Real estate investing is a tricky business. As the markets across the country begin to heat up, the opportunities that existed for real estate investors over the past few years are dwindling. Are there still good deals out there for investors? Of course. Are they as readily available? No. Is there a lot more competition for the good deals? You bet.
All of these factors make it even more important for the prudent real estate investor to be more resolute in their investment criteria. The big temptation is going to be “settling” for properties that are not what you are looking for, but instead to go after what you can get. I assure you, my friends, that this is a dangerous game to play. The results of playing that game can be terrible. Think about it this way: if you needed heart surgery, would you settle on the second or third or fourth best surgeon you could find? I doubt it. In the long term, being more selective in tight markets will result in the returns you are looking for from your real estate portfolio.
So, let’s take a minute, if you haven’t before, and really sit down and go over your investment criteria. These factors will determine what you buy, what you pay for it, and what you get out of it. Your investment criteria will determine, over time, your success as a real estate investor.
The Big 3
There are three big criteria we look at when coming up with an overall investment plan for our clients: the area, the house, and the money. By having pre-set, well-defined ideals on these three things, you can pick and choose what you will and will not compromise on when it comes to choosing the right property for your portfolio.
Where do you want to concentrate your efforts? If you live in a certain area and are going to manage your portfolio on your own, we recommend that you don’t buy homes outside of a 20-minute drive from your residence or office. There are, of course, exceptions to this rule, but it is a good starting point. If you are going to hire a property manager, the area can be more diverse, but we still recommend that you be familiar with where you are investing. The more you know about the area, the easier it is to choose the correct properties. Once you have selected a primary and secondary area (the secondary are can just be a slightly larger version of the primary) for your efforts, it is time to move on to the specifics of the house.
There are a lot of variables that come into play here and only you can, knowing the area, make the correct choices for what you are looking at. Things that you want to consider include: year built, square footage, number of stories, number of beds and baths, garage space, certain building materials, and lot size. For example, in the suburban Houston area, for our investors looking to buy and hold, we generally recommend a property that looks something like a 3 bed, 2 bath, 2 car garage, one story that is less than 2000 square feet and was built after 1980. This criteria allows them to look at a wide range of properties and communities in their area that will most likely produce good returns and will not pose a problem when it comes time to sell. Based on the area you already chose, take a look at the average sales and use that to build your criteria. If you do not have access to that information, have your Realtor help you.
Last, but certainly not least, is the money part of the equation. What equity level do you need to have? What do you need in monthly income (include property management fees if you are going that route)? What about rehab, down payments, financing, etc? These questions are a MUST when you set your criteria. At the end of the day, they determine your success as a real estate investor. Again, if you don’t know the answers, get with your Realtor, contractor, and/or lender to help you before you make a final decision on a property. If you just jump into a property without knowing these items, you are just asking to get surprised by something you couldn’t see beforehand. One of the biggest mistakes we see investors make is not doing the financial due diligence. They just look at a property’s price, guesstimate a generic rehab cost, look at a comp, and buy. That is usually the last investment property that they purchase.
Once you have determined a good set of criteria for making your real estate investment purchases, start looking. Just know that you are not likely to find something that fits 100% of your criteria. Your job is now going to be figuring out where you will and where you will not compromise on your criteria. I would not recommend being very flexible on the money side of things. The other items though, you can be a little flexible. If it’s a four bedroom versus a three bedroom, or maybe it’s a little larger, you can make those decisions based on what you already know you want. The key is this, if you don’t know what you want before you start looking for investment properties, you won’t know what you are getting. If you don’t know what you are getting, you are going to get surprised. Be prepared, be prudent, and be patient. Best of luck to you!