The primary goal when buying investment properties for the purpose of renting them is acquiring income-producing properties that put your money to work by simultaneously producing revenue while paying off debt associated with the property.
To start, you need two things:
1. Motivated sellers who are willing to sell below market value
2. An effective method of analyzing properties, so you know what you’re getting into.
One of the most important factors you must take into consideration are “projections,” or informed estimates about how profitable a property may be in the future. To do this, you need to research and understand what the income vs expenses will likely be for this particular property.
Your projections will likely not be perfect! It’s impossible to predict exactly how things will turn out, but when you use realistic data and assumptions, the result will be fairly accurate projections. Your actual results may not be exactly what you had predicted, but they should be somewhat similar.
Do not purchase a property that does not have cash flow! That’s going to be most of them. These are some things that can have a negative effect on a property’s profitability:
· Paying too much for the property
· High property taxes
· High interest expense
· High Insurance costs
· Maintenance and repairs
· Home Owner’s Association (HOA) Fees
· Unforeseen problems, like damage from natural disasters
The following is a general list of steps you should take in deciding whether a property is a sound rental investment:
1. Determine the rent and revenue
a. Gross income before expenses
2. Determine purchase price and type of financing
a. Cash purchases greatly simplify the process
b. Obtain a pre-approval letter from your lender if third-party financing is needed
3. Factor in all expenses
a. Property Taxes
e. HOA Fees
f. Property Management
g. Maintenance & Repairs
4. Calculate Taxes and Depreciation
a. Use tax history from public records as a guide
5. Executive Summary
a. Determine net revenue
b. Establish a list of pros and cons
c. Make your decision
6. Make an Offer
a. Consult your real estate agent about a fair offer amount
i. You or your agent can use the MLS to conduct a Comparative Market Analysis on the property, based on similar homes that have recently sold in the area.
b. Sit with (or email) your agent to complete and submit an offer to the listing agent
7. Obtain Financing (if necessary)
a. Lender will require appraisal of property
i. If your agent has done a proper CMA, your offer should be sound.
8. Do Your Due Diligence
a. Inquire about current tenant (if there is one)
i. Was there a background/credit check performed?
ii. What does his/her rent payment history look like?
b. Check out the local schools, businesses, neighbors, crime rate, etc.
c. Have the home inspected
d. You can back out during the “due diligence” period, should you decide against purchasing the property at this point.
9. Closing Process
a. Title company will perform a title search on your behalf.
b. Closing Table
i. Seller will transfer to buyer (you):
1. Current building inspection certificate
2. Copy of the Current Tenant lease, if there is one
3. Tenant Unit Condition Checklist
4. Original Tenant Application
5. Tenant Security Deposit
6. Keys to the House
ii. Buyer (you) will complete with the new property manager, if there is one:
1. Management Agreement
2. W-9 form
3. Direct Deposit information
4. Keys to the House
5. Security Deposit
Keep in mind:
1. It is typical for rental properties to cost you money, in the beginning.
2. There will always be maintenance required.
a. Set money aside to take care of issues that may arise.
3. You should consider keeping a six-month rent reserve.
a. Tenant may not always pay rent, or may pay late.
b. You may have to evict a tenant. If so, your property may sit vacant for 2-3 months or longer while you find a suitable replacement.
Purchasing rental properties takes a lot of research and calculation. It is not as easy as it looks, but successfully renting your income properties to the right tenants has been proven as a great method of generating multiple streams of permanent income.