Your Investment Property Shopping Criteria

It's time to start looking for a property. Before you do you need to define your selection criteria. This section will focus on what your criteria is, why it matters, and how to define it.Imagine that you want to use a new recipe in making your dinner tonight . You take out a cookbook to find a recipe that looks good, discover a great baked chicken meal, and make your shopping list of ingredients in order to make the meal for your family. You head to the store and begin picking up the items on your list. Chicken, basil, olive oil, and other items begin to fill your cart. Suddenly - you see the spaghetti and remember another recipe that you once wanted to try with spaghetti. You begin to reach for the spaghetti but then remember your shopping list. Spaghetti isn't on the list for tonight's dinner, so you put back the distraction and continue on your way home to make a perfect dinner for your family.

Real estate is no different. Your selection criteria list is just like your ingredient list in the example above. It is designed to keep you focused on shopping for the things you need, and not waste money on other good looking things along the way. Real estate is an exciting field with a lot of different niches and strategies - so it is easy to get distracted by the next big thing or trend. Having a clearly defined selection criteria can help you stay focused, avoid "analysis paralysis" and keep you on track to buy a great investment property. By defining your criteria, you will be able to narrow down the choices in the market, and you will then eliminate the vast majority of deals that are only distractions.  Instead, you'll focus on finding just the kind of deals that you are interested in buying.

Creating Your Selection Criteria

In chapter three, we looked at a number of different niches you could invest in, as well as multiple strategies you can use to invest. It's now time to choose the niche and strategy and come up with a list of criteria to narrow down your selection further.
There are a number of different items you will want to consider to add to your "criteria list." These could include:

• Neighborhood
• Property Size (Square Ft)
• Lot Size
• Property Conditions
• Number of Units
• Cap Rate
• Cashflow
• Appreciation Potential

No one can tell you exactly what your investment property criteria should or should not include. Some of it will come down to personal preference, such as "I only want to buy in Seattle" or "I only want houses with basements," but most of your chosen criteria will revolve around the kind of investment you are getting into. For example, if you are looking to become a "buy and hold" investor of small multifamily units, your criteria is going to include small multifamily properties and will exclude old commercial buildings.
By specifying, ahead of time, what criteria you are willing to look at, your search becomes much more manageable. In the same way, you are able to more effectively communicate your desires to others who may help you buy property. If you simply told people "I am looking for real estate," the most likely response would be "good for you..." However, if you instead mentioned that you were looking "to buy a small single family house in the Rockford neighborhood for under $150,000," you enable others to think of properties that might match that description and get you connected with the deal.

Understanding "The Rules" of Investment Property

Perhaps the most important part of the criteria you put together is the financial component. If a deal doesn't make sense financially, it's not going to be a strong investment for you. In chapter two we looked at some of the basic math surrounding real estate investing, such as income, cashflow, and return on investment. However, generally speaking, a listing is not going to tell you the important information you want to know about the financials of a property. Yes, you can generally determine the amount of income the property makes - but you won't know immediately how much monthly cashflow the property produces, how overpriced the property is, or what you should offer. Additionally - it's not going to make sense to get out your spreadsheet and do a full property evaluation on every single deal you glance at. This is when "rules" come into play.
A "rule" is short for "rule of thumb." Rules can help give you a quick way to evaluate a property's financials on the fly. As with any "rule of thumb" using rules is not an exact science and should never be relied on entirely to decide if a property is a good investment. However - they can help you quickly filter a property and decide if it's worth further evaluation. Let's take a look at a few of these rules:

The 2% rule states that your monthly rent should be approximately 2% of the purchase price. 

In other words, a $100,000 home should rent for $2,000 per month; a $50,000 home should rent for $1,000 per month. This is a very conservative estimate that is very simplistic but can help in deciding if a property warrants a deeper look. In most parts of the country, the 2% is very difficult to achieve, but the closer you can get to that, the better cashflow you'll receive.
Real World Example: An average three bedroom home rents for $800 per month in your neighborhood. According to the 2% rule - you should be looking to spend around $40,000 for that property ($800 / .02 = $40,000)

The 50% rule is a great rule-of-thumb that helps you to fairly-accurately predict how much your expenses are going to cost you each month for a property. 

The 50% rule simply states that 50% of your income will be spent on expenses -- not including the mortgage payment. 

As mentioned above - most real estate listings will let you know what the monthly income of a property is. By dividing that number in half, you are able to easily see how much you'll have left to pay the monthly mortgage (principle and interest). Any income left over, after the 50% of expenses and the mortgage payment are taken out, is your cashflow. The 50% of expenses includes all expenses, including repairs, vacancies, utilities, taxes, insurance, management, turnover costs, and the occasional "big ticket" repairs that must be saved up for -- aka. CapEx or Capital Expenses like roofs, parking lots, furnaces.
Real World Example: An apartment building brings in $8,000 per month in income. Using the 50% rule, we are left with $4,000 to make the mortgage payment. If the monthly mortgage payment on the property was $3,500 per month, you can reasonably assume a monthly cashflow of $500 per month.
The 50% rule is especially helpful in teaching that expenses are almost always more than one might think. One common mistake that new investors make is under-estimating how much the expenses are going to cost. The 50% rule helps to show that there are always costs that are unexpected, so plan for them.

The 70% rule is used by investors to quickly determine the maximum price one should pay for a property based on the after repair value (ARV). Though most-often used by house flippers, the 70% rule can actually be used for any strategy when you want to find a good deal. 

The 70% rule says that you should only pay 70% of what the after repair value is, less the repair costs.


Real World Example: A home which, after being fixed up, should sell for approximately $200,000, needs approximately $35,000 worth of work. Using the 70% rule, a person should multiply $200,000 by 70% to get $140,000 - and then subtract the $35,000 in repairs. The most a person should pay for this property, therefore, should be $105,000.
Remember, a rule of thumb like the ones above are used only to quickly and efficiently screen a property and decide if it's worth further investigation. Never use a "rule of thumb" to decide exactly how much to pay or if you should invest or not. If a property passes the above rules (or gets close) it may be worth a more detailed analysis on paper or via a computer spreadsheet. Don't confuse a rule of thumb for a license to skip doing your homework.

6 Things Homebuyers Should Avoid Once They are Preapproved for a Mortgage

You have done the hard part in the home-buying process and chosen a lender and a real estate agent to work with. You have also gone out and found the home of your dreams! Best of all, your team has done a great job of negotiating the best deal for you.

Now, as a buyer, all you have to do is sit back and wait for your loan to close … right? Wrong!!

Getting a home loan these days is a very interactive process. I am always amazed by how many clients I work with who come to me unaware of all the pitfalls they face during the loan process. To help avoid any surprises while waiting for final approval, I provide my clients with a short list of "do's and don'ts" to follow.

Let's start with the "do's" ...

1. Do keep the process moving by responding to your loan officers' requests for documentation as soon as possible.
2. Do make decisions as soon as is reasonably possible.
3. Do convey questions or concerns you
4. Do continue to make all of your rent or mortgage payments on time.
5. Do stay current on all other existing accounts.
6. Do continue to work your normal work schedule with no unplanned time off.
7. Do continue to use your credit as normal.
8. Do be prepared to explain any large deposits in your bank accounts.
9. Do enjoy purchasing your home but remain objective throughout the process to help make decisions that are best for you.

After you have been preapproved for your mortgage you will want to refrain from the following...

1. Do not make any major purchases (car, boat, jewelry, furniture, appliances, etc.).
2. Do not apply for any new credit (even if it says you are preapproved or "xxx days same as cash").
3. Do not pay off charges or collections (unless directed by your loan officer to do so).
4. Do not make any changes to your credit profile.
5. Do not change bank accounts.
6. Do not make unusual deposits into your bank accounts or move money around from one account to another.

Follow these simple rules and you will help to make your loan closing as smooth and hassle-free as possible! Good luck! 

4 Reasons your home isn't selling

There's a buzz in the air. The real estate market has improved and may be on the road to recovery. 

But the improvement in the housing market is not treating all home sellers equally. Some well-priced listings in prime locations are selling within a couple of weeks. In other areas, it still takes months to sell, and prices haven't fully stabilized.

There are several factors that could be keeping your home from selling. One is the state of the local housing market. Residential real estate is a local business. National trends, while informative, don't necessarily apply to the state of the market in your neighborhood.

Other factors include: the list price; the condition of your property; or lack of broad marketing exposure.

The housing market is pulling out of the worst recession since the Great Depression. This is fresh in buyers' minds. There are plenty of buyers who think this is the right time to buy, but they're not inclined to make offers on overpriced listings.

Sellers often wonder why buyers won't make an offer at a lower price if they think the list price is high. Buyers don't want to waste their time making an offer if the seller is unrealistic. Making an offer takes a lot of time and emotional energy. Most buyers who have the wherewithal to buy a home don't have time to waste.

There are "bottom feeders" who give sellers lowball offers below market value hoping to get lucky. These buyers also won't pay over the asking price. They want a bargain. You can do better than that if you price your home right for the market.

Here are clues that your listing might be priced too high. You don't receive any showings, or you receive showings but no repeat showings. Buyers usually look at a listing more than once before making an offer. Another possibility is that buyers look at your home and then buy another listing that is priced more in line with the market.

Let your real estate agent know that you want to hear feedback from buyers who have seen your home. If they like the house but not at the price you're asking, that's a clear indication that you should adjust the price if you want to sell.

Some sellers have false expectations about the current picked-up market. In some areas, the improved market means that homes are taking less time to sell, not that prices have increased. 

In other markets, prices have jumped approximately 25 percent from a year ago but are still way below where they were at the peak of the market. If prices dropped 50 percent in your area, they need to increase 100 percent to get back to where they were before the decline. 

For instance, if your home was worth $100,000 in 2006 and dropped 50 percent in value and then increased 50 percent of the lower value, it would be worth $75,000. It needs to increase 100 percent ($50,000 plus $50,000) to recoup your loss.

The condition of your home will influence the market value. You need to lower the price to account for deferred maintenance or a dated decor, or take care of these issues so that you can present your home in move-in condition. You'll then attract more buyers and sell for more.

It's always possible that your home has not been properly marketed. Ask your listing agent to provide you with copies of all advertising. More than 88 percent of today's home buyers use the Internet to find a home.

THE CLOSING: Make sure your listing is receiving wide Internet exposure, including a lot of good-quality photographs.

3 Emotional Mistakes Home Buyers Make

Finding your first home is an emotional experience. Owning a home has long been a mark of success and comfort—a space to make truly your own. It’s no wonder home buyers fall so in love with the idea of owning a home that sometimes they overlook important areas that will impact their bottom line.

Buying a home is, after all, an investment, too. Make sure you consider your purchase with a clear head before signing on the dotted line.

 

1. Home Buyers Don’t Remove the Rose-Colored Glasses

When purchasing stocks and bonds, it is rare for someone to fall in love with their portfolios. It’s an investment, right? The only important thing is the rate of return on your money.

When people look for their first home, they often romanticize it. They look for their “dream” home through rose-colored glasses. Oh sure, there’s some structural damage, but the kitchen has everything you always wanted. The price busts your budget, but the library alcove is heavenly!

Although this house will become your family home, you must treat it as you would any investment. Take the emotion out of the equation. Don’t ignore those, “Sure, there’s a problem, but … “, ideas.

They may not be dealbreakers, but you might be better off if you can muster the strength to walk away.

 

2. Home Buyers Lose Control

There may be a number of well-intentioned people working with you to purchase your first home. Real estate agents, mortgage brokers, parents and friends will all have advice. It can be confusing, especially if you are a first-time home buyer.

Each person advising you has their own point of view and experience. Remember your parents’ real estate needs aren’t the same as yours. A fast-changing housing market could put your accountant’s advice in the dustbin. The mortgage broker might be biased.

Weigh all their advice accordingly. Just don’t let it stop you from making the decisions you know are correct for you and your family as home buyers.

3. Home Buyers Aren’t Decisive

You will need to make a lot of decisions throughout the home-buying process. If you’re uncertain about major parts of home purchasing to begin with, don’t go down this path any further.

Make sure you can afford the mortgage payments over the long term. Make sure you can live in an area for years—selling a home isn’t always easy, and you’ll maximize your investment return if you can stay a while.

When you are sure you’re ready, make a list of all the things that are important to you:

- Do you need to move by a certain date?

- Desire a certain school district?

- Have space requirements?

Also, make sure you’ve got a reasonable sense of what you must have, and what you can—if pushed—live without. Kitchen island with a built-in second sink, we’re looking at you.

Once you know what you absolutely need in a home, don’t budge from that list. It might be tempting to waver if you find a home that meets other needs. The best thing is to tell your REALTOR® to only show you homes that meet your basic needs. Stick with what you know you need.

For instance, if you know you can only afford a home which is $150,000 or less, don’t ever step foot in a home listed at $175,000. And if you know you need at least two bathrooms, don’t view a home with only one.

If you are decisive, you’ll save a lot of time. And in the end you’ll wind up with a house that you can call a home—and a good investment—for the long term.

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