On Monday I bought a new car. The experience was pretty fun. I looked at several vehicles, test drove a few and ultimately got what I wanted. Yeah for me. Driving in this morning, I was reminded of a little lesson I learned on one of my very first rehab projects. Unfortunately the result of that endeavor did not have such positive results.
If you’ve ever purchased anything from a sales person worth their salt, you’ve heard about their limited time offer. From the infomercial to the car dealer, every offer includes a catch. It’s that one little line that puts you in the perfect place, at the perfect moment, to get the deal of a lifetime. But you have to act now!
I am a sucker for a good sales pitch. I love watching the craft of selling when it’s expertly delivered. I will be the first one in line to hand over my $19.95 for not just one, but two pairs of the kitchen knives that never need sharpening.
Impulsive buying is not a problem if it is limited to the occasional $20.00 purchase. But it is a huge problem if the purchase involves large ticket items like Real Estate investments.
As I rode along in my new car this morning I thought back to the third investment property I ever bought. It was a 2 story row house in the Francisville section of Philadelphia. The house had no roof, floors and only 3 walls. Calling it a shell is generous, and I should have known better.
At the time, Francisville was a developing neighborhood. Blocks of boarded up properties ran parallel to newly remodeled, high-end buildings selling for more than $500,000. The area seemed ripe with opportunity for an aspiring Real Estate investor.
When the wholesaler told me that he had 2 other offers coming on the house, all good sense went out the window. At full asking price and with limited knowledge of the market, I ran as fast as I could to buy a property I had no business being involved with.
The experience taught me an expensive lesson.
Whenever I start working with a new student, we begin by defining their ideal investment. The next step is defining their personal Real Estate investment rules. Only then do we discuss marketing, screening leads, analyzing deals and making offers. The structure is the key to successful investment.
How To Define The Ideal Investment
To define the ideal investment, you’ll need to answer a few questions. These answers focus attention on investments that have the highest probability for success.
- How large of a return do you want and how quickly do you want it? The investor who wants to make $50,000 on a flip within 90 days will have a different ideal investment than the investor looking for a rental property that cash flows $200 per month.
- What is your experience or comfort level with construction and repairs? If you’ve never done a large project, your ideal investment should not be a house with no roof, floors or rear wall. Believe me.
- What areas near my home or work have properties that meet the needs defined in the previous 2 questions? Time is valuable. Spending 2 hours every day traveling back and forth to your project is a waste of time. That time could be better spent looking for the next deal. So stay close to home.
Once you’ve defined the ideal investment, next define your Real Estate investment rules. While no one likes a lot of rules, defining the do’s and don’ts for your investments will give you freedom. Buying decisions will no longer be based on emotion. They’ll be based on what matters most in any investment – the numbers.
What Are Real Estate Investment Rules?
I’ve made a list of some Real Estate investment rules below as an example:
- All properties bought for fix and flip investments will have a resale value between $250,000 and $400,000.
- No purchased property will require more than $35,000 in work.
- No rental property will be purchased without a lead based paint inspection.
- All rehab properties must be within 10 miles of my house.
- All projects must have at least 35% equity based on an after repair value for the 30 day sales price on the property.
Your rules will probably look different from these. And they will almost certainly change over time as your objectives mature and your experience grows.
Instituting my own rules has allowed me to evaluate properties more easily. It has also helped me to focus my marketing and refine my processes. Best of all, these rules have kept me from buying another mistake like the project in Francisville.
Making an emotional decision on a limited time offer is not always the end of the world. It might just result in another exercise machine that takes up space in the basement. But when dealing with a Real Estate investment, be wary of deals that are only available for the next 30 minutes. Follow your buying rules. You’ll find that there’s always another deal and another opportunity.