Define Your Investing Criteria
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Hey, this is Josh Weidman here with REI 360. Welcome to today’s training. Today , I’m going to talk about defining your investment.
Well, anytime that you’re getting into real estate, whether you’re just beginning, you’re looking at a new area, or whatever the case may be, it’s really important to define exactly what you want. It’s going to set the table for marketing to go out and search for the kind of deals that you want. If you don’t know what those things are, defining it, sitting down, and taking a couple minutes to go through and define that ideal investment will really help you save time, save money, and ultimately, spend your time and resources in the right place.
So, I’ve broken this down into six steps. Each step along the way kind of builds on the one before it, and where I like to start is by determining what my exit strategy is going to be.
Now, determining an exit strategy, I have three major exit strategies that I like to take advantage of. One is wholesaling, and I do that for cash flow. The second is to buy, fix, and flip. I call this retailing. That is for the big hits. And the third is also for cash flow, but that’s rental properties.
Depending on the exist strategy, it’s going to depend on what price range, what geography, and these are all things we’re going to take a look at, and the amount of construction. But if you don’t know going in what you want to do with these properties when you get them, it’s going to be very difficult to identify these properties. You’re going to end up marketing to a whole bunch of different areas that are not going to meet the criteria that you’re looking for, and it’s a waste of time and money.
So, first define our exist strategy.
Next, we are going to define our geography. Really famous quote that I love is, “Geography is destiny.” It’s the destiny of nations. It’s also true in real estate. We’ve all heard the saying that “real estate is location, location, location,” and it’s true. Depending on what kind of exit strategy that you’re looking for, you’re going to locate different geographies, different areas of your town, different areas of a city – whatever the case may be.
For wholesale properties, you’re going to look for the type of properties that are going to appeal to a buyer. That may be a flip, that may be a cash flow property, maybe a rental. There are some people that like to buy properties subject to. So again, different areas of the city, different areas of your town are going to dictate that.
If you’re looking to retail a property, you’re probably not going to look in neighborhoods that are predominantly rental areas. You want to appeal to owner buyers – first time buyers, people that are looking to upgrade or downgrade, but they’re looking for owner properties that are traditionally going to be better kept and things like that. So, if you’re looking to buy a property, fix it up, and flip it, you’re going to be looking in neighborhoods that are predominantly owner-occupied.
On the other side of things, if you’re looking for rental-grade investments, yeah, you’d love to buy those predominantly owner-occupied areas, but it’s going to be very difficult to find a cash flow investment in those kinds of neighborhoods. So, you probably want to target your investments to more traditionally rental areas. So, that’s geography.
One thing that I also look at, for me, if I’m going to flip a property, I’m a firm believer if I’m involved in a rehab, I need to be there everyday. If I’m going to be there everyday, I don’t want to spend hours down the road going to and from my flip. I want to spend five or ten minutes, stop in, take a look at what’s going on, make any adjustments, get back in the car, and move on with my day.
So, when I’m looking at geography, I’m not just looking at the type of neighborhoods I’m targeting. I’m also looking at their distance from my office or from my house. I traditionally will flip properties that are anywhere ten to twenty minutes away from my house. So, it really becomes a little bit limiting, but that’s okay.
Boom, we’ve defined our geography. Now, we know what exit strategy and geography.
The next step is to define your price. Define your price. It seems pretty obvious, but if you are unrealistic and, “You know what? I want to make a ton of money on this thing, and I’m going to work in the higher dollar amounts.” If you’re just getting started, that could be a recipe for disaster if you don’t have experience dealing with the type of repairs that need to be done to sell a flip. That’s something to consider. Likewise, if you don’t have the money or aren’t going to be able to get the money to buy one of those high-end investments, you might want to be looking at the smaller end of the investment range. Again, this is just another step in the definition.
Step four is our construction. Okay, if you’ve never deal with construction, except for maybe remodeling a bathroom – you hired a contractor to remodel your bathroom in your primary residence – if you have never dealt with contractors, it can be a handful. You want to make sure that you’re not biting off more than you can chew.
One of the first flips that I got involved in was a rehab for a building that had three walls – no roof, no floors, and everything was sitting in the basement. It was a nightmare and became a real problem because I did not have the resources, I didn’t know what I was doing, and it became a failure. I don’t want that to happen to you.
You want to be able to find what you’re comfortable with. If you’re just getting started, maybe you’re only comfortable painting and carpeting a house. If you don’t know anything about heating, or you don’t know anything about the structure or repair – whatever the case may be, you want to define what you’re comfortable doing on a remodeling end so that if you see a property that seems like the greatest deal in the world, but it’s outside of your comfort zone on the construction end, you can feel comfortable walking away from that deal because a lot of the times, the deal you walk away from is a much better investment than the bad deal that you bought.
Okay, so we defined our construction.
Step number five is going to be our limiters or our deal-killers. I run into so many properties and so many investors that don’t take the time to write these things down and think about these things beforehand, and what ends up happening is they end up seeing the deal of a lifetime, seemingly, and ignoring the problems that are right in front of their face.
Well, what am I talking about?
One of my eliminating factors, or limiting factors, are the number of boarded up properties on a specific block. I’m talking about rental properties here. I’m not talking about retail properties. But the number of boarded up properties on a block really is going to impact the value and the attractiveness of that property, both to if I’m wholesaling a property to my end buyer and to a tenant if I’m renting the property out. If they’re the only house on the block, why are they going to want to live there? The people that are going to want to live there are probably not going to be the kind of people that you want to rent to.
In addition, board ups and things like that, they can add to the maintenance cost of a property because if the house next door is falling down, guess what? Your roof is going to leak. You’re going to have other problems that you’re not anticipating. So, that’s one limiting factor.
Another might be drug activity in a certain area or crime rate. These are things that you should look up and you should be aware of. There are some neighborhoods that look fantastic during the winter time because there’s nobody selling drugs on that corner, but then as soon as spring hits, it’s a nightmare! And again, it’s the type of thing that you just have to be aware of. If you say, “Look, there can be no active drug activity on the block,” there you go. You wrote it down. You got out to see a property and there’s active drug activity, the house is already eliminated. It doesn’t matter if they hand you the property and hand you the deed – it’s not worth the deal.
Structural damage might be another one. I know for myself, if there is a fire damage on a property, I’m uncomfortable getting into the deal unless I can anticipate literally stripping the entire house down to nothing and literally rebuilding everything including the beams and everything, and it still being within my profit percentages. I really do not want to move into it. That’s just me. It’s my own comfort level. Yours may be different, but structural damage is something that I try to shy away from unless I’ve already completed a project that is similar, or I can pull in a structural engineer that can give me some feedback on what needs to be done to fix the problem.
You should be writing this stuff down when you’re defining what kind of investments you want to get into.
Another limiting factor or deal killer that I’ve seen both from my coaching clients, and I’ve started to pay more and more attention to is trends in neighborhoods. An old investor one time explained a city like this: you have a box full of marbles and you’ve got all different kinds of marbles in that box, and you can shake the box up and move them around, but at the end of the day, you have the same number of marbles that are just in different places. His reference was the type of residents that are in a city. You have people that make a lot of money, you have people that make a little money. You have people that follow the law, and own properties, and are good tenants. You have people that they don’t follow the law, they break the law, they’re criminals, and they don’t own houses, and they’re awful tenants, but a lot of times you can see these trends in neighborhoods.
There are certain neighborhoods that aren’t so great, but then a developer moves in, and buys up a bunch of properties, and starts renovating there, and now investors start buying there, and the prices rise, and the neighborhood gets better, and better, and better. Well, there’s people that are being displaced from that neighborhood, they’re going somewhere. Where are they being displaced to? You want to keep an eye on trends like that. So, if you have people moving out of a bad area and that is trending up, then man, that could be a really great indicator to buy in that area. If you have a lot of investment, you have a lot of gentrification, that’s great. But where are those people going? If you have a pool of rental properties that you bought, and when you bought them they were worth fifty thousand dollars, and you have all of this bad traffic or people moving into this area, and it’s driving the prices of real estate down, you certainly don’t want to buy anymore there. It might be time to get rid of those properties. So, keep that in mind. You want to look at the way that neighborhoods are trending.
The sixth contributing factor, and the final one here, to kind of round things out is the type of return on investment. Return on investment. What am I talking about? It is pretty self-explanatory. How much do you have to make from this property? It can either be a percentage or it could be a dollar amount. Your return on investment is going to be a factor of all these first five indicators and these first five steps that we’ve gone through in the definitions.
If you’re dealing with a price point here that caps out at a hundred thousand dollars, it’s very unlikely that you’re going to be able to go in there and make eighty grand on the property. It’s probably not going to happen. Likewise, if you’re looking for a huge return on investment, or a small return on investment, or whatever, you want to be realistic and also aggressive in these numbers. Realistic, and just as I talked about, if you’re in a hundred thousand dollar neighborhood, making eighty thousand dollars is probably not realistic, but maybe making thirty or forty thousand – that might be pretty realistic.
So, you want to be aggressive, but also realistic when you’re looking at those numbers, and if that means you have to do more deals to hit the kinds of financial goals you’re looking for, then that’s what it means. But at least you have a written game plan, a defined investment strategy, on the type of properties that you want to buy.
So, there’s six simple steps to defining your real estate investing. Take advantage of this and give it a try if you don’t already. Take advantage of what you want to buy and invest in.
That’s it for today’s training. Thanks for joining me, and until I see you again, best of luck in your real estate investing.