October 24th, 2012
In a prior blog, we talked about rentals as retirement income. In this post, we’ll take another step and review what you need to know before buying an investment property.
Neil Uttamsingh has a website focused only on helping you get your first rental property. His message is that you should manage the property yourself and make sure you do your due diligence with home inspections.
A recent blog discussed that you should not rush the process or you will miss out on some important decision points:
One of the fastest ways of learning these skills is by finding a real estate workshop to understand how to analyze the value of the property, where it’s located, and what kind of tenants you could anticipate i that location.
Making certain that the property will provide a positive cash flow is the number one question you have to answer. The second is what monthly expenses can you expect?
The next step is to figure out how you will finance it. A good loan officer will help you crunch the numbers to find out what you can afford to invest. You will find out your options with how much money you can put down, whether you should get fixed or variable rate, what length of term you should use, and most importantly, you should get pre-approved so when the right property shows up, you can grab it.
Nolo Press has some of the best books that explain the law in plain English as well as useful forms. As we mentioned in the prior post, having a valid contract will protect you from a bad tenant.
In their Legal Encyclopedia, they have numerous questions and answers (FAQs) on signing leases and rental agreements such as how to enforce a ‘no pets’ policy, how to divide damages between departing cotenants, and how to handle a tenant wanting to break a lease due to noise.
Once you’ve gotten your first rental property up and running smoothly, then start to look for additional properties. Don’t try to invest in too many properties too quickly until you’ve established procedures for analyzing a property as well as systems for finding good tenants.
Always keep a separate checking account dedicated to your rental properties. Deduct the mortgage payments, insurance payments, and maintenance work from this account. At the end of the year, your tax accountant will have a much easier job. Additionally, you can regularly check your cash flow to see if it stays positive. Also, if you personally have a large expense, it will be more difficult for you to borrow from your investment property cash, and you will have peace of mind that your properties are taking care of themselves.
Remember, looking at a house from the eyes of a homeowner is very different then looking at the house through the eyes of the investor.
What would you want in an investment property that you wouldn’t want in your home?