What are your core investment filters?

 

If you invest in real estate (or any asset class for that matter), you need to have a goal. Goals provide focus and focus helps to eliminate all of the clutter and/or noise that surrounds us everyday. It is so easy to get lost in the endless possibilities and loose sight of your vision or what you want to achieve with your money.  It is very similar to investing in the capital markets, smart investors choose one strategy and stick with it.  For example, a day trader is likely to steer clear of blue-chip stocks for the same reason that a dividend investor would stay away from the venture exchange or penny stocks.

Core filters provide clarity and a reference point to specific goals.   Even public REIT’s stay within their core competencies and use filters to sift through the massive pool of opportunities.  For example, consider Allied Properties REIT for a moment – their acquisition criteria is very clear : class 1 office space in urban settings and I imagine, they use this goal to filter most opportunities. Have a close look at their portfolio and most of their assets look and feel the same.
For me, filters are critical to my investment goals.  Every filter narrows the pool of possible investments and provides laser focus. In the end, I only invest in assets that have passed the ‘filter test’.  I should also note that they are in order of priority (to me, yours might be different). Opportunities must also flow through the filters in order. MY filters were developed over time and with experience.

 

5. GOAL ALIGNMENT – Does this match my long-term goal?
This one filter eliminates 95% of the opportunities that I investigate.  This filter is critical to keeping the strategy in place and not loosing sight of the end-game.  For some, this means ‘passive income’ and for others, this means building your capital base.

4. RESPONSIBILITY – Is this a passive investment (or will this require time & effort)?
This filter narrows the buying pool even further.  Since I don’t have a lot of personal time to devote to managing a real estate asset, the property must be manageable by a third-party at a decent price. Some assets require too much work up front and/or are too labour intensive.
Note: I will consider building / renovating as long as I will reap the rewards on the other end (after completion).  Sometimes, the growth in equity will give you the opportunity to take out the initial capital investment OR it will dramatically increase the ROI and/or cap rate making it worth while to invest the energy.

3. RISK –  Is this investment insulated?
How insulated is this property?  What is the absorption rate for this product?  Can I handle vacancy in this asset and for how long? Every investment is different and totally dependant on the product / timing / cost, etc.

2. DUE DILIGENCE – Do the numbers make sense?
Next is the due diligence process and this means doing the homework on the property including lease audits, projections, IRR calculations, etc.  This is the final step in a very long process and very few assets make it to this stage. Because this is the most time consuming, I need to be confident that it is a viable option well before I begin this process.

1. STRESS - Will this investment add stress to my family/partners/life?
This is my favourite step and it is the most subjective filter. It is the final decision that depends on various external factors specific to every new opportunity.  It is the gut instinct that tells you this is the right or the wrong investment.


Adam Brind is the Broker of Record of Core Assets Inc. Real Estate Brokerage based out of Old Town Toronto. Adam specializes in both income properties and residential infill developments. Check out www.adambrind.com

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