Buying Investment Properties


By: Jeff Tompkins

As newspapers and real estate gurus tell us everyday, the housing bubble has deflated some as 2006 draws to a close (if not burst completely in some areas of the country). This has created a "buyer's market", where there is an over-supply of homes for sale, and because of that, prices are often below market value. Interest rates have held steady though, leading some to realize that now might be an opportune time to put their excess money into buying investment properties. As a mortgage broker and real estate agent, I agree that it is a great time to buy investment properties, but would caution that, like most business decisions, it depends on a few key things that can make or break your investments returns. Here are a few things to keep in mind before you buy:

  1. Don't buy without significant cash reserves! I see this scenario way too often — a couple buys an investment property, thinking they will get a renter in immediately, and the money will then come rolling in. But when the renter is harder to find than they thought, they end up paying a mortgage they didn't think they would have to, with savings they don't have. If you buy a rental property, make sure you have adequate cash reserves, not only for those times when the property might be vacant, but also for repairs that might come up on the property.

  2. Buy smart! Remember, the goal of owning investment properties is two-fold: cash flow and equity building. Don't buy a home with a $2000 monthly mortgage payment if renters in the area are only willing to pay $1500. That's negative cash flow, and doesn't help you. Be selective on the home you buy, the neighborhood, home condition, amenities, how undervalued it is, etc. Equity is the difference between what the property is worth, and how much you owe on it; essentially the cash you could get if you sold it. The longer you hold the property, the lower the balance on the mortgage goes, and the higher the value becomes (in good markets).

  3. Qualify your renters! First, you need to find renters. Besides posting a sign in the yard or window, post your vacancy on websites like Craigslist and RentClicks. A good number of potential renters are renting because their credit is too low for them to buy. You might even consider a rent to own deal with good tenants. Second, you need to make sure the renters you have found are going to be good tenants. Obviously there is no "flake-proof" way of finding good tenants, but there are some things you can do to protect your investment. I suggest: pulling a credit and background check on the potential renters, always get a security deposit up front, ask for and call references, include in your lease that you are allowed to make monthly visits to the property to inspect it (to make sure the home isn't being destroyed) and clearly communicate to your prospects what is and what isn't "OK" in the home.

  4. Account for Uncle Sam! One of the main ways an investment property differs from your primary residence is the tax implications when you sell. As a rule, if you don't live in a property (meaning the owner actually lives there) for 2 out of the last 5 years, you are subject to capital gains tax when you sell (usually 15% of the gain, the difference between what you paid for the home and what you sold it for). Since you normally won't live in your investment properties, you will normally expect to pay capital gains tax when you sell. Keep this in mind, as its one of the costs to count in deciding to buy an investment property or not. Ask your CPA for more details.

If you have any questions concerning mortgage or real estate, feel free to call Jeff Tompkins with Teacher's Funding Group and Advisor Commercial Realty at 720-872-2382, email at jeff@teachersfunding.com, or online at teachersfunding.com.

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