The Tycoon Report

How to Buy an Investment Property in Just 5 Minutes

Friday, July 24, 2009 | Ethan Roberts

This week, I realized just how many bad ideas are being offered in the online media (outside of The Tycoon Report, where you can find great ideas every day, absolutely free) when I came across an article promising to teach you how to evaluate an investment property in just minutes.

The "trick" the author offered was that the monthly income you could generate had to be at least 1% of the purchase price.  So, if the home costs $150,000, you would have to be able to get at least $1,500 per month in rent to have a positive cash flow.

At best, that trick is simplistic; at worst, it's tired, old information that gets recycled, often by realtors who are less than well-informed, and just repeat what they have been told by their broker. 


So I thought I would share with you today, five realistic factors that I am looking for when I evaluate a property as a possible investment.

1. I had better do better -- and I mean a lot better -- than simply 1% of the sales price per month in rent. 

Just to give you a few examples, I have one rental property for which I paid $109,000.  Right now it's on a 30-year mortgage, with about 23 years left, and my interest rate is 4.75%.  It generates a positive cash flow of about $370 per month.

Were I to simply receive 1% of the sales price, I would only be getting $1,090 per month.  However, I get $1,175 per month, which is an additional $1,020 per year -- or 4.6% better on a 20% down-payment amount of $21,800. 

Believe me, that $1,020 comes in handy when it comes to repairs needed or occasional vacancies. 

Another property, which I bought for $67,000, produces a monthly rent of $975.  That's a lot better than $670!

So, I'm not looking for the 1% rule  Let your realtors buy that "fabulous investment property" for themselves.  You tell them you are looking for more. 

It is entirely possible to do this if you buy homes that are well-below market value -- usually foreclosures but, on occasion, perhaps a short sale as well.

Also keep in mind that a low interest rate or a larger down payment will offset a home that is only generating a rent of 1% of sales price per month.  However, a larger down payment reduces your return on investment (ROI), and ROI is of huge importance to any investor.

2. I want a house in a good location. 

"Good location" doesn't mean the home has to be on the ocean or a mountaintop overlooking the Grand Canyon.  Just give me a house that is nearby (but not too close) to supermarkets, restaurants, retail stores, good schools, houses of worship and a major highway. 

Those are the things that most people want, and that is what is going to make my house rent and/or sell easily in the future.



3. I want a home with a good floor plan.

Have you ever been in a home in which you felt like a rat in a maze?  Bad floor plans can make you -- and your prospective tenants -- hate to come home to the one place where you're supposed to relax!

I have seen homes with bedrooms right off the kitchen -- no privacy at all.   I have viewed homes in which the garage is across the house from the kitchen, making it difficult to bring the groceries in from the car. 

These kinds of homes are not for me, and if I see a home with a bad floor plan, it is immediately eliminated from consideration -- no matter what the price.

Don't worry, you will know a good floor plan when you see one.  Traffic flows easily from room to room, "privacy areas" like bedrooms and baths are separated from social areas like family rooms, and the rooms are situated for maximum efficiency. 

4. I want a house that is easy to maintain.

I prefer one-story, single-family homes for this reason.  It is much more difficult to make repairs and/or paint two-story homes.  And I don't want the leaky toilet on the second floor to drip water down the walls and into the ceiling on the first floor.  

You also lose your senior-citizen tenants and people with very young children sometimes with a two-story home.   The seniors don't want to climb stairs, and the parents of young children are afraid of accidents. 

Another thing I don't want is a home with excessive landscaping.  No tenant is going to take care of that, and I will be stuck with hiring people to do the work.  No thanks.


5. I want a house that is a boring, cookie-cutter home that will rent or sell easily. 

Unique homes are fun and perhaps interesting or entertaining enough to live in as your primary residence for 20 years, but they don't rent or sell easily enough in most cases to make them good investment properties.






Ethan Roberts
Contributing Editor
The Tycoon Report