How to Establishing Your Real Estate Investment Criteria

Posted on March 23, 2009 by IC N in Finance
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Once you have determined the market you are seeking you MUST find a real
estate broker that specializes in this area of real estate. It also make sense to find
brokers in each of the areas noted so you are diversified and fully prepared for any
deal that meets the financial criteria you establish that will allow you to attract
investors. This also allows you to be prepared for the different cycles in real estate
which occur periodically depending on many variables such as supply and demand,
inflation, divorce rate, emerging markets, employment etc. For example,
residential condominiums were recently challenged by the sub-prime market issue
and the difficulty of the consumer attempting to obtain loans whereas rentals are
much more attractive to lenders at this time. In other cases, commercial becomes
more attractive when there are residential challenges and vica versa. Retail is also
cyclical and may be challenged after the holidays however in each of these cases it
gives you tremendous opportunities in all areas of real estate because prices are
far below market value. My belief is from chaos bring CASH profits and it purely
based on your focus and preparation to meet the opportunity.

The main reason why you want brokers on your “Dream Team” is for them to
bring deals to you because they do all the leg work and they save your time so
you can do what you want…when you want. Another reason is specialized brokers
know the individual markets, market changes, market trends and keep track of
sale prices and appraisal values and they have the support team behind them. The
work they do also doesn’t cost you a dime and you get them to filter projects for
you based on the financial criteria you establish. As you continue to work together
with various brokers they become accustomed of what you want, how you work
and when you are ready for more deals. This saves you tons of time and money.
There are so many deals out there and the primary reason for establishing the
investment criteria is so you can filter the best deals into your direction. It only
takes one large deal to make a boat load of money. This process is like basic
training whereas once the Investment Criteria is established and conveyed to your
brokers they act as your representative under your guidelines and it keeps away
all of the deals that are not worth looking at. It took me awhile to establish this
process and it’s not new I just didn’t have anyone to bring it to my attention until I
wasted a lot of time. I would have hundreds of deals come through my fax and
would not know where to start until I learned that by training the brokers that
became part of my “Dream Team” that it would save hours of work and financial
analysis.

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Our main objective is to find deals that allow you to syndicate these deals. In
other words you want to be able to establish partnerships whereby you bring in
investor to share the profits while you use their money to purchase the deals with
none of your own money. As you obtain these deals the investors that you attract
will begin to follow you into several deals in addition to marketing on your behalf
free of charge to other investors about the opportunities that you bring to the
table. This is the reason why we will talk about the financial criteria necessary so
you can move forward.
A few things that I would like to touch upon are outlined below:
1. 100% Cash on Cash
2. Exit Strategy
3. Where is your money source?
4. What are the terms of the money?
5. What are you basing the success of the deal on?

a) Comparables
b) Appraisals
c) Demographics
d) New activity in the immediate area
e) Long term need in the area.
f) What are others doing in the area?

CASH-ON-CASH – The financial criteria can vary depending on the market and type
of investment you are seeking. It can also vary depending if the investment is a
buy and hold, flip or new development. My rule of thumb on all investments is to
shoot for a 100% cash-on-cash investment. Why? Because this return allows the
size of pie to be substantial enough where you can easily attract investors while
leaving a large slice of the pie for yourself.
What I mean by 100% cash-on-cash is a return on investment that will double
your money. For example, if you invest 40% equity or $400,000 into a $1M dollar
investment you would earn a $400,000 dollar profit. This is a great rule of thumb
for flips and/or developments since it give you plenty of room to provide
substantial return to your investors. In today’s market a double digit annual return
to an investor is very attractive due to the challenges of the stock market and
inability to earn money through the conventional banking system.

EXIT STRATEGY – Determine what your exit strategies will be before your
investments are consummated. For example, if you are building a condominium
you may want to have an exit strategy of making it a rental if the market tanks. In
all cases you want to know how to get out and what you are going to do with the
investment before you buy it. You may have a plan to buy an apartment building
that requires some cosmetic work or fix up to increase rental and value. Always
know your exit is before you enter the process.
MONEY SOURCE – Determine your sources of funds before you enter the real
estate investment process or simultaneously raise funds as you perform due
diligence. In most cases, you will need seed money to get started and to lock up
the deal. Focus on raising money at all times. Have your investors lined up ready
to take action as the deals hit your plate. In our next lesson we will focus on
private lending vehicles.
TERMS OF THE MONEY – In short term investments you may be in a situation
where you borrow hard money at a high interest rate. In this case, the interest
rate may be negligible if the cash-on-cash is high enough to absorb the interest
rate. Establish what your investors will receive for their investment fund. In my
investments, I always give my investors a preferred return of 8-10% and then
split profits typically 50/50 at the end of the transaction for the highest upside.
SUCCESS BASIS – Some of the items that you want your broker to investigate for
you when they filter deals are comparable sales and listings in the market. This
will reinforce the market and give you more credibility when presenting the
investment to your investors. They can easily obtain sales comparables by using
multiple listing services for residential and Co-Star for commercial. Tell them to
give you statistics on demographics, mean income, population, average age,
schools. etc. Find out also what is going on in the areas, new development, long
term planning and what other businesses are doing. All of this information can be
used to support your investment presentation.

For more great tips like this check out the book

In conclusion, this is a simple process to
keep you focused on your success instead
of hunting around for deals. There are
also other methods of finding deals which
we will discuss in future FIND lessons but
for now this is the quickest way to get
started. Even if funding is not in place
begin building relationships with the brokers in the specific areas that you want to
invest. You most like filter a few brokers before you find the ones that you like to
work with for the long term.
OK, Ready – Set – Let’s Go!!!

“FIND” Assignment – Week #5
1) Establish You Investment Criteria
– One of the keys to success is getting
clear on your real estate and financial goals. I tell everyone to write down
SPECIFICALLY what you want you obtain – actual numbers, time frames and
the dream you want to achieve. If you follow this process you will far exceed
your expectations. Go through the process and determine your “Investment
Criteria”. Reach out to local brokers with this criterion so you can begin the
process of them packing the pipeline with an unlimited quantity of deals.

For more great tips like this check out the book