Buy Right and Stop the Chill on Your Investment Profits

At 9am this morning I received a call from one of my leasing agents. “You need to get someone out here as soon as possible! There’s an inch of water on the living room floor. It looks like a pipe burst.”

That makes 7 burst pipes in the last 24 hours. On one house in particular, the rupture was so severe that it sprayed a large section of siding off the side of the house.

In addition, I found out that the sewer line on one of my rehabs needs to be replaced. That’s an additional cost of $3500.

Yesterday was an expensive day. That’s the bad news.

The good news is that all of these properties were bought right. My exposure is limited.

If ever there was an illustration of why it’s important to buy right, yesterday was that day. Repairs are going to be expensive. They’ll take some time to put all the pieces back together. But it’s not a major calamity. I’m not facing bankruptcy or certain financial ruin.

Bad things sometimes happen. Surprises can be costly. If you a novice Real Estate investor, you’ll probably run into more surprises than you thought possible.

I’ve had great tenants turn into drug addicts. I’ve seen spiteful residents rip out a kitchen and heating system when they were forced to leave the property. I’ve seen temperatures so low that pipes burst even when the heat is on in the house. Stuff happens.

But if you buy right, you hedge your bets against the bad things that can go wrong.

When I purchase a rental property, I use the 2% formula. This means that the monthly rental rate should be at least 2% of my total investment into the property. That investment includes the initial purchase and repair costs to get the place ready to rent. For example, if I have a property that rents for $1,000 per month, I do not want to invest more than $50,000 into the purchase and repairs.

I have a lot of people tell me this model is not possible for higher end rentals. They say that such discounts are only available in lower income areas. That might be true, but it might not. What I do know is that my 2% model works.  It leaves plenty of room for excellent cash flow when everything works according to plan. It also assures that when problems occur, it doesn’t spell financial disaster.

Different Real Estate investors have different analysis for the various types of investments they make. I use the 2% model for my buy-and-hold properties. Day-in and day-out, the 2% model is going to protect my profits and protect the value of my investment. As you look into Real Estate investments in the New Year, join me in my 2% model. It’ll be sure to keep you warm, even as the temperature continues to fall.