How I Decide If a Property Is Worth Pursuing

Finding a property is the easy part. The tougher part is navigating the storms that will inevitably come. So before I pursue any property, I run it through the same checks. I usually call it three things, but there are really four: does it fit my buy box, does it fit the long-term vision of my life, do I have an exit plan, and do I have a contingency plan.

This is how I think about it as a buy and hold investor. It is my experience, not a rulebook, and your own goals and numbers will shape what matters to you.

1. Does it fit my buy box?

The first thing is making sure the property meets my buy box. That way I am not guessing on the use of the property.

A buy box is the set of criteria a property has to meet before you will seriously consider it, such as location, price range, property type, condition and what it should rent or sell for. You can have more than one. For example, I might have one buy box that is best designed for long-term rentals and a different one that is best for a potential fix and flip. Those are two different sets of criteria because they are two different strategies.

So the first check is simple: am I staying in my lane of expertise? The buy box also came up in my first investment property story.

2. How does it fit the long-term vision of my life?

The second thing I ask myself is how the property fits into the longer-term vision of my life. Real estate is a financial decision, but it is also a relationship decision and an emotional decision, because a property is a living, breathing asset with moving pieces.

I ask how it fits the long-term vision of both my lifestyle and my financial portfolio. I have primarily been a buy and hold investor, and if I cannot justify a property for the long term, I am hesitant to move forward. Having a foundational reason for what this property is supposed to do in my life is an anchor.

It is very similar to the stock market. If you buy a company and it has a dip, you may ask yourself whether the company is still worth holding on to. But the real question is: is this still a good company? Does it still have long-term upside that is congruent with my expectations? I try to look at a property the same way.

3. What is my exit plan?

To me, an exit plan is what specifically needs to happen for you to pivot the current use, ownership or disposition of the property. Disposition means how you eventually let go of it, whether you sell it, transfer it or pass it down.

If the property is designed to be a fix and flip, the exit plan means having a specific idea of who the end buyer is going to be, what time of year they may be buying and what type of financing they may need. All of that is so you can exit the property properly and take a profit.

If it is a buy and hold, the exit plan might simply be to transfer it into a trust for the long term, so the property passes to my children or family members. That is a clear exit plan. How trusts work, and how a property is moved into one, depends on your state, so that is a conversation for an estate planning attorney.

Or the exit plan might be this: buy at a discount, rent it to working professionals for eight years, then refinance and pull out a specific amount of equity to use that capital for something else. A cash-out refinance replaces your mortgage with a larger one and pays you the difference in cash.

It is all part of your business strategy: knowing when, where, why and how to get out when you need to.

4. What is my contingency plan?

Last but not least is a contingency plan. In my opinion it is baked into the exit plan and the overall business strategy, but I have realized it is important to identify it up front.

If your long-term vision changes, or your exit plan does not hold up, what do you do? What is your audible?

Say you are holding a property as a rental and your current rental strategy is no longer getting the job done. Maybe you need to switch from student rentals to Section 8, from Section 8 to short-term or mid-term rentals, or even to assisted living. Section 8 is the Housing Choice Voucher program. Rules on short-term rentals, tenant screening and source of income protections vary by state and city, and assisted living usually requires a state license, so check the local rules before changing how a property is used.

Contingency plans are for when the rain comes and then stays for way too long. Think up front about what is going to get you out.

Before you sign anything

None of these checks is about finding a perfect property. They are about knowing why you are buying it, how you will get out and what you will do if the plan changes. If you are weighing your first rental, I wrote about owning a rental while working full time and managing rentals in several states.

When you are ready to look at properties with an agent who understands investing, start at findablackagent.com.