Single family homes can be great investments. They command higher rents than condos and will increase in value better over time. Single family homes are also easier to sell when the time comes to reposition equity. In two previous installments, we discussed "basic" and "beyond basic" screening criteria for buying single family rental properties. As investors in single family homes, many of us have dozens, perhaps hundreds, of homes to screen as potential investments. We don't have time to research every house on the market, so we develop screening criteria that will us save time and money when we're ready to buy.
Previously, we discussed basic property selection filters: location, price and configuration. We then went beyond the basics to screen the remaining properties on our list for liens and liabilities, condition, and draft business plan (please refer to those previous articles for more information on these filters). In some geographical markets, we may have just a few properties remaining on our short list after going through all these filters. In others we may have a dozen or more. If we want to put our capital to work in a property now and can only invest in one or two, how do we come to a final decision? We have just two more considerations: strategic benefit and terms of sale.
Strategic benefit. In building a portfolio of investment real estate, we look for opportunities to add properties that not only perform on their own, but that also enhance our entire portfolio. For example, we may want to buy in geographic clusters where we know the market. Buying clustered properties of a like type may also help us purchase goods and services at a volume discount, spreading costs over all our properties. If we're looking at several properties that fit our investment criteria, we may give preference to the one that provides the best strategic benefit.
Terms of Sale. Our final consideration is terms of sale. We've already determined that all the properties on our short list meet our needs, including strategic benefit, so now we focus on which property is the best deal. We created a financial model in our draft business plan for each property, so let's look at those models to find which one will provide the greatest return on investment given the assumed purchase terms. We begin with the property that is forecast to provide the highest rate of return and make an offer for that property. If our offer is accepted or we are able to negotiate terms that meet or beat or business plan assumptions - we've found our property! If not, we go to the next property on our list and make an offer for that property, then so on down our list until we make an acceptable deal. Note: I do not recommend making simultaneous offers on multiple properties unless you are willing and able to buy all of them.
There are times when we are unable to make an acceptable deal for any of the properties that make it through our screening process. Rather than lowering our standards, we start again with a fresh list of candidate properties. Many investors add properties to the front end of their screening process weekly, even daily. Great properties often sell fast, so it's a good idea to ask your broker to set up an email alert so that you receive information about new properties as soon as they come on the market.
I hope this information is helpful to new and experienced investors. You may want to follow this process precisely or adapt portions of it to the process you already use. The important thing is to have a process and stick to the investment standards you set for yourself.
Happy investing!
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