When becoming an investor in real estate it’s important to have a solid understanding of the market and a strategic approach. Many people in the space often call their approach a “buy box.”
What is a buy box? It is a set of characteristics that you have already established on the front end of investing and it helps you become more clear on what properties to look at because they fit your buy box.
Here are some examples of characteristics of a buy box.
Location: City, State, Neighborhood, Zip Code, proximity to certain retail areas, etc.
Property Type: Single family, multifamily, Retail, industrial.
Property style: In multifamily apartments there is something called garden style apartments. It could be stand alone buildings.
Number of doors: I know many investors who won’t buy anything less than 100 doors.
The above buy box characteristics really refer to the property itself. Now you have to establish a buy box for the actual investment itself. Let’s call it the math on the deal.
Here are some examples of this:
Price Range: 1 million to 5 million.
Desired return on investment: This could be several different numbers. Such as cash on cash return, CAP rate, Internal Rate of Return, etc.
Hold period: On the front end you have to decide before choosing a property, what is your hold period going to be on the deal. 3 years, 10 years, forever.
When I first started investing in single family homes I quickly learned and defined what my buy box was at that time based on the market conditions. Keep in mind this was several years ago. But it is still relevant today, except the numbers are different. A lot different.
I liked 3 bedroom and 1 bath houses on a concrete slab. Usually somewhere between 1000 sq ft. and 1200. The price range was somewhere between $50,000 and $75,000 dollars. In three different zip codes preferably. I didn’t mind doing some work to the house, but I didn’t want to have to rehab a lot. Carpet, paint, etc. was the extent of it.
I also wanted to be able to charge rent that was double my payment at that time.
Pretty simple buy box really. Nowadays it is very hard, almost impossible to find any property that has the mathematics that these properties did. But that is just the way it was.
The purpose of the buy box is to narrow your focus onto certain properties that you can analyze further. The buy box allows you to sift through properties quicker and then due the necessary due diligence on the ones that fit your criteria.
In addition to creating a buy box. I also, recommend you do the following.
- Research and Due Diligence: Thoroughly research the local market, property trends, and economic factors. Identify the best locations, property types, and potential risks. Perform due diligence by investigating property history, inspection reports, financial statements, and legal matters.
- Set Clear Investment Goals: Define your investment objectives and create a clear plan. Determine the type of real estate you want to invest in (residential, commercial, industrial, etc.), your desired return on investment (ROI), and the time horizon for holding the property. Having well-defined goals helps you make informed decisions and stay focused.
- Financial Analysis: Conduct a comprehensive financial analysis before investing. Evaluate the property’s potential income, expenses, cash flow, and potential for appreciation. Consider factors like rental rates, vacancy rates, property management costs, maintenance expenses, and financing options. Ensure that the property’s income potential aligns with your investment goals.
- Risk Management: Real estate investing involves risks, and it’s crucial to manage them effectively. Diversify your portfolio by investing in different types of properties and locations. Analyze potential risks such as economic downturns, property damage, legal issues, or changes in local regulations. Consider working with professionals like real estate agents, attorneys, and property managers to mitigate risks.
- Long-Term Perspective: Real estate is generally a long-term investment, and it’s essential to have a patient and long-term perspective. Avoid making impulsive decisions based on short-term market fluctuations. Focus on properties with good growth potential and consider the potential for rental income over time. By taking a long-term approach, you increase your chances of building wealth through real estate investment.
I encourage any new investor to create a buy box for themselves based on what they are looking to accomplish. You can always change as you learn more. But you have to start somewhere.
The biggest thing is to just start. The more deals you analyze the better you will get at it.
To your success and your future.