I have investment property in the midwest while I live in Texas. Most of the properties were purchased in small blocks from banks. “Investors” had bought the properties, leveraged them to the hilt during the bubble and now cannot afford to support them.

For each block we purchased, there were two or three blocks where we got deep into negotiations before I pulled the plug because the seller would not move to where they made sense financially. I figure 75% of those will come out at a foreclosure sale at a lower price over the next nine to 12 months.

I also picked up some individual properties as foreclosures, short sales or outright purchases.

I grew up in the area and had friends locally with experience in the real estate business to help with the turnarounds and rehabs, but you are correct in that the secret is to make sure the properties cash flow. I don’t buy into the “no money down” approach, but if the property can’t pay for itself at $90,000 I am certainly not going to offer $100k. It is essential to be able to realistically project and evaluate the costs and the operating variables prior to figuring out what offer price makes sense. That system gets refined with every offer I make and with every rehab we complete.

The first property was purchased in October of 2008. I am now achieving regular, reliable cash flow. There could have been positive cash flow six or eight months ago, but I opted to put that money back into the properties.

I have two property management companies in the city we have invested in. They have completely different styles but they both take care of the problems. We have a set amount that they can spend without calling me so I don’t hear about minor issues. I learned from some previous real estate investments that property management is not my strong suit. I applaud @Erik for managing the properties himself. Everything he says is true. For me, the managers are well worth 10%.

On the whole I am pleased with how this investment is working out. It is like any other business in that you usually (but don’t always) get out of it what you are willing to put into it. Even with management companies involved, I still spend 20-30 hours per month reviewing the properties performance and evaluating the financials to see if there are properties that need to be dumped or re-worked.

Working with friends can be difficult. Expectations need to be laid out up front and should be in writing. Having it in writing will save your friendship on some days.

Evaluate and purchase based on a worst case scenario, control costs and keep good management. Nothing to it!

As a follow up to @IPIN, the time to buy is when others are fearful. Now is a good time to buy certain properties. If the economy takes a second leg down, there might be a better time to buy but timing markets is a loser’s game. As the foreclosure rates continue to rise, more and more people will need to rent until the economy comes back for them and they can try ownership again. Finally, I will have to find the data to back me up on this, but if inflation gets high the best investment is one on which you owe a fixed rate. If you have a fixed rate loan but your rental income goes up 3 to 5% per year your cost stays fixed, but your profit (albeit in less valuable dollars) goes up.

Today, that same house goes for about $725,000 and it can still be rented for $3250. Is now a good time to buy that house?”

Wouldn’t the renter be feeling pretty smug now, having avoided the loss of $225k?

I appreciate your comment. You are certainly right about the management headaches. In fact, many of my clients who have owned real estate in the past got out of it for the reasons you cite.

Having said that, yes, I own rental real estate. I have always partnered with someone and I’ve given them the authority to manage the tenant issues.

It’s solved the problem for me and that’s why I spoke about it in the post.

I’ve given up some of the cash flow and upside but I’ve also given up ALL the headache. A fair trade off in my case.