Economic

To put it plainly, you can't build your Economic Criteria unless you have a firm idea of what properties are really worth. Any successful

12 Investors are buying cash flow when they purchase rental properties. In the section on the Acquisition Model we'll walk you through the process of how investors determine a property's value from Net Operating Income (NOI), which is gross rent minus expenses.

13 From 1972 to 2002, a period that fairly represents rising and declining real estate markets, the median home price rose at an annual compounded rate of 6.11 percent and median rents rose at an annual compounded rate of 5.32 percent.

investor will tell you that it pays to know property values and rental rates. Actually, it's essential. You have to understand current market prices for property sales and current market rental rates to know what your Economic Criteria should be. Your Economic Criteria break down into four distinct parts:

1. The price range in which you want to buy

2. The discount you will require

3. The cash flow you expect to receive

4. The appreciation you hope to make

Basically, the price you pay (after your discount) will go a long way toward determining your cash flow and appreciation. If we add the two issues of hassle (the time and work involved in dealing with typical tenants for that price range) and liquidity (how quickly you might be able to sell the property) to cash flow and appreciation, we get four broad categories we must consider in determining the price range in which we might want to buy.

In the final analysis it's best to build your Economic Criteria toward the middle of the market. The chart just below shows how the four broad

Be In the Middle of the Market

Cash Flow

Hassle

Appreciation

Liquidity

Great Deals

Good Deals

Be In the Middle of the Market

Great Deals

Good Deals

High

Medium

Low-End Properties

Average Properties

High-End Properties factors—cash flow, appreciation, hassle, and liquidity—tend to work at various price points. Our research shows that the best combination of these four factors—the sweet spot, if you will—lies on the low end of the middle of any market. That's where the great deals are found and made. Cash flow can be best at the low end of the market, but these properties can represent the most work for investors, don't tend to appreciate as well, and aren't as liquid. High-end properties tend to appreciate well, but their cash flow is usually the worst. It takes longer to sell them, and so their liquidity factor is low, and because of the expectations of typical high-end renters and buyers, they can represent a hassle for the investor. Especially in the beginning, we'd advise taking the solid cash flow, strong appreciation, and low hassle offered by midmarket properties. It's about identifying these "bread and butter" properties in your chosen location.

In general, it's best to be where the largest market is, and generally speaking, the majority of renters and buyers will be in the average-priced properties. In this market segment larger numbers of renters and buyers can increase demand and drive appreciation. You're playing the averages to have the greatest odds for success.

With your location and property type in hand, spend "Typically the more expensive the house, the worse rental deal it makes. There's probably exceptions to that, but as a rule, as you get into a higher-priced home, the prices go up faster than the rental value of that house.

some time getting to know property values and rental rates. You want to get in the habit of browsing newspaper and Internet listings and Bill O'Kane

Millionaire Real Estate Investor Chicago, IL

taking notes. If you drive or walk through your target area, set aside time to drop in on open houses and inspect rentals. If you see a "for rent" sign, call the number on it. Whether you're talking to a real estate agent, an owner, or a property manager, ask a few pointed questions: Why is the property priced the way it is? How does it compare to similar properties in the neighborhood? What kind of person typically buys or rents this property? The more you research, inspect, and ask questions about the properties in your target area, the better your understanding of value will be and the easier it will be to formulate your Economic Criteria. For Millionaire Real Estate Investors, this Criteria-building process begins with determining their foundational Criteria of Location, Type, and Economic, and it doesn't end there.

Let's turn our attention to the Millionaire Real Estate Investor's Criteria Worksheet (see part one below) and look at all the Criteria you need to consider. This worksheet is designed to walk you through the thought process of building your Criteria from beginning to end. By

The Millionaire Real Estate Investor's Criteria Worksheet (1 of 2)

1) LOCATION

2)

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