2016 is upon us and everyone is telling you to get your goals set right? When it comes to those goals around investing, I always like to share with my investors some good practices to include in their investing endeavors. I have found with hundreds of conversations each year on acquiring a set number of properties, or perhaps properties that will generate a certain return, that probably the most important elements of those objectives get overlooked.
The Average Person’s Objectives
While return on investments, cap rates, and number of properties to acquire are great goals to have, I have found that people unknowingly have deeper objectives. When I ask them why these goals are important to them, I get answers like these: It will give me a nice retirement, or I will then have the cash flow I need, or if I continue at this pace for 5-10 years, then my investment plan will be accomplished.
The Seasoned Investor’s Objectives
Seasoned investors take their objectives to a deeper level. They understand that to have good cap rates and great ROI or accomplished investment goals, they will also need to ensure the properties are going to be able to perform over time. They do not just look at how properties perform today; they want to ensure they perform tomorrow, next month and next year. To seasoned investors, “buy and hold” means doing proper diligence to ensure the property will be worth holding long term. They understand they are investing in more than just an investment property; they are investing in a city or a market they trust to provide an economic foundation to support their investments.
7-Point Checklist to Ensure Sustainability on Investment
1. Are jobs being created? Many have invested in cheap properties only to later find vacancies and stalled cash flow. Investing in markets with job growth is paramount to ensuring you have a steady stream of renters who can afford to make their rent payments.
2. Is the population growing? This, of course, goes hand in hand with job growth. If a market is creating jobs, it should also be growing its populations. When you have rental property in markets that are growing in size, this also lends to a steady stream of tenants who will want to rent from you.
3. Are homes considered affordable? This is a big one—and often overlooked. Investing for buy and hold purposes suggests you will cash flow today with an exit strategy to enjoy a nice appreciation and sell to the retail buyer. To further help your objectives, buy in affordable markets where the home cost of a median price home is no more than three times the median income. Markets where you can acquire the median home price for three times median income or less provides for affordability and ease in finding retail buyers when you prepare to liquidate. The job growth and population growth will help to raise both the income and the home prices, ensuring you sustainability in your anticipated growth.
4. Are insurance premiums and property taxes low? Managing expenses is the number one task for any business owner, and investors are no different. Insurance and taxes are those uncontrolled expenses that you want to make sure are as low as possible. Cities that are not prone to disasters like tornados, or hurricanes or winds or mudslides, etc., are able to keep the rates in these areas low. Likewise, cities that have strong and financially responsible management in place and have a strong and vibrant , growing city with multiple streams of revenue also are able to keep their taxes lower. Expenses such as insurance and taxes that are outside of our controls for expenses can indeed be minimized by investing in areas where they are organically low.
5. Is it a landlord friendly state? Coming from a tenant friendly state where I grew up in Minnesota, investing in landlord friendly states are a pre requisite of mine. Any investor who was forced to do an eviction will tell you that a state that favors a tenant can be costly. To sustain great ROI you want to invest in states that are landlord friendly and understand you need to run a business and getting paid on time is important and has consequences when this does not happen.
6. Diversification: A variety of jobs in different industries is paramount for survival. We all know what happened to Motor City (Detroit) when the auto industry left. They are still trying to recover. This city relied on this one industry. When it left, there were not enough other businesses around for the city to thrive. A city thrives, survives or dies. Where do you want your investments?
7. Are things in place to drive future growth? All of the above are important and sustaining it is something you will want to be comfortable with. Does the city have a 5, 10, 15 or even 20 year vision plan for growth? All markets are cyclical and you want to invest within the cycle for sustained growth. Check into where the city is heading and ensure growth is ahead.
There are a number of other attributes we like to look for to ensure sustainable investments. If we lived in a perfect world, we would find cities with all the shining stars shining brightly and casting light on the investments. We do not unfortunately live in a perfect world, but a darn good one though. I have found, however, that if the property you wish to invest in encompasses these seven must-have attributes, you will have an investment worth holding on to for long term buy and hold investments.
Make 2016 count. Happy investing.
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