Focusing only on the property’s features is a fast way to the grave of your real estate career. I think this is an easy concept to grasp, but it does crop up, so I wanted to share how I feel about the variables an investor should focus on to make sound buying decisions. Investors make mistakes all the time when they pay too much for real estate, but I bet even more mistakes are made when it comes to NOT buying a property they should. The old saying is, “The only real estate deals I regret are the ones I didn’t do.” I’m not sure I totally agree, but I get the concept.
If you limit your criteria to property features, you will miss out on fantastic buying opportunities.
When I attend networking events, I often hear investors asking each other about their investment criteria. I cringe when I hear something like, “I’m looking for a 3 bed, 2 bath that rents for $1,400 a month.” If I get a response like that, I’ll probably reply, “What’s wrong with something that only has 2 bedrooms and rents for $1,500?” The normal response is a confused look or no response. Obviously, there is much more to it than the rooms and bathrooms and even the price. What about location, HOA fees, or deferred maintenance? What about the investor’s risk tolerance, appreciation potential, or redevelopment potential in the future?
When looking for deals, there are two things you might want to consider.
FOCUS ON PRICE AND VALUE
If you focus on property features, you may be missing out on a neighborhood that produces the financial result you’re looking for. I would rather listen to an investor explain criteria to him such as return on investment, property value price, or even a value stake in a certain area. This is the criterion that focuses on finances. One skill as an investor should be to be good at finding a security (which could be based on resale value, cash flow, or other potential) and then deciding how much you’re willing to pay for that security. A fix and flip is a great example and it is easy to analyze because there are so few factors. Rentals can be a bit more challenging because variables like; location, potential tenants, future vacancies, maintenance, future price changes, your short and long-term financing, management, and rental amounts all play a role in your decision. There are risks with all real estate transactions, so you’ll want to understand them as you work toward the price you’re willing to pay.
ACCORDING TO THE AREA
This isn’t always necessary, but in most cases you’ll want to adjust to the neighborhood. If you are looking for a condo in a building full of 2-bedroom condos, then buying a 2-bedroom condo would suffice. If you’re only considering a 3-bedroom, but looking in a 2-bedroom neighborhood, you’ll severely limit the opportunities. In many cases, the rooms add little to no resale value, but that’s not always true. There is a great opportunity if you can find a 1 or 2 bedroom home in a 3 bedroom neighborhood. By converting the house with fewer rooms to fit the area, you should see a huge advantage. You should also see benefits to adding bedrooms to the rental property as it should increase cash flow. All of these opportunities could be lost if you are not open to seeing them. One strategy that I see some investors implement successfully is to first understand a certain neighborhood and feel comfortable with the values, and then search for discount properties in that neighborhood. In this case, you will be looking for the price based on the value, not the characteristics of the property.
With all of this being said, a home that doesn’t fit the area could still be a good investment. Remember, all real estate has value and all real estate is a good buy for the right price.