A well-defined real estate investment criterion is a vital first step toward greater wealth and building a successful financial portfolio.
Investment criteria define your needs and communicates to your team the key aspects of the property purchase. Not only can it save everyone’s time and effort, but it can also result in better outcomes for both the customer and yourself.
Even if a particular property seems like a good deal at first, it is crucial to first run the numbers and potential benefits (and risks) before making your decision.
With that in mind, a few essential criteria can help you determine whether to grab the deal or pass on it.
The Benefits of Good Investment Criteria
Knowing what you want can prevent you from getting lost or buying just anything that comes your way. In addition, having well-thought-out criteria can help avoid you getting emotionally invested in deals that make no financial sense. For instance, even though a vacation house may look appealing, it offers minimal cash flow compared to a duplex that brings far more substantial returns.
Knowing the features, size, and budget of your desired property narrows your search and allows you to become familiarized with your market and type of property, recognize rent patterns, and eventually make more effective and educated decisions during your house hunt.
Simultaneously, investment criteria can also help foster a more positive and productive connection with your real estate agent. Why? Properly conveying your needs to your agent prevents you from wasting their time and increases the possibility of them helping you find good deals.
If you don’t, you will constantly find yourself refusing your agent’s offers, getting frustrated, and may even be put at the end of their client list.
In short, having good investment criteria helps you buy the right property instead of buying something just for the sake of buying.
Factors to Consider for Defining Your Real Estate Investment Criteria
Undoubtedly, location is a crucial consideration when looking for real estate. But several other factors can help you determine your investment criteria to find a property that conforms to your needs.
Property Location
Ask any investor what helps them decide on real estate, and you will hear the same adage from everyone–location, location. The neighborhood of the estate development is indeed one of the most crucial factors for determining profitability when investing.
When investing in any area, the investor should thoroughly review how the location is expected to evolve and its value in the future. What may be a quiet and peaceful area today may turn into a noisy and crowded hub in the future.
Expected Cash Flow and Profit Return
Cash flow denotes the amount of money left after expenses. Therefore, it is best to invest in a property type where you can see a reasonable future return rate, also known as a profit return.
To gauge the potential of a profit return, these are the parameters to consider:
- Inflation and its effect on the cash flow from rental revenue
- Long-term price appreciation or intrinsic value of the property
- Depreciation and its impact on tax
- Cost-benefit analysis of renovation
- Cost-benefit analysis of value appreciation vs mortgaged loans
Your Budget
Another defining measure you should provide to your real estate agent is your purchasing power. Since finances are constantly fluctuating, choosing a target budget to use as an investment fund can be difficult.
Recognizing your borrowing capacity is vital in determining what you can afford. Here is what you should evaluate before deciding on a value:
- Your annual income
- The loan type and interest rate
- Loan Terms
- Your monthly expenses
- Repayment Type and estimated repayment
Investment Purpose
Given the high transaction size and low liquidity of real estate investments, a lack of purpose or clarity can lead to losses and financial distress in the future, especially if your property is mortgaged.
Therefore, it is advised to identify the broad category for which you buy your property and plan accordingly.
- Buy and self-use:You can self-utilize this property while also benefiting from value appreciation
- Buy and lease:It provides long-term value appreciation and regular income. However, you may have to endure the added responsibilities of handling legal issues, disputes, repair work, managing tenants, etc.
- Buy and sell(short term): This is when a property is under construction and sold right after the construction gets completed. It can result in quick, medium profits
- Buy and sell (long-term):It focuses on long-term intrinsic value appreciation
Property Size
Real estate comes in various property sizes, from single residential units to multifamily properties and more extensive residencies that require commercial financing.
One smart move is to buy two to four multifamily properties since they generally result in better returns and less interest than larger homes. Multiple properties may also fit into the budget of an investor just starting out.
All in all, defining the size of your property can help you filter through the benefits and make it easier for you and your agent to come to a unanimous conclusion on whether it will make a good investment.
Action Plan
Once you have defined your real estate investment criteria after proper and thorough contemplation of the above-listed factors, this should be your action plan:
- Define the type of investment purpose you wish to pursue. For example, buy and sell
- Define your expected cash flow or profit return
- Specify the characteristics of your property (location and size) and other preferences you have
- Show your preferences and criteria to an experienced real estate agent
- Screen and purchase real estate unit(s) that fit your criteria
- Adjust property according to the market’s price to get your desired profit return.
The Bottom Line
Real estate investment has many benefits, from steady cash flow to tax advantages and substantial appreciation. However, these investments can be pretty risky, but following predefined real estate investment criteria and finding the right opportunities can help expand your existing assets and real estate nationwide and boost your revenue.
