Stop Focusing On Price
These 4 factors matter more
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Stop fixating on price.
It matters far less than you think.
How much you pay for a property is not the sole and only determiner of profitably.
It’s actually far down on the totem pole.
There are 4 core facets of every investment.
Get these right, and you will never go wrong. . .
#1 is Location
The importance of location cannot be overstated.
It’s one of the only un-controllables within real estate.
Once you’ve closed on a property, you can’t change the side of town that it’s on, the block in which it’s located, or how the surrounding area looks.
I avoid buildings that sit at a dead-end, as well as those that are situated adjacent to freeways and major intersections.
Alley access is sometimes an advantage, but the trash and unwanted traffic can also be a headache.
I’m careful when it comes to buying next to parks and schools. Some parks attract the wrong crowd - gangs, homeless, you name it. And while being located in a school zone can increase safety, the constant flow of wandering teenagers can be a turnoff to prospective tenants and buyers.
Most importantly, unless I have trusted boots on the ground, I’ll never buy too far away from home. The added cost of flights and hotels can back you into a corner, and you’ll quickly find yourself between the infamous rock and hard spot—leading you to bite the budget-blowing-bullet, or forcing you to depend on contractors that don’t have the same vested interest that you do.
Before we move on to #2, I cannot miss the opportunity to once again reiterate how critical it is that you are careful when choosing where you buy. Location is number #1 on the list for a reason. You only get one chance to plant your flag. Remain selective, and never settle.
#2 is Financing
How you fund a deal is less irreversible than buying in a bad location. However, taking on risky debt can undoubtedly cause challenges later down the line.
There are three types of debt that you should use sparingly: short-term, floating-rate, and hard-money.
Loans with maturity dates under 5 years would fall into the short-term bucket. These loans are built for single-family fix-and-flips and smaller renovation projects. Using this form of financing for a buy-and-hold rental wouldn’t make much sense. And leveraging these loans as bridge debt when taking down larger development deals can add a ton of pressure to your turn-around timeline.
Floating-rate, sometimes referred to as variable-rate debt, places you at the mercy of the market. If interest rates remain steady or decrease prior to your maturity date, you’ll have nothing to worry about. But if they rise, you can find yourself in trouble. An unexpected spike will not only cut into your cash-flow - making it tough to service the debt - but more importably, it can block your ability to refinance and limit your exit options.
Both short-term and floating-rate debt are common types of hard-money. But hard-money can also come in the form of long-term loans. I’d define hard-money as any loan that has little or no personal underwriting requirements. These loans are typically high in fees and carry a heavy interest rate; making it difficult to clear a profit if you’re relying on ordinary rental income.
Keep in mind, I wouldn’t say that these capital sources are completely off limits. Sometimes they’re your only option. But I would I highly recommend that you exercise caution when taking on any form of short-term or high-leverage debt that can change quarter by quarter depending on how the Fed is feeling.
Regardless of how tempting it may be to take on bad debt, try your best to remain conservative when building your capital stack.
#3 is Strategy
If your entire business plan is hinged upon a single investment strategy, you’re exposing yourself to a tremendous amount of risk. The more ways that you can turn a profit from a single property, the better.
If you acquire an asset that’s intended to be a fix-and-flip, you want to ensure that it will also at least pay for itself as a rental as well.
If you underwrote a property as a vacation rental, you should also run the numbers to see how it’d perform as a mid-term rental.
Whatever you had in mind for Plan A, make sure that there’s a viable Plan B.
Albeit relatively predictable, real estate can still be volatile. Not like stocks, but more like the weather.
Everything can be sunshine and rainbows, and then boom, you get hit with a rainy day—your contractor bails on you, squatters break in and occupy the property, new legislation passes. When the unexpected happens, you have to make sure that you’re prepared to make it through the storm. The inability to pivot can choke the life out of your profit and leave your deal for dead.
#4 is Operations
Operations are the lifeblood of a real estate portfolio. Efficient systems and processes can compensate for nearly any error you make - overpaying, costly debt service, even location to a certain extent.
Tenant screening, vendor selection, budgeting, management, they all fall within the operations umbrella. Each being its own small cog that makes the machine work as it should. When in unison, everything runs smoothly, but when a monkey wrench is added to the mix, the train can quickly go off the tracks.
It’s your job to be the conductor. Creating the necessary guardrails, sticking to your SOPs (standard operating procedures) and executing at the highest level.
Unlike every other aspect of real estate which requires you to remain nimble and be flexible, this is the one area that you should be rigid. Stick to your guns and don’t allow the rules to be broken, or even bent—even if times get rough. You’ll regret it when things go awry.
If you’re worried that you got the short end of the stick at the negotiation table, don’t fret. It’s not the end of the world.
How much you paid, does not dictate how much you’ll make.
Location, financing, strategy, and last but definitely not least, operations will trump the price tag.
So don’t beat yourself up over the small losses along the way, just focus on securing the big win in the end.
Hope this helps you along your journey.
Michael C.
What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?
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