4 Criteria For A Successful Real Estate Flip

Many successful real estate investors have a set of criteria when assessing properties before purchasing them. In the case of Manny Khoshbin and his first real estate flip in Houston, Texas, he used a set of four criteria to cherry-pick properties during the 2004 recession. By sticking to his criteria, Manny built a portfolio of over 200,000 square feet of property, divided into five properties, and spent 9.6 million dollars. He turned around eight months later without hiking up rent prices or using a broker to drum up new tenants and put the properties back on the market, selling them for 13.6 million dollars. Here are Manny’s 4 criteria for a successful real estate flip:

1. High Capital Rate of Return

Capital rate of return is a measurement often used in real estate to assess an investment’s profitability and potential return. This rate is calculated by taking the net operating income and dividing it by the property asset value, and it is provided in the form of a percentage. It’s important to note that the capital rate of return is for one year and assumes that the property isn’t purchased by loan but by cash.

For Manny’s five properties for his flip in 2004, the capital rate of return was 10%, which is much higher than the U.S. average for a commercial property.

2. Low Price Per Square Foot

Simply put, the price per square foot is calculated by taking the listing price of a property and dividing it by the property’s total square footage, but other factors are also considered when determining a property’s price per square foot. These factors include location, condition, size of the lot, age of the property, number of rooms, and more. Many real estate websites allow individuals to input this information and will then calculate the price per square foot for the user. Most websites that list real estate properties already provide the measurement with the listing.

The price per square foot was low for Manny’s five properties for his flip in 2004. This was a great indication that Manny’s properties would be able to compete against newer construction in the area and their higher rental rates.

3. High Operating Expenses

There are many expenses when it comes to operating a property. Some of the costs that pull on the investor’s wallet, therefore dragging down the profitability of a property, are things like janitorial operations and security. When looking at the operating expenses of a property, one of the highest expenses is property managers.

For Manny’s five properties for his flip in 2004, each property had its own property manager despite some properties being within walking distance of each other. By firing two of the five property managers and reassigning their two properties to the remaining managers, Manny was able to cut down on operating costs. Even with a small purchase of a golf cart to help the property managers travel between properties, it was still a significant decrease in spending on operations.

4. No Deferred Maintenance

The term deferred maintenance refers to the care of a property that’s deemed necessary but has been put on hold by the sellers. The maintenance might be things like repairs or replacements. For example, if all the windows in a property need to be replaced but haven’t been. These things require a new owner’s attention before the property’s value is desirable. This leads to investors having to fork out a lot of money for costs that quickly add up to a significant amount. Minor repairs will always be needed when purchasing a property, as you don’t want to buy a property that has no add-value, but substantial and necessary repairs need to be avoided as they aren’t worth the cost. The big spenders are usually the need for a new roof and HVAC replacements or repairs.