Selecting the Right Property for Investment
Joel Cone is a freelance writer based in south Orange County, California. For nearly a quarter century Joel’s career — both as a journalist and as a marketing communications specialist — has focused on the residential and commercial real estate industries, as well as the legal community. After a decade as a staff writer for the Daily Journal Corp. group of newspapers, Joel was a regular contributor to California Real Estate magazine for the California Association of Realtors; was the original Orange County reporter for GlobeSt.com; wrote executive profiles for OC Metro magazine; and has been published in a number of real estate-related publications.
The choice of real estate-related shows on television can give anyone the idea that investing in real estate is a worthwhile endeavor. It can be, but for any investor – seasoned or novice – there are some fundamental principles to keep in mind when it comes to selecting properties.
Regardless of the present state of the economy or the real estate market, any legitimate investor will not start looking at properties without first determining the ultimate goal desired. That goal depends entirely on the investor’s exit strategy.
Here are the two basic exit strategies most real estate investors adhere to:
- Buy and hold. The investor wants to collect a portfolio of rental properties to generate a steady income stream over a period of time, thereby becoming a landlord.
- Buy, fix and sell. Better known as “flipping,” in this scenario the investor wants to purchase desirable properties at as low a discount as possible so as to have a good payday at the end when each property is finally sold.
Once an exit strategy is selected, then locating and securing properties that fit the investor’s exit strategy is much more cut and dry.
Investors Learn to Adopt Strategy to the Market
Buy and Hold
Once the question of exit strategy is settled, where and how to buy good properties that fit those strategies is as individual as the investor.
While some investors do not mind buying in different markets around the country, others like investor, author and trainer Tony Alvarez prefer to stay in their own backyard like he has in the Antelope Valley area of Los Angeles for many years.
A former appraiser, Alvarez is a true student of his market, keen on knowing the local economy and housing statistics. In such a volatile market as his, Alvarez said that a long-term hold of an asset is not forever, but only until the market peaks before he sells.
“An investor is somebody buying one unit or a whole complex. They are usually making their decisions based on return of investment and calculating capitalization rates and stuff like that,” Alvarez said. “When I look at purchasing assets, I want to have more than one exit strategy when I make my offer. One eye is on cost of construction and the other eye is on the ability of that asset to generate cash flow. I use a gross rent multiplier.”
When it comes to buying and holding properties in Denver, Colo., attorney and investor Bill Bronchick also looks at the financials except his strategy calls for buying properties that can demand a rent that allows for a 25 percent cushion above total costs (principal, interest, taxes and insurance). After that, he looks for properties that allow him to get in and out with a minimum of repairs before renting it out. And his last requirement is that the property must cash flow.
“You want to be in an area that in terms of long-term growth is going to keep its value,” Bronchick said. “It’s a balance between cash flow and future potential. You want something that’s right in the middle of the pack. Stick with lower middle class properties that are just at or just below the median price for the city.”
Andy Heller, a longtime investor in the Atlanta market, coaches and trains wannabe investors. Unlike Alvarez and Bronchick, however, Heller does the buy and hold strategy with a tweak…
Instead of buying and holding a property over a long period of time, Heller prefers to offer up his properties to his tenants as a 3-year lease option. Doing so allows him to enjoy the tax benefits of being a landlord, while also giving the tenant a sufficient amount of time to either exercise the option to buy the property outright or to either extend the option or to simply move out.
To Heller, the most important factor is finding a property with a sufficient investor discount.
“My model is to lease purchase a property. I do not use a Realtor. I need a 10 percent discount if everything is perfect. I don’t need a 25 percent discount so I know there’s more properties out there for me,” Heller said.
Next, he looks for properties that satisfy his exit strategy – those that will make a good lease purchase to a quality tenant base. With Heller’s model, that’s middle-income properties. Therefore, the investor must know with certainty what the middle-income range is for the market they are working.
Lastly, after locating a property with adequate investor discount, in a middle income neighborhood, the final factor Heller focuses on is the area’s schools. The schools must be good in order to attract the high quality tenant/would-be buyer who would pay a premium to live in the area where his properties are located.
Being both a real estate broker and a general contractor, Scott Mednick knows what he is looking for when it comes to locating properties with potential to flip. Working throughout the Southern California region, he has established a methodical approach to selecting potential investment properties.
“I’m a negative Nellie. I look for everything wrong with the location first,” Mednick said. “Then I look at what’s right with the house. I try to buy the biggest, ugliest house in the neighborhood.”
For Mednick, the determining factor is strictly price. Before he even inspects the property he has gone on the MLS and done his homework so that he is at least 90 percent sure about the property ahead of time.
“I figure what the maximum sales price could be for that area. I’m going to do the nicest house in the area and get close to that price, backing off the rehab costs, the carrying costs, and what I’m buying it for. If there’s a 10 percent profit at the end, then it’s a go,” he said.
It’s how you play the game
Being a real estate investor is much like playing a game of chess. It all comes down to strategy. Every move an investor makes has to be with forethought and the end result in mind – the exit strategy.
After that, determining where and how to buy properties is an individual decision. For some investors check out the local multiple listing service and build relationships with local Realtors to get the scoop on new properties before they hit the market.
For others, it’s buying properties at auction, utilizing websites such as Auction.com as a prime source of information to find out when and where the auctions are being held and how much the opening bid will be.
But no matter the eventual purchase method, the most successful investors are the best students of their market when it comes to determining a property’s investment potential.
This is an exclusive article from Auction.com, LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.