Over the years I have been involved in hundreds of investment property purchases, which prompts a lot of how-to questions. Perhaps the most highly sought-after answer is to the question of where to find the best properties. Wow, that question has lots of different answers, but there is one that is my favorite for you active investors. The answer probably will surprise most of you: Investors can find great opportunity in buying property from none other than longtime passive investors.
I am not referring to just any passive investor, but often those who have owned a particular property for a long time so that property has a lot of meat left on those bones. Often these investment properties have bene rented for years and because they were purchased years ago for a lower price, many opportunities exist that the current owner often overlooks.
Opportunities Often Overlooked
Low rents dragging down the values—I am always amazed how passive investors who have either no mortgage payment or low payments (as they purchased years earlier for a low price) do not keep up with current rents. I once bought a higher-end, four-unit building from a passive investor and was able to raise rents by a combined $800 per month. As this property was owned by this investor for 20 years and had no mortgage, he was realizing a great cash flow. Because these investors have a great cash flow they often are not keeping up with market rents. Since investment property is valued-based on the income it generates, it is easy to buy these properties and raise rents for both a quick cash flow increase and a quick equity gain due to the increased revenues.
Repositioning with economic shifts—Here is another great example of longtime property owners not keeping up with their properties. The path of progress may be one of the most-overlooked opportunities for serious investors. We often see what was once an average working class area is now a highly sought-after upper-scale area. This is often the case when large retail or perhaps large companies come in and add lots of higher-end jobs to an area. This, of course, drives demand for housing to an area. The property that has been owned and rented to one rental class is now better served as a higher-end rental unit. Simple changes to the unit to add personality can demand higher rents. Perhaps some stainless steel appliances and granite countertops with a fresh coat of paint will draw a much higher rent to a different income-class tenant.
Highest and best use—Along with economic changes to a property location, maybe a re-classification of a property is in order, converting the property to its highest and best use and adding lots of value. I once converted a high-end property from a four-plex rental unit and reclassified it as a condo (read this story). That resulted in a $155,000 increase in value in just a few short months.
I could give examples like this all day long. I have found that when investors have owned property for a long time they often become a little more passive than they perhaps should be. However, sometimes it is simply the case that they have made a great deal of success and squeezing every dollar out of a deal is no longer their primary objective. Whatever the reason, I have personally found many great deals by buying properties from passive investors.
Look for Motivation
Something I would not have ever believed would generate a good deal is simply asking people to sell. I watched my brother repeatedly go up to people and ask if they would be interested in selling this or selling that. Surprisingly enough, if you offer to purchase something that people do not have a personal attachment to, they are usually interested or open to the idea.
My brother once stopped at a house where he had seen a double-wide snowmobile trailer that was covered in snow. Being covered in snow suggested that the trailer was not being used. He simply walked up, knocked on the door and asked if the owner was interested in selling it. My brother drove away with that trailer for only a $50 bill. After painting it and using that trailer for four years, he sold it for $350.
I was sold on the technique, and I was able to buy my best investment property simply by asking an investor to sell. So when you see a property that does not appear to be utilized to its highest potential, you may have an opportunity to buy a great property. Do some research and see if there is opportunity for you. My best deals have been manufactured through creativity or “outside the box” thinking.
How to Find These Passive Investment Properties
Talk to property managers. I find best luck in smaller companies. Ask them about their long-term passive investors and see if they have any who are less motivated to keep rents maximized or perhaps have been lacking in making cosmetic updates.
Handymen are also a great source of information. They often have long-term clients who may be your next great deal.
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