Why Real Estate Investors Have Their Own Investment Criteria

Writing down your real estate investment criteria means clearly defining your real estate investing needs and wants. But, more than that, it spells out exactly what kind of a real estate opportunities you are targeting to succeed. Having specific written criteria keeps you on track, can help you grow as an investor and even makes it easier for you to land the best real estate deals.

If your hope is to join the ranks of successful real estate investors, you need to develop formal written investment criteria that is well thought out and supportive of your strategic goals and objectives. Putting your investment criteria in writing not only helps those who can lead you to the right properties but it also allows you to quickly evaluate possible investment opportunities and see how they fit or do not fit into your future plans. This allows you to avoid wasting precious time and to pinpoint and quickly act upon the right opportunities.

Writing down your investment criteria also makes for smooth underwriting so that you have an easier time finding the best possible deals. It also allows you to share your criteria with other real estate investors so that they can refer or possibly partner with you on future opportunities. If you haven’t yet outlined exactly what your criteria are for selecting an investment property, now’s the time to put pen to paper.

When developing your written criteria, consider when you want to make an investment. What is the bottom line? Do you not want to make an investment at any time if you don’t understand it? Do you want to never make investments that you cannot pay for if everything goes wrong? Do you never want to make an investment where you cannot handle the worst-case scenario? Determine your comfort boundaries and the level of risk you are willing to accept or not accept, and put this in writing.

Next, when developing your written investment criteria, consider what your ideal investment would be like. What do you do to make sure that your investments are the best possible deals for you? Do you conduct a certain amount of research using specific sources? If so, write this down. Outline on paper the best real estate deal you have ever put together. What were the steps you took that made you an outstanding investor in that situation? What if you applied the same steps to every real estate deal you made? Would you generate more success from other opportunities? If so, outline exactly what you do when you are at your investment best, and add this to your written criteria. This will help ensure that every deal will at least have the opportunity of becoming as successful as your best deal ever.

Write down your money criteria. Where are you willing to go for financing? How much capital are you willing to put at risk? How comfortable do you feel taking risks with your money? What levels of risk are you willing to take? How are you going to secure your deals? Knowing how you will handle money is very important to you as an investor.

The manner in which you write your criteria depends on many different factors depending on asset class, what key criteria are most important to you and how you choose to categorize.

Typical Criteria Categories may include such things as:

Market Segments:

• Age
• Income
• Blue collar/White collar, etc.

Geographic:

• States, regions, cities

Property

• Asset classes: single family homes, small multifamily (duplex, triplex, fourplex), apartments, office, retail
• Size
• Price range
• Roofs with pitched construction
• 80% min occupancy

Cash Flow minimums

Cash-on-Cash Target Ratio

Minimum Debt service

IRR:

Hold period

Below are our specific objectives and criteria:

Our Investment Objectives & Acquisition Criteria

Manassero Properties has yield requirements that are commensurate with the risks and opportunities presented by each property. Manassero Properties, LLC focuses on sub-markets of growth and stability with “barriers to entry” and/or properties available below replacement cost. Additionally, we prefer stabilized properties (min 85% occupancy) requiring a renovation or upgrade where the property’s grade or class, at the time of purchase, is below that of the other competitive properties in its market.

Acquisition Criteria

General Criteria

• Emerging market areas with strong short and long-term economic growth
• Various cap rates depending on cash requirement, appreciation potential and property
• Cash on cash greater than 8%
• Debt service coverage ratio of 1.5
• Price range is generally $1,000,000 to $15,000,000 – all good deals considered
• Cash Equity – All Cash or Cash to Existing Debt
• Value-Add Opportunities Sought

Apartment Building Property Criteria

• Multifamily garden style residential apartments
• Roofs with pitched construction
• Asset Class: C or B
• Property Location : C to B+ properties located in C to A areas
• Number of Units: Greater than 70-500 units
• Preferred Age: Properties built in 1980’s and newer
• Minimum Occupancy: 70% or greater, provided properties are well located and present value enhancement opportunities
• Preferred Markets: Texas, Idaho, North Carolina, South Carolina, Tennessee, Florida, Georgia, Ohio, Alabama

A single family home buyer’s criteria may read like this:

Single family houses with 3 bedrooms and 2 baths in the 30263, 30265, & 30277 zip codes. Target full market price range is between $50,000 to $199,000. Ideal properties are on quiet, safe streets convenient to good schools and shopping. Ideal properties also include a garage or other storage and a useable yard. Target purchase price (including upfront repairs) should at least meet the 1% rule. Net rental income after financing for multi-units should be at least $100/month per unit and for single family houses should be at least $200/month. Cash-cash-on cash return should be at least 10%, and the discount from full value of property should be at least 10%.

These samples are meant merely as reference on how a finished criteria may look written down. You’ll need to present and highlight as to the emphasis of your goals and objectives.

Finally, and maybe most importantly, outline the standards by which you wish to live as an investor. What are the ethical boundaries you’re not willing to cross? What you want to stand for as an investor and what sort of person do you want to be as an investor? This may seem abstract and very much up in the air, but it will help you outline exactly the sort of investment opportunities you want to capitalize on. The best real estate investors have a code of conduct, so you should, too.