A bargain now will help you to better withstand fluctuations in property value over time so you can profit if and when you eventually sell in the future.
Whether working with a realtor or solo, you need to develop a deep understanding of what constitutes value or what truly is a bargain priced property in the neighborhoods you’re looking in.
(see Real Estate Comparables)
As an investor you can keep making low-ball offers and wait for the deal you want but great bargains generally get snapped up fast so you need to be able to act quickly once you’ve found that right property.
You also need to benchmark rental prices for comparable units in the area while getting a feel for rental demand in the area.
* The local classifieds are a great starting point for this and a few hours of research should give you a good basis for determining what you can charge and how long it will take to rent your vacant property.
* Just make sure to factor in for utilities (electric, gas, oil, water, sewer, cable, etc.) if they’re included in your area.
Depending on your area there may not be enough of a profit margin between what you will pay for monthly costs like your mortgage, taxes, and utilities and what you can charge a tenant.
Figure out what your spread needs to be before making an offer and analyze every house you consider against this amount.
My rule of thumb since I’m looking to make a yearly profit without much additional out-of-pocket investment beyond the down payment is that there needs to be at least a $500 to $600 in net income which is the difference per month between income and costs.
Of course the bigger the spread the better the deal as it means more profit. Don’t be emotional…let the net profit be your decision-making.
• Find partners with experience.
First time investors should find a real estate agent experienced in buying rental property that can help you locate profitable properties.
Look for real estate agents who expect to do business with you again and therefore they are going to be much more careful with what they show you and recommend you buy.
A second option is to go to local real estate clubs where you can collaborate with a more experienced real estate investor and close a deal together.
In this economy where financing is a challenge, an experienced real estate investor may be willing to work with you in exchange for the capital you can provide giving you the opportunity to get investment knowledge and experience firsthand from your partner.
Words of caution...make sure you check out your new investment partner. You want a partner will at least 10 years’ experience, is honest and has integrity.
Even if you don't partner with an experienced real estate investor you should still talk to them about pitfalls they've experienced or tricks of the trade they can pass on to you.
Something I found very interesting is to go down to the general district court in your area and listen to some landlord/tenant cases so you can get a sense of what kind of challenges you may face as a new landlord.
Here is a book I suggest you pick up before buying rental property: The Landlord's Kit, Revised Edition: A Complete Set of Ready to use Forms, Letters, and Notices to Increase Profits, Take Control and Eliminate the Hassles of Property Management by Jeffrey Taylor.
• Be aware of local rental regulations.
In many areas rental property is treated more like a business than residences and while 8×10 might be considered a proper bedroom size in your personal home it likely might not be considered appropriate for a rental property.
For example, in one county where you’re presently looking there might be a minimum ceiling height of 7′ and a square footage of 100 sq. ft. for bedrooms might be substantially different from what is required for a residential home.
Occupancy is calculated by the county based on the square footage of the unit, so what the local realtor tells you a four bedroom home may only legitimately be a two bedroom home if rented.
County enforced renovations can be a massive expense.
In fact, I personally know someone who paid nearly $50,000 to get two basement bedrooms and a bathroom upgraded to meet county codes!
He’d bought the house with a finished basement which the previous owners had completed without the required permit.
Because rental property is treated as a business he was not allowed to do the work himself but had to hire an architect to draw new plans to be submitted for approval, then a licensed contractor has to apply for the building permit and he hired licensed plumbers and electricians, to redo all the work.
It’s a safe to assume that you’ll need to bring your property into accordance with local rental regulations prior to renting the property.
Make sure you have the home checked out by a home inspector and check with the local counties office before you close to avoid making costly mistakes.
If you find any violation then knowing about these issues before hand will allow you to budget accordingly.
• Location, location, location.
If you’re buying rental property with the hope of it being rented out most of the time, location is going to be key.
Homes in high rent or highly populated areas are ideal. You will want to stay away from rural areas where there are fewer people and a small pool of potential renters.
Also look for homes with multiple bedrooms and bathrooms in neighborhoods that have a low crime rate.
My preference is what is referred to as a bread and butter home…about 1,500 sq.ft., 3 bedrooms two or more bathroom and a two car garage.
* Renters gravitate to a safe neighborhood and if they have kids they will want to be in a good school district. While you’re looking you will also want to think about potential selling points for your property for when you want to sell in the future.
Make sure the house is near public transportation, shopping malls or other amenities like community centers or parks. This will attract more and better renters as well as potential buyers for when you decide to sell in the future.
The more your house has to offer the more likely you are to rent you house fast and for top dollar to potential renters.
• Stay close to home.
Absentee landlords tend to find out about and resolve problems less quickly which in turn can make them bigger and more expensive problems.
Municipalities are not too fond of absentee landlords which usually also lead to bigger, more expensive problems, like fines and even citations.
If you’re first starting out I recommend buying rental property twenty minutes or less from you as an ideal distance. It allows you to appear involved and available to your tenants and local officials, be a visible part of the community and respond rapidly when repairs are needed.
With experience, you will be able to invest outside your area.
• CNN: Should you rent or buy?
• Look for simple construction.
That Victorian home you’ve been eyeing may feature lovely leaded glass windows but you’ll never find a suitable replacement at the local home improvement store.
A slate roof is a beautiful thing to admire but can be terribly expensive to repair or replace in the future and if the roof is very steep it will cost you a fortune.
A house which has simple, solid construction, where everything’s easy to access, uses relatively cheap, standard materials is generally the easiest and most inexpensive to maintain and fix.
* As most building contractors will tell you the shape of your structure provides a general measure of its complexity.
* Count the corners of your building. Four-corner buildings are often simplest to maintain and build. The more corners you have the higher the cost to maintain and build.
When you’re examining a potential rental property consider ease of access to the heating, cooling, plumbing, and electrical systems.
A panel or wall behind the shower allows quick access to plumbing in case of a problem whereas if that shower backs up to another bathroom you might be looking at removing a tiled wall or cutting a hole in the wall and then re-plastering it.
Avoid complicated landscaping because it’s expensive to maintain and your tenant will not look after it.
I look for properties with a simple, small lawn, nice manageable planting bed, and ideally a large rock garden or patio. Less maintenance for your tenants and for you will increase your profit.
• Look out for safety issues.
An excellent value for the money is hiring a licensed home inspector.
Home inspectors can help identify potential safety and maintenance issues and even provide ballpark estimates for correcting these issues.
* I would personally never purchase an investment property without having the property inspected because there are too many potential dangers lurking within and behind the walls which can turn your profitable rental property into a money pit.
Radon, lead paint, asbestos and mold are four primary issues you should be concerned with as they pose significant health risks and can be expensive problems to fix because they require specialists to remediate or correct them.
Many insurance companies will not even insure a property which it believes to have lead paint.
I’ve been hearing that in some areas the local code enforcement officials are doing tests which penetrate the top layers of paint to reveal any presence of lead paint below.
As a landlord there are certain things you need to pay special attention to in order to prevent potential lawsuits. Here are a few to look out for:
• Exterior stairways without handrails or where ice/snow/rain may cause a slip hazard
• Steep steps
• CO2 and smoke detectors (fire hazard)
• Obstructed doorways or exits (fire hazard)
• Broken windows/glass
• Cracks or unevenness in sidewalks, driveways, or walkways (trip hazard)
• Open electrical circuits, outlets or wires (electrocution hazard)
• Unfenced swimming pools (drowning hazard)
• Lack of GFI outlets near kitchen/bathroom water facilities (electrocution hazard)
As a rental property owner you have an increased risk of lawsuits so safety is a primary concern. Keep in mind that accidents will still happen.
Owners often choose to limit their personal liability risk by establishing each property as its own entity.
I always advise new investors buying rental property to consult a lawyer to ensure that your other assets will be protected in the event of a lawsuit.
• Have capital ready for deployment before buying rental property.
Speak to a mortgage broker or your financial institution about whether you have enough money for buying rental property and make sure you set aside enough money to handle the ups and downs that could come with investing.
Even if you plan to rent out the property count on paying the mortgage whenever there's a vacancy, or if you have to make unexpected repairs.
I recommend you have about six months of mortgage payments saved up so it's there if you need it and you can use that money for repairs.
Even if you're planning to fix up a home and sell it you may end up spending more on repairs or holding onto the property for several months in the current market.
• Build a buying rental property support team.
Don't wait until a rental property needs an emergency repair to find someone to handle them.
Line up contractors, maintenance individuals or Handy men who can take care of the different challenges that occur so you can simply call that individual when a particular issue comes up.
Another resource for buying rental property you may want to build is a relationship with a real estate attorney to consult with when buying rental property, and tenant issues.
Get a property management company to handle the day-to-day rental business and an accountant to help you understand the tax ramifications of buying rental property.
The more support you have the better you will be able to handle the issues that come your way.
Whatever you do, understand that buying rental property is an entirely different experience than buying your primary home.
Normally when you go to buy your own home your emotions usually are a part of the final buying decision.
When you are buying rental property you need to put all your emotions aside and ask yourself DO THE NUMBERS MAKE SENSE?
If they don’t move on to the next deal!!!
Please feel free to share your rental property experiences me.
Learning from each other is one of the most powerful ways to ensure your project succeeds!