The How and When of Buying Investment Properties
1. Location, location, location. We’ve said it before and we’ll say it again. Invest in the best location you can afford. It will determine the kind of tenants you will attract and how much rent you can charge. A property in a desirable location will also appreciate more over time and be less susceptible to the ups and downs of the real estate market. It will also stay more fully rented, helping your cash flow.
2. Don’t go overboard when you’re fixing up an investment property. You don’t necessarily need granite countertops and stainless appliances. After all, you’re going to get some reasonable wear and tear when the tenants move out. Most renters are happy with units that are light, bright and clean. Focus on that instead of upgrades, because for the less than $100 you will get per month for having a “wow” home, it just takes too long to recoup your investment. Save the fix up until you are ready to sell.
3. Forget about flipping. Real estate today is a buy-and-hold investment – for at least five to 10 years. We have had substantial downs. Hang in there so you can have a substantial up. This is America! We have had problems, but let’s be bullish on our futures. You’ll face considerably more risk with a shorter time frame. Although your rental will almost certainly appreciate over the next 20 years, the next few years are anyone’s guess. There are substantial costs to get in and out of a home – up to 15 percent of the cost of a home. Wait for a big payoff to make it worthwhile.
4. Think long term. For most small investors, long-term ownership makes the most sense. You’ll have plenty of time to ride out any swings in the market, and your rental income will be a nice supplement to your day job. Historically, real estate has been an excellent investment, always appreciating a few points over the rate of inflation. Rents also adjust for inflation over time, making it a great retirement plan.
5. Be prepared to have cash on hand. These days, buying a non-owner occupied property requires at least 20 to 30 percent down. You can get this from many sources, including IRAs and 401Ks.
6. Calculate the cost of ownership. This includes all the expenses of owning and managing an investment property, not just mortgage payments. Common expenses include property taxes, insurance, utilities, maintenance, vacancies, and repairs. You can use a conservative percentage of gross rents like 75 percent to see if you are still comfortable with the cash flow of a property.
7. Look at a property for what it can be, not what it is. Buyers with a little imagination can look past the cracked paint and overgrown landscaping and score a great deal. Cosmetic items do not cost much and you will get paid big returns for small improvements.
8. Hire and pay skilled workers to do your renovations. Start collecting recommendations for electricians, plumbers, painters, and contractors. Your Realtor is a good resource and should be able to help provide you with a list of helpful tradesmen.
9. Always screen your tenants. Run a credit check and call old landlords. Ask if they paid the rent on time, what condition the property was in when they left and if they caused any problems with the neighbors. It is important to understand the risks but not be so risk adverse as to not get it rented.
10. Read up on your rights as a landlord. Learn about the eviction process and other potential issues so you can do things right, saving time and money. Arizona has great laws in favor of being a landlord and there are easy and inexpensive services available to assist with evictions if it comes to it. Your understanding of the laws politely communicated to the tenants will keep many of the problems from occurring in the first place. You need to respond early to problems. For example, if tenants are not paying rent, it can easily get to the point that they cannot bring the rent current. Make it a priority for them.
11. Carefully consider all options. In general, buildings with three or four units or duplexes pencil out best having cash flow even if all of them are not rented out, followed by single family homes with three bedrooms. Some investors find it works out best to buy a duplex and move into one of the units.
12. Enjoy the advantages of your investment property. When managed correctly, investment properties are a great source of passive income – now and when you retire. Understand the advantage of amazing tax benefits to make your investment pay off. Go see an accountant to see what the real numbers look like. FBN