An investor’s guide to creating a property wishlist that actually works
Have you ever gone grocery shopping without a list and ended up impulse buying a bunch of random stuff you don’t actually need? Maybe some fancy chocolate bar or an expensive bottle of balsamic vinegar? Yeah, me too. Making real estate investment decisions can feel a lot like grocery shopping when you don’t have a plan. You wander around looking at shiny houses thinking “Ooh, nice kitchen backsplash!” or “Wow, beautiful oak floors!” without considering the financial facts. Before you know it, you’ve put in an offer on a money pit of a property that doesn’t actually fit your investment strategy at all.
That’s where the real estate buy box comes in handy. Essentially, it’s a wishlist of everything you’re looking for in an investment property. But it’s not just about pretty countertops and recessed lighting. It’s got all the nitty gritty financial details too – the info you really need to decide if a property is a good addition to your portfolio or just an expensive decorative item you’ll regret buying.
When you’ve got specific guidelines to follow, you’ll avoid making emotional decisions or wasting time looking at places that don’t actually fit your investing criteria. Think of it like a shopping list to keep you on track towards your goals instead of randomly throwing things in the cart!
What exactly should you include in this magical buy box?
Here are the key categories investors need to define:
Location, Location, Location
You’ve heard it a thousand times in real estate – location matters. When creating your buy box, narrow down the geographic areas you want to buy property in. Make sure to look at the comparables (or “comps”) to get an idea of typical sale prices, rents, etc. in different neighborhoods.
You generally want to stay within 1 mile radius of potential investments when looking at comps to value a property accurately. The closer the comps, the better sense you’ll get. As Chas Nichol, VP of a real estate brokerage explains:
“You want to be as specific as possible. For instance, if you cross the street, you can lose value, so it’s important to keep your radius as tight as possible if you can obtain enough comps.”
But it’s not just about the houses themselves. Check out demographic factors about the areas you’re interested in too.
For residential rentals, key info to review would include:
- School district ratings – Top rated schools can increase demand from families
- Proximity to shopping/amenities – Convenience attracts tenants
- Crime rates – Everyone wants to feel safe!
- Job growth – More jobs means more rental demand
Define your ideal locations based on your investing goals – whether you’re looking for affordability, cash flow potential, or appreciation.
What kind of real estate gets you most excited? Determine what asset class makes the most sense for your investing strategy.
Popular investment property types include:
- Single family homes
- Multi-family properties (duplexes, apartment buildings etc.)
- Commercial – Office spaces, retail stores etc.
- Specialty – Warehouses, self storage, mobile homes etc.
Think about your ideal tenant, management preferences, and financing options for different property types. Do you want to be a hands-on landlord for long term residents? Or take a more passive approach with commercial assets?
Many investors start with single family homes then expand into multifamily properties over time. Define where you want to start and how you intend to grow.
Financial Factors – Crunching the Numbers
Okay, on to the money stuff. The financial criteria you set in your real estate buy box is key for determining if a property nets enough return to justify the investment.
Price Range – Get clear on budget – know what you can afford in terms of down payment, financing, operational expenses etc. Factor in potential renovation costs too so you don’t overextend yourself.
Expected Return – How do you want the property to make you money? Through cash flow/rental income? Appreciation over time? Look at average cap rates and historical appreciation rates in your target markets.
Financing Terms – Understand requirements and interest rates for mortgages, investment property loans, lines of credit etc. Know what loans you qualify for.
Crunch numbers during due diligence phase on potential buys to confirm they align with financial goals!
Condition of Properties
Unless you’ve got money to burn, you probably don’t want to buy a falling down shack of a property that needs massive repairs. But you also may not have the budget for a total move-in ready luxury pad. Figure out what level of renovation work you can take on – and what kinds of repair costs you can swallow.
As Jon Wilson, head of rehab at a real estate company puts it:
“It’s usually always more work than you think it will be. A good rule of thumb is to over budget for your rehab in case you run into any surprises. Even with home inspections before you buy, you can always run into surprises”
If you’re doing bigger renovations, plan to get quotes from contractors to understand potential costs before setting max budget.
And don’t forget…location factors back in here too! If the home needs a new roof for example, understand regional pricing on roof replacements.
Hot or Not? Checking Market Conditions
You probably want to buy properties with decent demand. Make sure to look at indicators of supply/demand balance and growth potential in target markets.
A few key metrics to look at:
- Home sale prices – are they increasing or decreasing?
- Months supply of inventory – is excess supply pushing discounts?
- Rental vacancy rates – are there enough tenants to fill units?
- Job growth – are new companies hiring in the area?
- Population trends – is it growing or shrinking?
Markets ebb and flow over time. But understanding market cycles helps time purchases for best investment outcomes.
Set Your Buy Box, Stick To It
Those are the essential elements real estate investors need to define in a buy box.
By identifying your:
- Ideal locations
- Preferred property types
- Financial return needs
- Renovation budget
- Market indicators showing growth potential
You can set standards to filter out any properties that don’t fit the bill. If something doesn’t meet the predefined buy box criteria, pass it up!
Why get so picky? What’s the big deal?
Here are a few key benefits of having a carefully crafted buy box:
Avoids Emotional Decisions – It’s all too easy to fall in love with the fancy backsplash and hardwood floors when walking through a house and want to purchase regardless of the numbers. A buy box reminds you stick to the parameters that actually matter for investment success.
Saves Time – When you’ve got no direction, you can waste hours looking at listings all over town that will never actually work for your portfolio. A dialed in buy box lets your agent know exactly where to focus their search.
Prevents Overpayment – Having clear financial guidelines on returns expected makes it easier to calculate fair prices to pay for properties that achieve those projections.
Minimizes Regret – Ever bought something you later kicked yourself for? “What was I thinking?!” Specifying must-haves ahead of time minimizes chances you feel regret down the road.
Conduct Due Diligence With Care
Okay, so you’ve found a property that ticks all the boxes in your predefined buy box. Don’t get too trigger happy with the offer button just yet.
This is when proper due diligence comes into play to confirm the numbers and condition.
Order an inspection report to ensure no major foundation or structural issues. Check for other red flags like mold or faulty electrical systems.
Review recent comparable sales in close proximity again. Make sure estimated rehab costs seem accurate. Double check rents and price per square foot is in line with the area.
Crunch valuations based on actual cap rates and cash flow potential given inspection findings and cost estimates.
Don’t rush this part – digging deeper protects against overpaying or buying a lemon of a property!
Avoid Buyers Remorse! Steer Clear of Bad Property Investments
Even seasoned real estate veterans can admit they’ve purchased a dud investment or two in the past.
When you don’t do sufficient due diligence or stray outside preset buy box guidelines, you risk disappointment down the road.
Here are common ways investors end up with bad properties:
Location Lies – The old mantra rings true – location, location, location! No amount of lipstick on a pig can dress up a bad area or neighborhood. Vet geographical areas thoroughly upfront to confirm solid fundamentals.
“Too Good to Be True” – Crazy cheap deals can seem oh so tempting. But once you run the inspection reports and find major issues, bargain basement prices requiring exorbitant unexpected repairs lose their appeal.
Hidden Issues – Even properties that check all the boxes on the surface can reveal unpleasant surprises during due diligence. Don’t waive contingencies that allow you to cancel if major problems surface.
Rising Costs – An overheated housing market can result in buyers overpaying out of fear of missing out on deals. Stick to fair valuations aligned with realistic rents and cash flow to avoid massive mortgage payments not supported by fundamentals.
Wandering Outside Your Strategy – Types of properties or locations that don’t fit your ideal buy box can distract from your real estate investment goals. The shiny object syndrome (like that fancy bottle of vinegar remember!) can undermine your plans if you diversion too far from preset guidelines.
Is It Possible to Use a Shipping Container as a “Buy Box” in Real Estate?
Adjust Your Buy Box Over Time
Here’s the thing about buy boxes – they’re not necessarily static forever. As you gain more experience or want to expand strategies, adjust it accordingly.
Maybe you want to venture into commercial properties after a few years investing in single family homes. Or have enough rental units now to justify hiring a professional property management company to handle things, allowing you to scale out of state.
Tweak your buy box as your investment comfort level, finances, or goals evolve. Just be strategic and intentional about changes vs. randomly straying from guidelines on a whim.
The Buy Box is Your Real Estate BFF
As any experienced investor will tell you, having a dialed in buy box in place before you start looking at properties is an absolute must.
It keeps you focused on the financial factors that really matter instead of getting distracted by expensive upgrades or finishes that destroy your returns.
By setting clear standards on location, property types, cash flow margins, condition, and market trends in your buy box, you’ll be equipped to filter out thehouses that don’t fit your investment strategy.
Think of it like a shopping list to guide your journey towards building wealth! The buy box gives you direction and discipline – protecting you from impulse buys that you’ll later regret.
So do yourself a favor and take the time to thoughtfully prepare your own buy box. Your future self will thank you when you’re kicking back collecting rental checks instead of kicking yourself over an emotional splurge purchase gone wrong!
Now get out there and find your dream investment property! But don’t forget to bring your buy box checklist with you 🙂