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Investing in Your First Income Producing Property

By Edited Oct 28, 2015 0 4


Income Producing Rental Property
Billions of dollars can be made in real estate investment every year, just ask Donald Trump. The question is, where do you begin?  If you have ever seen real estate investing ads on the internet or watched infomercials on television, you may have noticed there are a variety of ways to invest in property.  It can be overwhelming trying to decide which method is the correct avenue for you. There is also a lot of mistakes made in purchasing your first income-producing property but by following simple rules you can dramatically increase your chances of success.   

5 simple rules for purchasing income producing property

1. Strategic property location

Location, location, location!  I think we've all heard this saying as it relates to buying a home or starting a business.  It is equally as important when purchasing an income producing property.  Pay very close attention to a six-block radius around your property.  Red flags include bars/taverns, unkempt lawns and buildings, boarded or closed businesses and excessive rental properties.  All of these will impact not only your ability to fill your units but the quality of tenants willing to sign a lease.  You need to search for areas close to bus lines, near shopping and restaurants, close to parks and with a variety of employment opportunities to attract quality tenants.

2. Making a large enough down payment

When investing in rental property it is extremely important to understand that real estate is cyclical. Property values can vary dramatically year over year.   Investors should put down a minimum of 33% of the property's value which can surprise some buyers.  You want to make sure your property doesn’t go “under water”, meaning you owe more than the property's value. Putting down a minimum of 33% will also save you thousands of dollars in the long run as you will have substantially less interest to pay.  A large down payment will serve as an exit strategy.  For example, if the housing market should crash again, and you are unable to pay your mortgage, it will offer some cushion in selling the property.  This cushion will help prevent foreclosure, which has a significant impact on your credit score.

3. Understand landlord and tenant rights

Understanding the rights of tenants vs. landlords is perhaps one of the worst mistakes new investors make.  Admittedly, I did not fully understand the rights of my tenants and more importantly my rights.  Researching the tenant-landlord relationship is extremely important to prevent costly lawsuits.  Laws vary by state so be sure to do your due diligence before taking any action against a tenant as mistakes can cost you significant fines.  I suggest joining a real estate investment group in your prospective city.  Investment groups have a large pool of resources and information at their disposal.  Real estate investments groups are also a great place to network.

4. Add up all associated expenses, including your time

Prior to purchasing your first property itemize all of your income and expenses to verify your income will easily cover your expenses.  Your expenses should be at maximum 75% of your income.  For instance, if your property's income is $1000/ month your expenses should not exceed $750.  This allowance will provide money to cover unforeseen circumstances, and I can guarantee you there will be unforeseen circumstances.

Here are some expenses to consider:


- Mortgage payments

- Taxes

- Insurance

- Maintenance/repairs

- Empty units

- Legal advice or representation

- Advertising

- Lawn care

- Garbage disposal

The most important item not listed is your time.  If you plan on performing the property maintenance yourself and managing your tenants, expect to be busy, especially if you have a multi-family dwelling.  Fixing even minor problems can be very time-consuming and can often eat up an entire day.  Rent collection can be another enormous headache depending on the quality of tenant.  Be aware that phone calls from tenants can come at any time, day or night.

5. Create a contact list

If you plan to hire out maintenance and repair work, be sure to network with all of the appropriate contractors.  You should give all contractors a tour of the property and be sure to shop around as fees can vary significantly. It is against the law for you to do plumbing and electrical work on a rental property if you are not licensed.  Furthermore, pulling the appropriate permits for work done on your property is of utmost importance.  

Here is a short list of valuable contacts:


- Realtor

- Plumber

- Electrician

- Lawyer

- Handyman/woman

- Police department

- Neighbors (if possible)

Have all of your important contacts saved in your phone, so they are easily accessible.

These five rules, though basic, will get you started with the purchase and management of your first income producing property.



Oct 1, 2015 9:59am
Good article Rick. I was surprised by #2 as I have heard the advice that you should be as highly leveraged as possible since the tenant is paying the mortgage. Therefore put down as little as possible. But your explanation makes sense.
I'm currently searching for my first income property in a tough market (Boston).
Oct 13, 2015 5:30am
This comment has been deleted.
Oct 22, 2015 11:37am
John...sorry for the slow response...You are correct with what most people will tell you and that is fine as long as you have cash on hand to get you out of trouble. The problem with this is most people are fully leveraged with no cash cushion. When problems arise they have no way out. I'm working on more in-depth articles on most o of these points and more. I do not write very well so it's taking me a while. Good luck with your first property, feel free to ask questions.
Dec 9, 2015 7:09pm
I've been to real estate seminars that teach that principle too: putting down as little as possible. What surprised me is a real estate investor that I met said that he's seen over an over where too much debt is added in and frequently an over-leveraged novice will end up in financial hot water between 7-11 years into the investment. Why 7-11 years? The real estate investor wasn't sure, it was just the pattern that he noticed for novices that used too much debt to buy a property.
Dec 10, 2015 5:44am
While I can't say with 100% certainty, I'm fairly confident with some reasons.
Reason #1: 5/10-year arm expiration and high-interest rates and refinancing costs. This can be particularly harmful when a property is already struggling with tight margins.
Reason #2: Motivation...dealing with tenants can be very wearing...If you try to do everything yourself you are destined to fail! You need to be able to have a handyman/woman or management company to rely on. Nothing worse than get that call about a clogged toilet on Christmas morning.
Reason #3: Many investors sell their properties when they are getting the highest rent because they can get the highest price. The problem with this is when a new investor comes in they look at that number as what they will be getting per month rather than looking at comps in the area for a more realistic number. This happened to me with a series of college properties I owned. I never got even close to the rent/ month I received the 1st year in the following 10 years.

Hope this helps.
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