Buying Investment Property

First a little story about buying investment property.

My wife and I stayed at a motel in Tucson for a week one winter. Our bill was for twice what it should have been, but since I already paid the correct amount in cash, I thought nothing of it. During our stay, we noticed that the lobby and swimming pool were unheated, and passed it off as frugality. A year later, however, when I read a news story about a new owner struggling to make the motel work, I realized what was really going on.

To prepare the motel for sale, the owner had been using the two most basic ways to inflate the appraised value: decrease expenses and increase reported income. Stopping repairs, turning down the heat, and quietly adding $100 in income to the books every day, might have increased the net income for the year by $45,000 more. With a .08 capitalization rate, that means the appraisal would come in $562,000 higher than it should have. Imagine the the poor guy who overpaid!

To avoid a mistake like this when buying investment property, you need to watch for tricks like these. You also need to understand the basics of appraising income property.

Valuation of income...