Buying Rental Properties - The Good, The Bad, The Ugly With Investment Property
Depending on who you speak with, some people won't touch rentals with a 10 foot pole. However, those that can get past toilets, tenants and termites find that rental property can set them up to receive a steady income stream for the rest of their lives if done properly. Clearly there is a right way and a wrong way to be buying rental properties. Let me share with you a few things I've learned along the way that might help you when acquiring rental properties.
Timing Is A Big Key When Buying Investment Properties
As with anything, it's all about timing. It's all about finding that great deal from that distressed homeowner, out of state landlord that is motivated, bank with too much inventory or economy that is struggling. The best time to be buying investment properties is when no one is buying. The best time to sell is when everyone is buying. It might sound contradictory at first, but you have to do the opposite of the norm especially with rental properties and real estate in general.
Think about what happened during 2006, 2007 and 2008. Everyone was buying investment property which was forcing home prices higher and higher. Those that were selling real estate during these times were making a killing. More and more investors started jumping on the band-wagon expecting to make a small fortune assuming home values would continue to rise. But as with everything, this false appreciation had to correct because household income could not keep up with the prices of real estate.
Now, a few years later, is one of the best times in history to be buying rental properties because people are trying to sell and banks are extremely motivated. Interest rates are at all time lows and home values have hit their low points in most markets. This is a buy indicator. Right now you can pick up investment properties for cheap... pennies on the dollar cheap. In some areas of the U.S., you can pick up some nice homes in some great neighborhoods, already rehabbed and rented for around $40K. That is a nice return on investment when you are pocketing $700 a month in rent. You can make that pencil all day long, even if you get a loan.
Location With Rental Properties Will Make Or Break You
You've always heard it's all about location and that still holds true today. The key to making money with your investment property is making sure it's rented each month. Each month the unit goes un-rented, means cash out of your pocket. The location of the home is critical in making sure you get paid each month. You want to avoid war-zones, these are the parts of town where violence, drugs, gangs, and theft run rampant. If you live in a big city, you know where these places are. If you are an out-of-state investor, it's critical you have someone local tell what places to avoid before you ever buy rental property. You will have a very difficult time renting out a home in a bad neighborhood or even selling it.
Even if you are an in-state investor, call up a few local real estate agents in the area just to confirm. What might look great during the day, ends up being not so great at night. The police department also has a good handle on neighborhoods and knows the crime rate in those areas. It's always a good sign to invest in rentals in the same neighborhood as a law enforcement officer. Chances are there will less crime and violence. Certain areas might also be prone to flooding. You wouldn't know this unless you happen to be there during the rainy season. Talk to local authorities and even neighbors before buying investment properties.
Get A Visual Of Your Rental Properties And The Neighborhood Before You Buy
One of the mistakes many people make when investing in rentals is not seeing the property. That doesn't mean you can't have someone local send you pictures, it means you need to know what you are investing in. This isn't a problem if you are local, but what if you are an out-of-state investor? How do you research an investment property without incurring a great deal of expense? This is where you need relationships. People you can trust. You can get someone local like an agent, contractor or management company to send you videos or pictures of the home and surrounding homes. I've seen places where every house on the street is boarded up but one. If you see a picture of just the one house, you might think it's a great house when in reality, no one will live in a boarded up neighborhood. Bottom line... don't invest in something sight unseen no matter how good it sounds. You may be wasting your money. Rather get pictures from at least 2 different sources to verify the deal, then you can move forward.
Rental Property Values - Don't Take My Word For It.
Every investor wants a good deal on their investment property. So how do you determine the value of a property and if it's a good deal? Whatever you do, you can't trust those online sites like Zillow, Eppraisal or HomeGain. These sites are so outdated and inaccurate that you can't base your buying decision on these numbers. Yes, they will give you an idea of what the home is worth, but don't take that number with you to the bank. A better way of knowing the true value of a rental property is finding the assessed value. Each year the county assessor comes out to give an "appraisal" of the property. This is public information in most counties, so you can jump online and see the numbers for yourself. The assessed value gives you an idea of what you can sell the property for. It's common sense to purchase the rental below that assessed value so you can unload it if you ever get in a bind.
One of the risks investing in rentals has always been negative cashflow. Meaning you don't collect enough in rents to cover the expenses each year. Whether or not you are buying rental properties using a bank loan, your personal savings, or your retirement account, you should always calculate your rate of return or return on investment (roi). We are seeing consistent returns as high as 20% annually on rental properties. Yes, it may require you to step outside your backyard, because these returns are only available in certain areas of the U.S.
Most people don't realize they can buy rental properties using their IRA or 401K retirement plans. I would venture to say that most IRA and 401k plans are struggling right now at the time of this writing and for the most part, savings have been cut in half for the majority of Americans that have retirement accounts. This is forcing many to stay in the work force longer than anticipated to make sure they will have enough for the future. This is why rental property looks so attractive right now. When you find the right location coupled with the right price, many investors are averaging over a 15% return right now, which is almost unheard of. Once you have the right formula, investment properties can provide you with consistent cash flow and an asset you can pass on to those you love.
Property Management Companies
Since we are on the topic of rental properties, it's probably a good idea to shed some light on property management companies as well because this alone can cause serious headache and hardships as a landlord. Depending on where you live and the location of your property, you may decide to do this yourself which is totally fine. Just make sure you've got some good tenants and don't forget to run a background check. There are lots of services out their that will do this for you for a small fee. If you are out of state, it is so critical to have a solid property management company that will help you manage your investment. They are worth their weight. You may even have to go through a few before you find a good one.
One of the best ways to find a good property management company is to use referrals. This doesn't always work, but it will get you started on the right path. Get 2 to 4 referrals because when 1 doesn't work out, you have some backups. Most management companies charge 8% - 10% of the monthly rent. For that service they do a number of things. One is to make sure the property is rented and the tenant is paying rent. If they are not paying rent, they will be responsible for getting the tenants out and making sure the property is clean and presentable for the next tenants. They are there to let you know of any changes or repairs that are needed to the house. They are there to take any calls if the tenants need anything. A good property management company will become your eyes and ears and really help you take care of your investment.