

So today we're talking, talking about how.

[Dave Meyer]

The MLS has actually become a sort of underrated tool for real estate investors. And we'll also talk about some of the trade offs with off market deals and some potential dangers that you should think about and try to avoid if you're going to go for off market deals.

[Dan Nelson]

So joining me for this conversation is Dan Nelson.

[Dave Meyer]

He's an agent and an investor in Chicago who helps clients from BiggerPockets and elsewhere find great deals on on the market every single day.

[Dan Nelson]

So let's jump right into our conversation with Dan.

[Dave Meyer]

Dan, welcome to the BiggerPockets podcast. Thanks for being here.

[Dan Nelson]

Hey, thank you. Appreciate it.

[Dave Meyer]

Let's jump right in. Tell us a little bit about yourself and your career in real estate.

[Dan Nelson]

Yeah. So my wife quit a job once, came home and I said, what are you going to do? We just bought a house. It was.

[Dave Meyer]

Did you know she was going to quit the job?

[Dan Nelson]

No, she just walked away.

[Dave Meyer]

Okay.

[Dan Nelson]

And I said, what are you going to do? And she said, I think I'm going to start flipping properties. And. And she started on the house we were working on and I went very reluctantly, started my real estate career and she's been very successful at that. She's been doing it for 20 years now. Along the line, I said it probably makes sense to buy multi unit properties, honestly for the insurance of it. Like what if one of these goes bad? Then we have this to kind of. And so that's how I got into buying rental properties. And I was working with a real estate agent was really great. And then eventually my wife, I'm an insane workaholic, wanted me to quit and I came home and I've been doing this since then.

[Dave Meyer]

What were you doing before you got into real estate?

[Dan Nelson]

I was in learning and development, so very early building sort of those training things that you do online. Then I worked for a textbook company as they moved into digital. And then I actually got a job training real estate agents. And that's when I would come home and tell the stories where I said, you've got to do this.

[Dave Meyer]

Oh, nice. Well, we are here to talk about deal finding and specifically about finding deals on market versus off market. So can you just tell me a little bit about your history of acquiring real estate and how you've typically found properties?

[Dan Nelson]

Yeah. So it's funny to me how much people talk about off market deals because we started. We didn't know anything about off market when we started. I mean, right when we began, I started listening to Bigger pockets and all that when it started up and got into that. And that was the first time I heard about it.

[Dave Meyer]

What year was that?

[Dan Nelson]

It was 2004, I think.

Okay.

[Dave Meyer]

Oh, wow. You were, you were way back then. That's awesome.

[Dan Nelson]

So we were buying things on the market and that's what we did. And you know, over time I built relationships with wholesalers and other people and I sourced some off market deals as well, mostly for my clients than myself, but for ourself, most of our properties we bought are on the market. And my fellow real estate agents that do investing, like that's crazy. But I think that there's a lot of advantages to buying on market properties. So even though I have access to off market, I tend to still buy most of them them on the market.

[Dave Meyer]

So just for everyone listening, if you're not familiar with the terminology here of on market versus off market, on market means that the seller has put their property on the mls, the multiple listing service, which is basically, if you've never done this before, it's the properties that you typically see on Zillow or redfin or realtor.com. these are things that every agent that subscribes to that MLS gets access to. Off market deals describes a whole different category of property where the investor or someone who works with the investor, like a wholesaler or even an agent sometimes develops relationships with a would be seller before they put their property on the market. And there's all sorts of advantages to this which we're gonna, we'll dig into in the course of this episode, but just wanted to make that clear. So tell me a little bit, Dan, like, why do you primarily look at on market deals when the common dialogue these days is that off market is the only way to find deals?

[Dan Nelson]

Generally, off market properties come with a problem. Now, this isn't true of every single one, but they come with a problem and it's a problem that no one's going to pay you for. So let's say one of the most recent ones I looked at, there was a cracked foundation which was of course hidden by furniture and Rugs and all that kind of stuff. But I found the crack in the foundation, right. Which wasn't like something to be sealed. It was, you're going to have to report the foundation. Right. So if you report the foundation on the house, you can't advertise when you flip it. A brand new foundation, that doesn't make anyone feel better.

[Dave Meyer]

That's right.

[Dan Nelson]

So you just took on a price to do something that isn't going to add any value to a property. If you buy something on the market, you could still have a cracked foundation, you still can have it, but you know, you're not going to buy that property. You're going to buy something else. The more likely scenario, if it's on the market, they're going to have taken care of a lot of the, you know, things that you have to do and, and the things that are wrong with it, you're, you're probably going to be easier to find and easier to identify. So as long as the ARV there, and so I'll say arv, which is after repair value, basically after you do the work on the property, as long as the, you know, you can see what you could sell it for, it really doesn't matter where you buy it. So, you know, I would not dissuade someone from buying off market properties. I would just say they generally have a problem and that's why they're off market.

[Dave Meyer]

That's a great way to put it because why would, there's no other reason why someone would choose to sell off market to an investor rather than put it on the open market where you're likely, especially in this type of investing climate, to get more people bidding on your property and you at least have more potential buyers with which you can negotiate. And to be clear with Dan, I agree with you, Dan. I think that, you know, foundation structural problems, inherent problems with the property are a common one. You also have people who want really specific situations like they want long rent backs or you know, the seller has some particular stipulations that aren't going to be popular on the mls. So there's usually some sort of hurdle to get around if you're doing an off market deal. But I agree there's no reason to say that you shouldn't do off market deals. I'll have to admit I've only done one in my entire career. But the point and why I wanted to bring you on is because a lot of real estate educators right now are saying and teaching that you have to do off market. So I'D love to just hear about some of the types of deals that you see in Chicago that are on market. Are these all flips? Are they heavy rehab? Are any of them stabilized?

[Dan Nelson]

Yeah, and I think that's essentially, you know, when I think about off market properties, I think of it as it's a higher skill set to buy them in. And so the message that that's what you should find, you know, I think it's important to realize that it's a higher skill set across all that. And we can go into more detail if you want on that later. But essentially, you know, I'll see a property, you know, I gave you one example, but it's not an uncommon one that I can find between, you know, 200 and 400,000. Like there's pretty much every price point in my market, but, you know, we all get lured into the lowest price is the best property. But you have to make sure that the place that you're putting in on the market, there's actually a market for you to put money into it. Right. So that matters a lot. So in the areas where you can get the cheapest properties, you have very little opportunity to make a mistake. If you make a mistake, you're going to lose money because the margins are so tight. And if you move up a little bit in price, then you can get something where there's a lot more room to make money and there's a lot more leverage. If you don't hit all your numbers perfectly, you still will be okay. So an example would be, recently I helped somebody buy a property in Evanston, Illinois, which is where I currently live, and it was on the market. A lot of people passed up on it because it's a weird property. It has a weird kitchen and a weird layout, but the layout was relatively easy to fix. You just had to open it up and it would look like a typical property in the neighborhood. So they're going to actually add another floor to the property, basically build up on that, and we're going to sell it for 600,000. And I think the market between 600 and 700,000 where they are is really good. So they want 700,000. I tell them, shoot for 600,000, and then if we can get there, we can get there. But if they can make money at 600,000, they're going do great. And that, that's an example. But that's a common example.

[Dave Meyer]

All right, time for a break, but we'll be back soon with more of this week's Deep Dish.

[Henry Washington]

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[Dave Meyer]

We'Re back with investor.

[Dan Nelson]

And agent Dan Nelson.

[Dave Meyer]

Okay, so that, that's for a property that you're doing value add on. Are there any properties at least in your market in Chicago where you can buy something that at least breaks even in terms of cash flow on the market and is stabilized? Is renter ready?

[Dan Nelson]

Yeah. So in general, anyone that's selling a rental property pretty much across the board, unless it's a flip, the rent is going to be way below market value. Not near market value, way below market value. So when you buy it, you're not going to cash flow. But yeah, once you turn over those tenants and bring it up to market, yeah, there are lots of opportunities in Chicago.

[Dave Meyer]

Can you explain why you say that? Why does everyone selling a rental property have their rents under market value?

[Dan Nelson]

There's two reasons. Number one, why are they selling it? Right. So they're selling it probably for one of three reasons. One, a family owned it for a long time and they passed to their kids and they have no interest in being landlords, so they're selling it.

[Dave Meyer]

So, so that's like the accidental landlord thing.

[Dan Nelson]

Yes, you got it. That's a perfect phrase. Yeah. And that's a big part of the people that are selling it. And then the other one is the person that owned it that's selling it. They, they bought it in 1987. They've been cash flowing since 1990. So the fact that rents are below market, they don't care because they're living in Miami and all they want to do is have tenants that will never ever call them. And they know their rents are so low, so they'll never ever call no matter what. They'll fix everything in the apartment itself. So they don't care. And, and honestly, they've been out of the market so long they have no idea how much the market has changed.

[Dave Meyer]

Yeah, I've, I've met a lot of these landlords, people who. I've actually lived with, landlords like this to my benefit, where they don't know how much they should be charging and get away with a steal.

[Dan Nelson]

Yeah. I'll give an example. I own a four unit property and in that property I know the owner on both sides of me and I told them how much we're getting for rent, how much I'm getting for rent, and they're getting two fifths of what I'm getting. Okay, not even half of what I'm getting. Yeah, no, and I, and they said, that's impossible. They said, that's impossible. You can't get that much rent. I said, no, I am getting it. And I can show you how other people are getting that too. They won't even listen to me. They think I'm just lying.

[Dave Meyer]

What, and you're not? Are you pushing rents really high or is this normal market value?

[Dan Nelson]

No, I mean, you know, I'm, I try to be. Basically, I certainly want to be at market value. I don't want to be the top of the market value. I don't want to be below market value. But, but they own their properties outright, so they're like, hey, I'm, I'm cash flowing, you know, 100% of my money. Like, I don't, I don't believe you can get that much more. Even though I've told them, even though I've showed them, I even showed them an ad. Look, here's my ad. She goes, oh, yeah, I'm sure you advertised it, but you didn't get it. Yeah, I don't know what to tell them.

[Dave Meyer]

Okay, so the first one was accidental landlords. The second one, these people who have been in the property for so long, they've just lost track of what market rents should be. And what's the third one?

[Dan Nelson]

The third one is somebody that is a recent landlord and they bought the property where the rents weren't at market value and then they didn't raise the rents and they're like, oh my God, being a landlord doesn't make any sense. It doesn't make any money at all. So they put it back on the market with the same tenants that they inherited.

That's.

[Dave Meyer]

I mean, maybe this is just me because I look at market data all the time, but that is so surprising to me that people wouldn't try and charge what is a fair market value for their rents. Are they, do you think people are just they don't know or they're too nervous to raise rent.

[Dan Nelson]

It's the second thing they, they probably never should have been landlords or they should have just said, I understand the value of owning a property. It's not all, it's not all cash flow as you know, and you talk about a lot. It's not all cash flow. That's, you know, only one of the things. And they should say, I'm not worried about cash flow. Get a property manager and then direct them to do what they don't feel comfortable doing. But you know, people get thrown off the fact that they have to get a property manager and how much money they're going to lose that way. And also they don't, they don't want to actually manage the property. You know, they thought it would be easier than it was.

[Dave Meyer]

Yeah, I totally buy this. You know, I buy small multifamily in the Midwest and I see this a lot where the property is for sale. And I think the thing that makes it hard is that the rents are, let's say they're $2,000 a month and then the pricing of the property is based on what rent should be. And so then the job of the investor then becomes buying that property knowing that your business plan has to entail getting those rents up. And as the investor you sort of have to eat those whatever, six to 12 months that it might take to have the tenants turn over or raise the rents appropriately, hopefully in a reasonable way, working with existing tenants. And, and I've done that. But I'm curious, do you think that's the move?

[Dan Nelson]

Right?

[Dave Meyer]

Do you buy it at the full market price or what they're asking for and then just take on that sort of risk and responsibility yourself as the investor.

[Dan Nelson]

So the answer is if you think of multi unit purchasing as a short term process, then you should be worried about doing the things that you said. But if you think about it as 5, 10, 20 years, like what do you care about year one? You're basically outsmarting the owner. That's how you have to think about it. This owner doesn't know what they have. Yeah, I'm going to dig for this piece of gold, I'm going to clean it off and then it's going to be, you know, a valuable asset. But of course we'll try to negotiate the price down, you know, and it has to make sense to the buyer. But essentially that's it anytime. Like people talk about value add property, like there's lots of things you can do to the property to raise rent as well that he never did. You know, so there's opportunity to get exactly as it is and just clean it up a little bit and there's opportunity to add a lot to it and get a lot more rent.

[Dave Meyer]

I will tell you my opinion about this after, but I want to ask you first. When you have a client who's an investor come to you and say, you know, you're looking at one of these properties where it's under market rent and the price is assuming that you're going to get rent up, would you advise people to buy it if it's not cash flowing? You know, on day one?

[Dan Nelson]

I bought very few properties that were cash flowing on day one.

[Dave Meyer]

Really?

[Dan Nelson]

Okay, almost none because I'm buying and appreciating areas, right. So that I'm more interested in the other three things that are involved with it. I know the rent's going to be up because I've already done my numbers, I've seen what's there. So, you know, the four unit property I told you about, it was cash flowing at 50amonth when I bought it. Obviously that was not my goal and now it makes $24,000 a year. So, you know, the goal is to find sort of the secrets that are out there. That's how I see it. You know, it's like, don't worry about year one plan year two and year three. By year three, you're going to be cash flowing if you buy the right property. That doesn't mean you're going to lose money for the first two years, but it does mean you, you might be under a little bit the first year for sure.

[Dave Meyer]

Okay, I. You sort of beat me to my follow up question, but I want to expand on it. I was going to ask you what is your time frame for break even, how long? Just generally speaking, I'm sure it's different for every deal, but how long are you willing to cover? You know, float a property while you stabilize it?

[Dan Nelson]

So I'm going to tell you basically there's three types of properties. There's one that cash flows from day one. It's never going to appreciate because in an area that's not great, I mean, not when I say not great, I mean an area that is not appreciating. And that's part of the reason that you can get it for such a good deal. So rents will be. You'll be cash flowing. Day one, you can buy a property that's cash flowing a little bit and could cash flow a lot More if you made some changes and brought it up to rent, you know, that's what most people are looking for and also be an appreciating area. Okay. So that one, that's what most people are looking for, is going to be cash flowing probably mid year two, but certainly by year three. And it all depends on the choices that they make. And then the third one that most people ignore and most people aren't interested and most people on the forums would tell you not to buy is a property that's not cash flowing at all. It's not even close. Okay. But it's an appreciation play. So if you bought all three of those properties in the same year, okay. That first one would be cash flowing all along. You know, it's always cash flowing, but the cash flow won't increase very much. The second one, by year three, you're going to be cash flowing. By year 10, it's going to really be cash flowing a lot. That first one will be similar to where it was when you first bought. It'll be up a little bit, but similar. But if you bought that other one that's not cash flowing from day one, in 10 years, it'll be beating all of them on cash flow. So it all depends on your strategy. Most people are looking for that sort of middle property.

[Dave Meyer]

Well, yeah, I was going to ask, like, why would it take two or three years? Because I'll just tell you, my general strategy is I'll, I'll float it for a year, right? Because I, my opinion is I'll, I'll eat some cash for a year waiting for tenants to turn over. I've been doing this thing where I wait for the tenants to leave. I renovate it. That, that pushes up values, and then I'm able to do that all within a year. Why, why wait longer than that? Why do two or three years?

[Dan Nelson]

So everything in that middle group can be a year. It definitely can be a year. So why would it take more than that to cash flow? Because you decided to add a bathroom in every unit. Okay. And you decided to put washer and dryer inside the unit and you decided to take out the boiler and put in furnaces in each unit. You decide to do all that work. So you're, you're going to take on a lot of cost upfront. That's going to take you a while to cash flow. But if you're like, no, I'm not going to do any of that, maybe I'm going to spend $5,000 in each unit patching and Painting and cleaning some things up and that's it then. Yeah, you know, in the second year you should be cash flowing for sure.

[Dave Meyer]

Does this strategy of buying on market deals, do you think it works for beginner investors more than experienced investors, or what type of investor should pursue this type of strategy?

[Dan Nelson]

Well, you know, I'm going to say anyone should if the deal makes sense. But, but for a beginner, you know, you know, when I started I was listening podcasts and I would hear people talk about buying off market properties, like, hey, yeah, that's what I'm going to do. And I would get on a strategy one month, then I get another strategy the second month, then I'd get another strategy in three months. So many things that work, right or that hand work and I wouldn't tell anyone that the way that I've done it or the way that I help clients do it is the only way that you can do it. But it is certainly the easiest way and it is what I ended up doing. You know, if I was starting out, this is how I would start. If you're an experienced person, the thing about experience is you're going to build your network. People, you know, hope to build their network right from the beginning and then, you know, they're going to be able to get everything off market. But just imagine like I had the perfect off market deal deal. Okay. And you've never bought a property before and I don't know what you're, you know, how courageous you are or not. And you say, yeah, I'd love a great off market deal. Like what's the likelihood you're going to get that from somebody and it's your first time versus somebody that's bought, you know, two, three properties for. And I know they're going to close. Like, no. If I make someone available and they don't buy it, the person I worked with is never going to trust me again. So, you know, it's really hard to get the best deal when you start. The best thing is just to start.

[Dave Meyer]

Yeah, I really want to echo that because I don't, I don't want to bash off market deals. I have looked at several recently. I've only pulled the trigger on one. It was actually a lot earlier in my career. But I think the key to these types of deals is you have to be flexible when you do the off market deals because usually at least the few I've looked at in the last couple of weeks, it's my agent being like, I just found out about this pocket listing, like they're going to list it in three days. Do you want it? So, you know, you have to be able to either pull the trigger really quickly, have a bank lined up, be able to buy cash, you know, be good at deal analysis and know the market cold so that you can make a decision really quickly. Those things work for me because I've been doing this for 15 years. It doesn't always work for new investors. That's a high pressure situation that is not always necessary to force yourself into that sort of rapid decision making for these sort of off market deals. Like, they all sound great, but just like everything in real estate, there are trade offs and those trade offs are usually speed and convenience for the seller, not for the buyer. And so the buyer is going to be giving something up for finding a deal that's off market.

[Dan Nelson]

Yeah, I totally agree. One of the best deals I've gotten in the last two years, someone reached out to me from bigger pockets and I didn't. None of my regular buyers were looking at that moment and I was like, I had talked to him, he was totally ready and then I showed it to him and then he got really cold feet and I was like, oh my God. Because I convinced this guy that I had a buyer and he was getting so furious with me and he's someone I depend on to source deals for. Fortunately, the guy did end up closing, but it was like such a, it was such a difficult time because I don't want to pressure someone into buying it. But if you introduce them to something, they, they, if it makes sense, they have to pull the trigger, you know, that's ultimately it.

[Dave Meyer]

Yeah, absolutely. I think this is one of the reasons why I typically recommend to people whether you're trying to figure out how to find your own deal in the market you live in, or if you're considering which market to invest in, I more increasingly in the last few years believe that the availability of on market deals is a crucial factor in picking a market. And this is not for everyone. If you're an experienced investor, if you're flipping houses, if you want to work with wholesalers, ignore what I'm about to say. But if you are new to investing and you work full time like I do, and the majority of the people who listen to this podcast do think about this a little bit because again, there's nothing wrong with off market deals, but it takes a lot of effort, it's a little bit more advanced. And for me, especially as an out of state investor now, which is what I primarily do, like I just want to be able to find deals on market. Like that is so valuable to me that I'm willing to give up, you know, a point or two in cash on cash return because I know that there's going to be more deals available to me. I'm going to be able to have a little bit more time. You often have more options that you can consider through. There's better comps for on market deals. So like there's all these advantages that I think often get overlooked when people just look at like, hey, I can buy an off market deal for 10 grand less than I can buy this one on market deal. You sort of have to look at it a little bit more holistically.

[Dan Nelson]

Yeah, I totally agree. That's. I mean, to me it's equivalent to you saying I buy all my groceries at the supermarket and then you have someone that says, I grow my own food. Okay. It would be cheaper. It's not easier though. It's, it's much more difficult. It takes a lot more. A higher skill set. I think it's great if somebody says I want to be a wholesaler, I want to find my own off market deals. It is, it is essentially a full time job, you know, in your part time telemarketer, part time negotiator. It is, you know, for most people. That's not a job that people would sign up for. Even, you know, what I do is like all day long I'm dealing with conflict and negotiating and something I'm extremely comfortable with.

[Dave Meyer]

Yeah.

[Dan Nelson]

So if you feel like, oh, those are my two favorite things, then this is probably the right path for you. If you're thinking, oh, I don't love to make phone calls where I'm having to be in really tense conversations every day. Off market might not be what you want to do.

[Dave Meyer]

Yeah, well, it's so true because off market deal finding is a very different skill set then being able to analyze and operate rental properties. It's just like you said, it's marketing versus operations or versus analysis. And honestly, I would hate doing it. You have a very calm demeanor, Dan. I bet you're very good at this. But I would, I don't know, it would stress me out way too much to do that type of thing. We got to take a break for some ads and then we'll be back for more of my conversation with Dan about the value of making on market deals.

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[Dave Meyer]

Thanks for sticking with us. Here's more of my conversation with Dan Nelson. So Dan, tell me a little bit about if people are into this idea. Maybe they're curious if their market offers these kinds of on market deals. What should people be looking for? If you're just let's assume they're working with an agent or they're just perusing zillow realtor.com what should they be looking for?

[Dan Nelson]

Yeah, I mean I'm glad you brought up those apps too because you know, 20 years ago it was much easier to find and source off market deals, right? Because you really had no idea what your property's worth. And Zillow and those other apps aren't 100% right? They're, you know, they can be off as much as 20%. I'll give you an idea. So people say, where do you get most off market deals? It's people I know. So my Next door neighbor is going to sell our house. Right. It's not in great shape. And I said, you know, what are you hoping to get for it? And she told me $200,000 more than what I could sell it if I sold it on the market and I'm trying to buy it from her.

[Dave Meyer]

Where did she come up with that number? Was it just a zestimate kind of thing?

[Dan Nelson]

Zillow told her that's what it was worth. Yeah, yeah.

[Dave Meyer]

And they get anchored to that number. You know, they see it and they're like, that's it.

[Dan Nelson]

Yeah.

[Dave Meyer]

They consider it in their bank account without thinking twice.

[Dan Nelson]

Yeah. So because of that, it's really hard. So usually you're, you know, if you get an off market, there's usually a reason, soft market, as we talked about. So wherever you're looking, essentially do your math. Obviously, BiggerPockets has a rental calculator that you can look at, but ultimately realize that you're going to get probably, if it's been on the market for more than two weeks, some money off of it, whether that's 3% or 5%. You know, some will be more, but essentially that. And then, you know, there are tools out there that you can use rental comps for. But most people, when they do this, they look at the average rent or worse, the median rent, okay. And those, if that's what you're hoping to do, it's going to be really challenging for you. You can't get average or median rent in 2024 because it's pulled down by all these people that own their property outright or got a 3% mortgage on it, and they don't care that they're not at market value. So like on one street in Chicago, I told you about my street, you might see a two bedroom, one bath, go for eleven hundred dollars, all the way up to $2,500. The same. Basically the same one. In some cases you have to make a few upgrades to it to get it up there. But if you're hoping to like charge eleven hundred dollars or get the middle of that price, so we'll say, you know that, we'll say that's sixteen hundred dollars. If you're willing to do that, it's probably not going to cash flow. So you got to look at the top third and say, like, that's what I'm looking for. The, not the highest price that's out there, but certainly the top third because that's the 2024 rental price. Otherwise it's just not going to make any sense?

[Dave Meyer]

Yeah, that's such a good point. I think this happens a lot, especially, you know, on biggerpockets. We offer tools that help you estimate rent. I helped design this tool. And we specifically show the distribution of rents. If you're not familiar with what that means, it basically show like, what percentage of properties are, you know, if the median rent is 1500 bucks, like, what's the high end there? Is it 1800? Is it 2500? And same thing on the low end. And I think it's super important not just to consider what Dan was saying is, like, is the median actually representative of market rent, but also where does your property fall within that range? Because a lot of times what I'm buying is maybe it is around median when you buy it, but then once you do an upgrade to it, you need to be analyzing your deal at the 75th percentile. And I never recommend people go the 100th percentile. You don't want to, like, be counting on getting the best possible rent in your entire market. But if you have one of the.

[Dan Nelson]

Nicer products in the area, you should.

[Dave Meyer]

Count on that and you should have trust that you're able to do that. So I think that's a great way of looking at it. And you know, I, I'm partially to blame for this because I put out a lot of content talking about the rent to price ratio in a city. And what we do for that is we use the median rent, the median price. Like Dan said, that's not what you should be looking for. You shouldn't be looking for a median rent place. You should be looking for a place where there's some efficiency between the rent that you can get and the, the price that you can get as well.

[Dan Nelson]

Yeah, I mean, I use that tool every time I use it because so many of my clients are from bigger pockets.

[Dave Meyer]

I love hearing that, by the way.

[Dan Nelson]

Yeah, no, it's great. It's. It's phenomenal because I started off using bigger pockets as an investor and to, to be on the other side that most of my clients come from biggerpockets. It's just been amazing. But I show them that and I show them, like, see all these other numbers? Like, here's the number the bigger pockets is saying you should get. Like, and I literally say, that's the sucker rent. If you're charging that rent, like, don't buy a property because it's not going to work. It's great that there are lower rents out there and there should be that opportunities out there. But I just go back to the same thing. If you're in 2024, you got to charge 2024 rents. You can't charge rents that somebody was charging even in 2014. It just won't work.

[Dave Meyer]

And do you target properties that have a little room for upgrade? You know, like, are these B class properties or where do you think the sweet spot is for on market deals?

[Dan Nelson]

So yeah, I mean I, I would say, I would say low Bs. Like, you know, I mentioned before a second bathroom. Right. So most of the rental properties in Chicago are pretty big because the city was built by people that, you know, rented, you know, and so a lot, there's so many rental properties and so a lot of them are really large, but back when they were built, people didn't take showers every day. So having one bathroom for your whole.

[Dave Meyer]

Family, it's so funny to think about.

[Dan Nelson]

Yeah, that's, it wasn't a big deal, like, you know, maybe they took a bath a week, you know. So the idea of having a second bathroom is, you know, just seems crazy back then, but now most people want a second bathroom and it's relatively easy to add a second bathroom and then you do that and that is the biggest impact you're going to have on increasing rent. Yeah, so yeah, I look for those kind of properties and other ones that need some work. A lot of people want something that's a little bit closer to ready to go. So, you know, it depends on the person. Like I don't want to do anything or I don't mind spending just a few thousand dollars painting or something like that. So it depends on the buyer.

[Dave Meyer]

Dan, this has been super helpful. I'm just curious if you have any thoughts on the flip side of this conversation where like when do you think is the right time for an investor to look off market?

[Dan Nelson]

So when does it make sense? It makes sense once you learned how to do it. To me, once you've learned how to, when I say learn how to do it, learn how to be a up an owner and a property manager and work with tenants and then you can start to say, hey, this is what I want to do. And you can get a sense of what really would work for you. And then you can start to build up your network. Obviously there's lots of tools and all that available, but you are competing against a bunch of people. But if you start to just kind of get to know the area, hey, I like this area, I'm in this area and just focus on that area, that's what Real estate agents do. We focus on a particular location and we just target that. But if you do that and people get to know you and you're essentially the mayor of that area, that would be a great way to do it.

[Dave Meyer]

Awesome. Well, great advice, Dan. Thank you so much for joining us today. Any last thoughts before we get out of here?

[Dan Nelson]

I'll just say that there are opportunities all over the place. And the hardest thing about buying your first property, it isn't cash flowing, it isn't anything else. It's getting over your own fear.

[Dave Meyer]

Totally.

[Dan Nelson]

And I say that word, that's it. Like, like once you buy a property, you will see the world completely different. You can listen to all the podcasts, you can read all the books, but you'll start learning once you buy a property and you'll just see the world differently.

[Dave Meyer]

Totally. Yeah. I forget who was saying this. This is not an original thought. But you know, you hear on these podcasts, other real estate podcasts like the Mental Leap and the that it takes to go from zero to one is huge. But to go from one to two is not that big. Two to three, it just gets smaller and smaller and easier and easier every time. And so if you can find something that you're comfortable with, to go from zero to one, you're going to benefit from that from years because you're just going to learn that there are things to learn about this industry and it's not that complicated. You can figure it out. Like most people who are willing to put in the time can absolutely figure this out.

[Dan Nelson]

Yeah. I mean, I would tell you that most of the people that bought the properties that you're going to buy them from, they got into real estate investing because they couldn't do anything else. That's how easy they consider it. You'll be surprised how many people, and that's one of the reason rents are so far below market is because they just don't know what they're doing. But they found a way to get in. It's easy enough to do that. You just get over your fear. You'll find out that there's lots of opportunity.

[Dave Meyer]

Awesome. Well, thanks so much, Dan. We really appreciate you being here.

[Dan Nelson]

Thanks, Dave.

[Dave Meyer]

And thank you all so much for listening. We hope you enjoyed this episode. If you did, make sure to share it with a friend who's been saying that you can't find on market deals. Send them this episode and hopefully they'll learn something and maybe find an on market deal for themselves. Thanks again for listening. We'll see you next time. Thank you all for listening to the.

[Dan Nelson]

Biggerpockets Real Estate Podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify.

[Dave Meyer]

Or any other podcast platform.

[Dan Nelson]

Our new episodes come out Monday, Wednesday and Friday. I'm the host and executive producer of.

[Dave Meyer]

The show, Dave Meyer.

[Dan Nelson]

The show is produced by Ian K, Copywriting is by Calico, Content and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up.

[Dave Meyer]

For our free newsletter, please visit www.biggerpo.

[Dan Nelson]

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 risk capital you can afford to lose, and remember, past performance is not indicative of future results. Biggerpockets LLC disclaims all liability for direct, indirect, consequential or other damages arising from a reliance on information presented in this podcast.