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MMF’s Seven Rules For Buying Investment Properties

JJF and I know Delray Beach pretty well. We own homes here and have bought and sold more than a dozen properties in our neighborhoods. We have been able to observe firsthand the growth in real-estate prices since the mid-1990s. And we know a good number of people who are active in the real-estate market.

As I said yesterday, the big secret about real estate that we have learned (at least for making money in the short term) is to buy good property at or below market value. And no matter what the popular books tell you, you won’t be able to do that on a regular basis unless you take the time to get out there and find the best deals yourself.

These are the rules we have set for ourselves:

1. Don’t own real estate from afar.

2. Buy only in proven, up-and-coming neighborhoods or those that border on the same.

3. Never buy a house for rental that when improved will have cost more than $125,000. I’ve found that it’s very hard to rent out a home consistently if the monthly rental is more than $2,000 — which means you can’t hope to get a good rate of return on your money. In the $125,000-plus range, I buy homes to spruce up and “flip.” (See Messages #397 and #398.)

4. Figure out how much you’re paying on a square-foot basis, trying to keep it as close to $100 per square foot as possible. That number is relative to the particular market. In Delray Beach, for example, nice homes in nice neighborhoods sell for $200 per square foot. I’d rather be down around $100 to leave room for improvements and margins for commissions.

5. Buy only homes where you can get a $2 to $4 return on every $1 you spend fixing them up. This is actually easier to determine than you might think. The trick is to buy a house priced considerably under the market and then redo it as cheaply as possible.

6. Spend money improving the house, but only where it matters. Paint. Put up cheap shutters and awnings. Replace cabinet doors and carpeting. Put ceramic tile on countertops. And landscape the entryway. Those are the main upgrade opportunities. Everything else you might do — including plumbing and electrical work — will probably not be good investments.

7. If possible, have a renter for your house before you buy it. If you let the word out sufficiently often, your friends and colleagues will think of you when they meet someone who is looking for a place to stay. That said, there is still much that is nebulous about determining value.

For example, is the two-bedroom ranch house that JJF and I saw on 13th Street and Seacrest worth the $150,000 being asked for it? In my judgment, it is. But I think virtually the same house one block away on 12th and Seacrest is overpriced at $120,000. You can’t answer those kinds of questions unless you have a very good feel for the neighborhood.

And, as I said, you can’t have a very good feel for a neighborhood unless (a) you limit your investing to a particular area — preferably in your own hometown — and (b) you are willing to drive around that neighborhood and ask questions. If you can do those two things, real estate can work for you. Think about it. And start looking.