The Basics of Buying Investment Properties

Posted on Jun 21 2017 - 4:49pm by Housecall
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By Author and Real Estate Expert Kenneth D. Rosen

Everyone wants a magic and immediate path to wealth. The bad news? The path doesn’t exist. Wealth is attainable through more conventional means. If you come to understand the real estate industry and if you deepen your own firsthand experience as you buy and sell investment properties, you’ll be on the road to success.  

Along the road, there are six core principles that will make or break each real estate investment deal.  They are the most important concepts you will learn. I call them the Big Six. With each successive deal I negotiated, I grew to recognize the common elements. The Big Six are part of a sequenced step-by-step formula that enables you to identify and purchase the right income property at the right price.  

The elements of the Big Six Formula that will guide you into the basics of buying income properties are the following:

Location

Location is the single most important component of any real estate deal. It is crucial in determining your investment success. Look for properties that are situated in an “A” location. Such locations include the socioeconomic levels of the people who live or work in a particular neighborhood, its proximity to shopping centers, public transportation, crime levels, the nearness of prestigious universities and medical facilities, traffic congestion, zoning restrictions, the quality of schools, fire and police protection, and even the reputation of the local government and its officials.   

Building Quality & Design Efficiency

Design efficiency interfaces with building quality. When you find an investment property you’d like to buy, you will need to scrutinize both elements. Look for properties that far exceed minimum construction requirements and that have useful and innovative design elements. This will not only make the property attractive to tenants but will add value to the property in the future. Design features on apartment complexes that stand the test of time include walk-in closets, large kitchens with windows, and his-and-her bathrooms. In an office building, a common area factor of 15 percent is desirable as well as a ratio of four parking spaces for every 1,000 square foot of rentable space.

Tentant Profile

Tenants can represent either an asset or a liability in an investment. When you invest, your mission is to make sure your tenant profile is the former and not the latter. Just as you want a well-constructed and well-designed property, you’ll want stable tenants who are a good match for your property and have appropriate lease agreements. Find out how much rent is generated and whether it is at market rate or under market. You want to focus on finding an income property that offers the opportunity to increase rental income and, by doing so, multiply the value of the property so that you can resell it at a substantial profit.

Upside

This fourth element refers to the cash flow growth possibilities offered by a particular property along with the likelihood that the property will increase in value. A property may cost $1,500,000 to construct, but if it brings in only the income of a $900,000 property, then it is worth only $900,000.  The key to increasing value lies in buying a solid Class B property in an “A” location where the rents are under the market, the leases are short term, and there are no options to renew the leases.  

Financing

In the musical Cabaret, there is a song with the lyrics “Money makes the world go around.” It could just as easily be used to describe real estate’s role in the economic landscape. The free flow of money and access to credit is what adds vibrancy to property investment.  Before you get started, you’ll need to get a number of finance-related items in order. The first thing you should do before applying for a mortgage loan is to review your credit reports and your credit scores. Also, learn the terms, understand the components of a mortgage and how they interact, and be open to the full range of financing options available. Banks and other financial institutions make money from mortgages. They are willing to negotiate. Be creative, you may be surprised at the terms you’re able to obtain from a bank or insurance companies, especially in today’s low interest rate environment.   

Price

The successful evaluation of a property’s price has to do with how much information you can gather about a seller and the property than it does about the price tag on the real estate deal. You must look at the value of the property, which is not the same thing as its price. The crucial concern is not just how much the property costs, but what kind of income it can generate for you. A property may be architecturally perfect and engineeringly sound, but if you’re locked into long term under market lease rates, the value will be eroded.  

If you master these principles, wealth will be within reach. However, it’s not enough to just understand and utilize the Big Six. You must execute them in order. That’s because they all fit together snugly to form your customized real estate formula.  

Author Kenneth D. Rosen, CCIM, is a successful real estate investor and the President of Kendar Realty, Inc. Rosen has bought and sold over $500 million worth of investment property. He is a past two-term president of the Miami Association of Realtors. In his spare time, Rosen sails and is a volunteer skipper with Shake-a-Leg of Miami, an organization through which children with disabilities can learn to sail. He is a graduate of Boston University, past master of his Masonic Lodge, a 32nd degree Mason, and a Shriner.

Investing in Income Properties, The Big Six Formula for Achieving Wealth in Real Estate Second Edition is currently available at InvestingInIncomeProperties.com in both hard back and digital versions.  It is also available on Amazon.com and BarnesandNoble.com.

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