How to Create Your Own Personal Investment Criteria

Four reasons to put your investing criteria in writing

Reason One: It helps you immediately know if a potential investment fits or does not fit. This saves you a tremendous amount of time sorting through which deals you are even going to take a closer look at.

Reason Two: It sharpens your focus and chances of finding great deals to begin with. How can you find what you want if you haven’t clearly defined what in fact you are looking for? How can you get other people to bring you great deals if you can’t clearly communicate with them what you are, in fact, looking for?

Reason Three: It allows you compare your criteria with other investors to learn from them, network, synergize, etc.

Reason Four: It helps show you how you are evolving over time as an investor. You can look at your written criteria as it has changed over time to see the ways you are growing as an investor.

Now I would like to share with you my personal criteria for investment deals. I share this with you not because it’s right or wrong, but because it gives you an idea of what your investment criteria might look like in principle. What size deals are you looking for? What kind? etc. What do good deals look like for you?

David’s personal investing criteria

1.) If I don’t understand the investment, I don’t make the investment, period.

2.) I invest in areas where I have expertise and the advantage to make a superior investment with minimal time and effort and energy. This lowers my risk, magnifies my returns, and saves me time and effort (by my skill, my systems, my team, and amortizing costs over many similar deals). If I’m not going to do multiple deals in an area or niche, it rarely pays to become an expert.

3.) I don’t put lots of capital at risk. If I am going to put money into a deal, I make sure it is a low-risk deal or medium-risk deal, and not a high-risk deal. I’m not comfortable taking a high risk with my money.

I look closely at how I’m secured in the deal. The greater the risk, the more I work to carve out and isolate those risks.

4.) If I am taking a medium risk in a deal, I expect to get a healthy cash on cash return, conservatively 15%, aggressively 30% – 40% or higher annual rate of return on my money depending on the degree of risk.

Plus, if the amount or deal is such that I want an extra layer of protection, I work to have some kind of meaningful input and insight on the deal (board of directors seat–with proper liability insurance in place to protect).

5.) Has the person selling me the investment bought himself or herself? If not, I pass. If so, it’s a necessary–but not sufficient criterion for me to invest. I may or may not invest after my due diligence.

6.) The game has to be worth playing. This means that if the deal isn’t big enough, why bother? Every deal requires due diligence of some sort. Deals where I put money at risk or take on personal liability have the highest need for due diligence. So, if the return is not there, the upside is not there on the whole, then I pass and don’t even get involved in the deal from the start.

If I can’t get a large enough profit, not just as a rate of return, but in terms of total profit in a deal, then why bother stepping into the deal. It takes almost as much effort to clean up the dishes after cooking a minnow as it does a whale, so why bother with the little guys?

7.) I look for ways I can bring increased value to the table besides just putting money into a deal to earn a founder’s share of the deal. For example, my skills in negotiation; or my skills of big picture business strategy and structuring; or my contacts; or my experience with making other deals happen.

Ultimately, I like to invest in my own deals best of all. I have more control, more influence, and I’ve already done my due diligence.

8.) If I am going to leverage my contacts to make an investment work, or if I am asking other people to put in money or resources, then I better make sure through good, quality due diligence that the deal is right. I’m staking a tremendous amount on that deal, which is my word and my reputation in the business community.

9.) I look closely at how the deal is creating value. If there is no clear way that the people who are doing the deal are creating a tremendous increase in value somehow in the deal, then I question how they are going to make a great return.

They can create that tremendous value by

• turning around a property that was under performing;

• taking a property and getting it for low value because they are changing the ownership circumstances; or

• taking a business and making it better through innovation or salesmanship, marketing skills, better contacts, better business management.

But somehow, they are going to have to increase or create value–either through better use of the property, or by changing the way something is positioned in a business environment; otherwise the deal can’t be a real deal.

10.) It has to be a business or investment that I feel good about, that I think does good things in the world:

• provide comfortable housing

• provide quality office space

• provide a valuable service or commodity to the marketplace

But it cannot be something that I would not feel comfortable with, for example, gambling, pornography, etc.

11.)The people with whom I invest have to be people I want to be in business with. They have character, competence, and experience. I verify this in my due diligence.

My “sweet spot” deal

I love a strong cash flow deal (with an upside kicker on the back end) on quality commercial real estate–ideally where I can invest $250,000 – $750,000–and we are getting a great buy. I am looking to earn a 10% -15% return paid at least quarterly, plus the equity growth kicker.

Ideally, I also earn an equity founder stake (in addition to my money equity stake) by leveraging my best talents with the team’s efforts in a “big picture,” advisory way. This gives me more information and a degree of control.

My preference is to be able to own the property over the long term, cashing out the investors principal via a refinance. My motto is “Run my money from the table and still own the cash flowing asset.” Every several years, I want to look into using the accumulated equity to acquire more great assets in order to keep our equity working for us.

I hope this helps you think strategically about the kind of real estate deals you are really looking for. I wish you great success!

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