Property Evaluation Criteria

Leila Moussavi · 2022-02-14T11:12:36-08:00

Hi BiggerPockets! My name is Leila, and I'm a 19 year old college student looking to investing in a buy and hold property out of state. I would eventually like to become financially free by 30 years old, living off of rental income. I am unable to quality for a conventional loan, but do have enough saved for a small down payment and some potential investors (family, friends) who would be willing to work some sort of deal out with me so I have the funding to purchase a property. Also they could be potential co-signers on a loan. I may even have a potential partner, as well. I am open to creative financing. My game plan is to create a set list of criteria for properties, then research markets, then find an agent and analyze properties from there until I find one that fits my standards. So far my criteria looks like this: • Neighborhood - B class • Property size (square feet) SFH: 1100-1200 Bed/Bath: SFH: 3 bed 2 bath MFH: ?? Bed/bath: MFH: 1, 2, or 3 bed units? Bath? What's ideal? • Lot size SFH: 6000 with 2 car garage MFH: What's a normal lot size? • Property condition - ?? • Number of units - SFH or MFH (2, 3, or 4) • Cap rate - ?? • Cash flow - 8-12% return • Appreciation potential - ?? A. How would I determine if I want to invest in a MFH or SFH out of state? Does it depend on the market/location? MFH seems good for scaling and less risky as far as vacancies. I'm leaning towards MFH. B. What criteria would you suggest I edit/add into my list above, keeping in mind my experience level and funding? C. Any other extraneous advice from out of state investors would be more than helpful. Thank you!

John Clark

Member since 2018 · 1k+ posts · 1k+ votes

4y

First of all, forget out-of-state investing. It's hard enough for people with experience, and neigh on impossible for rookies. Yes, I know, California is impossibly priced, but that doesn't make out-of-state investing any easier.

Try a small three-flat or four-flat in reasonable condition, find a partner similarly situated (just starting out) and each of you put up down payment and reserve money, and house hack: you live in one unit, partner another, and rent out to two tenants. You'll need a lawyer to draw up the partnership agreement or whatever other relationship you settle on.

Also, forget lot size unless you plan on adding an auxiliary dwelling unit (ADU). You want to be a landlord, not a farmer, and that means density. Sounds like you'll have your hands full learning the ropes. Navigating the shoals of ADU additions (with no money, I might add) will be too much.

Finally, stay in college. Unless you are majoring in some useless subject like art history, psychology, or (my favorite) "western civilization", you will want and need that degree. In fact, make sure that you can't put your savings to better use by using it to pay down/off student loans. You ill need to qualify for financing as you invest in real estate, and student loans can be a real burden.

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Joshua MessingerBusiness Member

Property Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes

4y

Hey @Leila Moussavi!

I love the ambition of jumping into making your own due diligence checklist. Though I wouldn't be focusing on the property side of things I would be focusing on the real aspects of what makes a deal or not... The numbers! (Not saying it's a bad thing that you have this checklist but it will be hard to find EXACTLY what you want in the market, so instead I would recommend you want to adapt to what the market will give you, and focus on finding/creating deals at ALL times). Also, I would start small then go big! It will be hard to start investing OOS(Out-of-state) as your first deal as you don't have your systems set up for operations, cleaning, maintenance, acquisition, etc.

When figuring out what makes or break a deal you need to take a couple of things into consideration:

- Gross revenue the rental property will make

- Expenses the property will have. This includes property taxes, insurance, HOA fees, repairs/maintenance, management fees, Cap Ex reserves, interest payment from your loan, and your principal payment from your loan.

Knowing these figures will allow you to have a better understanding if a property will work for a deal or not.

I hope you found this useful! If I can help in any other way please feel free to reach out!

Live Free,

Josh Messinger

[email protected]484-986-5012

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Leila Moussavi

OP

New to Real Estate · Riverside, CA · Member since 2022 · 34 posts · 12 votes

4y

@Joshua Messinger

Thanks for the informative reply Joshua! Quick question regarding your advice that investing OOS would be hard because I don't have systems set up for operations, maintenance, cleaning, acquisition, etc: I don't have these system set up in California, either. I would have to establish these systems in wherever I choose to invest, therefore I'm thinking why not start with OOS, if I'm going to have to set up these systems for properties in-state, anyways? What are you thoughts about this line of thinking?

Thank you!

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Leila Moussavi

OP

New to Real Estate · Riverside, CA · Member since 2022 · 34 posts · 12 votes

4y

@John Clark

From your perspective, what makes OOS investing nearly impossible for rookies? From my (very limited) knowledge, it seems like you would use the same principles whether you are investing in or out of state. Out of state obviously has the downside of distance - not being able to conveniently meet your team face-to-face or see properties/neighborhoods in person. However, it seems like there are tons of resources vetting neighborhoods/zip codes online, not to mention insight from BiggerPockets community members who are invested in the same area.

Would love to hear some insight. Thank you!

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Joshua JanusBusiness Member

Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes

4y

Is a house hack a goal of yours in the future? Study the requirements for an FHA loan like a book and make sure to set yourself up for success. Examples would be building up your credit, getting the most recent tax returns for the last 2 years in the same field, building up capital for the down payment, closing costs and 6 months in reserves so you can use as much of the rental income from the other units as your own income when you getting qualified. These are some barriers I had to make sure to be able to climb over. Let me know what questions you have.

[email protected]614-502-5316 Podcast Guest on Show From DoorDasher to $1.5 MILLION in Real Estate (All at 22 Years Old!)

1 Reply

Leila Moussavi

OP

New to Real Estate · Riverside, CA · Member since 2022 · 34 posts · 12 votes

4y

Quote from @Joshua Janus:

Is a house hack a goal of yours in the future? Study the requirements for an FHA loan like a book and make sure to set yourself up for success. Examples would be building up your credit, getting the most recent tax returns for the last 2 years in the same field, building up capital for the down payment, closing costs and 6 months in reserves so you can use as much of the rental income from the other units as your own income when you getting qualified. These are some barriers I had to make sure to be able to climb over. Let me know what questions you have.

@Joshua Janus

After college, I might be interested in house hacking, yes! How long would you say it would take to meet all the requirements for an FHA loan, assuming I don't have a credit card/W2? I'm not sure how many years it would take to build up an adequate amount of credit and collect a steady income to qualify for this loan.

1 Reply

Joshua JanusBusiness Member

Realtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes

4y

@Leila Moussavi I drove for Uber during college for roughly 18 months to get 2 years of the same 1099 income on my tax returns. Theoretically you could do it in just 13 months but you would want to make sure you have enough income shown to qualify. I wrote off too many items and miles the first year and didn't realize the consequences of that. In terms of cash, I have conservatively allocated 20k for my house hack. (3.5% of down payment) 6125 + (closing costs) 4000 + (6 months of cash reserves to maximize the rental income I can pull from the other units to help me qualify) 7000 = 17.125k. The extra 3k is for any cosmetic upgrades or repairs that I make to add some value although that isn't the main goal with this house hack. It is to live for free and build equity!

[email protected]614-502-5316 Podcast Guest on Show From DoorDasher to $1.5 MILLION in Real Estate (All at 22 Years Old!)

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Leila Moussavi

OP

New to Real Estate · Riverside, CA · Member since 2022 · 34 posts · 12 votes

4y

@Joshua Janus

Understood. Thanks for the fast reply! Super helpful.

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Bahman Ghashghaei

Real Estate Agent · West Sacramento, CA · Member since 2014 · 39 posts · 14 votes

4y

Congratulations Leila for starting this early. I'm much older and just starting out.

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John Clark

Member since 2018 · 1k+ posts · 1k+ votes

4y

Quote from @Leila Moussavi:

@John Clark

From your perspective, what makes OOS investing nearly impossible for rookies? . . . Out of state obviously has the downside of distance - not being able to conveniently meet your team face-to-face or see properties/neighborhoods in person. However, it seems like there are tons of resources vetting neighborhoods/zip codes online. . .

------------------------------------------

The factors you mention make it impossible. Online resources usually aren't worth the paper they're written on (who's writing them if not a real estate shill trying to unload property at full retail?). Other resources cost money (property managers, etc.) if they're good, and even more money if they're bad. Plus, you have to get a "feel" for a neighborhood and a building. You can't do that from afar. Compound that with being a rookie and it's essentially impossible to get a fell for what you are buying.

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Darius Ogloza

Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes

4y

When you invest "out of state" you are competing against many, many experienced investors with vast stores of local knowledge and hard-won relationships that have taken years to develop. Trying to beat these people to deals while not completely futile is highly, highly unlikely. Moreover, as a buyer, many of the deals that will be presented to you will come from very experienced sellers (i.e. turnkey sellers) who make a profit by buying low and selling high to "out of state" investors like you. They too have a massive advantage over you - troves of local knowledge. Can you compete with these folks? Maybe after some time. But this will require years of diligence and study. In every market there are winners and losers and distinguishing between them is notoriously difficult, especially when trying to learn about market conditions from an app. From Orange County, nearly everything in the Midwest and most parts of the South will look "cheap" to your eyes but the vast majority of these "cheap" properties make terrible investments. That $50,000 three-flat house in Cleveland probably required $8,000 to build in 1920 dollars (i.e. the equivalent of $112,000 today). So, what looks like appreciation is actually a massive loss. In fact, $8,000 invested at 5% per year should have yielded over $1 million dollars by today. What would you rather have $1 million or a $50,000 house in Cleveland that will likely be worth $40,000 ten years from now??? Invest in what you know.

1 Reply

Scott KronePro Member

Investor · Northbrook, IL · Member since 2017 · 352 posts · 295 votes

4y

@Leila Moussavi I love the entreprenuer spirit. Great place to start. I agree on a significant point - out of state investing or out of a local area. It is difficult if you don't have the ability to go and address a problem within a local drive. There are many reasons this may come up: non-payment, tenant damage, maintanence issue, meet a repair person, etc, etc.

The systems in place which are necessary for out of town is local management that can address all of those issues which will arise. So the issue becomes finding someone to manage a one off rental. That can be costly which inturn impacts your bottom line. What makes MF "easier" is a manager can oversee 20 or 30 or 40 units compared to one, so the cost is spread out over more units. Or, if you had 10 SF you could get some savings as well. SF are harder to manage, because they are typically spread out which means it takes more time to manage. If I can drive 20 minutes and check on 20 or 30 units, versus driving 20 minutes seeing one unit, then driving another 15 minutes to a second or third location.

So, I am not saying don't invest out of state or out of your local community. What I am saying is it is important to recognized the increase in your cost and factor that into your underwriting.

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Joshua MessingerBusiness Member

Property Manager · Poconos, PA · Member since 2020 · 443 posts · 264 votes

4y

Quote from @Leila Moussavi:

@Joshua Messinger

Thanks for the informative reply Joshua! Quick question regarding your advice that investing OOS would be hard because I don't have systems set up for operations, maintenance, cleaning, acquisition, etc: I don't have these system set up in California, either. I would have to establish these systems in wherever I choose to invest, therefore I'm thinking why not start with OOS, if I'm going to have to set up these systems for properties in-state, anyways? What are you thoughts about this line of thinking?

Thank you!

No problem!

When setting up these systems OOS it will be much harder since you're new to the area - meaning you will have to figure out a ton about the area before even getting started!

You have to keep in mind, you are also competing against others who have a very large amount of experience/knowledge in the area. You already have knowledge/experience in your area. Why not leverage that?

Usually, when getting started you will want to self-manage your property so you can learn about your property's operations/upkeep. Without good knowledge about the upkeep of your rental, it will be hard to set up your own maintenance operations.

You can leverage the connections you already have to get started, the places you know, and the stories you have in the area you live in. Why leave that experience/knowledge on the table?

Otherwise, nothing great has come easy so it is truly your decision on what you should do! I hope you found this useful!

[email protected]484-986-5012

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Scott JohnsonBusiness Member

Specialist · Greenville, NC · Member since 2019 · 673 posts · 408 votes

4y

@Leila Moussavi, It's important to note how everyone is responding, and I'm fully on board with them. As a new investor, I always recommend being able to walk or drive to your first rental. If it's good enough for Robert Kiyosaki, it's good enough for me. That allows you to check in on it every now and then, even if you have a property manager, and see how things are running. You'll learn by osmosis and asking your property manager questions. Or, heck, manage it yourself and get the full education.

If you are dead set on investing OOS, find someone here or in your local REIA that you can partner with. Any partner won't do it, they need to have experience.

Of course, if your goal is to lose money for tax purposes, then the aforementioned advice is null and void. Investing OOS with no prior experience and no mentor is a great way to get those incentives.

[email protected]

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Will Pieper

Realtor · Columbia, MO · Member since 2019 · 34 posts · 25 votes

4y

While I think everyone's caution and concern are understandable, I don't think you have to go through the "conventional" methods of learning about real estate investing anymore. While self-managing and being able to drive to your property are great experience, if you plan to be in OOS investing, you won't be doing these things anyway so I don't think it's totally necessary to have done them. If I were in your shoes I would find a handful of markets (maybe 3) that you are interested in and start talking to people there.

Talk to the local property managers and realtors in the area and let them tell you about it and what they think about your specific situation and if they want to help. If you are looking at an area, look up crime or call the local chamber of commerce or police department and see what they think about the area. I do agree that certain banks and professionals are going to be skeptical working with you due to your age and the situation but it is something that is becoming more common and if you have the financials and motivation to back it up, somebody will be happy to help you. Even established adults who are investing OOS have trouble finding the resources and people they trust in OOS markets but with time, effort, and caution, you can do it.

Before you jump into a property, I would highly suggest talking with someone you know and trust that has experience in investing and having them look over everything. Maybe even have them reach out to the people you have been talking to, and seeing if they get the same information and feel that the people you are working with are being truthful. Do your research, look up reviews, find out how much business they do and if they are a good company. Whether you are a local millionaire or a teenager investing out of state, established companies and people don't want to do bad business, so they will either write you off and not help you or help you the best they can. Be smart, be cautious, but I think it is possible.

Good Luck!

1 Reply

Mollie Hess

New to Real Estate · Columbus, OH · Member since 2021 · 36 posts · 19 votes

4y

Hi Leila!

It seems like you're in a great starting position. I'd suggest adding in some market research on population growth and job market. Especially looking out of state, this should give you more information on where is better for you in the long-term investment.

As for single family versus multi-family, consider the type of tenant you want and the level of management you're looking to handle or hire out. A single family tenant will likely be less management than a multi-family tenant.

Good luck in your such! Feel free to reach out if you want to talk more! I'm also a young, just starting out investor.

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Shane Kelly

Real Estate Agent · Cleveland, OH · Member since 2021 · 383 posts · 361 votes

4y

As a 20-year-old looking to invest in the near future, I love the initiative you have.

A.) I see the trend a lot that investors start with SFH when they are a newer investor because it's easier to get into. Then after they amass a large enough down payment, they 1031 into a bigger MFH and then repeat that for bigger and bigger MFHs. This is kinda the "rich dad" strategy I guess you could say, and makes sense to me. However, if you had the resources and are willing to commit, I'd say you could in theory skip the SFH all together and upgrade but knowledge may be what kills you in that endeavor, so a savvy, veteran partner would be a nice addition. Do you own number crunching though, and find what makes sense for you and your backers.

B.) As for what you can buy, depends on a lot of things. If you want to get appreciation like some investors do, you have to be very picky and identify areas that have growing populations, strong job markets, etc. If all you care about is cashflow, you can try to find a Midwest cash cow somewhere that goes above the 2% rule. They each have their trade offs, where the cash cow may only be worth a dollar more than it is today in 10 years, and the appreciator may only ever break even on cash flow. At the end of the day, you make your money on the purchase, so find a good deal that fits you criteria AND stick with your criteria once it's set.

C.) Make connections with wholesalers and PMs where you're looking to invest, they can pay for themselves many times over if you make the right friends.

Best of luck!

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Danielle Jackson

Phoenix, AZ · Member since 2021 · 504 posts · 282 votes

4y

This is awesome that you are thinking about this and preparing yourself as an RE investor. A lot of great advice throughout this thread.

As far as local vs. out of state markets, I can attest to the benefit of being able to drive to the property. You will be learning a LOT with your first investment, and its extremely beneficial if you can experience it all first-hand versus relying on others. If you can secure a team of people you trust implicitly then I would maybe consider it. Out of state is certainly easier to do once you get a little experience under your belt.

I also recommend practicing running numbers to get really good at evaluating properties. Build yourself a simple excel model where you can plug everything in and quickly to come to a decision. This is hands down one of the most beneficial things you can do to prepare yourself as an investor.

Also, I love your drive to get yourself into a financial position to qualify for loans going forward. While creative financing is always available, it is extremely helpful (and many times less expensive) to not have to rely on it for each investment. As others have mentioned, focus on putting yourself into a position to qualify for conventional financing; 2 years work experience, good credit, and reserves.

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Property Evaluation Criteria

Property Evaluation Criteria

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