So far we have just finished covering topics relating to financing your deals using debt and equity. Financing is usually the biggest impediment to completing real estate deals since without capital you have no deal. On the same token, financing is irrelevant if you cannot find a deal that is worth raising capital behind. So this month we will be covering tips, tricks and methods to finding deals. We will start with defining your investment criteria so that you can use that as a filter system to find deals that match your investment style.
Prior to beginning your investment search for deals, I would recommend that you sit down over a cup of coffee/tea and lay out the investment criteria for your target or “sweet heart” deal. So you must be asking what are the investment criteria’s that I should have at a bare minimum. Below I highlight a few metrics that I would recommend pondering over and having as a part of your investment criteria:
Market Area- this is basically the area of your target investment. Some investors want to invest in their “own backyard” while other feel comfortable going out of their state and even out of country. So this criteria filed can be as board as the state/city or as refined as the zip code.
Maximum Investment Price- some gurus out there say that it does not matter what the price is as long as the deal makes sense. There is truth to that statement but the honest truth is that money is not unlimited and every investor has a different capital investment budget so that should be kept in mind as you decide on your maximum investment price. Since looking at deals that you can raise capital behind will be a waste of your time in the long run and time is a very precious commodity when it comes to finding and acting on deals.
Asset Type- this is criteria is important by my standards as a investor should start in one asset class and get comfortable prior to jumping into others. The asset classes can range from single, multifamily (2 to 4 or 5+ units), retail, industrial, special purpose, hotel and healthcare. Within each broad category there are sub-classes so pick your asset class on the basis of your interest and expertise.
Return Criteria- everyone is looking to purchase or invest in real estate to do one thing: Make Money! Hence it is important to understand what is your target investment strategy? There are two broad criteria of investment strategies: Flipping or Cash Flow. B
Based on the target strategy, you need to establish return metrics that a deal must have for it be marked as a “Prospect” within your search. For Flips investments, it is important to define the “minimum spread” between market value or the After Repaired Value (ARV) and your all in investment. For cash flow investments, you can setup measures such as Cap Rate, Cash on Cash Return, Equity Multiple (we covered how you can calculate these measures in prior e-newsletters so feel free to contact us to resend them to you if you need them for reference)
The criteria metric laid out about is a good basic investment decision tool to help you find your next real estate deal faster by being able to reject deals that don’t work for your investment style/strategy. If you have any questions feel free to call at 973-894-3004