Property Evaluation Criteria

[Leila Moussavi]

Hi BiggerPockets!

My name is Leila, and I'm a 19 year old college student looking to investing in a buy and hold property out of state. I would eventually like to become financially free by 30 years old, living off of rental income.

I am unable to quality for a conventional loan, but do have enough saved for a small down payment and some potential investors (family, friends) who would be willing to work some sort of deal out with me so I have the funding to purchase a property. Also they could be potential co-signers on a loan. I may even have a potential partner, as well. I am open to creative financing.

My game plan is to create a set list of criteria for properties, then research markets, then find an agent and analyze properties from there until I find one that fits my standards. So far my criteria looks like this:

• Neighborhood - B class

• Property size (square feet)

• SFH: 1100-1200
• Bed/Bath: SFH: 3 bed 2 bath
• MFH: ??
• Bed/bath: MFH: 1, 2, or 3 bed units? Bath? What's ideal?

• Lot size

• SFH: 6000 with 2 car garage
• MFH: What's a normal lot size?
  

• Property condition - ??

• Number of units - SFH or MFH (2, 3, or 4)

• Cap rate - ??

• Cash flow - 8-12% return

• Appreciation potential - ??

A. How would I determine if I want to invest in a MFH or SFH out of state? Does it depend on the market/location? MFH seems good for scaling and less risky as far as vacancies. I'm leaning towards MFH.

B. What criteria would you suggest I edit/add into my list above, keeping in mind my experience level and funding?

C. Any other extraneous advice from out of state investors would be more than helpful.

Thank you!

[Darius Ogloza]

When you invest "out of state" you are competing against many, many experienced investors with vast stores of local knowledge and hard-won relationships that have taken years to develop.  Trying to beat these people to deals while not completely futile is highly, highly unlikely.  Moreover, as a buyer, many of the deals that will be presented to you will come from very experienced sellers (i.e. turnkey sellers) who make a profit by buying low and selling high to "out of state" investors like you.  They too have a massive advantage over you - troves of local knowledge.  Can you compete with these folks?  Maybe after some time.  But this will require years of diligence and study.  In every market there are winners and losers and distinguishing between them is notoriously difficult, especially when trying to learn about market conditions from an app.  From Orange County, nearly everything in the Midwest and most parts of the South will look "cheap" to your eyes but the vast majority of these "cheap" properties make terrible investments.  That $50,000 three-flat house in Cleveland probably required $8,000 to build in 1920 dollars (i.e. the equivalent of $112,000 today).  So, what looks like appreciation is actually a massive loss.  In fact, $8,000 invested at 5% per year should have yielded over $1 million dollars by today.   What would you rather have $1 million or a $50,000 house in Cleveland that will likely be worth $40,000 ten years from now??? Invest in what you know.