As a new real estate investor a lot of questions may be running through your head. How do I know which property to invest in? What should I be looking at with each of the properties? And the list can go on and on.
To help you get out of your own head and get you on your way in to investing and accumulating wealth. I compiled a short list of things I thought about and still use in many cases, although my strategies have changed some, when I invest in income producing real estate and more specifically single family homes.
As we have discussed many times before. You first need to determine what is going to be your strategy for investing. Meaning, what are you looking for. Click here and you can learn more about each of these things, but I will quickly outline them for you.
Are you investing for cash flow, cash on cash return, appreciation, tax benefits, etc, or a combination of all of it. By knowing specifically what you are investing for it will help you to look at the right properties and stay away from the ones that don’t fit.
Early on in my investing my criteria was pretty simple:
I had a picture of the type of person or persons that would be renting the place. Typically a two parent household, making about the average household income, and either one or two kids. Or a single mother/father with two kids making less than average household income and could afford one of my places.
I wanted my properties to be in line with what it would cost them to rent a b-c class apartment (to learn more about classes click here), but what they really wanted was a house and would be willing to pay a little more than they would in an apartment to get one.
- The rent collected had to be double the amount of my mortgage.
- Back then and even for the most part now, I want the rent to be at least 1% of the value of the home each month. See here for more information on the 1% rule.
- The property had to be in an area that I wouldn’t be afraid of knocking on the door and collecting the rent.
- I wanted to be able to get my down payment to be paid back with in two-three years. Ex: If I had to pay $10,000 down, then I wanted to get that amount back before the third year was up.
- I preferred houses built on a concrete slab.
- No basements.
- 3 bedrooms and 1 bath was an absolute. These are way easier to rent.
- Not located on a very busy highway.
I had a few other less subjective things as well. Things such as nothing weird about the lot of the house or the layout of the house. I wanted it to be simple. You can be amazed how some of these older houses just have weird configurations or even things built in to the home.
I also preferred no very large trees close to the house. Trees can become very costly to manage and especially costly to get torn down.
Would I compromise on any of the criteria? Not really. Now you have to analyze each deal individually, but the purpose of the criteria is to help you not get paralysis from over analysis. You can’t look at everything. So by coming up with a criteria and a strategy it helps you, your realtor if you are using one, and lastly it helps you make decisions quicker.
As you can see by my criteria, I am really looking at cash on cash return. I want the downpayment back pretty quickly and the only way you can get that is with a great cash on cash return. With cash on cash return, I am investing for cash flow, not extreme cash flow, but I want it to carry my mortgage and all expenses with the property and actually have some cash left over to use.
I used this simple strategy and criteria for close to ten years of investing and I still use it when I am looking at single family income producing real estate.
If you are currently an investor, what is your strategy or criteria?
If you are new and haven’t bought your first property yet, what are you thinking?
Please share in comments.
To your success and your future.