1. Determine your investment strategy. There are hundreds of strategies you could use with a property, so figure out which one works best. Do you prefer to buy, rehab and hold? Or buy, rehab and then retail the property? Do you feel more comfortable with wholesaling? Some properties can turn a profit with many different kinds of strategies, so you should pick one you have experience in or feel the most comfortable with.
2. Conduct Due Diligence on the Property. You should be able to estimate all your costs and potential profits in order to accurately predict the cash flow. It’s important to include all costs, such as taxes, insurance, the cost of using private money (or a mortgage), maintenance, holding costs, liens, inspections, closing costs, and any other expenses. A good general rule is to overestimate your expenses to allow yourself some wiggle room in case you have overlooked something or prices increase. Also, set aside an emergency fund for the unexpected. These precautions will help you to realize your profit in spite of a bad situation.
3. Know Your Area. Thorough market research will allow you to make educated guesses about what the market will do, reducing your chances of unforeseen complications, such as attempting to sell or rent the property without success. You want to be able to identify if the area is contracting, expanding or is stable. This will also influence the type of investment strategy you will decide to follow.
4. Have an Exit Strategy (or three). Work the numbers with a few different strategies to see if your property still positively cash flows. These strategies, such as renting, lease options or wholesaling, are exit strategies that would still allow you to make a profit in case there is a complication with your primary strategy. It’s a good idea to employ three exit strategies that cover all possible market activity. For example, if you purchase a property to rehab/retail on the assumption that the market is stable or growing, but it actually contracts, you can still rent the property to the increasing number of renters that a contracting retail market produces.
5. Don’t Over-leverage. Leverage is one of the beautiful benefits of real estate, but over-leveraging is it’s evil twin. If you are over leveraged, you are vulnerable if the market goes down. If you see an amazing property but you have funds tied up in others, perhaps you could assign a contract instead of agreeing to purchase a property with only 5% or 10% equity. A safe rule of thumb is to have 20% equity in a property upon purchase. Less than that, and you’re needlessly risking your profit margin if the economy tanks.
Following these basic criteria will give you confidence in determining if a property is a good deal or not, which is the cornerstone to success in real estate!
Based out of Indiana, Cliff Redding is a real estate entrepreneur, real estate broker, and property manager with experience in single family and multi-family management.
