My Rental Purchase Criteria

I have recently been asked to elaborate on my rental property purchase criteria.  You would think I have an elaborate set of guidelines, must haves and must want but it is not that simple. If you have been following this blog for a while you might remember that we started in the house buy-sell business (flipping) and it took a year before we decided we wanted to start keeping some properties. That means we have taken a different approach to the business.

Like the buy-sell business one of the main criteria is EQUITY today!  For rentals we are looking to pay 75% of ARV value less repairs for any purchase.   So if the property will be worth $100,000 once it is fixed up and requires $10,000 in repairs the most we would pay is $65,000 ($100,000 * 75% = $75,000 – $10,000 in repairs).

The second requirement is CASH-FLOW.  The property must generate a positive cash-flow after all expenses and factoring in 10% on the entire purchase and rehab.  We cannot get traditional financing any more, so we are paying private and hard money rates.  This pretty much means that the max investment on a deal is going to be about 120,000 or so, or else it will not achieve positive cash flow.

So the goal is to buy a property at a discount, collect the cash-flow, leverage some of the investment out and sell or trade when the right substitute investment comes along.  I am hoping to see some appreciation in California at some point, but with our model it really doesn’t matter if it happens or not.  We could sell everything rental we own for a profit in today’s market.

Our criteria is pretty flexible if it can meet the above two goals.  For example many investors don’t like to buy 2 bedroom, 1 bathroom houses, I have no problem with these as long as I can get them for 75% or less of what other 2 bedroom, 1 bathrooms are selling for.

There are some items that are deal breakers:

  • If I am afraid to get out of my car in the neighborhood, day or night, I don’t want it.
  • If it is over a 45 minute drive from my office, that is probably too far.
  • Dirt Roads.

Things I don’t like and would want to pay less:

  • Flat or gravel roofs.
  • No garage.
  • Really busy streets or other major location problems.
  • A really old house (1940 or less)

I know I probably didn’t provide anything revolutionary or an exact criteria to follow: instant equity + positive cash-flow + good location is really the formula…


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11 Responses to “ My Rental Purchase Criteria ”

  1. VL says:

    Why don’t some investors like to buy 2 bedroom 1 bathrooms?

  2. Arthur Garcia says:

    Steve, I know much of this is kind of straight forward, but seeing it spelled out like this is really helpful to see your though process while evaluating potential properties. Thanks again for taking the time to post it.

  3. George says:

    @ VL – 2 bdrms are harder to retail, and the rental market is much smaller.

  4. Steve says:

    I should also add… any rental house over 2,000 sq ft I don’t like to keep. That is too many people and too much stuff to fix.

  5. Shae Bynes says:

    Hey Steve, your criteria looks pretty close to mine :-) Have you considered selling off some of your properties with owner financing and just collecting payments?

  6. Steve says:

    Hi Shae, I have been asked that question a couple of times and I do not think it makes sense in this market.

    Right now, I believe property prices are low and interest rates are cheap. If I sold a property with owner financing I would be fixing the sales prices and payment amount. We do sell properties and let people get bank financing as they are happy to get 4-5% interest. Even if I can get 110% of market value and 7-8% interest or higher I would rather keep it.

    If I had a lot of cash or really struggled to manage properties I may answer different.

  7. Shae Bynes says:

    Yep, makes sense.

  8. I like your deal breaker items. Reminds me of a time I was driving through one of the worst areas of town and a crack head jumped out in the front of our car, in the middle of the day. This thing was cracked out!

    My wife was yelling at me to punch the gas and get the heck out of there (urging me to run the stop signs). lol

    I guess I could add: any place where if a guy pulls over in front of you and gets out and starts walking toward you, your first instinct is that he is about to car jack you.

  9. Andy H says:

    You mentioned borrowing money from investors. What kind of form or documentation to you use to secure the loan from a private investor, i.e. friends, families, etc. I’m still looking to do my first deal, but doing some research in the meantime.

  10. Steve says:

    Promissory note and a trust deed if it is to a specific property.

  11. JC says:

    In San Francisco Bay area, where I am living, there is no property meet your criteria…

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