A real estate investor's essential guide to properly verifying the three critical numbers before purchasing any investment property - and why getting just one opinion isn't enough.
A week ago, one of my real estate friends came to me and told me, "Dan, you're not going to believe this, but I am going to do my first real estate deal." Of course, my reaction was, "Oh my god, I'm so happy for you. Tell me about it." But if he's messaging me, he probably needs some sort of assistance.
He told me, "Here's the address. Let me know what you think." The property was in Indiana, and I work in Milwaukee \ North Carolina. I don't have a team there or really know the neighborhoods. But I thought I'd take a look.
The Red Flags Started Early
When I looked at the address, I saw it was an off-market deal with no pictures and basically no information. I asked him for more details because just an address isn't enough to determine if it's a good deal. He told me he was very busy and asked if I could just take a look and let him know what I think.
I contacted one of my friends who works successfully in Indiana. We found that houses around that neighborhood are selling for around $200,000 for similar properties. I got back to my friend with my opinion about the ARV (After Repair Value) - it seems like it could sell for around $200,000, but I didn't know the property's condition inside.
When I asked about repair costs, he said, "It's maximum 25K." I asked what he based that opinion on, and he told me, "Well, that guy told me so" - referring to the person sourcing the deal for him. The wholesaler (or deal sorcerer) had brought his contractor for a walkthrough, and that's where the $25,000 estimate came from.
That's when I had to stop him. "Who else was in the property for you other than that guy?" The answer was no one else.
The Three Numbers Rule
This is when I realized we need to make something crystal clear. When you purchase a property - whether through my company, any other company, or by yourself with a realtor - there are three numbers you must verify before you purchase a property:
1. ARV (After Repair Value)
How much we believe the property will be worth after we finish repairing and fixing it.
2. Repair Cost
How much it's going to cost you to repair the property.
3. Rent
How much we believe we can rent this property for.
Each of these numbers is crucial for your business plan. These are basically the only numbers you really need to verify. It's just a game of three numbers - very simple, but most people get it wrong.
The Three People Verification Method
You verify these numbers with three different people for each number. Don't take the word of one source. You need three different sources that are qualified to answer these questions.
Verifying ARV
For ARV, you should ask:
- Investors that work in that area
- Realtors who sell properties in that particular block or neighborhood
- Appraisers
In my friend's case, I wasn't qualified to give an ARV opinion because I don't buy in Indiana and don't know that market.
Verifying Repair Costs
For repair costs, you need:
- A professional property inspector
- Three different contractors for repair estimates
Before you spend $60K, $100K, or $200K, bring an inspector. It might cost you $600-$700 maximum in most of the US, but those few hundred dollars could save you from a $100,000 bad investment. If the inspector finds major issues - rotten house, foundation problems, attic issues - you've just saved yourself massive losses.
When the inspector tells you everything is okay, it's just part of your closing costs or due diligence, and the deal absorbs it. It's wise money to invest before you invest the big dollars.
Verifying Rent
For rent verification:
- Property managers who work in the area
- Online tools and rent comparison sites
- Local market research
You can go to property managers and ask, ""How much do you think we can rent this property for?"" They can walk through the property and give you both renovation estimates and good rent projections if they work in that area.
Tools and Resources
There are online tools that can help with verification. Check out DealCheck - it's a good platform that I think you should at least consider, though I wouldn't take it as the absolute one source for all, but it will help you determine ARV and the Rent.
A Word About Appreciation
You'll notice I haven't talked about appreciation because this is speculation. In Milwaukee, we've had double-digit appreciation per year for the last two years, but maybe next year it'll be negative. We can't know, so appreciation is speculation - it's not one of the three numbers.
Maybe you can plug in 3% appreciation in your business plan, but I don't really count on it, especially with single-family homes and duplexes. When you're talking about bigger deals like multifamily commercial real estate, appreciation becomes more significant. But in these smaller transactions (though they may be the biggest investment you've ever made), I don't think it makes that big a difference right now.
The Bottom Line
Three numbers. Three people for each number. That's nine people total verifying your deal.
I hope this doesn't make your brain spin too much, but this was obvious to me, and I felt the urge to share it with you guys.
Conservative Approach
This market is super interesting to be active in right now. If you're hesitant, I understand. Be on the safe side and take cushions. If a contractor tells you $25K repair estimation, write down $30K - add that buffer. If you think the ARV is $200,000, write down $190K. Maybe you'll be surprised for the best, but it's better not to be surprised for the worst.
Put the conservative numbers in your business plan. Always be conservative.
Ready to Start Your Real Estate Investment Journey?
The three numbers rule isn't just theory - it's the foundation of every successful deal I've done throughout my career. Whether you're looking at your first property or your fiftieth, this systematic approach to verification will protect your capital and maximize your returns.
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Remember: Don't be afraid to invest - just invest wisely. Your financial independence is waiting on the other side of doing your due diligence right.
Dan Y. Shimony is an International Real Estate Investor & Public Speaker who helps young men achieve independence through real estate and clarity.