Buying Investment Property

Buying property as an investment is different from buying a home to live in. Here's what to consider before jumping into real estate investing.

Investment vs. Primary Residence

Different Goals

Primary residence:

• Shelter and lifestyle
• Appreciation is a bonus
• Emotional connection matters

Investment property:

• Cash flow and/or appreciation
• Returns drive decisions
• Emotions should stay out of it

Different Financing

Investment property loans differ:

• Higher down payments (typically 15-25%)
• Higher interest rates (0.5-0.75% above primary residence)
• Stricter qualification requirements
• No VA or FHA for pure investment

Evaluating Investment Properties

Cash Flow Analysis

Will the property generate positive cash flow?

Monthly Income:

• Expected rent (research comparable rentals)

Monthly Expenses:

• Mortgage payment (P&I)
• Property taxes
• Insurance
• HOA fees (if applicable)
• Property management (8-10% of rent)
• Maintenance reserves (5-10% of rent)
• Vacancy allowance (5-10% of rent)

Cash Flow = Income - Expenses

Key Metrics

Cap Rate (Capitalization Rate): Net Operating Income ÷ Purchase Price

• Higher = better return
• Typical range: 4-10% depending on market

Cash-on-Cash Return: Annual Cash Flow ÷ Total Cash Invested

• Measures return on your actual cash investment
• Accounts for leverage

1% Rule (Quick Filter): Monthly rent should be at least 1% of purchase price

• $200,000 property should rent for $2,000+
• Not always achievable in California markets
• Use as a screening tool, not a rule

Market Considerations

Rental Demand

Research the rental market:

• Vacancy rates in the area
• Rental price trends
• Tenant demographics
• Economic drivers (jobs, schools, military)

Appreciation Potential

Some investors prioritize:

• Growth markets over cash flow
• Value-add opportunities
• Emerging neighborhoods

Landlord-Tenant Laws

California has strong tenant protections:

• Just Cause eviction requirements
• Rent control in some areas (AB 1482 statewide)
• Security deposit limits
• Required disclosures

Understand your obligations before buying.

Property Selection

Ideal Investment Properties

Look for:

• Good rental demand
• Low maintenance needs
• Desirable location for tenants
• Room for rent increases
• Manageable size for your experience level

Red Flags

Be cautious of:

• Below-market rents (may indicate problems)
• High vacancy areas
• Deferred maintenance
• Problem tenant history
• HOAs that restrict rentals

Financing Options

Conventional Investment Loans

Standard approach:

• 15-25% down payment
• 30-year fixed available
• Credit score and income verification

DSCR Loans (Debt Service Coverage Ratio)

For investors:

• Qualify based on property income, not personal income
• Higher rates
• Good for scaling portfolio

House Hacking

Live in one unit, rent others:

• Use owner-occupied financing (lower down payment)
• FHA for 2-4 unit properties
• Build experience while living there

Management Decisions

Self-Management

Handle it yourself:

• Save 8-10% management fee
• Direct control
• Time commitment
• Need to learn landlording

Property Management

Hire professionals:

• Hands-off investment
• Cost reduces returns
• Good for out-of-area investors
• Frees your time

Tax Considerations

Investment properties offer tax benefits:

• Mortgage interest deduction
• Property tax deduction
• Depreciation (paper loss reducing taxable income)
• Expense deductions (repairs, management, etc.)
• 1031 exchange for deferring gains

Consult a tax professional—investment property taxes are complex.

Getting Started

My recommendations:

1. Educate yourself before buying anything
2. Run the numbers conservatively
3. Start small to learn the ropes
4. Build reserves for unexpected expenses
5. Treat it like a business

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Considering investment property? Contact Greg Franklin or call (559) 816-7780 to discuss opportunities in the Central Valley.