Defining Real Estate Investment Criteria-Part 1

Defining Real Estate Investment Criteria-Part 1

A real estate agent is a valuable member to have on your team as a real estate investor. A good one will help you develop a plan to reach your financial objectives beyond just the next transaction in front of you.

To get the most out of the relationship, you must be clear on what you want. What is your list of criteria that will help you know a great opportunity when you see it? Whether you want to Buy & Hold or Fix & Flip, you need to know what a good deal looks like for YOU.

A great deal for you may not be a great deal for someone else. And a good deal for you today, may look different five years from now. As you gain experience, you may have a better feel for your risk tolerance and also which types of investments work best for you. A good agent can also help you do the heavy lifting of reviewing the market data to help you get up the knowledge curve quicker to know what are realistic criteria.

Over the next three blog posts, I will share some areas where you can define clear criteria in a way that will help others source deals for you. Here are the first three:

1) LOCATION

Real estate is still all about location. Location is also often defined block by block. You will sell a castle on a declining street for less than you would for the exact house on a more desired block. An experienced investor will zero in on targets where they can get premium rents and better sales prices upon exit. When you evaluate location also consider:

  • Future outlook-As a buy and hold investor, you are making a bet on the longer-term outlook of the neighborhood, not just what you see today. Will the rents in this neighborhood remain stable or fall? Is the local government planning any projects that may impact valuations for the better or worse?
    Focus-Within a metro market, you should choose your neighborhoods carefully. Newbies try to cast a wide net and have trouble getting to know a single neighborhood well. Since every offer does not turn into a purchase, you can gain an advantage if you focus your bidding on a target area over time.
    Proximity– Your local area may not be the best place to invest if few available properties will meet your financial objectives. In this case, long distance investing is the best option. You will need criteria for the team you need in place to make you feel comfortable turning over this control.

2) PROPERTY TYPE

You can invest in a wide range of properties, from a single-family home to a commercial property. Each property type has different financing options available.

• Small multi-families give you the unique opportunity for more favorable financing as an investor if you agree to live in the property for at least one year.
• Income-producing commercial properties sometimes have better lending rates available than residential properties.

3) TYPE OF TENANT

People typically segment tenants by income, which is often dictated by the location. There are other specialized tenant types to consider such as

  • HUD Voucher clients (previously known as Section 8)- Requires compliance to maintenance standards and processes by local housing authority
  • Student housing– Requires more complicated leases
  • Commercial– Requires managing the business risk of your tenant

These are the first three criteria to consider when developing an investment strategy. Don’t forget that everyone will not have the same list. As mentioned earlier, your criteria will be specific to your financial objectives and risk profile. In parts 2 and 3, I will cover two more criteria: the condition of the property and financial metrics.