How to Find Good Investment Property

You can find good investment property in a variety of ways. 

• You can hunt for foreclosures, making friends with city hall clerks or bank employees who know which properties are about to be sold. 
  
  
• You can run ads in local newspapers. 
  
  
• You can contact real estate agents who keep their eyes peeled for possible buys. 
  
  
• Join a local landlord or property owner's association is another way to make contacts. 
  
  
• You also can try approaching landlords directly to see if they’re willing to sell, by calling the numbers listed on rental ads in the classifieds.

• Cruising neighborhoods looking for “for rent” signs or by talking to any landlords you know personally.

The idea of owning rental real estate does not appeal to every one just as being a brain surgeon does not appeal to everyone. Not everyone has what it takes to be a landlord. 

Once you’ve made the decision to buy rental property, your real work begins. Finding a profitable rental property usually takes time, connections and plenty of research.  Our objective is to make our profit on the front end, not wait for it to show up on the back end.  We want to find a seller that is willing to give us free equity.

Here’s what you need to know to get started:

Your investment plan will determine how long you plan to own a particular rental property.

The longer you plan to own the property, the more you’ll probably need to invest in maintenance, repairs and improvements.  If you’re keeping it for 20 years, at some point you’re going to be putting a new roof on that property. You’re going to be putting in new appliances and doing some major repairs. If you’re only planning to own a property for five years, by contrast, you’ll probably want to avoid making any major improvements unless you’re sure you can recoup the cost with a higher sale price.

You also may face more investment risk with a shorter time horizon. Although your rental will almost certainly appreciate over 20 years, it could easily lose value in the next five, particularly if you’re buying in an overheated market. You’ll need a bigger potential annual return to make up for that risk.

For many small investors, long-term ownership makes the most sense. You’ll have plenty of time to ride out any swings in the market, and rental income can make a nice supplement to your day job. Find enough rental properties, and being a landlord may become your day job.


The better your credit, and the less credit card and other consumer debt you have, the better your prospects for getting a decent loan, lenders usually require bigger down payments, higher interest rates and generally stronger finances when you’re buying rental property. That’s because they know people are more likely to default on investment property than they are on their own homes.

It pays to have a substantial cash reserve left over after buying a property. This can help pay for unexpected repairs and vacancies. Although there are few rules of thumb, setting aside at least one month’s rent for each unit is a good start. Another strategy is having a line of credit, secured either by the property or your own home, to cover larger costs.

You should make sure you can save enough for retirement and other goals before investing in rental real estate. While rental income can supplement your retirement, most people shouldn’t count on it to replace other investments or allow themselves to be entirely exposed to the whims of the local real estate market. Rents and property values can fall as well as rise, and those who are adequately diversified with investments in stocks, bonds and cash will be better able to endure the bad times as well as the good.

Some investors use formulas, such as not paying more than six to eight times the rents they expect to make the first year. Others try to estimate what the property could be worth after needed repairs and upgrades are made, and they don’t pay more than 70% of that price, less the cost of those repairs.  

Make offers on properties that will return positive cash flows.  Make sure your rental income will cover your out-of-pocket costs. That includes the mortgage payment on the property, as well as taxes, insurance, maintenance, repairs and a vacancy rate of around 5%. (If you have five units, for example, you should expect at least one unit to be empty three months each year. Here’s the math: 5 units times 12 months equals 60; 60 times .05 is 3.).  If you can at least break even, you’ll be able to profit from any price appreciation as well as from tax breaks available to rental property. 

When crunching the numbers, you should know that there’s a big difference in how repairs and improvements are treated for tax purposes. You can typically deduct the cost of a repair, such as patching a roof or fixing a leaking pipe, on your tax return for the year in which the repair is made.

Replace that roof or those pipes, however, and it’s typically considered an improvement, which means the cost can’t be deducted. Instead, it’s added to the amount you paid for the property to determine your tax basis when you sell. The higher the basis, the lower your taxable profit. But if you have to wait 20 years after making a major improvement to recoup any of the cost for tax purposes, you may think twice about buying a property that needs a lot of up-front work.   If you have difficulty determining the after-repair-value hire a  property inspector and have them do a  thorough inspection before you buy a property.   

Find electricians, plumbers and contractors that are reputable and trustworthy and  send them to any prospective property, with a promise to them that they can do any repair work they find. Another option is to hire a professional inspector that you trust.

All this work pays off in profitable properties that build their net worth while providing a steady income stream. 

Remember: Our ultimate objective is to turn the property over to a property manager so we can continue to find good investment properties and repeat the process. Make your plans accordingly.