What to Look for in a Real Estate Investment
One of the questions we get asked all the time is: How do I evaluate properties and choose a property that will make a great investment?
Enrique Jevons, the head of our Seattle Property Management team, has a lot of experience in this area, as well as multiple other markets across the U.S., so we asked him to share some of his expertise with investors like you. Enrique isn’t only a professional property manager. He’s also an investor. He owns a lot of properties personally. So, he has some personal and professional experience to share today.
Real Estate Success Strategies
Enrique is constantly looking for more properties to buy and he has set up his own criteria for evaluating rentals which we’ll get to in a little while. First, we want to remind you how to be successful in real estate investing. You need three things:
If you’re lacking any or even all of these things, it’s okay. You can leverage other peoples’ time, money, and expertise. There are many ways to do this and smart investors know that.
Find an Investment Team
First, hire someone to help you who has the necessary expertise. This might be an attorney or a realtor who earns a commission every time you buy. It might also be a wholesaler. You don’t have to be tied to just one expert, remember. Make sure you’re using a lot of people to help you out. Get as many real estate professionals as possible looking for deals for you. Work with several wholesalers, and put your requirements out there.
Once you figure out your investment criteria, let everyone know exactly what you’re looking for. This is the best way to gather leads for new properties to purchase.
Determine your Financing Strategy
Next, decide how to finance your real estate and don’t be afraid to use other peoples’ money. Don’t wait until you’ve found a deal to think about looking for money. Try to figure it out ahead of time so you’re prepared to negotiate. You don’t have to have the funds locked up in order to look around, but you do need to know where you will borrow and how you will access the capital you need.
The least expensive place to borrow is a bank. The banks will have the best lending rates, but they’ll also have the strictest criteria. You may not qualify for the loan you want. There are also private money lenders, hard money lenders, and friends or family members who can help you invest.
You can also sell or finance existing property. You can use your 401k plan if you have a self-directed IRA. Figure out the money.
Consider Property Management
Finally, you need to rely on the expertise of others. This might be a property manager or a property inspector. Your inspector may be your best resource when you’re thinking about buying a new investment. We always find it crazy when a buyer tells us he has to see the property himself and can’t make a move for a week or two. This delays the purchase and sometimes negates the opportunity because other investors are ready to make a decision right away.
You don’t actually need to see the property in order to buy it. What you need to see is the inspection report. That’s going to tell you everything that is potentially wrong with the property. It will be the qualified and licensed inspector who gets paid to crawl under the home and into the attic. You won’t have to look for a cracked foundation when you go to the property yourself.
We have never had a buyer go under the house to check the foundation or go into the attic. So, you don’t need to see the house, just the inspection report. It’s thorough, reliable and it includes photos and tells you if something is wrong. Use the time and expertise of others. Don’t think you know it all.
How to Evaluate Potential Investment Properties
When they are deciding to invest, most people are looking for cash flow. Your investment goals will determine what you want in a property. It might be the property doesn’t cash flow today or immediately, but if you get a fixed interest loan that’s a 30-year mortgage, your rents will hopefully go up each year, and the value is appreciating. This will eventually deliver more cash flow. So, even if the property isn’t earning right now, in 5 years or 10 years, you’re likely to see a much stronger cash flow.
Figure out what’s important to you before you start looking for investment opportunities.You might want to choose a property in an area that is traditionally appreciating. A history of real estate investing shows that properties appreciate. They have done so in the past and they will continue to do so. Look and see if that’s the play you want to make.
If you’re chasing appreciation potential, that’s the filter you want to use when you’re evaluating potential opportunities. If you determine that you need cash flow today, remember that you’ll always make cash flow later.
Over time, your real estate will go up in price and value. There’s occasionally a dip in the market, but there’s always a recovery. This allows you to decide when you want to sell, and you’ll never sell because you feel like you have to.
The Four Filters For Real Estate Investing
Enrique is a successful investor, so let’s take a look at his four filters that he uses when he’s making investments for his personal portfolio. All of the wholesalers he works with know these filters and what he wants.
1. One Percent Rule
This one is pretty common. The one percent rule means that the gross rents divided by the purchase price equals one percent. The higher the percentage, the better the deal. A two percent figure is even better. This isn’t the only filter Enrique sets because if it was, he’d miss a lot of great deals. However, this filter is easy to set up on the MLS. He gets an immediate notification when something comes online that meets the one percent rule.
2. Solid Cap Rate
The cap rate is the net operating income. It’s your revenue minus your expenses, and that gives you the net. Your net divided by the purchase price delivers your cap rate, and it’s another number that’s frequently used on the MLS. Again, it’s easy to give to a wholesaler. This number does not include any financing. That’s because financing is a personal thing to each buyer.
The buyer’s interest rate on their cash will be determined by their own financial position, and every buyer has a different financial position. Calculating the cap rate eliminates any leverage or hard money and assumes the purchase is in cash. This helps you compare apples to apples. Taxes, insurance, utilities, and operating costs will make up the cap rate. It’s also possible to set up a filter on this.
3. Available Cash and Financial Position
Next, Enrique considers the amount of cash that he personally has on hand that he can deploy immediately. Based on how much money he has in his line of credit and the cash he has in the bank, he’ll set a filter for properties he can afford to buy in cash. This number changes throughout the year depending on what’s available to use. Any properties that get listed online that are under a particular purchase price will get his attention. He personally likes smaller single-family houses, and he’ll take a look at those available properties that are affordable. If he can purchase an investment in cash, he knows he’ll have a competitive advantage over other investors.
With cash purchases, he includes an inspection contingency but can set the closing date for a week and buy fast. This helps him to beat the competition. Sometimes, these properties will not meet the one percent rule, but if he has the cash to buy them outright, he can beat down the price from the list price.
4. Seller Financed Properties
Enrique’s final filter is for seller financed properties. There are a lot of advantages for these, so he always keeps an eye out for them. While there are fewer now than there used to be, they can still be found. Some properties on the market are seller financed, and they make great investments. Enrique also likes the words TLC in any real estate advertising. If that shows up, he will look at it and see if it’s something he’s interested in.
While he doesn’t flip homes, he will purchase them and fix them up and then rent them out. Then, he refinances them and gets all or most of his money back. It’s like flipping a home to himself and the bank has fully leveraged the property.These are some examples of a personal criteria from a successful real estate investor. Just figure out what a good filter for you might be. Put it out there because that’s when things fall into your lap.
If you need help from an expert, please contact us at Mynd Property Management.
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