A recent article published at Inc.com has some good advice for people looking to purchase an investment property.
With our company managing over 3,000 properties now for over 1,000 investors, I agree with most of these points. Plenty of challenges accompany the current real estate market and those who invest in real estate without proper preparation might suffer the negative consequences. If you’re interested in beginning a rental property business, here are a few of the most basic aspects to remember.
- Get Finances in Order
This one seems obvious, but it can be more complicated than you think. Investing in an income property isn’t like purchasing a house; it can be much more risky. With an income property, you never know exactly how your tenants will treat the property and how much work will need to be completed throughout the year. For that reason, it’s extremely important to have financial stability and a low-interest loan.
To begin with, ensure that you have enough money to handle the ups and downs of a rental property. The first rule of financial stability in the rental business is ensuring you can afford the payments on a house without the rental income. You may not always have renters, and when you don’t, the bank still expects you to make payments on the house.
You will also need a healthy sum set aside for emergencies. When the pipes burst and cause thousands in property damage the insurance won’t cover, you need to be prepared to take care of the cost.
We typically tell our investors to budget 4-8% of annual rents towards a “vacancy allowance” and an additional 4-8% towards an annual “maintenance allowance”.
Finally, remember that when you run a rental property business, you are not running a home; you’re running a business. Therefore, it’s wise to have an account separate from your business dealings for your spending related to the care of your income property.
- Understand the Market
The real estate market is one of the most malleable markets in the country. It can change at the drop of the hat, and it’s difficult to predict when it will go up again, unless you’re thoroughly immersed in the market.
If you truly understand the real estate market, you know when it’s smart to purchase a property and when it’s best to wait for a better price. You can also gauge the proper times to raise rent prices. Overall, you’ll receive better returns if you can predict the market.
- Begin with the Right Property
Almost every prospect requires that you start out low and work your way up, and real estate investments are no different. It’s important to begin with a solid property before finding a challenge.
- “Buy a property that you love.”
- “Skip the prize properties.”
- “Buy as a personal residence and change to rental.”
- “Buy properties in good shape.”
Some additional tips would be:
- Focus on “middle America” blue collar properties – there is a strong rental demand for bread and butter
- Focus on properties that are in the right market (regardless of where you live) Learn more here
Each of these options are excellent suggestions for those joining the business. Once you’ve mastered the simpler income properties, you can move on to another challenge, such as flipping a dilapidated property.
- Plan for the Care of the Property
Managing a property isn’t easy. If you choose to be the landlord, it’s your responsibility to collect rent, keep the books, file taxes, screen tenants, handle maintenance, work out the insurance plans, write the contracts, and more. Many feel that they’re up to the challenge and try to handle the work themselves.
For others, the task is daunting to say the least. If that sounds like you, you’ll probably want to look into hiring a property management company. A property management company can cost anywhere from 5-10 percent of a month’s rent, which decreases your return, but can be well worth the investment.
This article from Green Residential of Houston points out there are many benefits of hiring a property manager including local knowledge, low turnover, legal knowledge, marketing expertise, and expertly handled maintenance. It’s not the right option for everyone, but many have found the time and money saving benefits to be worth the monthly fee.
- Screen Tenants Properly
Finally, once you’ve take care of the basics, it’s time to rent out the property. However, it’s not wise to use a first come first serve basis with tenants. You need to be sure that they’ll pay the rent every month and treat your property respectfully. This requires a certain screening process, which will allow you to find great tenants.
Furthermore, be prepared for the tenant to screen you, in a sense. The best tenants will be prepared with the right questions. An article previously published on Inc.com outlines some of the most popular questions tenants ask before signing a lease. Make sure you have the answers ready, and take these questions as a sign of their dedication to the property.
Getting a handle on the income property business will likely be more challenging than you think, but once you’ve mastered these basics, you’ll be ready for the next important business step: making a profit.
All of these tips are great, for additional tips and a free “blueprint” on how to purchase investment properties, visit: 6 Steps To Passive Properties