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.
What do you look for in an investment property?
May 13th, 2021 / 11:40 am
Hi Jessica:
I’m what you might call “retired” at this point. Living off my rentals and doing short term rentals with some of my properties. Your plan sounds very safe. I believe the real estate market currently is at the top of a bubble and that, in the next 2-3 years, some great prices will be available for investment purchases.
I wish you and your husband tremendous real estate investing success!
May 13th, 2021 / 9:13 am
Hi Karen,
Great blog post! I just listened to your story on BP episode #2 dated back in 2012. I am curious as to where you are in your business today. I am very new to real estate investing. My husband and I have paid down all of our consumer debt and are about a month and a half away from paying off our home mortgage. Right now I am doing alot of reading to figure out my strategy and go with it. I do know that I would like to save up at least a 20% down payment on anything I purchase and have a 3-6 emergency fund already in place for the property itself at the buy. Your strategy is very intriguing to me and I would like to learn more. Thank You!
Jessica Connick
Sep 2nd, 2019 / 7:55 am
Hi Ryan!
The first month that we own a rental property, we like for the tenant’s rent to “cash flow” — cover the mortgage, interest, taxes, insurance, HOA dues, all of our expenses, PLUS have money left over for our “profit” or “cash flow”. That money is not extra to be spent, but money to be save for eventual property maintenance like new roof, carpet and paint, appliance replacement, etc. – all the costs associated with owning the property over time. That’s cash flow and what I mean is that I want that bit of profit from the day I own it. Some investors may not have cash flow immediately but think it will come over time as the property appreciates and they can raise rents. I don’t believe in waiting because you never know what’s going to happen in the future – values could come down!
I’ve done a few other podcasts other places but I actually don’t know where they are… Here’s one I linked to on my blog: http://www.karensperspective.com/how-investing-fits-into-the-family-real-estate-business/
Thank you for the wonderful comment and taking the time to add to the conversation. Stop waiting to get started in real estate and jump in! It’s truly the only way to learn.
Good luck to you!
Sep 2nd, 2019 / 1:49 am
Hi Karen!
Thanks for a great blog post. Your advice is extremely helpful and very genuine. I have been researching real estate investing for a few years and have yet to jump in. This post along with your advice on BP podcast #2 are of great help. Do you have any other podcast features?
2nd Question: When you say cash flow from the beginning what exactly do you mean?
Thanks,
Ryan D. Siwinski
Jan 31st, 2019 / 8:00 am
Absolutely, Donye. Thanks for reaching out.
Jan 31st, 2019 / 7:53 am
Ms.Karren, my name is Donye Smith. I love what you do and seeking some advice/mentorship. Please contact me.