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How to Buy Rental Property

April 22, 2010 By

If you want to make additional income and think that you have a good lead on an area of the city that would provide a great rental, you may be ready to add the title “landlord” to your credentials.  If you are a first time investor, you may want to research books about investing in rental properties for beginners. I also strongly recommend the excellent How to Purchase Rental Property for Under $5k.

Knowledge is power and although investment real estate can be fruitful, you must choose your type of property, your agent and most importantly, your location, carefully.  A book of this basic knowledge will inform you of things that you may not have otherwise considered. If this type of investment appeals to you, then here are some tips on how to buy rental property.

  1. Location, location, location. You have heard it before; real estate is all about location. If you plan on purchasing a multi-family rental property and renting it out for income, you must first find a place with a healthy–and hopefully booming–rental market. College cities and towns can be a great place to find rental property for sale since some students choose to live off-campus, and still more end up staying at least a year or two in the city where they went to school. Schools with large populations and graduate school programs are particularly good areas for a rental property investment. Other locations to consider are cities in general (since people want to live close to where they work and close to the exciting city life). Rural communities and suburbs (unless they are very close to public transportation into the city) can be less fruitful for an investment in rental property.
  2. Get an agent. Though you must do research about the community on your own, rely on a real estate agent to do much of the legwork, finding the best rental property or rental houses for sale. Have an agent show you the rental houses in town and get a firm grasp on what the market values are for one, two and three bedrooms. Make sure you pay attention to the caliber of renovation in each unit, as a three bedroom with new granite countertops and stainless steel may go for triple the amount of a bigger, but more run-down rental in the same area of town. Your agent will help you find good income property and will estimate the amount of money you might be able to generate with it.
  3. Get a terrific mortgage broker. When you find what seems to be the perfect rental, you may find yourself wondering, “Now, how do I finance rental property?” Learning about the types of rental property loans is crucial, particularly if you are trying to buy a rental property with no money down. This is when you talk to experts and learn from them. You should speak to a mortgage broker about a rental property home loan even before you step foot inside a real estate office so you understand rental property rates and how to finance your purchase. Knowing how much you can afford is the key to the process of applying for a loan for rental property. Make sure your mortgage is less than the amount of income you will get from your renters. Usually this will require a good deal of money down and a low interest rate. Bad credit makes it more difficult for buying rental property but with the right assistance it can be done. Speak to your advisor about the options for investment property loans, and remember to shop around for a mortgage rate–they can vary widely.
  4. Fixer-upper? If you are handy (or have the cash to hire a contractor), it may be a good idea to find cheap property for sale by getting a fixer-upper; then, convert it into rental properties. But, be wary. Sometimes the cost of renovation far outweighs the benefits of renting. Some owners find that after the work is done, they might as well turn the units into condos and sell. If you are not up for a full-on project, steer clear of “contractor specials” that arise on the market.
  5. Buy an existing cash cow. Cash cows are hard to come by, but if you take over a property that has existing tenants and a positive cash flow, you cannot go wrong as long as the building is not about to topple over. Sometimes older members of the population, tired of the landlord game, will give up their properties. Have your agent do a cash analysis of the rental income and the sale prices to determine which homes on the market may be a good deal, prior to investing in any of them. Have an inspector make sure the building follows all building codes and that it is in good shape before you purchase. I suggest getting all the inspections possible, including structural and pest–just to make sure you aren’t buying into a money pit. The more information you gather, the better.
  6. Legal advice. It is always a great idea to have legal counsel for any real estate decisions and transactions. A lawyer can also help you with any issues that may arise with your tenants, and will provide you with assistance during the closing of your investment property. Have a contact ready before you make any purchases and consult him or her with any questions that may arise during the buying and renting process. Not all people will use a lawyer, but it is a good idea.
  7. Make an offer. As always, you cannot lose by making an offer. If you see a property that you really like but it does not “cut it” on the financing side, make an offer anyway. If it is a buyer’s market you may be surprised at how willing the seller is to meet your price. You never know what will happen when buying a house.
  8. Property managers. The next step is to decide if you will provide the rental property management or not. If you decide not to manage your own, then once you secure a good investment property, you need to find someone to be your rental property manager. This person will be on-call for any problems that may arise in your building. If you live out of town, a property manager is crucial. If you do not want to hire a property manager, at lease formulate a list of reliable handymen (plumbers, roofers, carpenters, HVAC company) that you can call on should any problems arise. Bottom line: the basic decision you need to make is whether or not you want to and have the time to handle the management of your property or hire a property manager to do it for you.
  9. Get tenants. Have your agent advertise your rental properties at a price where you can make money on your investment. When you have your applicants, make sure you examine their credit, job history, references, and if possible, you should meet them prior to signing a property rental agreement. If you choose tenants that destroy or do damage to rental property or those that do not pay rent, you are not “gaining” with your investment. Always, always get a security deposit in addition to–or in replacement of–a last month’s rent when finalizing any agreement or contract. Put any and all stipulations in the lease (no smoking, no pets, etc.) and make sure the tenants understand the terms and sign where appropriate on the lease. If you are unable to take care of this transaction in person, then be very clear to your rental property management company about your expectations.
  10. Bank account. You will want to speak to your financial advisor about your bookkeeping, but remember that a property investment entails a whole new set of IRS regulations and accounting nuances. Check with your accountant about the best way to keep your property rental records. It is a good idea to line up all your help (mortgage broker, property rental management, real estate agent, lawyer and accountant) prior to making any purchases. Buying rental properties for investment purposes can be a great source of income, but as with everything, advance preparation is the key to success.

Good luck with your new source of income and I hope you enjoy being a landlord!

Popularity: 1% [?]

Filed Under: Investment Property

Bay Area Investment Property

April 18, 2010 By

Prices on property are dropping in many areas and while that is bad news if you’re looking to sell it puts the ball in your court if you’re interested in buying. Buying rental property in a down market can be a lucrative investment but there are some factors you should consider before you jump in.

From Consumer Reports, consider these four tips on how to find a good rental property:

  1. Find out where renters want to live. Location, location, location takes on added economic urgency when purchasing a rental property. Ask your real-estate agent to show you properties that have an established rental track record going back two or three years, during which vacancies were limited to no more than three months at a time. And make sure that you see the income and expense statements on the properties for at least two to three years to find out what has been spent on repairs and general maintenance.
  2. Do the math. Before you buy, figure out whether the rents will cover your expenses and leave room for profit. To determine how much yearly rental income you are likely to receive, ask real-estate agents for the going rates and scan the classifieds for comparable properties in the same neighborhood. Don’t forget to take into account the possibility that the property may be vacant for a month or so. Then subtract annual mortgage payments and operating expenses — insurance, utilities, projected repairs and maintenance and landscaping. Ideally, income tops outlays, and what’s left is called cash flow. If outlays top income, producing negative cash flow, the property is too expensive. Either negotiate a lower price or continue hunting.
  3. Assess the tax consequences. Anything left over after expenses is taxed as ordinary income. You can depreciate the cost of residential rental property, but not the land it sits on, over 27.5 years — even if it is increasing in value. Suppose you paid $400,000 for a triplex on a sliver of property assessed at $50,000. Depreciation would come to nearly $13,000 a year, or, put another way, you could have that much rental income without paying taxes on it.
  4. Choose tenants carefully. Neophyte landlords often fail to conduct a thorough background check on prospective renters, says Vito Simone, a broker at Simone Real Estate in Baltimore. Such a lapse can be costly if the tenant stops paying rent or damages the property. Don’t approve tenants until you have checked their credit and criminal histories and talked to references and employers. The lease should lay out rules about pets, parties, rent due dates and late fees. If tenants already occupy the property when you buy, you will have to honor their lease until it expires.

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Filed Under: Investment Property Tagged With: bay area, bay area investment property, bay area real estate, bay area real estate for sale, bay area realtors, bay area rental property, cory hill

How To Buy Bay Area Rental Property

April 18, 2010 By

Are you interested in learning how to buy investment property? Are you a first time investor?  Oftentimes, buyers who are new to investing are fearful of making errors that will cost them larger sums of money than the investment itself. This gives way to a natural hesitation about diving into the investment pool.  I will provide you with tips to learn about investment properties for beginners. The process is not difficult; you just need to follow the proper procedures.

Before we go any further on this topic, I do want you to understand, however, that buying investment property is a complex business decision not to be taken lightly.  You should study this subject in-depth prior to taking any action, and you should seek professional help from your attorney, accountant and real estate agent.  That said, it is always good to have a plan in mind before you start looking for help with your property investments.

  1. Choose the type of investment. Investment properties can include vacant land, rental houses, condominiums, apartment buildings, store fronts, commercial properties, industrial properties, mobile homes, mobile home parks, etc., each have varying degrees of risk and reward.  For someone just starting out buying investment property for rental income, a rental house or small apartment building is probably the best choice.  This type of rental property offers the opportunity for income on a regular basis, has shorter vacancies on average than commercial or industrial property, is less regulated than condominiums and mobile homes in most areas, and there are many places that you can get information and education on becoming a successful landlord in small residential properties.  It is a good place to start, and it is the investment type we will be concentrating on in this article.
  2. Choose an area. Some people have a difficult time deciding where is the best place to buy investment property. Look for a property location that has a diverse economic base offering many employment opportunities.  After all, the tenants will need an income in order to reliably pay rent.  The area should offer good schools, shopping and transportation.  If all three areas are satisfactory, then try looking at houses for sale so they will rent easily. Another possibility is locating and buying condominiums for sale. This, however, would involve much more property management on your part than buying a house would. Ideally, the location you choose will be an easy drive from your residence so that you can keep an eye on your investment.  And, the area should be safe.  Profits and money are not worth risking your life for, and the quality tenants that you want to attract do not want to risk their lives either. Tip: When you investigate an area, get copies of the local newspapers and the city newsletters for the last few years so that you will be aware of things that are happening that may affect the value of properties.  Changes in the laws, land use planning, zoning changes and many other things can change the value of property.  Talk to people in the community to find out what issues are being discussed.  Talk to other investment property owners to find out how the community relates to landlords.  Due diligence in this search can save you a lot of time and money.
  3. Choose a location within the community. When buying a good investment property, the three most important things are “location, location, location.”  Location within the community will determine the ease with which you rent or resell the property.  It will determine the price that you can command.  And, it will determine the quality of customers you attract.  It is one of the things about real estate that is unchangeable, so you have to choose right to start with.
  4. Research property values and rents. This information is available from real estate agents, as well as from a variety of other services in most areas.  You will want to call rental ads in the paper and talk to local landlords about what they are offering, how much they are charging, and what their experience is with the market.  Some of them may be open to selling their property and may even be willing to finance it, so be sure to ask.
  5. List the criteria an investment will need to meet in order for you to be interested. For instance, single family home with at least 3 bedrooms, 2 baths, and a 2 car garage which will rent for enough to cover the mortgage payment.  Taking the time to define your search ahead of time, including the finance rates for your loans, will keep you on track and shorten your time to success.
  6. Find a competent real estate agent that is in the area, knowledgeable about investment property, and willing to work. Make sure you get referrals. Interview agents before you choose one.
  7. Analyze the property. When you find a potential property, gather all of the data that you need to determine the seller’s motivation, what the property will rent for, what the expenses will be, and who pays for what.  With commercial investment properties that you want to use as rentals, such as apartments or condominiums, it is imperative that you get all of the information the seller has to offer.  Then, when they are done providing information, it is your job to go check it all out. You want to make your offer is based on actual rents and actual expenses, not sloppy or fictitious numbers.
  8. Research financing options. Financing investment properties could be challenging if you do not have any or little money to put down. If you have already developed a solid banking relationship with your local bank, things will go more smoothly with both your investment property loans and finance rates. You need to know your investment property finance rates are typically based on your credit score so it would be good for you to check your current score prior to proceeding further. If you are running into obstacles finding investment loans for property, do not give up. With extra time and perseverance, you may eventually find a perfect lending institution for you; one where you can develop a lifelong banking relationship.
  9. Make an offer. Make your offer contingent on a review of all documents related to the property, a thorough inspection of all units by yourself and a professional inspector, and approval of the terms of your contract by your accountant and/or your attorney. If your offer is accepted, then your next task will be deciding if you want to play a role in the rental management team, or hire another professional. You need to consider your decision carefully as investment property management is time consuming and having prior knowledge in this area would definitely be beneficial.

Hopefully, you will find the perfect property investment and will receive adequate financing.  At that point, you will have successfully become a property investor and it is time to enjoy your new-found wealth through your income property, whether building your future retirement or supplementing your existing income.

Popularity: 20% [?]

Filed Under: Investment Property Tagged With: bay area, california, investment property, real estate, realtor, rental property
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