My Tips on Buying Investment Properties

I certainly don’t consider myself an expert in the field of investment properties, but I do have some practical experience in that I currently own several single family homes (SFH) for longer term investing.  I have also read quite a bit about investing in real estate and buying investment properties so I feel that I can share a little about my philosophy of investing and offer some tips.

First of all, I would advise that you determine your reason for buying investment property.  In my case, I purchased property for the purpose of having the tenant pay off the mortgage over time.  This should occur when I am in my mid-sixties and should then provide a decent source of retirement income upon which to live.  If I am too old or ill to manage the properties, I can hire a manager or sell collecting the cash.

Alternatively, you may want to invest in real estate for current cash flow or for flipping.  In that case, you will need to get a really good deal on the purchase price since ultimately the purchase price will determine the amount of cash flow as well as profit from gains.  Your approach to funding the purchase and level of involvement will also be different in this case.

Since I have purchased real estate mainly as a buy-and-hold investment, my other tips will apply to this type of strategy.  I would suggest that financing be through a 30-year fixed interest rate mortgage.  The goal is to have a tenant pay off the mortgage so you would like to know your expenses.  The last thing you want is an adjustable mortgage and have rates, and thus your payments, increase without being able to increase the rent.  I also suggest a 30 year mortgage.  If you want to pay it off more quickly, you can always add to the principle.  But if cash flow becomes an issue, you don’t want to be locked into a higher payment.

Speaking of cash flow, I also tend to price my rentals at the low end of the market.  I do this for two reasons.  First, I usually get plenty of calls whenever I have a property opening up.  That gives me many different prospective renters from which to choose.  I can review the application and references only interviewing those who appear promising ultimately choosing whom I think is the most likely to be a good tenant.  Secondly, by keeping the rent toward the low end of the market, I am able to maintain a constant revenue stream.  I have even had one family move out in the morning and a second move in that evening after getting the place cleaned up in the afternoon.

Consider these numbers.  If you are able to rent a property for $950-$1050 per month, and it takes just 3 days to find a tenant at $950 but 6 weeks to find one willing to pay $1050 per month, it just cost you about $1250 waiting on the better paying tenant.  It will take one full year to make up for that loss in cash flow.  Plus, there is no guarantee that after one year the tenant won’t move to a lower cost place.  Then you have another vacancy.  My feeling is that I want to keep the place full so I don’t have to pay for utilities and turning the place over.

These are just a few of the tips that I have to offer regarding the investment and management of investment properties based upon my own experience.  I would certainly be happy to hear about the experiences and ideas of others.  Feel free to comment.