Figure 36

1. How much cash will you need to make any repairs?

2. How long will it take to put the property in rentable or sellable condition?

3. For big projects, how much risk is involved?

Ideally, you want to find a discounted property that needs no repair, but that is quite rare. Generally, discounts come from fixing other people's problems. The seller doesn't have the cash, the time, or the inclination to handle the repairs himself or herself and then put the property up for sale at a higher asking price. That's where the investor comes in.

While we'll discuss this in detail in the section on the Acquisition Model, a general rule is that the more repairs a property requires, the greater the discount is. Major cosmetic repairs such as updating kitchens, bathrooms, and appliances can net investors big returns if they are willing to tackle them. Structural repairs such as fixing a bad foundation bring the biggest discounts but also entail risk. When you start moving or adding walls, there are often unpleasant discoveries (finding dated or dangerous wiring) or collateral damage (broken pipes) that will cost you time and profits. We recommend that beginning investors start with properties that will require only minor repairs unless they have significant construction experience.

As part of their research for this book I encouraged the rest of our writing team to buy, improve, and sell an investment house, using the millionaire models and worksheets. Through the seller disclosure and on-site inspections, Dave, Jay, and our researcher, Heather, learned that the property had a bad foundation and needed major cosmetic repairs. Everything went by the numbers, and their cost estimates were within 2 percent of the actual expenses except for one big problem: During the foundation repairs the main sewer line was broken about 20 feet under the slab. That amounted to a repair bill of over $10,000, as workers had to hammer through the slab to repair the line. That surprise expense added over a month to their holding costs and cut their profits substantially. But—and this is very impor-tant—because they were able to purchase the property at a deep discount by strictly following the models, they still earned a profit from their investment.

Bob Guest, a local Millionaire Real Estate Investor who advised them on the property, remarked that "they had the good fortune of having their education paid for by the property." He was absolutely right. By following the models they got a great education on Condition Criteria and made some money too.

The fifth principal area of your Criteria is Construction. This is an important consideration for real estate investors because a property's construction often has a big impact on maintenance and expenses. Roofs have to be replaced, siding has to be repaired, and septic tanks need periodic treatment. These are all costs that will affect net cash flow if you plan to hold the property or your selling price if potential buyers are sensitive to these issues. Millionaire Real Estate Investors Jimmy and Linda McKissack only buy homes with brick exteriors because they knows that that's what people in their Denton, Texas, market want. They also understand that solid construction is more affordable to maintain over time.

Features and Amenities are the final principal areas of your Criteria. Features include such basics as the number of stories, bedrooms, bathrooms, and living areas a property has. Consider important features in your target area to be prerequisites for any property you purchase. If all the properties in your target location have two-car garages, your properties should too. Anything less and you'll probably have to discount the rent or price. Amenities are the unexpected extras a property may have. You may not include any of them in your Criteria, but you should always bear them in mind. A property that's missing a key feature may still be worthwhile if the amenities offset this deficit. For example, the two-car garage may have been converted to an extra bedroom that might be just as attractive to a prospective renter or buyer. Think of features as your minimums and amenities as your maximums.

"Theory and philosophy are great, but you must put in the work necessary to understand the market in which you intend to invest. Knowing a specific market is more powerful than any theory you could learn. Never try to shortchange the effort that is required to learn a market."

Paul Morris Millionaire Real Estate Investor West Hollywood, CA

Completing the Millionaire Real Estate Investor's Criteria Worksheet14 should give you a clear picture of the type of property you hope to find. Over time, as you invest more and more, you may end up with several sets of real estate investment Criteria. While you may be in the market primarily for single-family homes in a certain area of town, you may have another set of Criteria for vacant lots you'd develop or even fixer-uppers you'd sell for a quick profit. The point of the Criteria Worksheet is that investors must always have a clear, detailed understanding of their current targeted properties. You must know what you hope to find if you are to have any hope of finding it.

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