The MrRental Blog Archives

The 3 Rules of Buying Rental Properties

by Jes Herman November 9th, 2009

I’m sure this comes as no surprise to many of you, but for the people who are knew to real estate investing, it’s important to understand the basic fundamentals of acquiring rental property. You don’t want to buy a lump of coal, but rather a diamond in the rough, and by applying these three simple rules you can make a lot of money in any market.

Rule 1: Make Money When You Buy
This is easily the most important rule when it comes to real estate investing. You want to profit WHEN you buy, which means you buy the rental property well below market value. These kind of opportunities usually appear when there is turmoil in the life of the property owner. For example, perhaps there was a divorce, a partnership gone bad, foreclosure, or perhaps the owner just wants to get out of the property at any cost. Regardless of the situation, make sure you accurately perform your due diligence and provide an offer that is super low. The better the deal the quicker you will get your return on investment (ROI), so make a low offer and put their motivation to the test.

Rule 2: Make Money While You Own
Your final purchase price and due diligence plays a part here because you need to make sure that your new rental property will cash flow immediately. If your calculations were wrong it could cost you a lot of money and potentially put you in a negative cash flow position, however if you did things right, you will reap the rewards. There is no better feeling than seeing your money work hard for you each and every month; potentially rewarding you for the rest of your life.

Rule 3: Make Money When You Sell
Sometimes it makes sense to sell. Perhaps you want to clear out the low performers and use the cash for more profitable ventures. If you have followed rules 1 and 2 so far you are in a great position, and if the market is up from when you purchased it, the capital gain is a nice bonus for your hard work. There are plenty of options available to sell your property: traditional agent, online websites, or even FSBO. Whatever your choice, decide which method will put the most amount of money in your pocket. Make sure you complete your due diligence for selling your property. Identify all costs, expenses, and taxes up front, and depending on your personal circumstances, decide which option is best for you.

When it comes to real estate investing, renting, and managing your rental properties, you want to make money every step of the way. You don’t want to feed the beast, and sometimes it’s not always possible, but you can always improve your situation by performing thorough due diligence and price negotiations up front. Just remember: keep your emotions under control, understand the motivation of the seller, and always look at the numbers. Your primary objective is to make your money work hard for you.

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