How Do I Choose An Investment Property?

28 Apr How Do I Choose An Investment Property?

To lock in your property development profits, you have to get a great deal on the property.

Defining Your Selection Criteria

Having clearly defined selection criteria helps keep you focused on buying property that meets your needs, prevents “analysis paralysis,” and helps you speed up the process by narrowing your choices to a few select properties that will bring the greatest ROI.

What to consider really depends on your ultimate goals. Some criteria come down to personal preference such as targeting specific neighbourhoods or avoiding commercial spaces. Here’s a quick list of what you need to clarify in your mind before you start shopping.
● Location: city, neighbourhood, even street
● Property and lot size
● Property condition: scraper? Major reno? Cosmetic fix?
● Growth/appreciation potential
● Cash flow

By specifying ahead of time what criteria you are willing to consider, your search becomes much more manageable. Knowing exactly what your constraints are will also help me identify the right properties for your goals, and it will help you define a budget for the development project.

Investment Property Rules: 2%, 50%, 70%

Of course the financial component is the most daunting for most investors. If a deal doesn’t make sense financially, even if your heart is set on a property, it’s not going to become a strong investment but likely a “money pit” that may… or may not… yield financial results for you in the long run.

We’re here to help you make money as a property investor/developer so let’s stick to that and leave the “labours of love” for when you’ve created a healthy portfolio.

Generally speaking, a property listing only gives you very limited information about a property’s financials. You can find out the amount of income a property is currently making, but you won’t always know at first glance whether the property is overpriced or what your offer should be.

It’s helpful to know a few rules of investing before you start looking at listings.

The 2% Rule

Your monthly rental income should be approximately 2% of the purchase price. Factor in the cost of development, and you could be looking at relatively hefty rental prices, which may be higher than the property warrants.

The 50% Rule

50% of your rental income is spent on expenses NOT including the mortgage payment. This includes repairs, utilities, taxes, vacancies, property management fees, maintenance and escrow for occasional big ticket or emergency expenses. Expenses almost always tend to be more than you might think so plan ahead and factor in every contingency you can think of.

The 70% Rule

The 70% rule applies to properties that are renovated as opposed to new construction. When purchasing a property, pay only 70% of what the post-development value is, less the costs of the development. For example, if a renovated home sells for $200,000 after needing $35,000 of work… you would multiply $200,000 by 70% to get $140,000. Subtract the cost of the reno ($35,000) and you arrive at a purchase offer of no more than $105,000.

These are great rules of thumb, but you also need to consider factors such as anticipated growth in a specific area, which may give you a bit of a “safety net” for going a bit over budget.

This is something that beginning investors shouldn’t do on their own, without a solid knowledge of the real estate market, real-world construction costs, and the costs of holding a property. As you can imagine, it can become quite the goulash of information to digest. Please give Neal a ring, schedule a consultation and together you can create a more detailed analysis of your needs, capabilities, and the realities of the projects you are considering. A rule of thumb is never an excuse to skip doing your homework. In the long run, you’ll make a lot more money if you dig a little deeper and uncover a property’s true potential… and not just the potential that you’ve set your heart on.