Executive Letter #23: What I Look For in an Investment Property

In my last letter, I talked about some of the most common questions I get as a seasoned entrepreneur. Today, I want to talk about the most common questions I get as a seasoned investor.

What do I look for in an investment property?

To me, the answer is simple. It’s all in the facts, the numbers, the tangible stuff right in front of me. I don’t have a sixth sense or a magic scanner to help me weed out lemons. Sure, my years of experience are an advantage, but I stand by the fact that anyone can be a successful investor.

Let me tell you how.

You'll Know It When You See It

Investing involves a straightforward formula: earning potential minus financial risk. If the result is positive, you’re in a good place. Negative? Not so much.

That’s why I don’t usually sweat many of the details when looking at a property. Sure, I want to know about property history, structural integrity, etc. More often, though, I’m looking at the bigger picture. What’s the history of the street or neighborhood in which the property is located? Where is it situated in the local market? Those are facts that can make or break an investment, but they are all things I learned over time.

When Sherry and I first set out, yellow legal pad in hand, we had next to no experience in residential real estate investing. What we did have was experience in business, and we applied what we’d learned accordingly.

We learned we had to approach properties with a plan. While sometimes the right opportunity might come along for sale, chances were higher we'd get the property if we were proactive. After we found a street we liked, we wrote down house numbers, and followed up with hand-written letters asking if the current owners would be willing to sell. That was all it took for us to get started.

When an REI Nation team member drives down the same street, nearly twenty years later, the process to evaluate a property is generally unchanged.

What does that tell me? That my initial instincts were spot on. That renters are looking for the same things that homeowners are: a comfortable home in a convenient location. They don’t want to live amongst McMansions out of their price range, nor do they want to feel unsafe when they walk down their own street. Established, median-priced neighborhoods are where I look for good investments.

Don’t forget, that investors can play a key role in establishing neighborhoods and helping to rebuild them too.

Developing a Standard

After all this time, our selectivity about investment properties hasn’t changed. The average age of the houses we buy has only decreased, and that doesn’t include the new build-to-rent (BTR) homes we’ve begun introducing to our business.

With the inventory of homes as relatively low as it’s been the last few years, we didn’t hesitate when considering the BTR model, particularly in our Alabama markets. Studies show that renters are beginning to appreciate living in BTR single-family residence communities, and we’ve found that to be true in our experience.

Regardless of when your investment property was built, though, there are still lots of decisions that need to be made in order to make it 100% resident-ready. After several years of real estate investing, we streamlined our practices into a set of brand standards: a playbook for everything from what we need to replace and when, to what materials we use and where, to what colors we use to paint.

This was necessary for a couple of reasons, the primary being the geographical spread of our acquisitions and renovations. Whether it’s a house in Tulsa, Oklahoma, or San Antonio, Texas, or Birmingham, Alabama, it’s still an REI Nation property. Every resident’s experience should be the same, including the look and feel of the property they rent from us.

When renovating an investment property, you have to take your ego out of the equation. There’s no room for flashiness or expensive features, because it’s not about you or what your money can buy. You have to create a blank canvas, so that when a resident comes through they can fill it all in with their imagination. It’s ultimately about what will best serve them for years into the future.

Our Personal Favorites

Popular wisdom is that homebuying—that is, buying a property for you and your family to live in and perhaps work from—isn’t an investment.

In some ways, I agree with that. But I can’t say that homeownership hasn’t been an investment in my case.

Sherry and I have bought and lived in a number of houses over the years. In fact, it’s hard to keep track of just how many. We weren’t necessarily looking to “flip” homes, but we weren’t afraid to move on to something that fit us better as our needs changed—like when we had our sons in the house, when we didn’t, and when our count of grandchildren began to rise.

Though each house held special memories for us, one stands out because it was the only house that Sherry ever begged me to buy.

We were looking at an interesting foreclosure in the Germantown, TN area that we were considering purchasing as an investment property, but by the time we pulled up to the house the line of people interested in touring it was wrapped around the block. Now, normally we’re not interested in engaging in that level of competition over an investment, but after Sherry and I took a look around she was convinced this was the house for us.

That’s right, she wanted it not as an investment, but as a home. The competitor in me came out, and we won the bid.

I have to give her credit for her instincts, too. The house had dated features that would have been expensive to renovate but added real character to a home that was just for us.

Sometimes a unique opportunity comes up that you just can’t say no to. Sometimes a home becomes an investment, and sometimes an investment becomes a home. To me, there’s nothing wrong with that.

Commit to The Grind

Real estate investing has certainly changed over the years because real estate trends are constantly evolving. That doesn’t mean that you should change your expectations or your operations to keep up. If anything, it means you need to double down on what’s important to you as investor and let that be the major influence on your investing decisions. In other words, don’t implement some fancy new VR app just because you can. Only do it if it’s the best interest of your portfolio, and most importantly your residents.

Due diligence is more important than ever, no matter what you’re buying or where. Whether you’re actively investing or trusting someone to do it alongside you, it’s a major red flag to allow steps to be skipped in the investment process.

Remember, if you’re investing, you’re doing it with a goal in mind. When you’re looking at a property, ask yourself if it’s in line with your ultimate goal, and if it isn’t… move along.

Until next time,

Kent Clothier
Chief Grind Officer