I was recently asked what key things we look for in an investment property and what criteria we use to determine how much to offer for it.
Number one, it has to make us money fast. If there is no immediate profit on the deal, we walk away. For example, we don’t buy land: new construction takes too long and we went through the 2008-2010 recession. That market turn happened quickly, like someone flipped a switch. Builders were the first to be put out of business because by the time their properties were ready for the market, it was already too late: they had no buyers and most of those properties were seized by the banks.
For much the same reason, I avoid major rehabs. I have no idea what the retail market will look like in 9 months. My goal is to be in and out of a deal quickly. I like that my retail rehab takes 3 months or less from purchase to sale.
Potential Appreciation: Don’t count on appreciation. Appreciation works only in a very small segment of the country: big cities like Seattle, Phoenix, LA, Miami. For most of us, appreciation is very slow and I want profits sooner than 15 or 20 years from now, so I focus on cash flow when I plan to hold. By the way, you need to generate good cash flow from day one; I don’t want to wait for a future date to start generating income.
potential benefit: One thing we’ve done from the beginning is demand profit on the day we buy. Because we never speculate on the future, we survived the 2008-2010 economic downturn basically unscathed. We want cash flow and equity when we buy. Those give us room to sell for less or lower rents as needed when market values drop.
How do we determine how much to offer? It depends, I know it’s a terrible answer, but it’s true. Location, quality, condition and our exit strategy (wholesale, refurbishment, rental) play an important role in our offer. There are always additional things that also have an impact, even if we have to pay the funds to buy a property. In that case, we offer less because we have a cost associated with the loan, but if the seller is willing to finance, we can offer more.
Be conservative: Most importantly: shop conservatively. For us, all purchases must have capital and cash flow from the day we close the purchase. The flips must have great ARV (After Repair Value) earnings potential so we can sell it below market value if necessary so it will sell quickly. I want all rehabs to be sold, not for sale.
The key strategy that has carried us safely through all our ups and downs in the market has been: “Be conservative”. There is enough real estate and enough opportunity out there every day that there is no reason to chase after risk. My investment comfort level is slow but safe!
Approach: The biggest investor mistake I’ve seen over the years (over and over again) is getting impatient and distracted. Too many have unrealistic hopes that investing in real estate is a quick or easy way to get rich. It is neither. Pick a strategy, take the time to learn it, and stick with it. The tremendous rewards are well worth the wait.
What are you looking for in an investment property?
