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