The 5 SECRETS You Must Absolutely Know
Before You Buy A Rental Property!
Property Investing is serious business. If you are eager to buy a rental property and become a landlord, there are some things you NEED TO KNOW in order to become successful. Make money in this business starts with BUYING RIGHT! You’re probably getting set to tune me out because you’ve heard that before. I know you’ve heard it before! So why am I telling you such a basic fact again? Look, there’s a reason that every guru worth his salt, pounds it into your head repeatedly. Why? Because it’s the #1 mistake investors make ALL the time!! The purpose of this report is to help arming you with the knowledge you need to ensure you make a solid investment! With that said, let us just right in…
SECRET # 1 — Location, Location, Location
Tenants want to live in nice neighborhoods with desirable amenities. Meaning they want to be close to hospitals, schools, parks, and work. They want convenient service and goods providers like grocery stores and dry cleaners.
What they don’t want is a run down neighborhood tucked in and/or behind the mechanic shop and right across the street from the liquor store where the boys are constantly hanging out drinking their malt liquor. Yeah I said it. It not only happens but it decreases the chances of you finding renters. Lower income neighborhood incomes are ok, but when you’re looking in a lower income neighborhood look to the one that is stable or improving – obviously avoid neighborhoods that are declining. To be blunt so what if they have a lower purchase price, they also have lower rents that can also be very difficult to collect. In fact when it comes to troublesome tenants I have two words for you. Section 8! Enough said.
Don’t be afraid to buy nicer places for rental properties. By finding neighborhoods that are stable or improving, it will be easier to rent the property for higher rents. People who can afford $1000.00 a month without assistance are more likely to pay the rent on time instead of someone who can only afford to pay $400.00 a month. One of life’s little burps in the latter case and you won’t be getting your rent on time, if at all. If this happens enough times it can lead to the difference between being a landlord or a slumlord because you won’t have enough money set aside for building maintenance and improvements.
TIP: Look for homes by colleges. Especially colleges with a housing shortage! You can make a killing in by renting out each room individually!!!
SECRET # 2 — Inspection
Inspect any potential purchase thoroughly! Walk through the house be sure to check the floors, walls, tiled areas, ceilings and foundations. Look and make notes of any stress, cracks, separating joints, water damage, once again be thorough! Test the electrical outlets, the appliances and plumbing to make sure it all works properly. Look for reasons NOT to buy!
Because of the nature of multi-family homes and/or the type of financing you will be using, you may be required to hire a professional inspector. I still recommend doing all the above on top of hiring an inspector. Make sure this professional is trained and comes with a knowledgeable background. Don’t be afraid to ask them what certifications they have. Make sure they are licensed, bonded, insured and hold up the industry’s standards.
SECRET # 3 — Do Your Due Diligence
Local Rental Regulations – If you are about to buy a property, consider and study up on what your local regulations are. Many cities and towns consider rental properties to be more like businesses than residences and are treated as such. Make sure your property complies with Zoning and Fire Codes and if there are inspections required by local officials for rental properties, and does this property pass those inspections. You never know the real reason the current owner is selling the property.
For instance if you have a converted basement, does the basement have the required size and opening radius to meet egress standards? Also what are your legal height requirements for finished rooms? If you already bought a rental property and the upgrades or any improvements were not finished to code by the previous owner, your town or city official can actually require that all finish work be upgraded. Or worse he/she may require you to tear it all out and start over. If you have tenants in place living there, you’re not let off the hook in fact you can be forced to relocate them at your expense and fined if you refuse until the city standards are met.
This can be very expensive if you buy a house without properly inspecting the property and its history. Make sure that all rehab work and or building improvements such as adding basement bedrooms and a bathroom were done with proper permits. If you live in a city or town that treat rental properties as businesses, chances are you won’t be allowed to do any of the work yourself. Meaning you will have to hire an architect to draw and seal the plans and then you will have to hire the general contractor to make sure the plans are properly approved by the city, the list goes on.
Other things you may consider when considering a rental property.
- Cement Slab Construction – no crawlspace or basement means ground floor plumbing is an expensive pain in the lower posterior region to access or replace.
- Laundry on the second floor – Should the hose leak or machine overflow, congratulations on having to remodel the entire first floor.
- Off street parking – Is it available and is there enough space for the number of tenants you will have residing there.
- Ease of access/materials – Remember a house that has solid, simple construction where the plumbing, electrical, heating and cooling systems are easier to reach and that uses standard materials is generally the most inexpensive and the easiest to maintain. 4 corner buildings are the usually the simplest to maintain. The general rule is that more can go wrong with more corners or more complex buildings. Bottom line is that maintenance and repairs are crucial to the success of you investment!!!
- Hardwired Smoke detectors – These are becoming a regular requirement. Does your building have them? What will it cost to put them in?
- Certificate of Occupancy – For a fee many towns or cities require a new one for every change of tenants plus a yearly CO inspection (for yet another fee)
- Good Rental History – Whenever buying rental properties, you must check the rental history. Check to see, do the tenants pay on time and what is the average length of stay. Bear in mind that location will affect your turnover times.
All these factors and many more can affect your purchase price and you need to account for them so you can, say it with me, BUY RIGHT!
SECRET # 4 — Tax Advantages
With rental properties, there are many tax advantages. In contrast to deductions for your primary residence, which are usually only home mortgage interest and property taxes almost everything else is tax deductible. This includes depreciation and operating expenses, such as repairs, maintenance, and insurance.
When you buy your rental property consider, acquiring it through a tax-deferred 1031 exchange to avoid paying capital gains tax on the appreciated value. The rules for properly doing a 1031 exchange are challenging and complex. Be sure to hire an attorney and/or tax advisor who is an expert at these kinds of transactions.
SECRET # 5 — Appreciation vs. Cash flow
So which came first the chicken or the egg? Before you acquire any rental property, ask yourself “what’s more important to me, appreciation or positive cash flow?” Bear in mind that multi-family-units that bring in the bucks each month are likely to be in the modest neighborhoods that aren’t likely to appreciate greatly and they can have higher tenant turnover. Where as single-family homes in the most desirable part of town that appreciates quickly, rarely generate the sort of income needed for positive cash flow due to high carrying costs.
If appreciation is the goal, then look at the ones that have traditionally appreciated well in the past even in down markets. If you want guaranteed positive cash flow then make sure your real estate agent is showing you income producing properties that have favorable balance sheets to back up these claims. Ask if they have reputable, established clients. Make sure you see the P&L statements for these properties for at least the previous two years. Note what’s been done in capitol improvements and what you can expect in the areas of repair costs, and projected maintenance costs, association fees and other expenses.
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