What Everybody Ought to Know About Buying Income Properties

When you buy income property always remember that you are buying an 'income' property. Don't fall in love with it, and be sure to keep these ideas in mind.

When you buy an income property are you buying the bricks and mortar, or the income stream? Take your time and think about this one... Are you sure? How does it get financed - an evaluation of the income stream and leases or strictly a direct comparison to other properties? From my perspective, you're buying the income stream that the property generates i.e. you agree to pay a price today to secure future income. The bricks and mortar are simply a vehicle to provide that income. Within reason, you should ignore the final sale price of comparable properties unless they have similar leases with similar tenants with similar covenants in similar neighbourhoods, etc., etc. ad nauseum. Rather, when looking at comparable properties, you'll be looking at the income stream and the capitalization rate applied and how it compares to the property you're considering.

Buy for cash flow today, not tomorrow. The price you pay for income property today should provide positive cash flow today - not at some point in the future. If an investment can't carry itself from Day 1, it's not an investment, it's a liability. If there is more month left at the end of the money, guess who gets to pick up the shortfall? Hint: It won't be me, because I would have advised you NOT to buy that particular property!

Ignore capital appreciation - don't wish for some future gain. Wishes won't get you to your desired rate of return. Telling yourself, or worse relying on bad advice, that you shouldn't worry about any shortfall in cash flow because the market is just going "up, up, up!" is sheer folly. Surely you haven't forgotten 1990 or late 2008 already? As I said above, the property should return a postive cash flow that meets your target rate of return today. Any increase in value over time is your upside and should be looked at as just that, upside.

If I missed anything, or if you just think I'm off my rocker, I'd love to hear your ideas in the comments.


Elizabeth McDonald,  June 14, 2009 at 11:25 PM  

Brilliant Doug! I really do appreciate these "to knows" that you write.

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