The late great Kenny Rogers had it figured out as he sang about the advice an old gambler once gave a down-and-outer on a train bound for nowhere. You probably remember Kenny singing, “You got to know when to hold em, know when to fold em, know when to walk away, and know when to run.” Well, strangely enough, Kenny could just as well have been singing about an old real estate investor giving the same advice to a new investor.
This post is about how to make real estate investing easier, less stressful and way more profitable. Tom Wheelwright says, “The difference between a professional investor and an amateur investor is the amateur investor makes a new decision every time… and the professional investor makes the decision once… and just applies those criteria over and over again.” I cannot agree with this more. Here’s the thing, once you know your criteria for buying and selling real estate you essentially have a magic box that will allow you to determine – within three minutes – if you are going to buy or sell an investment. Then with your “magic investing box” every time you come across a “good buying opportunity” you simply see if it fits inside your box. If it does – buy it. If it doesn’t – don’t even, consider it. The same thing for selling. If you are wondering if it’s the right time to sell, simply break out your “investing box” and see if your “selling opportunity” fits inside. Again, if it does – sell. If it doesn’t, don’t sell. That’s what the pros do and that is what you should do.
Let’s Talk Criteria
When should you sell?
Before you ever invest in a property, I recommend that you create detailed criteria (rules) for buying and selling investment properties that you will always follow and will serve as a curb to keep you from going “into the ditch”. This way you will be operating based on a well thought out plan/strategy and not simply acting on emotion. As matter of fact, the more emotion you can eliminate in your investing the more predictable and profitable your investing should become. I have 9 criteria that I lean on – yours may be different, everybody has their own – but one of the universal criteria for investing is knowing your Exit Point. In other words – knowing when to sell. Let’s start there – here are five selling criteria to consider implementing:
- Target Price is Reached: When you buy a property for X you create a future sales price of Y such that when Y is achieved it becomes a tipping point causing you to sell and take your profit.
- Target Event is Reached: When you buy a property and determine that you are going to sell it when you experience a foreseeable event such as Retirement, a kids wedding, to pay for college… things like that.
- Emergency: One of your criteria when purchasing an investment property is that you will sell if an unplanned emergency presents itself. Illness, loss of a job, legal issues… things like that.
- Stupid Money Offer: Every now and then prices jump so far so fast that the numbers get so big that it becomes stupid not to sell and cash out on a high. The way to know this is – ask yourself… would I buy at this price? If the answer is no – SELL.
- Better Use: Another trigger to sell is because you can put your money to better use. If you have a big gain and can use it to invest in an opportunity that will produce an even bigger gain – you should sell. Or perhaps if you can sell at a loss so it triggers a greater gain from a tax offset perspective. If you can sell and put your money to better use – you should do that.
Caution: Real estate always goes up over time so if you take a long-term approach, you will almost always be okay. It’s when you start speculating, are loose with your criteria or you simply panic and sell outside your cycle is when you get hurt or don’t win as much.
“Risk comes from not knowing what you’re doing.” – Warren Buffett
When should you buy?
Like with selling you should have a well thought out plan or strategy for buying investment property and then stick to that plan. Of course, you should review your plan from time to time and adjust it if necessary but when you get your fundamental criteria down pat, I recommend that you stick to it without fail. This will cause you to miss out on some big deals, no doubt, but it will also cause you to miss out on almost all the big misses and it’s my belief that avoiding the big miss while consistently building your wealth is when you win big over time.
The other huge benefit of knowing your criteria and sticking with it is you can make quick easy decisions. If a property falls within your criteria – it’s an easy buy. If it doesn’t – it’s an easy don’t buy. Once you have your criteria deciding to buy a property or not should not take more than a couple of minutes. Think about that for a minute – no pun intended.
Buying Criteria: There are typically more buying criteria than there are selling and it’s because – in real estate – you make your money when you buy. Here are my first six fundamental buying criteria:
- Cash Flow: Will the property always bring in more than it costs me to own it? Because if the market drops and I have to hold the property until prices rebound (no matter how long) I want to know that this property will always pay for itself and not become a drag on my finances. As a criterion, you should only look at properties that are cash flow positive and not even consider those that aren’t.
- Rental Income: What is the current rental income this property is producing and how does it compare to the maximum potential rental income? If the property is cash flow positive under the current situation that makes it a good investment. If you know that because of other factors, you control the property will produce even more income it may become a great investment for you. Other factors could be your team of experts: Rental Management, Interior Design, General Contractor / Handyman to name a few. As a criterion, only consider properties that your team can generate higher rental income.
- Cost To Own: What is the current cost to own the property and is there any way to find savings? Again, if the property is cash flow positive under the current situation that means it’s a good investment but if you can create savings because of factors, you control then it could become a great deal. Other factors you can control are your team of professionals: property management, maintenance, and repair. As a criterion, only consider properties that your team can reduce the cost to own.
- Market Type: Short Term Vacation or Annual Leases? These are two very distinct markets requiring different types of expertise, skills, and strategies to create predictable returns on your investment, so it becomes very important to understand where you are best suited to invest – especially in the beginning. Typically speaking short term rentals are more hands on and can be a bit more volatile… but they generally produce higher rental returns than annual leases. For your criteria you should decide which you will invest in – vacation rentals or annual leases and only consider those.
- Property Type: House or Condo? Again, these are two very distinct property types and require different types of abilities and capabilities to operate successfully. I recommend that when you are starting your investing journey that you choose one or the other and build your criteria and your team around one type of property until you master it. Once you have mastered one you can move onto the other with a high expectation of success. For your criteria you should decide that you will only look at condos or houses.
- Market Location: Where they property is located is a vital criterion when deciding to invest or not. If you are at the beginning of your investing journey, I would recommend that your criteria be properties that are near where you live, are in places where you already own, or are in locations you like to visit. This way you have a lot of familiarity with the area and good understanding of its short comings and long-term potential. For your criteria you should establish a location or area you will not go beyond.
- Price: This is often a comfort level criterion because if a property is cash flow positive and your team you can further increase the rental income and decrease the cost to own price becomes less important and investor partners often show up to help defer some of the cost. But because it is massive part of any purchase you implement a price point you will not go beyond.
- Mortgage: This is the cost and terms of money (Leverage) and you want to establish criteria with regard to how much you borrow, at what rate, variable or fixed, and for how long. This will tie into the first criteria – cash flow. Set your criteria such that you will only borrow up to X percent of the sales price, and cost X percent, for X number of years and if it doesn’t fall into those parameters – you don’t buy.
- Exit: Like we mentioned earlier make sure you know your exit criteria before you buy. If you don’t know how or when you will get out – do not buy.
Buying Criteria Summary: Those are my foundational criteria for buying an investment property and I do not even consider a property if it doesn’t fit my criteria for those categories. Example, I like to invest in short term vacation rental properties, condos, at the beach, that are fairly close to where I live, that are already cash flow positive, AND… AND… AND… I know that because of the team I have in place, I can improve the rental income and decrease the cost to own.
As I said, these are my primary fundamental criteria but there are a few others that I also consider such as tax benefits, what types of insurance options? Return on Investment (ROI) and others. Remember, every investor will have their own criteria but there are eight or nine that are pretty foundational and which most investors follow to some degree.
Caution: If you are loose with your criteria or not committed to them, you can find yourself doing things that often work against your goal for investing in the first place. Perhaps you’ve heard of bidding wars, buyers waiving their rights to inspection, repairs or financing, people who bought on high floors even though they are afraid of heights… on and on.
Want help creating your foundational investment criteria?
Call or text 850-420-9825 – We’re happy to help.
Bottom Line
We are wealth builders, so our goal (whether you are buying or selling) is to get you the best deal possible – based on your financial goals and the current market conditions – call us today and lets talk about how you can max out your position as a buyer, a seller or as an owner to continue building your family’s wealth well into the future.
John Moran – CEO
The Smart Beach Investor
AT THE BEACH TEAM
Certified Luxury Home and Condo Marketing Specialists
Keller Williams Realty Emerald Coast
Gulf Breeze | Navarre Beach | Destin | 30A | Panama City Beach