Monthly Archives: February 2013

Buying Rental Property

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ImageBuying rental property is hard work but very rewarding if you educate yourself and put processes in place to make sure you succeed.  Remember purchasing a rental property is a big deal it’s one of the biggest purchases that you may make outside of buying a traditional property. Owning a rental property is like owning a small business you need to keep track of paperwork, work with tenants and vendors, file taxes, etc.  Investing in real estate is no easy task make sure you have a reason and a plan of why you want to invest in real estate:

  1. Make sure your personal finances are in order. Never buy a rental property if you don’t have income to cover the payments of the rental property and at least an eight (8) month emergency fund. Remember if something happens with your tenant you are responsible for the mortgage payments and repairs.
  2. Get preapproved for a loan. Sit down with a mortgage lender or broker to find out if you can afford to make an investment before you spend a lot of time searching for a property. You will need a 20-25 percent down payment for most lenders (and that’s 20-25 percent, plus closing costs and renovation costs, might add up to 30-35 percent cash up front to close escrow and get a property rental ready). So, for a $120,000 property, that could easily be $40,000 cash needed. 
  3. Research going rents. Ask real estate agents, property managers, or other renters in the area how much you can realistically expect to charge for rent. There are sites like Zillow.com, Truila.com, etc that can also help you with going rent rates.
  4. Buy properties in good locations. The quality of the neighborhood is important for keeping good tenants. Take a look at the proximity to employers, schools, parks, and public transportation. If you plan to manage a rental yourself, be sure that it’s fairly close to your home (the rule of thumb is no more than 1-2 hours from your primary residence).
  5. Make purchase offers contingent upon inspections. Always pay to have professional inspections made so you can determine what repairs may be needed and if there’s evidence of pest damage.
  6. Get landlord insurance. You need to have plenty of liability insurance to protect yourself in case someone is hurt while they’re living in or visiting your rental property. I also make sure that my tenants have renter’s insurance this will cover all my tenants property at its full replacement cost.
  7. Know the rules. There are federal and state laws regarding rental property that you must not to violate. Visit nolo.com for information about the landlord-tenant laws.
  8. Consider the services of a property manager. After years of managing my own rental properties, I turned them over to a professional. Even though a property manager charges around ten to fifteen percent of the gross rent they collect—to me, it’s well worth it. If you want to circumvent all the hassles of managing a property, be sure to add the expense of a professional manager into your calculations before you decide to buy a property. 

It’s important to remember that there are no guarantees when you invest in real estate.  It’s true that the value will increase but it will also decrease along with the increases and decreases the rents and home prices with go up and down but if you’re cut out for  investing in real estate it is an amazing way to diversify your investment portfolio.