Did You Have A Plan When You Bought Your Investment Property?

Let me ask you something, would you give me $600,000 for an investment? Please? Pretty please? Why not? I’ll give you a return in 20 years. Still no? Because you don’t know anything about me or my investment opportunity? Then why are you buying an investment property without researching it first? I talk to people all the time who bought a rental because they found a “good deal” and thought they’d become weekend warriors. And you know what? Almost every single one is losing money each month. Now tell me this, would you rather make $500/month, get a free house and be able to buy others and make more, or lose $500/month, get a house in 30 years that you’ve paid $180,000 for and not be able to buy many others? Option 1 sounds good to me, and guess what? It’s entirely possible if you’re willing to work for it; trust me, this work will pay off big time.

Don’t Purchase Investments Without A Solid Plan

Before you buy an investment property, you need to know what you’re going to do with it and when; in other words you need to have a plan. Don’t buy a house because you thought it was a good deal, and then decide to rent it out. Decide you want to make money from a rental, or flip a property, or whatever, then, and only then buy the property that’s going to meet your goals. Listen, any Joe Schmoe can get into real estate, most of them will fail. And that’s why you’re lucky you have me (donations accepted); while Mr. and Mrs. Schmoe are getting raked over the coals, you’re going to be a smart investor, do the research you should do, and wave at the Schmoe’s in line at the soup kitchen while you drive by in your [insert favorite car here].

What Type of Research Should You Do

So what kind of research are we talking about here? Well, you need to know the purpose of your investment purchase; are you going to refurbish and flip it, rent the property to some college kids, or something else altogether? I don’t care what you do, but you better know what you’re going to do before you even look for the property.

The best way is to start at the end and work backwards. How much cash do you want to take out of this place? And don’t say a billion; be realistic. I’d shoot for at least $200 a month positive cash flow from an investment property and at least $20,000 profit from a flip. Let’s use the rental as an example; the principal is the same for the flip.

Rent To College Students For Positive Cash Flow

The easiest way to get that kind of positive monthly cash flow right now is to rent to college students; they live like crocodiles sleeping 30 to a room, which keeps the rent down for each of them, but with the right place the total income can be high for you. So now you need to find a place that’ll rent for $200 + taxes and insurance per month over what you’ll pay on the mortgage. Let’s take a $130,000 pad in my old college town that I can rent to 5 college students for a total of $1200/month. Even at 100% financing and an 8.25% interest rate, you’re paying $893 interest only, plus $142 for taxes, plus $37 for insurance per month. For you math whizzes that’s a total of $1,072 per month. So we’re $72 away from our goal of $200/month and I we’ve only been at this for two minutes; this may be a deal if we can cut costs in some way. Maybe we can put some money down, reducing the principle, and thus the payment; or maybe we could charge a little more for rent; or, and I really like this one, we can buy a row of 4 of these places and get the bulk discount. You can tweak the numbers any way you like; in the end, this particular example may or may not be a go.

The point is, you need to do this type of research before you buy the property. Don’t just wing it, because they’ll be wingin’ bankruptcy papers at you by year end. You can make a lot of money in real estate, but not without a little number crunching and common sense. Just like any investment, you need to know what you’re doing before you do it. It’s your money, you might as well make the most of it.

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