Investors buy investment properties for a variety of reasons. Some buy for cash flow and/or future appreciation (sometimes referred to as “buy and hold”) and some buy to rehab and resell for immediate profit (commonly referred to as “trading”).

In this article, I will discuss how to appraise a property that is being considered for purchase.

TIP #1 – Don’t buy a property just because you “love it”.

It can be a cute little colonial. The koi pond can look very attractive; the landscape may seem ideal. But if it doesn’t meet your goals, move on! If you’re buying for positive monthly cash flow, don’t lower your required bottom line because you’re in love with the property.

If you’re buying to flip, don’t rework your bottom line to make it seem like a better deal than it really is. I see investors do it all the time. They begin to rationalize the purchase even though it doesn’t fit their investment goals. That’s a enormous mistake. And once the novelty of the purchase wears off and they realize the property is a dog, it’s too late.

TIP #2 – If you’re buying by cash flow, let cash flow be your guide.

I recently listed a 4-unit investment property in the Philadelphia area for sale. The sale price was $139,900 and the property generated $2,100 per month in gross rental income. Cash flow after mortgage payment was about $940 per month, and after all other estimated costs, I was bringing in about $600 per month. In the eyes of serious investors, this property is a success. “I don’t even need to see it, just send me the bill of sale!”

But before one of my smartest investor clients snatched up the property (by the naked eye), I heard some of the most ridiculous reasons why a buyer was passing up the property.

“The tenants don’t keep their apartments very clean,” a potential investor told me. “That second floor unit is a pigsty.”
“Okay,” I replied. “Do you plan to live with them?!”

You can’t control whether your tenants wash the dishes daily, vacuum the floors, or put the dirty clothes in the hamper. What you want from your tenant is a check on the first of the month. If you obsess over how the unit looks based on the current tenant, you will not be a successful investor. You have to be more detached than that. You are in the business of cash flow and profit, not cleaning. Keep that in mind as you go through a property that interests you.

TIP #3 – If it ain’t broke, don’t fix it!

Another investor told me, “The units have old appliances and they look a bit dirty. Everything is getting old and I’ll have to replace everything right away. I’ll have to update the entire building.”

Yes, the appliances were a bit old. But everything was in order and the tenants were happy. Why on earth would you spend money upgrading a building that did NOT need upgrading?

This is a huge mistake that I see a lot of investors make. They upgrade the kitchens and bathrooms in their rental properties just for the sake of upgrading them. In this 4-unit example, the owner had a waiting list of people who wanted to live there. The old look of the property did not deter tenants in any way. Everything was safe and functional, and it was years since they needed replacement.

Now, if the old look of the property kept tenants away, THAT would have been a different story. Just make sure any improvements you make to a property are necessary particularly when it comes to cosmetic items.

So remember, buy a property with your head, not your heart. Real estate investing is a business and we are in it to make money. If you have cash flow requirements, stick to them and be sure to evaluate each property based on cash flow first. And don’t go around updating and improving areas that don’t require attention. Wait for its updates and replacements until you feel it in your pocket. These three simple tips can keep you on the right track as you build your real estate investment portfolio!