Real Estate Investing Basics

It Is Called an “Investment Property” for a Reason

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Flipping Houses, Business Management, Personal Development, Mortgages & Creative Financing, Real Estate News & Commentary
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Investment properties are bought by investors.  Investors are generally looking for one thing: a good rate of return.  Numbers are what drives the purchase decision.  Emotions and other factors (like schools, etc) generally do not fit into the equation.  Both buyers and sellers of investment properties need to be clear on this.

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The Truth about Investment Properties

What is an investment property

It can be any type of property but generally they are commercial type properties.  Investment properties are those often used for office, manufacturing or retail space, or are made up of multiple dwelling units.  But they could be single family homes or even farm lands.

If you are looking to buy an investment property, you have to understand that it is all about the numbersIt is all about income being greater than the expenses.  A one-bedroom unit will only bring in so much rent in a given market.  This income will ultimately determine that unit’s value.  Remember, the numbers will not lie.  Do not try to force or massage the numbers or you will get burned every time.

Lessons for a Would-Be Investor

If you are looking to sell an investment property, you have to understand that it is all about the numbers.  It is all about income being more than expenses.  Sellers, remember when you bought your investment property?  What were you looking for?  You wanted a decent return on your investment.  Sellers and current owners need to understand that the only people (except for a rare occasion) who are going to buy that four-plex, small apartment building or commercial building are other investors.  Generally, the only property that can be sold for a retail price is a single family retail property to an owner occupant in a decent neighborhood.  Everything else is going to be sold to an investor who is looking at the numbers for a decent return.

So don't get mad when an investor offers you a fair price based on the property's income. We honestly do not know how that real estate agent figured out that asking price. Investors care about one thing, the numbers, because the numbers drive the property's value. So, investment property buyers understand what you are buying, sellers understand what you are selling, and owners understand who you are going to sell to in the future.

Just thought I should clear that up.

(On a completely unrelated note – Go Memphis Tigers!)

Photo: Neil Kremer

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in ...
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    Al Williamson
    Replied about 7 years ago
    Hey Kevin, Just for giggles, because I don’t completely disagree with your point of view, isn’t the objective of an investment to make a profit? If so, then an investor should take a position with some idea on how they/someone will better that position. Otherwise, buying solely based on the cash flow leaves a lot of factors to chance. Entropy wrecks all systems if they are left alone. Anyway, the underlying fuel for all the commercial investments you listed is people. It’s too obvious to mention, but people drive the system. So, what do you think? Can we expand your definition of “Investment Property” to encompass the idea that they include offering some type of tangible value to people.
    Kevin Perk
    Replied about 7 years ago
    Al, Sure, return or profit could be two sides of the same coin. Investing in an investment property can take many forms. It could simply be for existing cash flow or there could be room for some type of improvement or value addition. Maybe that addition is a rehab, maybe it is better management or it could be simply be holding on until the path of progress comes your way and then preparing the land for development. Adding something that someone else values is a great way to get a better return/profit. The trick for us investors is seeing where the value can be added and taking the steps to add it. Thanks for reading and your comments, Kevin
    Kevin Yeats
    Replied about 7 years ago
    Kevin, you hit around a highly related point … value. Some of the “numbers” to which you allude come in the form of a higher value (= higher selling price) of the asset. Here you discuss investment properties but that asset could also be gold, silver, beef futures contracts, stocks or bonds or other financial assets. Investors need to examine the assets that they consider buying for investment purposes with this question in mind “what can I do to increase the value of this asset?” Better tenants? Higher rents? More units on the same property? etc. As a side note, I am astounded by the shows on HGTV etc where experts look at the increase in the value of a property by adding granite counter tops or an updated bathroom and determine that spending $10,000 will increase the value by $6,000. It just never makes sense to me. ( Go Buckeyes )
    Kevin Perk
    Replied about 7 years ago
    Kevin, Good points! I think that I hit them with my response to Al above. I never got HGTV either. It just makes my tenants ask if they can get granite counter tops too! They never hit on how this world really works. Thanks for reading and commenting, Kevin Good luck to your Buckeyes!
    Trevor Brunckhorst
    Replied about 7 years ago
    Just a cautionary tale to all (nothing directed towards author) : As a property manager in the Metro Detroit region, I’ve worked with far too many people being burned today by simply buying the numbers. There’s a reason the house that an investor just paid $40,000 for was originally purchased a year ago for roughly $5,000 (and two additional people have also skimmed profits by buying and quickly flipping to the end “investor”). I’m sorry, but you do need to know something about the location, schools, crime, demand, if you are buying it as an investment. Plain and simple, the numbers look great on a $40,000 Detroit investment property, but in reality, the 14-16% you were promised is really negative 10% or worse annually. In the end, do your due diligence. The seller is trying to sell you something – you should be cautious about anything they tell you. Contact a local management company to simply ask if the projections are even remotely accurate. I have saved many people thousands of dollars by them simply calling to get a third opinion on a potential investment property. As an example: an owner paid $42,000 cash for a Detroit property last year and we have it under contract to sell now for $12,500 (still high for the area). It’s a game of hot potato these days. BTW, when I am speaking of Detroit, I mean the city proper. There are still fantastic investment opportunities in the METRO DETROIT market, but most people who don’t live here don’t realize that the City of Detroit and Metro Detroit are two very different markets.
    Kevin Perk
    Replied about 7 years ago
    Trevor, Very true! The same thing happens here in Memphis. People need to understand the reality of the business to get at the true numbers of any investment. Many things can be made to look good on paper. Thanks for bringing up some valid points and for reading, Kevin
    Replied about 7 years ago
    Trevor, Very good advice. Properties are more than just numbers or anyone good do it with a spreadsheet. Jason
    Ira S.
    Replied about 7 years ago
    Great blog – clear, concise and to the point.
    Kevin Perk
    Replied about 7 years ago
    Thank you Ira! Kevin
    Sharon Vornholt
    Replied about 7 years ago
    Kevin – Well said! Sharon
    Kevin Perk
    Replied about 7 years ago
    Appreciate it Sharon! Kevin