What Do We Look for In Investment Properties

Ring. “Hello, this is Charles.” “Hi Charles, this is John, I am a real estate investor.” “How many properties do you have, John.” “None, but I have been watching the market for years.”

John is not a real estate investor. He is a real estate watcher. Nothing wrong with that but many people enter the New Year with aspirations of buying an investment property and never do. The New Year’s Resolution has no mercy.

Every investor has a different strategy. For us, it is the single family unit in close-in neighborhoods. Our goal is to find a home that needs little or no work to be in “renter condition.” Something around a B, B- on the scale of livability- we have no interest in being slum lords. When it comes time to sell it, we’ll remodel it to A condition.

If you buy a trashed house to put a renter in, you’re going to have to spend a lot to place the tenant and then through wear and tear (if not outright damage) you’re going to have to do a lot of the work again when it comes time to sell. If the house is not in solid shape, you’re going to have to make repairs on the tenant’s schedule. You can’t just leave the door unlocked for the contractor to take their time to get over there.

Buy a solid house, in a market where the neighborhood has good appreciation possibilities and that is not to inconvenient to you.

7 Comments on “What Do We Look for In Investment Properties

  1. John is not a real estate investor. He is a real estate watcher. Nothing wrong with that but many people enter the New Year with aspirations of buying an investment property and never do. The New Year’s Resolution has no mercy.

    A prudent investor knows when to be a watcher, and sometimes has to watch for years. This is true of the market now – for someone interested in investing (not speculating) in RE, the last 3-4 years have been a BAD TIME TO BUY. John is smart to stay on the sidelines while this national (heck, GLOBAL) euphoria over RE peaked and now fizzles out. All those 400k condos in Pearl? Will be $200k in less than 2 years.

    New year’s resolutions have absolutely nothing to do with investment decisions. That is an inducement to do a transaction by commissioned interests. Investors are immune to these whoppers.

  2. If we were standing on the sidelines, armchair quarterbacking, PDXrenter might have a point. Since we practice what we preach I think he/she is off base. Instead, we’ve bought and sold and made some pretty good money during the time sited as a lousy time to be in the market.

    I couldn’t care less about what your motivation is to look at real estate as a potential investment, it is not for everyone. It might be a New Years resolution, advice of an accountant or just a gee whiz.

    The whole point of this blog is to help people decide if real estate is right for them and if it is, hopefully get them to work with us. This is a form of advertising and hopefully a lot more useful than a glamour photo in a glossy magazine. It shouldn’t be a newsflash that we get paid for selling houses. We get paid more by creating a relationship where our clients use us more than once and refer us to their friends. It is about selling houses and building relationships.

    I can’t wait for two years to pass so I can grab up all of these $200,000 Pearl condos.

  3. Charles,
    I like these guidelines. Buying a rental property in Southern California with 20% down will probably yield rents of 50-70% of your monthly costs. GRMs of 20 are the norm. Needless to say, it’s a bit discouraging.

    How difficult is it to purchase investment property in Portland that will cash flow neutral to positive? I would love to make the rafting trip a tax deductible business trip!

  4. Here’s a property that I showed a client and think would make a

    good investment
    property.  It’s in the St Johns area of North Portland. 
    It is listed for $259,900.  My estimate is that it would rent for between
    $1200 and $1300 per month.

    Twenty percent down is $51,980.  A 6.5% loan over 30 years on the
    balance yields a payment of $1314 per month.  Thirty percent down ($77,980)
    leaves a monthly payment of $1150.  I’m going to assume that cash is
    brought in to cover closing costs (in this case probably around $4000). 
    Property taxes are listed as $756 (seems low).  Property insurance should
    be around $400 per year.  Let’s call the combination $150 per month. 
    Therefore, 20% down leaves us a PITI payment of $1460 per month or $1300 per
    month with 30% down.

    Best case scenario is breaking even with 30% down and $1300/month in rental
    income and monthly PITI payment.

    You’ve got to talk to your accountant about the tax benefits/pitfalls and
    your own god about appreciation.

  5. Charles,
    Thanks for the example and the breakdown. It’s a nice looking house, and it bogles my mind that it would only fetch $1200-1300 in rent. In most of LA it would probably go for $2200, but the purchase price would be $500k.

    Even at Portland prices that’s still a GRM of around 16. Seems to me that the GRM actually is a pretty good rule of thumb. Anything under 12 would probably make a pretty good investment.

    See you at Beerfest.

  6. We bought a single family home in close-in SE between Hawthorne and Mt. Tabor in June 2006. The house is smaller than we would like and we are not crazy about our neighbors, who are long-term renters. We are thinking of buying a bigger house and renting our current house out, but have never done this before and are not sure what kind of montly yield to expect. The house is 4 bedrooms (3 standard and one very small), 1.5 baths, built 1918, new kitchen and baths, hardwoods throughout, good-sized fenced back yard, original architectural details in-tact. What would be a reasonable price per square foot to expect? Above-grade is about 1500 square feet.

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