When a new property comes your way you should be able to determine if it is for you in a matter of minutes. The longer you waste on evaluation and due diligence the less time you have to focus on other deals. There are many investors who chase every new deal only to find that they aren’t really interested. They do this because they don’t have a firm grasp on what they are looking for. You should have a defined guide as to what kinds of deals and properties you will accept. This guide will lead to putting time into deals you are interested in and passing on those that don’t fit your criteria. Here are six areas to help you determine if a deal is for you.
- Cash Flow vs. Lump Sum. What is your goal for the transaction? Do you want a lump sum payment that a rehab would bring or long term cash flow in the way of a rental property? There is truly no right or wrong answer only what you prefer. How you answer this question determines what kinds of properties and deals you will entertain. A potential rehab property may not make the best rental property. A great rental property may not be a good rehab option. The goal for the transaction will determine everything else about your deal evaluation moving forward.
- Property Type. Not all property types are the same. Dealing with a condominium or mobile home is not the same as a single family. A single family is far different than a three family. Not only do each of these have their own individual challenges they are also financed differently. A commercial property requires anywhere from 20-30% down payment whereas a single family can be purchased for 10-15%. In addition the market for these properties is often completely different. A two family duplex in a market may be much different than a condo. Find a property type that interests you and has room to grow and run with it.
- Market. Where do you want to invest? Would you entertain a deal thirty minutes from where you live? Is there a local market that you see greater upward potential in? A lot can change over the course of a twenty minute drive. Before you look at a property you need to know if the market is right for you. You can get a great deal on a property but if the market is filled with crime and has excessive foreclosures you may not be comfortable with it. Market due diligence requires a good amount of time and research. You need to stay on top of your local markets and see which way they are headed. There are times when you need to expand your market search but you can’t stray too far. If you look at every new deal in a sixty mile radius you won’t end up making too many offers.
- Price Range. Do you want reduced price properties that you need to put work in or turnkey rentals at market value? Before you determine your price range you need to know what you can afford. If you are using lender financing you will get a preapproval number that you can go up to. If using hard or private money your partners will give you their number they are comfortable with. It is important to use these figures as a firm guide. Even if you can squeeze a few thousand higher you may be stretching yourself too thin. Eventually this can lead to doing extra work only to make the same profit. If you have a price range that you are comfortable with let this be your sweet spot. Don’t stray too far in either direction.
- Available Capital. How much capital do you have behind you? There is no point in stretching your budget to obtain a property if you don’t have the money to make improvements. Your available capital is a big factor in evaluating a property. This is especially the case if you plan on making improvements. What you will find is that you will often need more money than you anticipate. Getting started with the improvements only to run out of money will set your business back months. Only look at properties that fit your price range. A good deal may come your way but if you don’t have the capital to make improvements you need to pass.
- Fits Your Guidelines. In addition to your goals with the property you also need to determine what specific criteria you need to have. What kind of returns do you expect? Is there a specific dollar amount of profit that would make it worth it for you? Do the returns need to be a specific percentage? What timeframe are you working with? These are just some of the questions you should answer before pursuing a deal. Real estate investing is all about risk and reward. This can work both ways. You never want to buy a property filled with risk only to squeeze out a minimal profit. Conversely you don’t want to work twice as hard on a deal only to break even. Your specific purchase guidelines can be bent on a given deal but never broken. If you do you will regret the purchase.
There is a lot that goes into moving forward with a deal. Before you make any offer you should look at these six guidelines and see where your deal fits. Sometimes the best deals you make are the ones you walk away from.