So, you’re ready to become the next Donald Trump and embark on your real estate empire. Or maybe you’re just looking to diversify your investment portfolio. Here are nine tips to consider when buying investment property:
Know the market
Look at the area’s rental vacancy rate. If it’s below 5 percent, it’s a “landlord’s market.” If the rate has been declining, that’s also a good sign. Anything above that may mean there’s adequate rental housing on the market that might mean your property would sit vacant between renters.
Home vs. investment
Consider how much the property would take to bring to code. Once you flip a house or property to rental, it may need work to bring it to code instead of having it be a primary residence. Calculate the cost of repairs and what you’d have to charge in rent by looking at comparable properties. If the math doesn’t add up, it’s not a good buy.
Know the neighborhood
How close is it to amenities like parks, shopping areas, grocery stories and what kind of parking does it have (for example, a garage)? Is it located in a quiet area or on a busy street? All of these factors will determine how easy it is to rent and what other properties you’ll be competing against. You may also check on the crime rate, which could mean you’ll have to discount the rent.
Save and buy
Don’t just consider the upfront costs to purchasing rental properties. Walter Molony, an economic spokesperson for the National Association of Realtors said a property owner should have six months of “caring costs” saved and in the bank to cover expenses if properties become vacant.
Not your typical loan
Don’t expect a typical mortgage. Banks reason: If you have cash flow problems, which mortgage are you likely to pay first — your home that you live in or your rental property, said First Interstate Bank Vice President Brian Brown. Most banks consider loans for investment properties higher risk and require:
- Good credit scores
- 25 percent downpayment.
- Five to six months of reserves in the bank.
Banks may look more favorably on properties with more than four units because they carry less vacancy risks. But experts say: With more units comes more management. Be sure you’re ready to meet the needs of four or more tenants which may require more maintenance, regular upkeep and paperwork.
Counting the cost
Real estate author and expert Brandon Turner said that in addition to having an investment plan with an exit strategy, landlords don’t consider all the costs of ownership before determining feasibility. Those costs include:
- Water and sewer
- Garbage (possibly commercial service for larger properties)
- Legal fees (including eviction)
- Other utilities — electric, gas, Internet
- Vacancy costs
- Scheduled maintenance (heating, cooling, roofing)
- Capital improvements
Some investors don’t want the hands-on aspects of being a landlord. Property management firms can manage your property and may take care of arranging showings, leasing and other maintenance issues that arise. However, the landlord will still be responsible for the costs, and property management will likely run between 7 and 10 percent of the monthly rent.
Whether you select a property management firm or do it yourself, expect more paperwork. You’ll now have to keep careful records of rents, leases, expenses, maintenance and deposits. Even if you have a bookeeper or accounting service (which adds to your expenses), tracking down the paperwork adds time, and will be required for tax purposes.