2 Ways to Buy an Investment Property

By Nick Krautter

Nick Krautter is a Portland-based real estate professional, market analyst, and author of The Golden Handoff: How to Buy and Sell a Real Estate Agent’s Business, which debuted number one on Amazon for mergers and acquisitions.

If you’re thinking about buying an investment property, there are basically two ways to look at it. Both can build real wealth over time, because in the long run, odds are you’re going to come out ahead with real estate. But the two approaches treat one thing very differently, and that difference is what I want to walk you through today. I’ll also tell you which one I prefer and why, especially if this rental won’t be your only source of income.

The long-term payoff approach. The first way to look at investing is simple: you buy a property, let the rental income pay off that mortgage over 15, 20, or 30 years, and at the end of that stretch, you own it free and clear. Once that mortgage is gone, your income from the property jumps dramatically. It’s a very valid way to invest, and I’ve had a lot of clients build serious wealth with exactly this kind of long-term perspective. If you’re closer to retirement or cash flow today isn’t your priority, this approach can make a lot of sense.

Why I prefer cash flow first. My preferred method is to have positive cash flow from day one. For most people, a real estate investment isn’t their only income, and it’s tough for a single rental to offset all of their expenses unless they’re putting in millions. A typical return on a rental property runs about 5% to 7%, which usually isn’t enough for most people to live on. So I’d focus on properties that are cash flow positive from the start, because there are always surprises and bumps along the way.

Surprises are part of the deal. Let me give you a real example from my own portfolio. I need to replace a roof on one of my properties, and that’s going to eat up the profit from a couple of years on that place. If I were cash flow neutral or negative, I’d be paying for that roof straight out of my own pocket. Instead, I’m taking the profit that the property already earned, reinvesting it into the new roof, and coming out even.

That roof protects the asset and improves its value, and it’ll probably take me another year to fully recapture the cost, but I’m never writing a check out of pocket to do it. The property is paying for its own maintenance and improvements while still paying down the mortgage and still throwing off positive cash flow.

Appreciation works either way. In both approaches, you’re going to benefit from decades of appreciation as the property gains value. The difference is that when you’re cash flow positive early, you stack that steady cash flow on top of the appreciation over the entire life of the investment. Add those together, and it usually comes out to more money in your pocket. It’s why, when I’m sizing up a rental with someone, I start with whether the property pays for itself from day one.

If you’re thinking about investing, I’d love to talk through your options and how the process works. One tool I’d point you to first is our APOD calculator, which we’ve really simplified. It’s a great way to run a first look at a property, or to compare a few of them side by side to see which one pencils out better for cash flow. You’ll find plenty of other resources on the site, too.

Give me a call or text at 503-901-8100, email me at nkrautter@gmail.com, or visit sellpdx.com, and let’s figure out what the right investment property looks like for you.