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 quickly. If there’s no immediate profit in the deal, we walk. For example, we don’t buy land – new build takes too long and we went through the 2008-2010 downturn. That market turn happened quickly – like someone flipping a light switch. Builders were the first to be taken out of the business because, by the time their properties were ready to market, it was too late – they had no buyers and most of those properties were taken by the banks.
For pretty much the same reason, I avoid large rehabs. I don’t have any idea how the retail market will be in 9 months. My goal is to be in and out of a deal quickly. I like my rehab-to-retails to take 3 months or less from purchase to sale.
Appreciation potential: Don’t count on appreciation. Appreciation works in only a very small segment of the country – large cities like Seattle, Phoenix, LA, Miami. For most of us, appreciation is very slow and I want profit sooner than 15-20 years from now, so I focus on cash flow when I’m planning to hold. By the way, it needs to make good cash flow from day one – I don’t want to wait for some future date to start making income.
Profit potential: One thing we have done from the beginning is to demand profit the day we buy. Because we never speculate on the future, we made it through 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, which I know is a terrible answer, but it’s true. Location, quality, condition, and our exit strategy (wholesale, rehab, rental) all play a part in our offer. There are always additional things that have an impact, as well, including whether we have to pay for funding to buy a property. In that case, we offer less because we have cost associated with borrowing but, if the seller is willing to finance, we can offer more.
Be conservative: Most important: buy conservatively. For us, all purchases must have equity and cash flow from the day we close on the purchase. Flips must have a large ARV (after-repair-value) profit potential so we can sell it below market value, if needed, to get it sold quickly. I want every rehab sold, not for-sale.
The key strategy that has gotten us safely through all of our market ups and downs has been – “Be conservative”. There’s enough real estate and enough opportunity every day that there is no reason to go after risk. My investing comfort level is slow-and-steady!
Focus: The biggest investor mistake I’ve seen over the years (over and over again) is being impatient and getting distracted. Too many have unrealistic hopes that real estate investing will be a fast or easy means to wealth. It is neither. Pick a strategy, take the time to learn it, and stick with it. The tremendous rewards are worth waiting for.