Reply #8: Arghhh!! Price by itself has NOTHING to do with buying [View All]

[DancingBear]

We've owned investment properties for several years now, and here are the rules we follow:

1) Whether to purchase the building or not is (almost always) solely a function of its cash flow. In previous times, when real estate could literally be "flipped" for a profit within months of purchase this was not always the case, but in todays climate it is. I lived (and bought) through the salad days when mortgages were given through handskakes (the S&L we worked with went belly-up).

2) Use these factors on the "expense" side of the ledger when figuring out if cash flow:

P&I
taxes
insurance
water/sewer bill (if landlord responsible)
management fees (if applicable)
other utility bills (I.e. are there "common areas" such as hallways that landlord would be responsible for)
vacancy factor (we use one months rent)
maintenance (we use 5-7%)
lawn/snow maintenance (if applicable)
advertising (ads, fees to rental companies, if applicable)

3) On the income side:

do one set of figures with current rents
predicated on what you realtor tells you, do a second set with projected rents

4) Remember that prices are higher now due to low mortgage rates. If you can lock in a low rate now (NOTE: if this is your first time investment DO NOT look at a 1 yr. ARM - find a fixed rate, or if not then a 5 yr. ARM is OK) do it - as inflation and mortgage rates rises your rents will increase, and the investment will become ever better as first time home buyers will be squeezed out of the market.

5) Find a realtor who has experience in investment properties!!! I CAN"T stress this enough. If they are doing what you're doing they will have the valuable insight (rental histories, tenant profiles, etc.) that you need.

6) If the numbers don't work, move on.

7) If you like to renovate, work on the theory of "everything plus 1". In other words, find out what the normal amenities for rental stock is in your area, and add one thing to it. These can (and usually are) simple things - a walk-in closet instead of a conventional one, a bathroom with a ceramic floor instead of linoleum, well, you get the idea.

Hope this helps - if I can be of help just PM me.