Are you struggling to find your first real estate deal? You’re not alone. We’ve been there, and that’s why we’ve created this beginner series. Welcome to video #2 (click HERE for video #1), where we focus on how to create essential buying criteria. If you’re new here, we are Ali and Amanda from ProspHer Collective, where we educate women like you on how to buy residential real estate.
Why Have Essential Buying Criteria?
Let’s get started by discussing why creating a buying criteria is so important.
Think of it as a road map. It provides clear guidelines and helps eliminate all the extra information that can be overwhelming. When we started, we were looking at everything—single-family homes, duplexes, even large multi-family units—and we ended up feeling totally lost. It’s like that overused Alice in Wonderland quote: “If you don’t know where you’re going, it doesn’t matter which path you take.” Without a buying criteria, you won’t know if a deal is worth pursuing or when you should walk away.
Essential Buying Criteria #1: Determine Your Market
The first step is determining your market—where you want to purchase real estate. We always recommend starting in your own market because you can be on-site, monitor the property, and visit more properties since they’re close to home. Start with a radius around where you live.
If your local deal flow is low, like in our hometown of Billings, Montana, you might need to expand to other markets. For example, we might consider Phoenix because it’s quicker to hop on a plane than to drive eight hours to other parts of our state. However, if you’re choosing a market outside your area, make sure you know it well or have boots on the ground—people you trust who can monitor the area for you.
Essential Buying Criteria #2: Analyze Market Metrics
Once you’ve chosen your market, start looking at key metrics. These include population size, job growth, and employment diversification. For example, in our market, we have hospitals, refineries, and large employers like Walmart and Costco. You don’t want to invest in a town that relies on a single employer. If that employer shuts down, the local economy can collapse, like what happened in Butte, Montana, when the mine closed.
Also, consider population growth. If people aren’t moving to the area, there’s no need for more housing. Look at the median income in the area, too. Tenants generally need to earn three times the rent to qualify, so ensure that the local median income can support the rent you plan to charge. Check vacancy rates and make sure the numbers align with what you’re looking for.
Essential Buying Criteria #3: Define Your Deal Size
Once you’ve nailed down your market, start defining your deal size. What are you looking for? Is it a single-family home, a duplex, or a multi-family property? Know what you can afford—whether it’s a $1 million loan or a $4 million loan—and whether you’re paying with cash or using debt. If you’re partnering with someone, make sure the legal documents are in order. It’s crucial to avoid wasting time looking at properties outside your budget, like a 29-unit complex when you can only afford a duplex.
Essential Buying Criteria #4: Set Age & Condition Preferences
Next, consider the age and condition of the property. Many investors prefer properties built after 1975 because they often have updated plumbing and electrical systems, reducing the risk of expensive capital expenditures. If you’re purchasing an older property, make sure you know what you’re getting into—whether it’s replacing old plumbing or dealing with outdated heating systems.
You’ll also want to choose the class of property you’re interested in. Properties are graded from A (new construction) to D (in need of major renovations). We typically look for B and C class properties—ones that may need some improvements but can still offer a good return. If you prefer to avoid headaches, you might opt for an A-class property. On the other hand, if you or your partner enjoys tackling major renovations, you might consider a D-class property in a decent area.
Essential Buying Criteria #5: Identify Physical Characteristics
What physical characteristics are important to you? For example, we prefer properties with garages and central air, which are important in our cold Montana climate. Other features to consider include fenced yards, brick buildings, and washer/dryer hookups. A good way to figure this out is to ask a local property manager what features tenants in your market expect.
Essential Buying Criteria #6: Look for Value-Add Opportunities
Value-add opportunities come in two forms: operational and physical. Operational improvements could involve transferring utility costs to tenants or raising rents if the current ones are below market. Physical value-adds might include updating flooring, adding a washer/dryer, or improving curb appeal with new landscaping and paint. We like a combination of both types of value-adds to maximize our investment.
Essential Buying Criteria #7: Ensure Cash Flow
Finally, make sure the property cash flows. Don’t rely solely on appreciation, as it’s not guaranteed and can fluctuate. Cash flow is what will protect your investment. If the property isn’t bringing in more money than it’s costing you, you’ll end up paying out of pocket for unexpected expenses. Having a property that cash flows ensures you’re making money even if the market doesn’t appreciate as you hoped.
BONUS Tip!
Managing a single-family home or a multi-family property requires about the same amount of work. So, if you can afford it, consider a property with a higher door count. In our experience, an 8-plex is just as much work as a 29-unit complex, but the latter offers better returns.
Now it’s your turn! Go create your road map, your buying criteria, and the factors that are important to you. We’ll be sharing our criteria in our Facebook group HERE. Head over there and join us for more resources, and if you have any questions, feel free to ask!
Don’t go anywhere- we’ve got lots more coming your way soon- SPOILER ALERT: Next vlog will be on how to find deals. See you then!
