How to Purchase an Investment (Rental) Property
Buying and investment property may be a good choice for you especially when interest rates are low and the stock market unstable like nowadays. Of course, there are items you will want to review carefully before making any purchase.
(1) Location, Location, Location
This mantra applies to rental units just as it does to any other kind of real estate. You must decide on the area in which you are thinking of purchasing. You may want to speak to other friends or families where they own their properties and how things are going. You may also want to check with the Chamber of Commerce or your city planning department to see whether any major changes are in store for the area.
(2) Compare Property Values and Rents
Check out the area’s property values and compare them against the property you are considering for purchase before you make any offer. You need to check both property values and find comparable rentals in that area. If you see large swings or confusing figures, ask questions. If rents seem very low, find out why.
(3) Investigate Financing Options
After you decide which property you want to buy, make sure you check all loans carefully to see how they will perform in the future. Many adjustable-rate loans can change the property from a good investment to a bad one if the interest rates skyrocket. Many investors choose interest-only loans to maximize their return on investment.
(4) Consider the Property Tax
When investors purchase at a higher property value, the taxes increase. Don’t get caught in this trap. Find out the state tax laws and possible tax changes, and incorporate the new, projected property tax into your figures. In some states, when purchasing a property, you are responsible for paying a supplemental tax. This is usually a local tax paid to your county tax assessor. This bill is in addition to your normal property tax bill, but it doesn’t exist in some states.
(5) Check on Insurance Coverage
Find out whether there have been any claims in the last three years. Be sure that you are able to get insurance on the property before you close the deal. Just as the tax bill can increase, so can insurance. Additionally, you will want to incorporate a “landlord/rental” policy into your estimates that will give you more protection than the standard homeowner’s insurance policy.
(6) Check on Utility Costs
Check with the local water, sewer, and garbage companies to see whether the utility companies will bill the tenant. On multiple units, often you may pay for the water and garbage. Ask for copies from the past year of the renter-paid utilities, water, and garbage. This will give you a general idea of what to expect for those expenses. If you buy two units or more, you probably will be paying the common area utilities, like the outside lights, sprinklers, laundry room, water heater, air conditioning, and so forth.
(7) Estimate Your Future Maintenance Costs
Beware of the trap of not planning for any maintenance, simply because you have purchased a property in excellent condition. Think of your own residence and the time and energy required to maintain that property. There is always something. If you have an opportunity to purchase a fixer-upper, you need to obtain realistic estimates. If the property has a swimming pool, landscaping, or other facilities, there will be monthly maintenance expenses to pay. You may consult with your accountant/financial planner and real estate agent.
(8) Inspect Your Property
Last but not least, always be sure to perform a thorough inspection of the property before buying. If you cannot personally do this, use someone reliable to do it for you. Get the facts before signing a long-term commitment and a long-term loan. There are a few items that are often overlooked that should also be inspected during your inspection time like: the roof, chimneys, swimming pool, etc. This is for your protection and the long-term maintenance of your investment. Take the time to do the inspections. You need to feel comfortable about purchasing the property.
Paul Henderson is an author, teacher and CEO of a growing network of international companies focused on helping investors from all walks of life learn how to diversify their portfolios and practice good money management. Get his Lease 2 Purchase Handbook and FREE CD at http://leasepurchaseinvestment.com/ and start profiting TODAY.
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