Through determination and self-education you too can become a millionaire by making the right decisions with your real estate investments. In this series, we are looking at five steps to help one make the right choices in acquiring real estate investments.
In this final article of the series, we will discuss how finding the right property and not getting cocky will keep you on the right path.
Step 4 – Find the right property
Some investors say, “You need to make your money going into a property.” Having an instant profit on a purchase is more of an outlier than a regular occurrence.
There are scenarios where you may be privy to information that may give you an edge. For example, an imminent change of zoning for the area, a large company coming bringing jobs and foot traffic or perhaps you may know of a business looking to purchase allowing you to “flip” the property for a profit.
Many of us focus on not paying a premium and through a planned strategy can increase the value in hopefully a short period.
It is smart to have a list of criteria to test against each property before buying. A good friend of mine, Harry, who likes multi-family investments, uses the following criteria (I am introducing several new concepts below, but will not be discussing in this article. I have discussed in past articles so be sure to review my archive):
Debt-Service-Coverage-Ratio (DSCR) needs to be 1.25 or higher.
Current rent for each unit may be no more than 30% of the average monthly household income for the area.
The capitalization (CAP) rate need be at least 5% for the first year.
The trade area must have an overall vacancy rate of 7% or less.
If on Harry’s first review of the investment it passes his four criteria test he further investigates for a potential purchase.
My grandfather always used to say, “Go where the money is and then figure out where the money is going.” Put on the hat of the retail business owner, office user, manufacturing company, renter, homeowner, etc. to help you determine their needs. This will guide you to where the money is and where it is going.
Step 5 – Don’t get cocky
It is prudent to find a niche (both in location and property type) and learn all you can. With experience, you can consider expanding into other areas and property types. Just because you had success buying your first apartment, for example, does not mean you can jump into single-tenant net leased investments.
Do not let you own success get in the way of future decisions. Remember Harry’s four criteria test? Create your own and stick to it. Lastly, do not get caught up in the hype whatever it may be at the moment.
Burt M. Polson, CCIM, is a local real estate broker specializing in commercial, luxury estates and wineries. Reach him at 707-254-8000, or [email protected] Sign up for his email newsletter at BurtPolson.com.