If you’ve managed to untangle yourself from “paralysis of analysis” for long enough to explore your local market, here are a seven ideas to bear in mind:
1. Keep it within 30 minutes of where you live: The reason for this is simple – for as often as you need to visit your investment house, you don’t want to drive away your day in time and gas dollars to get there!
2. Build your portfolio with houses all in the same general area: Among other things, as you build your portfolio, you will avoid driving needless distances from A-to-B-to-C when visiting more than one property in a day. You will also find that it is easier to find property types in the same caste of structural preference.
3. Purchase only properties of a similar build: Because the homes I buy are in close proximity to one another, I find it easy to repeatedly select similar, if not identical structures. My preference is a single-story on slab with three bedrooms and one bathroom. Using this guideline, my renovation parameters and pricing guidelines can be remarkably predictable from asset to asset.
4. Look for highly distressed physical structure: While this is more of a loose guideline than a rule, I have found that value (equity) can be more easily “acquired” with truly ugly physical conditions. That is to say, your cost basis will be proportionally lower than the absolute cost to make the house fully habitable, while many investors are too intimidated to take on the project. By sticking with a finite type of house structure, you will already know exactly what all the cost points will be, regardless of whether the house needs a new roof, new mechanicals, substantial drywall replacement, etc. Having stated this, it is not an absolute necessity that the house is a complete junker – I’m just saying that it can be prime opportunity. If you can instead find a property with minimal renovation necessary, and it fits easily in your economic model, go for it!
5. Make sure the economics of the purchase fit your investing profile: If you have committed to a paradigm where you can NET 15% of your revenues, don’t make an emotional purchase that presents a risk to your standard. For instance, if you can commit a total of $35,000 for purchase and repairs as your total cost basis, while estimating a sum of $15,000 in closing costs, utilities, and repairs, don’t offer any more than $20,000 for the property! Also, don’t “tweak” your repair estimate to make an offer price work simply because you’re feeling emotionally convicted to a particular piece of inventory. There will be plenty of opportunity to purchase within your business model without risking economic breach.
6. Don’t expect to “love” the neighborhood: This is a biggie. Many, if not most, potential real estate investors will scramble from the best opportunities because the target neighborhood looks nothing like their own backyard. I’m not talking about slumlord territory, either. Most likely, you wouldn’t want to move your own family to the area where you will own investment inventory, but reality invariably dictates that your optimal risk/return plot on the investment frontier exists in a geography that may initially evoke a sense of discomfort. Big mistake, if you care at all about making fantastic income in the real estate markets. Many would-be investors never get started because they can’t trump emotion with logic and empirical proofs.
7. Don’t put the cart before the horse, but make sure you have both: Have a game plan. While I advise against the trap of “paralysis of analysis” (never getting anything done because of feeling overwhelmed with information in a new industry), the other risk is running out and buying a house just to get started. I admire the aggressiveness, but temper this with a broader knowledge of subsequent processes. For instance, will you be doing some or all of your own renovation work? Do you have funds available for both purchase and repair? Do you have reserve funds for unforeseen repairs once you have finished the house and placed a tenant? How do you plan to lease and manage the property? Etc.
There is more to the process than perhaps meets the eye, at a glance. It’s good to know what you’re getting into, and essential to know what you are looking for. These tips are the learned result of my own years of trial and error – I didn’t have a mentor.
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Until Next Time,
Vince
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