Investing Criteria. What do you look for and why?

Question

Hello Fellow BPers,

I just recently graduated college and started to gather a passion for REI. Right now, I'm educating myself on the subject through books, podcasts, this forum and other avenues of learning. I've gotten to the point where I want to start developing a business plan to lead my investing philosophy and approach to REI for the next few years, and one of the items I'd like more expansion on is my deal criteria. So my question to you guys is, what sort of criteria do you investors use to analyze the potential of deals, what numbers do you look for and why do you use these measurements? Furthermore, do you have easily "translatable" criteria for when you enlist a realtor or wholesaler to start searching for potential deals? Or do you only give your "bird-dogs" information such as square footage or bedroom #? And do these criteria tend to be more quantitative or qualitative? Which ones are the most important to you when deciding on if you want to move on a property or not?

Sorry if that was a lot of questions, but I have so many right now, since I'm just starting out! lol

Just as something to work off of, I'm from the DFW area in Texas and I'm looking to specifically invest in small multi-family properties (2-4 units) for the purpose of long-term buy/hold for cash flow. So far, I've established that I want:

Quantitative:

-Minimum 10% CoC Return

-Minimum 6% Cap Rate

-Estimated minimum equity position of 30% (using ARV, not including downpayment)

-Rents must be at least 2% of the purchase price

-$250k purchase price or below.

-Maximum $15k in rehab costs.

-Minimum monthly cash flow of $200/month

-OK with high LTV, as I plan to finance my first property using an FHA loan w/ 3% down

- 1.25x DSCR

Qualitative:

-Minimum 2,000 SF

-Minimum 2 bed / 2 bath

- 2 to 4 units

-Must be in a nice neighborhood, minimum to zero crime rates.

-Must be near an affluent area, with a growing/thriving job market and preferably a growing population (like DFW)

-Wood flooring

-Foundation and structure of the building must be sound, with no major repairs needed.

As a small disclaimer, I have not done a lot of analyzing deals in my local market yet, so I don't know how attainable these criteria are. However, I will be getting started on doing that sometime in the next few weeks and adjust them accordingly to realistic standards as necessary. However, I feel like this is a decent baseline to start and would love y'alls insights and opinions! Thanks for your time helping out a newbie investor!

Sincerely,

Treivor Cashion

Erik Sherburne · Answer

I agree I think your criteria is well thought out.  One of the big things I look for (with a full time job and family) is the return I get relative to my time.   I don't have a lot of extra time right now so I'm patient to find properties that won't be a lot of maintenance while still producing good cash flow.   I have four properties now (just refinanced and looking for a fifth and sixth) but as I analyze it is only about a property every other month that "fits" my criteria to even put an offer on.  Admittedly I'm still relatively new but I have analyzed hundreds of deals to get to four.  Be patient, good luck.

Jeff Richardson · Answer

@Treivor Cashion There are 4 ways we make money in real estate:

Equity capture (the amount of discount we get the property for after all closing costs included)

Cash flow

Equity build up (I factor 5%, and DFW has been close to 10% for a couple of years)

Debt paydown

Here is a deal we have under contract:

Purchase price: 100,000

Repairs: 12,000

ARV: 135,000

Hard money loan: 101,250

Refi to conventional loan: 101,250

My total Cash out of pocket: 18,722

Closing costs from Hard money loan and rate/term refi and carrying costs: 8,081

All in: 120,081

Equity capture: 14,919 (80% return on capital gain)

Monthly cash flow after immediate refinance: 483

Yearly cash flow: 5,796 (31% COC/year)

Annual appreciation: 135,000 ARV x 5%= 6,750 (36% return/year)

Debt pay down: 1,200 (6% return/year)

EC=14,919

CF x 2 = 11,592

AP x 2 = 13,500

DP x 2 = 2,400

= 42,411 return after 2 years or 226% after 2 years.

Our strategy is a 5-7 year hold and when cap rates improve, or once our cash flow is double our living expenses, we will start partnering into 50 unit plus apartment complexes.

Jonathan Damon · Answer

I have to 100% agree. These are very narrow terms in a hot market. 8 years ago no problem but now finding a 3/1 in a low crime area with less than 15k in repairs is a White Rino. I mean homeowners are now competing like crazy for a house like that and they pay over ARV.

Bart H. · Answer

I think you are looking for a unicorn.  2-4 units , in Dallas, 2% rule, $250K or less and in an affluent neighborhood with low crime, no foundation issues with wood flooring.

As an example a little over a year ago we sold a duplex in Dallas that was bringing in about $2,800/month for $377.5K.

In DFW, you will be lucky to get 1% on a property needing a little repair.  Almost every house will have some foundation issues.

We personally focus in on properties where there are multiple shots on goal.  For instance, that duplex I mentioned we bought in 2013.  We lived in one half of it for a year.  So it was a nice enough property to live in.  We could have continued to rent it out, or we could have sold it to developers, or we could have torn it down and rebuilt condos/townhomes on it.  Ie there were multiple exit strategies and multiple ways to make money.

In short we have looked for properties that more or less hit the 1% rule in the path to progress. if we could do a little value add repairs to increase rents, and then sit and wait on development to come our way, even better.  Because imo that is how we have made the most money, is that price appreciation kicker from development heading our way.

I think you will find the most success by learning the politics of the city, looking into neighborhoods that are getting new development and being there a year or two ahead of that development.

Best of luck to you.

Jeff Richardson · Answer

Treivor, our criteria is:

20% COC minimum

100% ROI over 2 years

Minimum $400/month gross cashflow

<2,000 sqft

ARV $100,000-$170,000

3 bed

1.5-2 bath

As much rehab as it takes to get those numbers.

Every house we have purchased has had foundation work in the rehab

In an area I'd feel comfortable having my wife and children outside.

Treivor Cashion · Answer

This is very informative and helpful information. As stated in my original post, I have no experience in the DFW area in buying small MF properties and I wasn't quite sure on what exactly was realistic at this point in the market. However, since I work as an analyst at a bank, I am very aware that housing prices are extremely high here and that the chances of finding such a deal with my narrow criteria might be slim to none at this current point in the market (specifically the purchasing price criteria).

There is a ton of development going on here in the DFW area from the limited experience I have and from working at a bank that primarily deals with residential and commercial real estate loans locally, so I absolutely agree that going to those areas BEFORE the major development begins is a big part of investing successfully in this market. When you mention "learning the politics of the city" and "finding neighborhoods that are getting new development", how exactly would you suggest learning about these two important factors to succeed in REI in the DFW area? I follow some market researchers that I gain access to through my bank, some local news through the Dallas Business Journal, and I'm about to start driving around (driving for dollars) in some areas that I've heard thrown around at my bank by some of the real estate lenders, but beyond that I don't know where else to gain some general market information and more insight into the politics of the city...any suggestions for a newbie on how to get educated in that respect? Also, just off the top of your head, where do you see the most opportunity in the DFW area for small MF properties? Thank you so much for your insight!

Jay Helms · Answer

And it may not be in your area. I still use the 1-2% rule when putting an opportunity through the good ol napkin test.

Treivor Cashion · Answer

@Erik Sherburne That's a great point. Time is our greatest asset, so if we're not using it efficiently, we're not going to make time for the reason we work so hard in real estate...our close family and friends.

@Jay Helms Hm, that's an interesting view, I haven't heard of that as an issue before...what do you generally deem as acceptable and most successful in your rent-to-purchase price ratio?

@Jeff Richardson Good stuff, love setting the bar high! Could you elaborate on your strategy to achieving a 100% ROI on a property you buy? Do you rehab homes at hefty discounts, put in repairs and flip over a short period, or something along the BRRRR strategy where you buy and improve the property over time while receiving cash flow from tenants and sell if a good opportunity presents itself? And what variables influence your calculation, like is your investment considered the whole purchase price of the property (loan + down payment + rehab) or simply your cash investment? I'm trying to wrap my head around how a property receives a 20% COC return, but will give you a 100% return on investment in two years...thanks for the insights!

Jay Helms · Answer

good stuff @Treivor Cashion  I had a lot of the same criteria starting out. Those deals are out there but from my experience, 2% rule usually means a rough neighborhood. Cash flow nicely, but rough. Keep plugging away! My criteria support my goals, cash flow is my current focus.

Antoine Martel · Answer

Treivor.

I think that the information that you have outlaid is plenty!

I don't even give my bird dogs or wholesalers that much information.

I think that if you pass that info along on what you're looking for to wholesalers or realtors they'll know exactly what to look for when the next deal comes along.

It's time to get out there are start telling people what you're looking for.

Investing Criteria. What do you look for and why?

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