Getting Into The Property Investment Business

Property investing is like building a 401K only you can see it, touch it and personally count the return every month!

Like any good investor, the important strategy is to diversify.  You've got some stocks, you've got some mutual funds, you've got some nice antique furniture - why haven't you got some Cincinnati investment real estate?

Most people don't buy investment property because they don't want to manage it.  They believe all those stories about blocked up toilets in the middle of the night.  Well think of it this way, you don't NOT work because you have to deal with irritating bosses or other co-workers.  This is just the same but this is better because you don't have to spend 7 years in college to do this and you can hire a plumber.  Most issues in managing property are about knowing who to call. That's all!

Factors in deciding what investment property to buy:

The Tenants

Now that you have decided to buy investment property and have decided you aren't going to buy Trump Tower but something a little smaller, you should really look at the issue of the tenants, because they are going to be your next best friends.

Are you comfortable with low income tenants?  Are you more comfortable with blue collar, working poor?  Do you prefer students?  Do Yuppies sound better?  How about young families?  Does executive rental sound more appealing?  Choosing your tenants has a lot to do with what the property is going to look like and how to find it.

What kind of real estate?

Once you have decided who you are going to rent to, you will need to think about where they would rent and then take a look at the Multiple Listing Service and see what that would cost.

Generally speaking, it is hard to make cash flow from Yuppies and Executive Rental because they will want to rent houses that will have a mortgage payment of more than you get for rent although in today's mortgage market, this is becoming more and more likely and desirable.  And, these properties will most likely be in neighborhoods where you will be able to make up the difference with appreciation. Also there are neighborhoods close to those really desirable neighborhoods where yuppie wannabees will also live while they are on the way up and in these neighborhoods, you will probably be able to make the rent stretch as far as the expenses!

The question is if you actually buy in a really desirable neighborhood can you afford to make up the difference yourself in the meantime or put more money down in order to make it cash flow, or must it be that the property has to cash flow for you to proceed?  If the property has to cash flow in order for you to buy, then I would suggest you aim for working poor or student housing.

Choose a location that is on the edge of a more Yuppie neighborhood and plan on doing some updating in order to work up to renting to the Yuppie who can't quite afford the neighborhood they really want.  This way, you improve your property, get the cash flow you need, build appreciation, and before you know it you will be on your way to building a portfolio!

Currently there are a lot of foreclosures in low income  and marginal neighborhoods and if you have the expertise to rehab, this real estate is currently a great deal in Cincinnati.  The income is good, the costs are low and if you pick your tenants carefully and take care of the property, they will be with you for a long time. 

Student rental is another good way to build a portfolio.  Usually the cash flow is quite good, you can use the additional income to fund another property and so on.  Students are quite hard on property though, often they move out after a year in order to get a clean apartment now that Mom isn't around to pick up after them!  That, of course, means that they leave a horrible mess and almost always there is a time crunch when they do this. The day they leave is typically the annual change over date and you'll have about 12 hours to clean up their mess, repair and paint before the new tenants move in!

However, they don't often call you during their tenancy, mostly because they are afraid of what you'll find when you go over to repair things. This is good and bad. That's mostly what investment property is anyway though. Good and Bad! So long as the money works though, in the long run it's good!

Here is something to be careful of. There are whole neighborhoods in Cincinnati that used to be more than 50% owner occupier and now is 99% rental. In these neighborhoods there has been such a lot of lender owned property that investors have bought up the neighborhood and they won't buy anything that has already been fixed up when they can buy something for $15,000 or less. So there is virtually no flip market here. This is a buy, fix up and keep for a long time. Cheap to acquire, cheap to fix up, good income but virtually no appreciation and very hard to finance.

How do I pay for my investment property?

Think of it this way, you take an equity line on your home for the down payment, your tenants make the mortgage payments, you get a tax write off and in 20 years or so you own the property!  In the first few years, you take your cash flow and pay off your equity line until you can afford to go out and buy another property.  Or when you have fixed it up and re-rented at a higher rate, you refinance it, take out some equity and pay down your equity line that way or go out and buy another property. 

We calculate that if you buy a 4-family rental or four small houses when each of your children is born, you will have enough cash flow to send them to college and give them a wedding present and fund a very nice retirement for yourself! So what is wrong with this picture? It sounds better than Social Security to me and a lot more understandable than the stock market! And the income tax rate on the dividend is 15%!!!

Right now you can mortgage 4 properties, 4 units each or less, per owner on a reasonably low fixed rate loan.  If you are married that is 8 properties in all or as many as 32 units if each is a 4-family. So you have to look carefully at what would be the best property.There is less appreciation for multi family homes and there will be less in the future when the market picks up and people start buying houses again. However, there will always be a need for apartments, they are easy and very predictable to rehab and rent.

Another thing to also note is this is a good business to have your children help with too. While you are over painting an apartment, it's a good time to spend some time with a teenage child, who can help with cleaning, cutting in the the paint, painting the trim, cleaning windows etc.  Our children lived in our apartments while going to college, helping to manage the apartments. They often did the shopping for new appliances, gave us trendy advice about paint colors and updates that young people like, showed apartments when they were vacant, took out the garbage etc.  We paid them then and we pay them now to help with the management so that we can go on vacation!  It's a great family business. And from this experience Vicky Meadows has started her Property Management Business here at Keller Williams!

Call us, we've made a career of helping people like you.  We have good ideas about how to find these properties, we know how much they will rent for and what makes them rent for the highest dollar, and if you really can't deal with the tenants, we'll manage it for you! And if you want to manage the property yourself but need a little back up, we'll coach you too. It's all about being flexible, looking at a great buyers' market where the renter pool is increasing. And our rents are going up every year because there are more and more people who are renting now because owning a house is difficult in uncertain times. Is now the time or what?

Call 513.766.3878 or email us at JamieMilek@gmail.com or Gillian@kw.com