Landlord must figure out a way to keep a tenant full invested in the property.  The perfect tenant treats the landlord’s investment property like it’s their own personal home.  Even if tenants pays the rent on time every month, how they treat the property can still make them very bad tenants.

The standard way to mitigate tenant damage to the property is to collect a security deposit upfront, typically one month additional rent.  This deposit serves as insurance against property damage when the tenant leaves.  Unfortunately, with this method, how much rent landlords collect directly correlates with how much insurance they can secure.  Furthermore, the less a tenant pays in rent, the less invested a tenant will feel.

Landlords can turn regular paying tenants into perfect tenants with some create leasing agreements and good maintenance habits.  As a caveat, always consult a lawyer before adding non-standard provisions into lease agreements.  Assuming a state or city allows the landlord to put in minimum maintenance provisions, these can be extremely helpful. 

Some landlords have even charged a below market rental rate, but required tenants to do all maintenance on the property.  This strategy works well with established, responsible tenants.  Be careful using these provisions with first time tenants because this gives tenants much greater incentive to simply defer maintenance.  Landlords are often surprised by the conditions tenants can live in when they have to maintain the property themselves. 

In the absence of any maintenance provisions, it helps to show an interest in the property.  Being responsive to maintenance calls and checking in on a monthly basis to perform standard preventative maintenance shows tenants that a landlord is very invested in the property.  Most tenants will value this and help maintain the property.  Landlords should be eager to provide tenants paint and other light working equipment, if a tenant expresses interest in doing some upgrades to the property.

Some landlords offer bonuses to tenants that add additional value to their property.  If a tenant consistently keeps the property in great condition or upgrades appliances, carpets or fixtures, that tenant has added significant value to the property at no cost to the investor.  Encouraging this behavior with a gift card to Home Depot or Lowe’s makes the tenant feel great and further enhances the value of the property.

Regardless of the method, moving a consistently paying tenant to a true property asset pays significant dividends.  With a very small monetary investment and a lot of thoughtfulness, landlords can improve their investment tremendously.

Investors that focus on long-term hold periods must become experts in tenant selections.  Great tenants add tremendous value to a property, while poor tenants not only detract from the property valuation, but will also take years off of your life.  Every investor that has been in the real estate business for a while can share a tenant nightmare story.  Tenant selection is a mixture of art and science, so here are a few quick ways to stack the odds in your favor.

1.         Standardize the Process: Start with a basic tenant questionnaire.  Focus on questions like employment history and rental history.  Before conducting any tenant interviews, familiarize yourself with the tenanting laws of your state.  A variety of questions are illegal to ask and could potentially open you up to litigation from rejected tenants.  Additionally, familiarizing yourself with landlord tenant laws of your state will make you a better landlord.  Regardless of the area, always assume tenants know their rights.  Many lawyers specialize in finding tenants with the sole purpose of suing landlords.

2.         Credit Checks: Always run credit checks on your tenants.  If you have a mortgage broker, they can traditional run credit checks for you for a nominal fee ($15-$30), which should be passed on to the applying tenant.  Credit checks should not be solely used to approve or deny a perspective tenant, but they should add to the overall tenant story.

3.         Rental History: Be careful when verifying rental history.  Bad tenants will often get excellent reviews from their current landlords.  Think about it.  If you have a nightmare tenant that is looking to move to another location, would you do anything to prevent them from getting out of your property?  Get around this by asking for their past three landlords or more. 

4.         Employment History: Look for patterns in employment or any major gaps.  Great tenants keep jobs for long periods of time, have no employment gaps, and work for strong industries.  Be wary of tenants in bad industries (e.g., autos) or in commission-based jobs.  These types of jobs layoff often and traditionally these people have fewer savings.

5.         Financial Statements: Secure monthly income and expenses.  The most important items to note are the credit card bills.  Watch out for tenants with significant revolving debt, even if they pay it off regularly.  Factor in what rents you will be charging and the expenses that will be passed through to the tenant.

Tenants should not be approved or denied on any one factor.  Perfect tenants are tenants that value your property as they would their own.  The best tenants not only have strong scores in the factors above, but also have strong character.

For novice investors, a No Money Down strategy will look very different than it will for an experienced investor.  The risks of a true No Money Down strategy are too high for investors just getting into real estate investing.  While many novice investors started with this strategy in 2003 – 2006, 2009/2010 will not be a great time to secure these mortgages.  Additionally, the high costs and high risks of this financing strategy make it a poor fit for the novice investor.

So what is a novice investor to do when they are short on capital?  Take the traditional fundraising approach: Family, Friends, Investment Clubs and well wishers.  Fundraising in this manner not only gets a novice investor much needed capital, but it forces him/her to critically analyze their investment opportunity because they have to present it in a compelling manner to their future investors.

There are critical rules to working with friends, family, investment clubs, etc.  First, an investor should prepare clear terms and spell out exactly what will be done with any funding received.  For example, if an investment property will be purchased for $100,000 and the money received will go towards the down payment that should be clearly stated. 

Next, an investor should create a simple return structure.  It’s easy for non-real estate people to understand a monthly cash flow and it’s easy for an investor to manage.  Returning to the $100,000 example, if friends or family members commit $20,000 for the down payment, an investor should promise a fair return.  Assuming a 10% return on $20,000 ($2,000/year), an investor should commit to paying $167/month and returning the full principal upon the sell of the property.

These agreements should always be in writing.  This is a best practice for any investor and should be no different with friends, family, etc.  The more structure and professionalism an investor brings to the deal, the more credibility he/she will have when pitching their investment.  Be detailed about the role of the general manager and the role of the silent investment partner.  It might be worth having a lawyer draw up a very basic boilerplate contract to use for future deals.

Investors should also try to under-promise and over-deliver.  Never promise unrealistic returns or understate the risk of an investment to secure funding.  This only serves to ruin your credibility and cut off future funding sources when the road gets rough.  Real estate investments carry inherent risk that is only compounded by limited experience in real estate investing.  Being honest and regularly providing information to financial backers helps the novice investor stay abreast of the market and their investment.

Friends, family, investment clubs, etc. offer great opportunities to connect with other real estate investors and secure additional investment funds.  This No Money Down strategy provides capital and important relationships to help grow a successful real estate investment business.

“No Money Down…”  A phrase widely used in infomercials and by many proponents of real estate investing.  Does it exist; certainly.  Is it a good idea; sometimes.  Will it work for you; almost certainly not. 

After 2007, many zero down financing programs dried up, making the possibility of purchasing an investment property with no money down challenging.  Traditionally, no money down financing was reserved for investors who planned significant renovations to their property.  For example, if an investor wanted to buy a $50,000 home, and then perform $20,000 of renovations, it would be possible to get a loan for $55,000 or more.  The interest rate on these loans was usually significantly higher than a traditional investment loan, but it provided many buyers the advantage of securing property with no upfront equity.

Hard money lenders also filled the cash void for many investors before 2007.  If an investor identified a good investment opportunity, they could secure a traditional investment loan (80% Loan to Value) and then get a hard money lender to supply the 20% down payment.  Hard money lender traditionally charge rates above 10%, but again, they provide a way for an investor to secure an investment property for little or no cash equity.

While this strategy is high risk, it has significant advantages.  First, none of these loans are recourse.  This means that the only recourse the banks and the hard money lender have is the underlying property.  This will certainly do a number on an investor’s credit rating, but their home, other investment properties and personal possessions will remain secure.  As a quick aside, every investor should read every page of every document they sign.  Never sign up for recourse debt, ever.  Second, this strategy allows an investor to expand quickly.  Depending on the investment strategy, this can be a great means of securing multiple properties fast.

Numerous risks exist with this financing strategy as well.  Investors traditionally have to hit a homerun with a property to make this financing worthwhile.  At a 12-15% interest rate and a short term maturity with stiff penalties, any hiccups in the project could totally derail the investment.  In a rising market, this risk might be very manageable, but in a falling or even a steady market, this risk can overwhelm even the most experienced investor very quickly.

Like all financing, a No Money Down financing strategy is a tool.  This tool is very dangerous, even in the most capable hands.  Before an investor jumps into the No Money Down market with both feet, he/she should be well aware of the risks and expect to hit a homerun on their project.

For Sale by Owner (FSBO), a concept few sellers attempt, holds many potential rewards for the savvy seller.  Unfortunately it also holds many perils for the seller solely attempting to cut out a perceived middleman.  With the tactics any investor can learn from this very website, it should be easy to find a realtor worth their 6% fee.  Before an investor decides whether or not this method of selling would work best for them, they should consider the following analysis.Strongly consider the value of your time and the expected cost savings of not using a realtor.  On a $100,000 home, an investor will avoid costs of approximately $6,000 or 6% by not hiring a realtor.  However, the investor will incur numerous additional costs that would be traditionally born by the realtor.  Marketing fees can be substantial.  After printing signs, flyers and putting ads in the paper a seller could be down $500 - $1,000. 

Next, the seller must put an hourly wage on their time.  As an investor, a generous number of $50 per hour is appropriate.  Doing some very simple math, after marketing a seller can afford to spend about 100 hours of their time on the sells process.  While that seems like a lot, its about 12 eight hour work days.  The most basic property will require a minimum of two to four weekends of showings.  After four days (2 weekends) of showings at six hours a day (2hrs. prep time, 4hrs. show time), an investor only has about 76 hours left.  Add 5 -10 off hour showings and the time really starts to add up.  This is before the buyer’s realtor begins requesting documents from you and the banks start calling.  It’s very easy to spend 12.5 eight hour days selling your home.  Most realtors spend the equivalent of that amount of time or more on a transaction.  And remember, they do it for a living so they are much faster and generally better at it than you.

Consider the market you are selling into.  FSBO properties work very well in strong markets when the seller has the upper hand.  Conversely in a buyers market, the negative perception of an FSBO property alone could cost an investor 2-3% of the property value.  Think about it from the prospect of a buyer.  Owners typically know much less about the real estate market, have very little access to current market comparables and have completed far fewer transactions than an experienced realtor.  That’s worth a 2-3% discount in most buyers’ opinions.  Additionally, so many FSBO properties are poorly managed.  Many realtors farm FSBO markets for this very reason. 

Investors should also understand the scope and the value of their network before attempting a FSBO transaction.  Realtors know buyers, sellers, other realtors, investors and other interested parties.  They employ their entire network with the goal of selling this particular property.  If an investor can’t think of at least 10 people to pitch their investment property to it might be time to call a realtor.  Smaller networks mean it will take longer to sell the property.  During this time an investor could be missing numerous investment opportunities. 

FSBO transactions can work, but investors need to understand the risk and rewards.

Real estate can be an excellent buy and hold investment.  Provided rent covers a substantial portion of the mortgage payments and operating costs, investors can simply hold a property and wait for leveraged appreciation to make them wealthy.  While this seems like a deceptively easy strategy, buy and hold investors need to have a good understanding of finance and the market to maximize their investment.

Buy and hold investors make money on the buy.  Since these investors are much less sensitive to short term market movements, these investors should try to locate up and coming neighborhoods.  Neighborhoods with significant construction represent great opportunities to get in on the ground floor and wait.  These investors should absolutely avoid the flavor of the month or locations that have experienced unexplainable appreciation.

Investors with a little more experience should consider major markets in a down cycle.  Many major market experienced 40%+ declines in real estate valuations, with very little change in the economic fundamentals.  Areas like Las Vegas and Florida in 2007, 2008 and 2009 could be prime targets for smart buy and hold investors.  Investors that understand where the fundamental value in these areas is could purchase new homes at deep discounts with a great deal of seller concessions.  These opportunities may help investors minimize the upfront costs and provide them with properties that pay for themselves.  Again, buy and hold investors in major markets need an in-depth understanding on the historical market rent trends, economic/job growth trends and real estate pricing trends. 

Another area that traps buy and hold investors is the holding period.  Typically, these investors are overly concerned with selling at the height of the market.  This presents two problems.  First, many times investors wait too long and miss great buying and selling opportunities.  Second, investors do not remember to maximize their interest and tax deductions. 

Sellers should not try to time the market.  Buy and hold investors should look to maximize the value of their property and then locate their next investment.  As the market trend higher, sellers should begin to look for great buying opportunities.  When an opportunity is located, the investor should considering selling or refinancing their original buy and hold investment.  Buy and hold investors should be very familiar with 1031 Exchanges.  Remember, buy and hold investors can cash out of their investment with a refinance or with a sell.  Refinancing allows investors to maintain control of the property, increases their tax deductions and frees up cash to make additional investments.

Buy and hold investing should not be a passive pursuit of wealth.  Actively managing a buy and hold portfolio yields more investment opportunities and the potential for much higher returns on investments.

Like marathons, real estate transactions seem to never end.  Even at the closing table, the deal could be derailed by a myriad of issues.  Despite these potential challenges, buyers need to stay focused until they take sign the papers and take the keys to their new investment property.

Before you get to the closing table all buyers should do a final walkthrough to ensure that any requested repairs have been made and that the property is in the expected purchase condition.  Ideally, the premise will be unoccupied and you will be able to see the property free of furnishings and other miscellaneous items.  However, if this is not the case, you should go through the property with a fine tooth comb.  Remember, this is your last chance to save precious capital.  Come prepared with a checklist of all of the negotiated repair items and the inspection report if available.  Make a thorough list of items that have been neglected or items that seem to have fallen into significant disrepair since you last saw the property.  The goal is not to be nit picky, but rather to ensure that the deal you negotiated for has been executed.

Your list should be hard and fast.  While it may not be possible to repair all of the things you mentioned, the seller should be willing to negotiate a reduce purchase price based on the items that where not repaired as agreed to.  At this point in the deal, your real estate agent will not be your friend.  Remember, they are compensated based on a percentage of the selling price and their commission check is less than a day or two away.  They will do everything in their power to bring you to the closing table, so stick to your guns if your needs have not been met.  If the seller thoughtlessly left two garbage bags in the basement, that should not be enough to keep you from closing.  However, if the seller said they would bring all electrical outlets up to code and those have not been fixed, that should be enough to take a step back.  Again, it may not be necessary to hold up the closing, but it will certainly be necessary to get additional compensation in the form of a reduced purchase price.  Use 0.5%+ of purchase price to decide if something is worth mentioning.  This should include the time it will take you to get the item fixed as well.  If it’s a small item that takes 5+ hrs of your time to get fixed, it’s worth mentioning.

Never be eager to close.  It’s fair to be excited about the deal, but always remember that an honest penny saved is an honest penny earned.  Don’t let your hard work go to waste by being too eager to get the deal done.  Sellers are notorious for promising to do an enormous amount of work and then doing nothing because they know buyers and their agents make arrangements to move into the property immediately.

When everything is finally over, remember to send thank you notes to all the parties involved.  Relationships are important and despite the challenges of closing a real estate transaction, business is business and people are people.  Don’t mix the two up.  Always remember, negotiate everything and do it hard, but fair.

After the first offer has been submitted, sellers will most likely come back to buyers with a counteroffer.  Sellers will typically only not counter offers if they see the offer as being egregiously low (or high).  In down markets, sellers may also be more likely to accept a well crafted first offer for fear of losing even more value while waiting for the next one.

If you have followed this guide and made a fact-based offer based on your returns and constrains as an investor, the counteroffer process will be fairly straight forward.  Start the counteroffer by giving on some of the less important contingencies (i.e., shorter due diligence period, seller financing, etc.).  Note, never give up the financing contingency.  No matter what anyone tells you, bank supported financing is never a guarantee and even if you can cover the entire purchase price, your return on investment will be significantly negatively impacted.  Again, NEVER give up the financing contingency.

Next, consider the price that the seller countered with.  Is this is hard counter or a soft counter.  Many sellers will try the nibble, countering with a 1-5% increase in price.  Don’t fall for that.  If a seller will sell a house for $105,000, they will probably also sell that same house for $100,000.  Buyers should be looking for specific selling price increases because it might not be possible for a seller to sell below a certain price.  There could be a recent second mortgage or refinance that you might not be aware of that has to be paid off at closing.  While the seller and their agent will probably not tell you this, their counteroffers might betray some additional information.

After giving on a few of the lesser contingencies and double checking your original offer price against market comparables, consider putting up additional earnest money.  Sellers will value a firm slightly lower offer with a strong closing potential higher than they will a high priced offer with a small earnest money deposit and heavy contingencies.  Additional earnest money costs a small amount in forgone interest payments, but could save you 1%-5% on your purchase price.

When instructing your real estate agent to send your counter offer, ensure that he/she sends the market research that you have done as well.  You want to communicate that your offer is fact-based and fair.

This strategy will vary based on the market conditions.  In a buyers market, buyers should be prepared to give very little and expect to receive three or four counteroffers.  In a sellers market, buyers should be prepared to ditch more of the contingencies (never the financing contingency) and do more market research.  Avoid getting so wrapped up in the negotiation process that you fudge the numbers so that you can offer a higher price.  Stick to your guns and wait for good deals. 

Remember, not every seller or buyer is sophisticated and many make a lot of mistakes.  If something seems to rich, it probably is.  Stay fact-based and unconnected.

Real estate transactions slant in the favor of the seller.  The seller pays both agents commissions and both agents are rewarded for transacting at the highest price possible.  Given these incentives many sellers select the agent that offers to list their home for the highest price, and then simply waits for the offers to come rolling in.  Sellers employing this tactic are making a big mistake, particularly investors looking to sell their investment property. 

Sellers should first understand that time is money.  Even the best realtor will only dedicate two or three months to actively selling your home.  Furthermore, realtors want to get paid.  Commission based employees love to see a big check.  From a realtors perspective, selling a $100,000 for 6%, nets them a commission of $6,000.  Increasing the price by $10,000 only nets them an increase of $600.  Given the challenges of getting to the closing table, most realtors value a quick closing more than they value getting the extra $10,000 for their seller that could take months to materialize.  What means a lot to you, really only means a little to your real estate agent. 

Always remember that you as the investor should drive the process.  Hire great professionals and let them work for you.  After selecting the best realtor a seller must prepare for the negotiation.  Start by understanding your potential pool of buyers.  Is your neighborhood an active investor community or should you position your property for new families?  By understanding your potential buyer, you can shape your property into a blank slate, with subtle hints of character that might appeal to your audience.  If you expect to have a lot of investors coming by, it might be helpful to do some research on rental rates and neighborhood occupancy details.  Young families might enjoy a list of local parks and recreation activities gear towards family.

Sophisticated buyers will be armed with facts about the neighborhood and property values.  You should know your property and know your competition as well as or better than the buyers.  Shop your competition.  It’s always helpful if you are able to comparatively list off details that make your investment property unique.  These unique items should increase the value proposition of your property.  While your house may be the only one on the block with a bird feeder, that will not drive traffic or stop a buyer in his/her tracks.  On the other hand, if you can say my house is the only one in the area with newly refurbished hardwood floors, buyers might certainly take notice.

Check your emotions at the door.  Creating a value proposition for the buyer means offering a superior product at a competitive price.  Don’t be offended by low offers.  Even low offers tell you something about the market and potential buyers mind sets.  Getting more than one might suggest you are in a buyers market.  Take every opportunity to seek to understand the value of your asset.

Real estate negotiators achieve their optimal outcome when they understand their needs and the potential investment opportunity.  Negotiations should never be emotional, but rather they should always be rooted in tangible data. 

Fact based negotiations keep everyone focused on the numbers and helps the buyer formulate an investment basis for the property.  If you are seeking a 20% return on an investment property and you know based on the current rents and projected selling price, you can only pay x for the property, make sure that you can justify x is the appropriate price.  If it’s lower, than this could be an excellent opportunity, but if it’s higher, then you have already set your maximum bid price.  Stay focused on the numbers and never bid more than your research suggests you bid. 

Novice investors also miss the opportunity to increase their market knowledge through their negotiation sessions.  Sellers typically have a very good grasp on what is going on in the market.  Regardless of the outcome of the negotiations, understanding where the seller feels the market is head in the next five years could provide value insight into future investments.  Obviously sellers will be overly optimistic to achieve the highest selling price, but by probing a potential buyer could find out about potential new developments, retail or residential units coming online or going offline and a variety of other neighborhood specific items outside buyers might not be aware of.

While buyers should come prepared to negotiate based on facts and market research, they should also be prepared for a seller negotiating solely on emotion.  Sellers have invested time and money into the property they are currently marketing and will always believe that they have the best property on the market.  Many times sellers feel like a low offer is a reflection on their management skills or their skills as an investor rather than simply the prevailing market price.  Never take anything personal and always stand behind the research.

Buyers should also avoid being overly concerned about what the seller paid for the property, but should request this information from their real estate agent.  Buyers need to know what a seller paid for a property (public records that any realtor can provide) because it can help them understand if a seller might be holding a mortgage worth more than the property or if they might be underwater after paying commissions and other selling costs.  Furthermore, sellers will be much more eager to provide financing if they receive a large settlement from selling the property.

Always keep the end goal in mind when negotiating.  Buyers should consider price and terms when considering purchasing a property.  Market customs vary, but always remember, everything is negotiable.

Real estate is a relationship business.  Investors work with a tight knit community of professionals that provide access to numerous on and off market deals.  Novice investors rarely have access to the best deals until they have proven they can be reliable, knowledgeable and trustworthy.

A strong, constant flow of investment opportunities allows investors to focus on managing their current real estate portfolio.  Creating a team of professionals that understands your investment criteria and provides you constant opportunities saves investors time and opens up potentially high return opportunities not available to the general public.

Investors should seek deals and deal makers everywhere.  As a novice investor, it is extremely important to establish a niche and communicate that to all the professionals you encounter.  If you want to specialize in single family rehabs in a specific area, let every investor, real estate agent, accountant, lawyer, etc. know that space is your focus area and that you are actively seeking investment opportunities.

Novice investors must establish a good reputation for deal making as well.  By establishing a reputation for sound investment principles and fair dealing, an investor can build a solid standing in the real estate community.  Traditionally, this takes time and commitment to an investment strategy. 

Fair dealing does not mean being a soft negotiator, but rather it means doing what you say you will do.  Every investor seeks to maximize their own returns and expects others to do the same. 

Local investment clubs and real estate planning board meetings provide additional forums to meet investors locally.  Networking with local professionals keeps you top of mind when investment opportunities arise.

Investing for appreciation carries higher risks and higher rewards.  Investors should focus on selecting the right market and the right property to execute this strategy.  While this strategy usually yields very little cash flow during the life of the investment, investors profit when they sell their investment property for a gain.

Appreciation focuses expected future rent growth.  Traditionally, markets with high appreciation experience strong job growth and have a significant retail presence.  Real estate markets experience a life cycle.  Appreciation ebbs and flows as prices increase and decline.  As major metro areas price homeowners and investors out of the market, they begin to move to less populated areas, which in turn begin to see a price increase.  As these areas become more populated, pricing pressures ease in major markets and the migration ceases.  Understanding this cycle helps investors better understand when and where to invest to capture the highest amount of appreciation.

Selecting the right market is paramount to execute this strategy.  Young markets with significant upside potential represent the best chance to minimize downside risk.  Additionally, small to mid-size markets with easy access to major metro areas, jobs and retail aid in future rent growth.  Be careful of markets that appear to be too strong or experience unreasonable appreciation levels.  As markets appreciate, affordability declines.  At some point all markets reach a tipping point where appreciation slows, stops or declines because they become unaffordable. 

Investors can also create value by choosing the right property to invest in.  In these markets renovations can make sense.  It’s usually best to choose the properties with the most upside potential, but it is equally important to choose the properties that suit the investor.  Large renovations take time, effort and capital.  Investors with limited capital resources investing in these markets should choose projects that need cosmetic renovations or upgrades. 

Remember, the goal is not to have the best house in the neighborhood, but rather to achieve the highest rent with the lowest capital spend.  Map out investment items and compare each item to an expected rental increase to ensure the upgrade or renovation makes sense.  Even if every home has newly remodeled bathroom, it could more sense to charge a below market rent then to actually remodel all the bathrooms in a home.

Appreciation and buy and hold usually go hand and hand.  Properties that appreciate 5% per year return about 25% per year to an investor, who put 20% down to purchase the property.  Let the appreciation and leverage work together.  Investors should watch the market closely for opportunities to exit or upgrade their investment.  As markets mature and appreciation slows, investors should be prepared to cash out and move to another growing market.

Low income areas often prove attractive to first time investors because of their low cost of entry.  Investment properties in low-income areas can be purchased for well under $100,000 and typically provide a nice stream of investment cash flows.  Investors can use this strategy to build up a strong base of investment capital and improve the community in which they invest.

With few exceptions, low-income areas tend to experience little to no appreciation for several reasons.  First, investors in these areas expect low future rent growth.  Typically, tenants in these areas have limited disposable income making high rent increases on a regular basis unfeasible.  Second, investors expect limited neighborhood improvement.  Again, with very little disposable income retail demand tends to be lower.  Furthermore, major offices tend to locate in more affluent areas, so new developments generally do not occur in these neighborhoods.

So where is the value?  Tenants and property selection create value in these neighborhoods.  Investors should first understand that not all vacant buildings are created equal.  Finding a structurally sound building in need of cosmetic repairs yields the most value for an investor.  With a ceiling on rents and low appreciation expectation, heavy financial investments in property upgrades will not make sense.  However, cosmetic touches like new doors, paint, landscaping, carpeting, etc. can go a long way in increasing the value to the perspective tenant.

Tenant selection also creates value.  Quality tenants, who pay their rent every month and take care of the property, generate significant value in this type of an investment.  Remember, current rent and expected future rental growth drive value in real estate.  Selecting the right tenant not only locks in current rent, but increases the expected future rental growth. 

Tenant selection is as much about the tenant as it is about the landlord.  Tenants will care as much about a property as a landlord cares about them.  If landlords are slow to respond to their needs or generally treat them poorly, tenants will be slower to pay rent and slower to appreciate the value of their home.  Investors should understand the cost in time and dollars of managing a rental property.  Saving a few dollars in the short run by deferring maintenance items that are important to the tenant will cost an investor a quality tenant in the long run. 

Finally, investors should always be thinking about their exit strategy.  It is important to understand that value is created upfront.  Once an investor completes the cosmetic repairs and places the tenant, he/she should expect very little additional value creation because of the factors mentioned above.  Young investors looking to move up to bigger properties should look to quickly sell these types of properties to investors looking for stable, easy to manage cash flows.  By establishing a niche in this investment type, an investor could quickly obtain a stable of willing buyers and create a very profitable business model.

Investment strategy starts with choose the right market.  Markets drive strategy.  In markets with rapid appreciation or escalating rents, buy and hold strategies or renovation strategies might be appropriate.  In more stagnant markets it might be less attractive to renovate, but investors might be able to generate value by placing quality tenants in quality properties.

Remember, current rents and expectation of future rent growth drive the value of real estate.  An investment strategy is the way in which an investor will affect one or both of these metrics to improve the valuation of the property.  Simply taking an empty property and putting in a tenant increases the current rent and potentially increases the future growth potential; therefore, the property valuation will increase.  Additionally, renovating allows investors to charge higher rents, in turn increasing the current rent and the future growth potential.

In considering the first investment, an investor needs to develop a clear understanding of the market and formulate a strategy that will be successful based on those market factors.  Once an investor selects a strategy, the investor must implement the strategy in a cost effective way to increase value by more than his/her costs.  While this seems obvious, novice investors often underestimate their costs and overestimate the value they should receive from their investment.

Consider an investor, who has chosen to renovate a small foreclosed home in a less than stellar neighborhood.  In this situation, the most important investment strategy should be tenant selection.  Renovations will return very little on their investment because of the general neighborhood conditions and the expectations that the neighborhood will not improve.  If an investor performs cosmetic renovations (~$1,000 – $2,000) and selects a quality tenant that will pay rent on time and take good care of the property, that investor has just created a very attractive, easy to manage cash flow stream.  This investor now has the option of selling the property at a gain and potentially reinvesting the profits into another investment or simply farming the cash flow of the property.

It should be noted in this situation that the investor should not expect any additional appreciation beyond the value created from placing the tenant; therefore, should not plan to hold this type of a property for a long period of time, unless their goal is to invest in stable cash flowing properties.

Investors should look at each investment with a clear plan of action.  Understanding the market and formulating a clear strategy will increase the likelihood of an investments success.

Major and minor developers and investors fill markets like Los Angeles, New York City and Chicago looking to capitalize on the growth associated with these markets.  Novice investors typically take the “me too” approach by trying to enter these markets on a smaller scale or drifting to the outskirts or city limits.  Conversely, smart investors know that by establishing a superior value proposition in an area with little competition yields the biggest return on investment.

Consider my own interesting start in the real estate business.  Living in Detroit, Michigan, I decided to start my real estate practice in the worst real estate city in the United States.  Luckily, I had two things going for me: 1) A tremendous passion for people and real estate and 2) An excellent eye for out of the box investment strategies.  After speaking with real estate agents and mortgage brokers, I discovered that most tenants would pay about $700-$800 to rent a two-bedroom home.  I also discovered that a two-bedroom house sold for $25,000 - $60,000.  The lowest end of the range represented fixer uppers without tenants, while the upper end represented nice structures usually owned by a family or rented to a family.  There would be no natural appreciation because jobs were leaving and the city continued to experience terrible urban decay.

Next, I got on the ground and spoke with the market.  After interviewing tenants, landlords and more agents, I found that most landlords treated tenants poorly and most tenants were only tenants because of their glaring credit score issues.  It turns out that it is very hard to live in Detroit without being laid off at least one time. 

By now I had established a need, an opportunity and a plan.  Everyone in the city needed a decent place to live where they could be treated with respect.  At $25,000 - $40,000, I had the opportunity to provide this at a cost to me of approximately $250-$300/month, while charging a rent of $700 - $800.  Finally, I put together a plan to buy two houses to start the business and test my theory.

My plan ended up being wildly successful.  Not only were both properties providing ~$300/month in cash flow after expenses and debt service, but the properties were appreciating.  They were not appreciating because of the neighborhood, but rather, they were appreciating because I was able to provide any future buyer with tenants, who did not miss a payment in 12 months, and who were locked into a lease at $750/month.  Properties purchased for $30,000 - $40,000 were now worth $50,000 - $60,000. 

This is one example of a unique plan tailored to a local real estate market.  With few investors interested in this market, I had all the investment opportunities I could buy.  Once I established my reputation as one of the best landlords in Detroit, I also had all the tenants I could house.  While this turned out not to be scalable because of its intensive management requirements, I could not have asked for a better first time investment experience.

 Everyone possesses different strengths and weaknesses. Successful investors maximize their strengths and surround themselves with professionals that compensate for their weaknesses. Real estate investing requires skills with people, relationships, organizations and finances.

Regardless of where your personal strengths lie, investors should understand the importance of comparative advantage. Comparative advantage describes a situation in which an individual should focus their time on activities that they are best at. Even if a person is an expert at everything involved in real estate investing, time limits how effective that person can be at each skill. 

Early in my real estate investing career I quickly found that the numbers aspect of real estate drew me to the investments. While I am certainly good with people, relationships and organization, my passion and training fall on the side of finance. In order to maximize my effectiveness in real estate investing, I spend more of my time underwriting investments and sourcing deal. Furthermore, I surround myself with partners and professionals that work well with people and have great organization skills.

While comparative advantage is extremely important, investors should not neglect their weakest skills. Solely relying on people skills or finance skills opens investors up to missing opportunities or being taken advantage of by professionals who are well rounded. An investor must be responsible for their own investment decisions, must be able to keep their business organized and must be able to source tenants, investments and other real estate professionals. Real estate investing requires a basic level of understanding in all of these areas despite what an investor may inherently be better at. 

Novice investors must constantly be learning every aspect of real estate investing; while more advanced investors should ensure that they deploy their efforts to the activities that will yield the biggest return on the time investment. 

 Real estate is personal. Each individual will be attracted to a variety of styles, trends, furnishings, etc. One of the most important rules every investor must remember is to invest for the tenant. While you may like a subzero refrigerator, stainless steel appliances and cherry wood floors, your tenants might be quite happy with bargain brand new appliances and linoleum floors. 

Most novice investors make the mistake of going too expensive or too cheap with furnishings and amenities. Whether you are a minimalist or a person of high fashion, the only focus an investor should have when purchasing, renovating or furnishing an investment property is the buyer or potential tenant. Rarely is it as simple as buying a cheap house and furnishing it cheaply or buying an expensive house and furnishing it lavishly. 

Investors should first understand the expectations of the tenant. The simplest way to do this is to tour the competition. Understand the offerings in the neighborhood. Do houses or apartments typically come furnished and with washer/dryers/stoves/refrigerators/etc? Ask the detailed questions because you never know where you can save money. In one of my earliest investments, I interview several tenants the day before I was going to buy appliances for the property. It turns out every tenant had their own washer/dryer/refrigerator/stove, so I save about $1,500 in upfront costs. Additionally, I would not have worry about any future repair or maintenance of those items. Remember, every dollar saved goes right to the bottom line.

After understanding the expectations of the tenants, an investor should strive to slightly exceed them in the most cost effective way. Consider the value of each investment decision. If there are basic item that need to be replaced to get tenants in the door, those should be done immediately. Items like painting, laminate flooring and new doors and fixtures and exterior maintenance go a long way to adding value at low costs. 

Lastly, make a budget and stick to it.  The key to making a good budget is to tie every item to the rental income stream. For example, if you can get a tenant into the property at a rent of $100 today by doing nothing, but after installing appliances, they will pay $150 then you know your budget for appliance should be around $500-$1,000. A good rule of thumb is to expect a 5-10% yield on renovations. In the example about $500 in appliances lead to a $50 increase in rent or a 10% yield ($50/$500). Had the investor spent $1,000 on appliances and gotten the same $50 increase, they would be getting a 5% yield. Making a budget with yield figures helps an investor understand what is value add and what is not. Forecasting this is more art then science and investor become more accurate over time and through talking with tenants and touring competing properties.