Investment Criteria of a Beginning Real Estate Investor

August 7, 2020 Stan

Focusing on property features alone is a quick way to the grave of your real estate career. I think this is an easy concept to grasp, but it does come up, so I wanted to share how I feel about what variables an investor should focus on to make solid buying decisions. Mistakes are made all the time by investors paying too much for a piece of real estate, but I would bet there are even more mistakes made when it comes to NOT buying a property they should. The old saying is, “the only real estate deals I regretted are the ones I didn’t do.” I am not sure I totally agree, but I understand the concept.

If you limit your criteria to property features, you will miss out on fantastic buying opportunities.

When I go to networking events, I often hear investors ask each other about their investment criteria. I cringe when I hear something like, “I am looking for 3 beds, 2 baths that will rent for $1,400 a month.” If I get an answer like that I will likely respond with, “What is wrong with something that is only 2 bedrooms that will rent for $1,500?” The normal response is a look of confusion or no response at all. Obviously there is a lot more to it than the bedrooms and bathrooms and even the price. What about location, HOAs fees, or deferred maintenance? What about the investor’s risk tolerance, potential for appreciation or potential to redevelop in the future?

When looking for deals, there are two points you might want to consider.

FOCUS ON PRICE AND VALUE

If you focus on property features you might miss a neighborhood that produces the financial outcome you are aiming for. I would much rather hear an investor explain their criteria as a return on investment, price to property value, or even a value play in a certain area. This is the criteria that focus on the financials. A skill as an investor should be to be good at coming up with a value (that could be based on resell value, cash flow, or other potential) and then deciding what you are willing to pay for that value. A fix and flip is a great example and is easy to analyze because there are very few factors. Rentals can be a bit more challenging because variables like; location, potential tenants, future vacancies, maintenance, future price changes, your short term and long term financing, management, and rent amounts all play a role in your decision. There are risks with all real estate deals, so you will want to understand those as you work towards the price you are willing to pay.

CONFORM TO AREA

This is not always necessary, but in most cases you will want to conform to the neighborhood. If you are looking for a condo in a building full of 2 bedroom condos, then buying a 2 bedroom condo would make since. If you are only considering buying 3 bedrooms, but you are looking in a 2 bedroom neighborhood, you will severely limit opportunities. In many cases bedrooms add little to no resell value, but that is not always true. A big opportunity exists if you can find a 1 or 2 bedroom house in a 3 bedroom neighborhood. By converting the house with fewer bedrooms to conform to the area, you should see a big upside. You should also see upsides when adding bedrooms to rental property, because it should increase cash flow. All of these opportunities could be missed if you are not open to looking at them. A strategy that I see some investors successfully implement is to first understand a certain neighborhood and get comfortable with the values and then search for discounted properties in that neighborhood. In this case, you will be searching for price to value not property features.

With all this said, a house that does not conform to the area could still be a good investment. Remember, all real estate has value and all real estate is a good buy for the right price.