Step 5 - The Hunt
What location should you search? How many bedrooms and baths should it have? How old? Square footage? What are the market rents? How much fix-up is needed? Are there any deed or zoning restrictions? Are schools important? These are just a few of the critical factors that will determine if your investment house will produce profit, or suck money out of your retirement forever. Four predominate factors to this end are: Your available investment cash, expected rate of return, time frame, and eventual exit strategy.
Investment Cash - Rentable houses in your target market should be purchased with cash flow in the forefront of your mind and equity in the back. Price ranges for solid cash flow properties usually fall between $50,000 and $150,000. We still have houses in our portfolio that had a total aquisition cost of less than that, and they produce upwards of 12-17% return on cash invested. That's without equity appreciation! It can happen. Those opportunities are harder to come by (the secret is out, thanks Warren Buffet!). Before deciding you want to get into this investment asset class, set aside a suitable amount of cash for your first purchase. How much should that be? We'll help you figure that out with our Opportunity Analysis Sheet (example).
Rate of Return - This is a big one. After all, this is an investment. An investment without an expected rate of return is like playing roullete. Local markets play a significant role in the available returns for your investment houses. Rental rates can vary greatly, not just from county to county, or city to city, but even from street to street and house to house. For that matter, so can your cost structure. We've been able to experience return rates anywhere between 10-20%. But some of our so-called best houses have our lowest returns, while houses you wouldn't look twice at produce heavy cash flow returns. Setting a minimum threshold for both cash flow and equity before investing will make the hunt go a lot smoother.
Time Frame - How long do you plan on investing with this house? Flippers want to be in and out in 90 days or less. That's because they are usually borrowing the money to buy the house and make repairs at anywhere from 10-25% interest rates! When you plan to buy and hold, the math is different. Projecting out 5, 10, 20, 30 years, with realistic appreciation factors will help solidify the whole idea of "investing" as opposed to quickie buying and selling.
Exit Plans - Your plans need to consider the end. Possible choices include: sell the house,...,yep that's pretty much it. Selling the house is the only true exit from the investment completely. There are many other things that can be done instead of selling it to reduce liability, or get your cash back. Refinance the house. Assuming you had good management, and the home appreciates while generating cash flow, traditional and non-traditional lenders will become attracted to your free-and clear cash flow. What about passing your investments on to heirs? Absolutely a great idea. You'll want to talk to a reputable estate attorney to set up the proper structure for doing so. There's private notes, lease-options, seller financing. You have many more options under the sub-heading of "sell the house" that help you move on to a new investment or cash out completely. The important thing to do is to plan for it.
TriStone Group loves to help with exit strategies. Fellow investors please...do NOT get greedy at the exit. Remember that you likely took on this investment from a previous investor. You worked it, got your return, and now its time to pass it on to the next savvy investor. We'll help you structure the best exit that rewards you and suits the nest buyer.