Thursday, November 7, 2013

20 Tips to buying your first rental property.

Investing in a rental property can be one of the best long-term financial moves you ever make, but it’s not without a fair share of risk and hard work. They say most first-time landlords actually lose money, or at least get supremely frustrated, because of the 4 T’s.  What are the 4 T’s?  They are taxes, termites, tenants, and toilets!

For those reasons, it’s best to do a fair share of research about buying and owning profitable rental properties.  An experienced, local realtor can be your greatest asset, and also talk to other successful long-time landlords and read up on the subject.  You’ll hear plenty of conflicting information, but that’s because there are different strategies based on where you live, your cash position, your capacity to fix up a property, etc. 

For the average first time investor, here are some general parameters for purchasing a rental property, so that you’ll be able to put cash into your pocket, not losing it because of the 4 T’s!
  1. A standard 3-bedroom/2-bathroom house is your best bet for a single-family residence.  Usually a whole family can’t fit into a 2-bedroom house, and 4 bedrooms and up typically have a higher price tag-to-rent payoff.
  2. Depending on your strategy, also check out halfplexes, townhomes, duplexes, triplexes, and even fourplexes, all of which still qualify for residential )non commercial) real estate purchases.  Definitely consult your realtor on this to learn the pro’s and con’s of each of these properties, because hidden issues like HOA fees and managing multiple tenants may make or break your investment. 
  3. Be careful with condominiums.  In some markets, they are amazing investments because you can get them so cheap.  But often it’s very hard to get a mortgage loan on a condo (especially if the renter-to-owner ratio is too low) and byzantine HOA rules and restrictions make them unattractive.  Remember this: people buy condos because they are new, easy, and cheap.  After the first wave of ownership the new part and often the easy part go away.  However, condos can be great if you can scoop them up for cash, and your maintenance and landscaping costs may be nil.
  4. Look for a humble house in the best neighborhood you can afford, not the best home in a marginal neighborhood, where appreciation won’t work in your favor.  Working class neighborhoods are great because there are always families who work hard, pay their bills on time, and need a safe, nice place to live.
  5. Stay away from high-end rental properties.  They rarely cash flow because your initial investment and mortgage payment are too high.
  6. NEVER bet on appreciation – only purchase a property that pencils out to cash flow immediately.  That’s the mistake too many of us made in the past, pre-mortgage bust; we bought homes betting that they’d appreciate quickly, even though they didn’t make money (or break even) in the short term.  That’s not investing – that’s gambling!
  7. When factoring all of your income and expenses for the property, make sure you over-estimate all expenses, probably by about 25%.  Factor in 3 months vacancy a year, and plan on the water heater blowing, unexpected roof fixes, etc.
  8. A house near parks or elementary schools is gold!
  9. Don’t buy on a street that is too busy.
  10. Don’t buy an older house – they require WAY too much fixing and unexpected maintenance.  Depending on the era, they might have nob and tube electrical, rusted pipes, asbestos, etc.  Your rental property doesn’t have to be brand new, but post 1978 is a good bet because construction was modern enough and you won’t have issues with lead paint.
  11. Make sure you get a great home inspector to check out the property, but spend extra attention on the roof, central heat and air systems, foundation, electrical, and plumbing.  Review seller disclosures carefully and get roof certifications or warranties when possible. 
  12. Have the seller pay for a detailed pest inspection, and if there are problems (like termites) request that they pay for a year's pest control service.
  13. As you are buying the property, ask the realtors if you can put up a “For Rent” sign in the front yard, even when in escrow.  Definitely put one up when you close on the property, even if it still needs some work – you probably will get a lot of phone calls from drive by traffic and have a renter the first day it’s ready.
  14. Find a house in close proximity to shopping, people’s workplaces, highways, etc.  Don’t buy a house that’s too isolated.
  15. Make sure the house you buy is consistent with the neighborhood.  For instance, don’t buy a 2-bedroom house when all of your neighbors are at least 3 bedroom homes.  Your house appreciates in value only based on closed comparable sales, as done by a licensed appraiser.  If there are no similar properties, there are no comparable sales, and the value won’t go up.
  16. Try to find a house with a clean, open, standard floor plan.
  17. Look for a property that you can improve with easy projects: paint, tile, landscape, fixtures in the kitchen and bathrooms.  Those are easy, cheaper than big, complicated fixes, and most of the time you won’t need a permit.
  18. Stay away from homes with “funky” rooms.  Homeowner additions, converted porches, garage conversions, etc. are all always liabilities, not assets, and never count the square footage to these rooms in your calculations.
  19. Owners vs. renters.  If you’re purchasing a single-family residence, try to buy in an area with a healthy portion of homeowners, not just renters.  Homeowners usually take more pride in their homes and improve them more, because they have pride of ownership – and a big financial interest.   
  20. My best advice?  The old adage, “Location, location, location,” is true – buy in the best neighborhood you can!

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