How to Buy Rental Properties
Expanding and enhancing your investment portfolio needs to be a No. 1 priority during these challenging economic times. When it comes to this task, you may have made the decision to buy rental properties. If that is the case, there are some important steps that you will want to keep in mind and follow when it comes to investing in rental property as part of your comprehensive investment plan.
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Things You'll Need
- Current listings of rental properties for sale
- Certified appraiser
- Licensed inspectors
Instructions
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Identify those neighborhoods in which rental properties are in demand. Although the universe of potential rentals varies slightly from community to community, these tend to be in neighborhoods that include lower-range priced properties, ready access to schools and sections that include residences that are older and have not been subject to rehabilitation.
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Obtain pre-approval for financing. By being pre-approved, you will find that sellers will be far more eager to do business with you. You will have a much better chance of closing quickly on rental properties that you are interested in owning. You enhance your chances for pre-approval by providing information about your current assets, a business plan pertaining to your plan to invest in rental property and ensuring that your credit report is in order and contains no erroneous information.
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Determine if there are foreclosed rental properties (or rental properties heading into foreclosure) that might be cost-effective investments for you. Resources that are available to you through which you can find foreclosure options include legal notices in newspapers, the clerk of the county court and online services. Keep in mind that you need to look beyond real estate that historically has been used as rental property to other residences that might be suitable for such a purpose.
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Obtain a complete array of all necessary inspections. One of the biggest mistakes people make when buying investment real estate to be used as rental property is foregoing these inspections. These need to include inspections of electrical systems, plumbing and structure. Make sure you use only licensed inspectors.
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Obtain an independent appraisal of the real estate you are considering buying. You cannot rely on an inspection that may have been obtained by the property owner or even a bank or other type of lender. They have their own vested interests.
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Examine rent rolls. When examining rent rolls, which are a list of tenants and their rents and lease expiration dates, particularly with a multi-family unit, you need to pay attention to late payment rates, evictions for nonpayment and the overall vacancy rate for at least a 24-month period of time. Even if you are pre-approved for financing, your lender will want to examine rent rolls.
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Analyze the ratio of mortgage to rental income. You need to ensure that your potential investment realizes a monthly minimum of rental income at a rate 30 percent above your mortgage obligation. Keep in mind that out of that overage will come other expenses related to ownership, including repair and maintenance costs.
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Note your responsibilities. Examine any existing leases to determine how long you must keep tenants at the current rents. Check the local rent laws to determine how long they legally can stay once the lease runs out. Determine if a complete renovation entitles you to move them. Factor any costs you might incur to terminate their leases. You may have to pay tenants to move early. Remember, as long as the building sits without repair, you may lose money you could earn with higher rents for upgraded apartments. Think "worst-case" scenario and determine if the purchase makes sense if you must carry the current rent rolls for at least a year.
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Tips & Warnings
Consider engaging the services of a professional real estate broker. A real estate broker can reduce your search time by providing rental properties that are suited ideally to your own investment needs, goals and objectives.
If you want to purchase a property in foreclosure or one that is heading into foreclosure, remember that the owner may have stopped maintaining the property. The property may be "wasting." With the help of a contractor, calculate how much you may have to spend in repairs and rehabilitation. Compare that to what you save by purchasing the real estate at a distressed price to determine if it's really a bargain. In most states, the law makes it difficult to evict tenants, even those in arrears, and court proceedings will involve legal fees. Factor all that into your cost estimates.
