In my post “I Know You Have Questions”, I asked the readers to send me questions or topics that they are confronted with often. John Gall asked two questions which I can answer together: “1. Are any suburbs in particular gold mines for rentals? 2. Are outer suburbs with inexpensive newer housing stock like Otsego and St Michael, Albertville still viable for rentals for single family homes?”

Investment property in the suburbs must be analyzed just like any other property in the metro Twin Cities, MN. There are several key points to consider before buying any property (especially ones in the suburbs):

1. Is the property financially a good purchase for price, cash flow, and potential capital appreciation?
2. Are there other rentals in the area? Competition can be helpful in attracting new tenants. If you are a rental island in the sea of single family houses, it may be difficult to get anyone to be interested in your apartments. Also, setting your rent may be more difficult without other rentals in the area.
3. When it is time to sell, it may be difficult to find comparable investment properties for the mortgage company to use when getting an appraisal. This in turn could deflate the price you can sell your property at.
4. Newer housing can appear on the surface to be a nice alternative to the worn-hard properties in Minneapolis or St. Paul. Often, though, these properties are priced higher than older buildings in the city, thereby reducing or eliminating any cash flow.
5. As I have wrote before, you should also consider where those suburban properties are relative to your own home. They may look appealing, but if they are 45 minutes from your house, you will not anxious to drive there often.
6. Lastly, the price of gas has doubled over the last couple of years and housing starts are at record lows. Most experts agree that the suburbs are the worst hit, as people contract back into the city, wanting to be closer to their jobs and not able to afford that bigger, new house in the suburbs. Consequently, the retail businesses in those suburban areas close, do not expand, or reduce their work force. Because renters generally live close to where they work and renters most often fill retail positions, those prospective tenants will not move into the area where the job market is tight or shrinking. Logically, this reduces the need for apartments in those areas, thereby making suburban investment property more vulnerable in a down market.

I encourage you to evaluate each one of these points before buying MN investment property. I believe that suburban investment properties need extra scrutiny to insure you make the right purchase decision.

I never write (or even think about) New Year’s resolutions, but all businesses (and investment property is a business) need to set goals and measure themselves against those goals, frequently. After reviewing my cash flow and financial results for 2007, I decided that I need to make some changes and commitments going into this next year. Here are some key items I want to accomplish in 2008:

1. Cut tenant bad debt by 75%. I have tenants that pay throughout the course of the month and most of them do eventually pay (see accounts receivable goal below). Unfortunately, every so often, I get one tenant that will catch me with my guard down and not pay as planned. At this point, they may owe me 1 month’s rent, but because the eviction process can take 3 weeks, they will owe me at least 2 month’s rent before they are finally out. I plan to accomplish this by firmly setting the 15th of the month as the last day before I start the eviction.
2. Reduce total accounts receivable to less than $1000. Not only do I want to shorten or eliminate my bad debt, I want to reduce the number of tenants that owe me some portion of back rent. I will be accomplishing this by consistently applying late fees to any outstanding balance owed after the 3rd of each month (per my leases). A stern letter is going out to all tenants as I write this post!
3. Reduce vacancy rate to less than 1%. This equates to less than 4 vacant months across my 336 rental months. I will be working to more aggressively market each apartment sooner in the process.
4. Develop a more realistic budget for 2008, print actual vs budget reports each month and analyze them. Many landlords look at the cash flow or expenses on a property when they buy it and (I would argue), very few ever print a report to confirm the properties are performing as expected. I am committing to you (and my wife) to do this every month.
5. Buy three Investment Properties (MN). Because of the quantity of property I own and with the new mortgage industry changes, it will require me to think/work outside the box to make this happen.
6. Reduce my maintenance expenses. I am realizing that my cash flow from my MN investment properties was strongest when I was doing the property maintenance myself. During 2007, I found a new handyman who I now call for every plugged toilet, kitchen remodel, and burned out light bulb. In 2008, I plan to take back some of the maintenance when it makes sense and does not interfere with my real job of selling Minnesota investment property.

These changes are designed to improve my cash flow, lower my stress, and strengthen my business. All investment real estate owners need to look critically at their business yearly and spend the time to set strategic goals and directions. Then when the toilet is overflowing or the tenant is not paying rent, you can work tactically to fix the problem.

Here is another question asked by a reader, to my post “I Know You Have Questions”: “If you had $45k to invest, would you buy one property with 20% down to get some cash flow or buy two with 10% down and break even on cash flow or have a small negative cash flow.” Truthfully, I would do neither:

In this current market, in Minnesota, there are so many amazing investment property deals out there that I don’t believe you need to settle for a property that has little or no cash flow. In fact, even in the best market, I would never buy a property that had negative cash flow. In the recent past, I have heard of some mortgage brokers proposing that you should take some of the money that you put into your 401k each month and divert it to paying the negative cash flow on a property each month. That is rubbish!

Who wants to be dealing with tenants and toilets and then, on top of it, take money out of your pocket each month to support the building? If we lived in California, I may agree that you will need to accept negative cash flow, but it is not necessary when buying Minnesota investment property. If you look at all the foreclosures and short sale deals out there right now, you can almost throw a rock in some neighborhoods and hit a good property investment that cash flows.

One of the best opportunities out there, right now, is to find a property that is vacant, needs work, rehab it, and then rent it out. I work with a realestate investor group that has been flipping properties for about 18 months. They have accumulated 76 rehabbed single family houses that all cash flow in their portfolio. They are buying houses in Minneapolis for $.30 on the dollar, spending $20-40k to rehab them, and renting them out for a nice monthly cash flow plus around 75% LTV.

Please do not listen to anyone who tells you that you must accept negative cash flow in this market. Get out and see for yourself. In fact, let me make this offer: Send me an email with your search criteria and I will send you back a list of properties that cash flow. I am happy to help anyone find a good MN investment property.

In my post “I Know You Have Questions”, I asked the readers of my site to send me questions or topics that they are just dying to ask or are confronted with often. John Gall asked: “If you could purchase only one property would you choose a 4 bedroom and skip 3 bedrooms or consider all looking for the best deal with the best cash flow or overall appreciation potential?” Actually John, I have two answers to that question:

My process always starts off with figuring out what neighborhood area I (or my customer) want to buy in and then what type of property. With that information, I go onto the MLS and export anywhere from 40 to 400 properties into a spreadsheet (see and click at right) that I have designed to sort and filter the properties. The best property investments based upon both cash on cash return (appreciation potential) and cash flow sort to the top.

If I am wearing my financial hat only:
Once I have identified the top financial performers, then I review the MLS listings and pictures to quickly determine if this may be a property we want to see. If we see it and the condition, cash flow, and location are decent relative to the price, we buy it. We never talk about bedroom count.

Conversely, if I put my landlord hat on only:
I am mostly looking at the investment property features. In fact, I don’t own anything with 4 bedrooms and I prefer 1-2 bedroom units. I do have many 3 bedroom apartments and for whatever reason, those seem to be my biggest management nightmares. Without saying anything about the type of renters in the 3 bedrooms, it just seems like those units require more phone management time and more maintenance time. I have met some landlords that own 4 and 5 bedroom units and they agree that those size units take the most abuse (as you may have 4-10 people living in one apartment-legally).

Unfortunately, if you owned a 1-1 bedroom duplex or a 1-2 building it is not going to make as much (if any) cash flow compared to a 3-3 bedroom. I understand that, so most of my duplexes are 2-3 or even 3-3. In the Twin Cities, you are typically going to find 2-2, 2-3, or 3-3 bedroom buildings. If you go to Southern Minnesota, to somewhere like Hastings or Red Wing, you will only find 1-2 bedroom investment properties. Additionally, with rents anywhere from $900-$1100 for a 3 bedroom apartment in Minneapolis, those units are my biggest concerns when rent comes due and when leasing.

At the end of the day, it is really a matter of personal preference. While analyzing the numbers is critical to your success, if you are not comfortable with the property or area, you should not buy it.

Jeff Schnepper at MSN Money writes a great article as he puts it: “I’m not singing a song of disaster. I’m singing a song of prudence.” In years past it was easy to make money in real estate. Just buy it and hold on for the appreciation. Well, in this new market you can’t assume you will see double digit appreciation and expect to cash out fat and happy in the end. You need to do your research and buy wisely. Jeff gives us some examples of that in his article: 3 Ways you can go broke in Real Estate.

Here is a recent question I received: “When screening a tenant, if they have bad credit but a solid rental history would you rent to them? Do you recommend credit checks or focus more on criminal and rental history.” I originally just shot back an answer in a comment, but then decided it probably needs more attention. I have written about Tenant Application-Red Flags, My $2000 Tenant Screening Mistake, and even Screening Tenants Using MySpace, but I have not addressed what you do when you actually receive a rental application and what to look for.

When I meet a prospective tenant, I tell them that I require a completed rental application and that the application fee is $25, non-refundable. I explain that in Minnesota I use a service that gives me a report on credit, criminal, and rental history and that I am looking for anything recent or significant. I require each adult to fill out an application regardless of who is on the lease and I ask them up front if there is anything in their background that I may find.

Most importantly, I require the prospective tenant to fill out and sign a copy of my Rental Application Policies. This document tells the prospective tenant (in writing) what I am looking for when screening tenants. In fact, it is required by law when leasing Minnesota investment property. It can also act as a liability shield if someone tries to sue you for discrimination.

Once I process the application, I find that most of my tenants have less than perfect credit. In fact, some have terrible credit. If the following items are satisfactory, I will overlook their bad credit (assuming they have no criminal or rental red-flags):

• I review the circumstances of how they got the bad credit (collections, late payments, large debts). Very often tenants have utilities, cable bills, or cell phone bills in collections, which I am not overly concerned about.
• Is their income less than 40% of the rent amount?
• If they have a stable long-term job, it speaks to their ability to pay the rent.
• The length of time they lived at their previous address also tells me about their stability.
• The amount of the rent at their previous address compared to my rent. If they are increasing their rent amount significantly, they should be able to justify the increase and have a plan to pay for it.
• Lastly, I contact their current landlord to confirm they pay their rent on time.

Any red flags in the above items will trigger a denial. The following items, in other areas, may trigger a denial:

• If they have any larger items in collections (cars, boats). Again I look really hard at their employment and income.
• A derogatory report from their current landlord is an immediate denial.
• Any felonies in the 10 years or any sexual assault related charges ever. I review the charge or conviction on gross misdemeanors and other violations.
• Any evictions in the last 5 years will most certainly lead to a denial unless the judgement was satisfied.
• If the prospective tenant does not have the ability to pay the damage deposit and first month’s rent.
• A new search that I do, is searching for their email address and cell phone number in Google and their name in MySpace.

While this process is not perfect and I probably have a few false-positives where I deny a tenant that may turn out good, I have had my share of bad tenants and it is cheaper to screen a prospect up front than evict a tenant later!