We have all seen the many programs on television depicting investors buying distressed properties. The investors then renovate the property under the pressure of some arbitrary, stress inducing deadline and then sell it for a huge profit. Nice work if you can get it. There are now many people looking to flip houses because it looks so easy and profitable on television. The reality is that it is neither easy nor as profitable as it seems on television. To be a successful flipper, you need to have a strong understanding of home repair costs, knowledge of the market that you are going to be selling the house in, and the discipline to bring the project in on budget. Many house flippers have found themselves underwater in projects that they paid too much for, spent too much on the renovation due to unforeseen expenses, or over estimated the value of the renovated house. So as glamorous as it is on television, flipping is not the way to real estate wealth.
The real way to real estate wealth is to buy and hold properties that provide positive cash flow. Positive cash flow means properties that bring in enough revenue to cover all expenses with some left over. These can be multimillion dollar office buildings, a multi- unit apartment building, or a condo that is rented. Whatever your choice as an investment property, there are some guidelines to finding properties that will add to your wealth with lower risk.
First and foremost, plan on owning your property for a very long time. While values may rise and fall during up and down periods in the market, positive cash flow properties will continue to add to your wealth. Here are some other guidelines to keep in mind.
Buy properties in low vacancy areas. Areas with high vacancies can seem like a bargain, but don’t be fooled. Properties can take longer to rent and are harder to get fair market rents for. High vacancy areas are also more subject to break in and vandalism, and are less likely to cash flow in down markets.
Buy a property that is well built and in really good shape. Properties that are a bit run down can seem like a deal, but one major mechanical or structural repair can ruin cash flows. Buy a property that is going to start putting money in the bank as soon as possible.
Look for properties with solid, credit worthy, long-term tenants. Good tenants make your life as a real estate mogul much easier. You should examine the current tenant’s leases, credit application and payment history. If you buy properties with quality tenants in place, you get security deposits, steady rental income, and no need to do much to the unit. Buying properties with home owners associations or other common interest requires much due diligence. Check the association for any legal, operational or financial troubles. Are there any lawsuits pending? Are there any looming repair expenses? What are the association’s reserves? Ask the tough questions or risk being stuck with a bill.
The next guideline is the most important- location, location, location and not the location you think. Everyone would love to have a beach rental, an Old Port rental or a Cape Elizabeth rental, but they would be making a mistake. These glamour properties often produce negative cash flow or produce low returns. Look for properties in moderately priced areas with lots of working class tenants. These properties tend to cash flow best over time. They are cheaper to acquire, cost the same to maintain, and tend to have low vacancy rates. Think Westbrook, not Western Prom.
As always, uses a qualified realtor to guide you through the process. Buy it, hold it, and get on the path to real estate wealth.
Rick is a Windham resident, author, and realtor. He can be reached for any of your real estate questions at columnist@TheWindhamEagle.com.