Choosing The Right Investment Properties

There's more to creating a profitable real estate portfolio than just buying what's available.Here's how to make the best choices.

Boyd, 40, of Woodbury, Minnesota, referring to a unit where rents are government subsidized. “Some people like Section 8 investments because your rental income is guaranteed,” he explains. “[But Section 8 tenants] might be less apt to take care of the property, which can lead to more wear and tear.” Boyd says that many Section 8 tenants don’t work and are home during the day, which increases wear and tear on the property.

The unit Boyd rented out to Section 8 tenants was in such disrepair, he had to do extensive cleanup and restoration before he could rent the unit again. “Based on my experience, I would avoid Section 8 properties in the future.”

For some, current cash flow may be secondary to price appreciation. “If you have long-term goals,” says Wright, “one option is to buy land without a structure on the property. If you buy property in the path of development, you may be able to sell at a profit in the future, perhaps when you’re ready to retire and need more income.” Determining the direction of future development is not easy, but local real estate professionals might be able to help you track current trends.

Boyd says that if you want rapid appreciation, your best bet is to buy a property that needs work: “Put in $10,000 to $15,000 worth of improvements and you may well be able to resell it immediately at a substantial profit.”

Broussard cautions that holding a property for either type of investment gain — current cash flow or appreciation — carries risk. “From a financial planning standpoint, it’s important to have the ability to handle any negative cash flow that might result,” says Broussard. “You might have months of vacancies. If so, you won’t be in a good situation without a cash cushion.” Therefore, you should make sure you have enough cash to handle the maintenance needs of the property as well as the usual expenses such as mortgage interest, taxes, and insurance.

KNOW THE NEIGHBORHOOD. Whether you’re looking for current cash flow or long-term appreciation, “You have to consider the neighborhood,” says Ellison. “Picking the best investment properties in Detroit, which has some blighted areas, can be much different from buying in the suburbs, where you can find some of the nicest communities in the country.”

“In the city,” he continues, “we look for the worst house on the block. We say, ‘If we can make it livable, will people want to own it?’”

Ellison says that you should not be put off by city properties that are not in the best shape. “It’s a matter of affordability,” he explains. “You say to yourself, ‘If I had a modest income and could afford to pay only so much for a house, is this where I’d want to live?’”

Deciding if tenants would want to live in the neighborhood wasn’t an issue for Monté Ross, 34, an assistant basketball coach at St. Joseph’s University in Philadelphia. His first investment property was on the same north Philadelphia block he grew up on.

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