Hi there, everyone. We are going to cover investment property purchases and, specifically, rental properties today. I own investment property and I property manage it myself so what I’m sharing with you I’ve learned from professional education as well as the school of hard knocks. There are several topics, however, that you will want to speak with other professionals such as an attorney and a CPA to get your specific questions answered.
#1 — Get clear on what you are trying to get out of this?
Investment property is not a “liquid” investment so you will want to get clear on your goals. Are you looking for a monthly income supplement in the short term, are you simply trying to get someone else to pay off this mortgage (the tenant) so that you may supplement retirement income or sell it at the appreciated value in 20 years?
Also consider whether you have the right temperament for being a landlord. If you have the mentality that “someone is living and messing up my house” and you feel that you need to drive by your occupied property 3 times a day, this might not be the adventure for you.
#2 — Selecting the property.
OK, so lets say I select that I want to purchase a property and finance it for 20 years….the tenant(s) effectively pay off the loan for me and I will continue to rent it as a retirement supplement in the future and one day sell it for its appreciated value. So the goal is clear….now what?
I like to select property that speaks to the masses. Yes, it is great to have a 5 bedroom home that you can rent for over $3,000, but how many people are looking for that?
Consider this as an example:
1400-1600 SF/3 bedroom/2 full baths/2 car garage/ fenced backyard/good storage areas/good school district/proximity to parks and shopping.
This description checks off a lot of boxes for your prospective tenant.
Who is your customer? Why do they want to be in a rental home and how does your home solve their problem? Could be an apartment dweller with pets and sick of paying high pet fees (fenced back yard). Could be a young family that has outgrown an apartment, but doesn’t have their down payment together for a home purchase (two car garage, storage,2 full bath)
Be thinking about your specific policy on the home. What is your pet policy? How many? What weight? Know that your individual rules or flexibility won’t take priority over an HOA or your city ordinances/codes so check into that beforehand. Don’t forget to indicate whether the unit is smoking or not. Who is going to be responsible for the yard work? Be specific and put that in your marketing materials right up front.
#3 — Financing the property?
Unless you are paying cash or have inherited the property, you will need to know a few things about financing this investment purchase.
Remember when you financed the home you now live in? Whether it was an FHA or conventional loan, you had some minimum down payment requirement. FHA is 3.5% and Conventional is 5%. Well that works for owner occupied homes. Non-owner occupied is a different animal. If you are financing through a traditional lender, you will need 20% of the purchase price toward your down payment.
#4 — Attorneys/CPAs/Insurance Agents/Realtors
Talk to the pros to make sure that you are moving forward in a constructive way. Some suggestions are as follows:
Attorney: Personal liability, tenant laws, lease preparation, city licensing.
Insurance Agent: Policy on rental home and any additional liability insurance.
CPA: Tax time deductions, tips on organizing accounts for expenses and rental deposits.
Realtors: Check out 5-10 year property appreciation in the area you are contemplating.
#5 — Budgeting and Property Management
Let’s use an example of an investor purchasing a home with 20% down. The monthly payment with principal, interest, taxes and insurance is $1000. You see that rentals in the neighborhood for this type of floor plan go for about $1400. So far so good. We can’t go run out and spend that $400 bucks just yet. You will have repairs, maintenance, some annual fees (ex. cities have rental licensing applications/fees, if you form an LLC you will have fees for that as well). You will also want to save some of your monthly profit toward things that you know are coming some day…new furnace/ac, roof, driveway, tree trimming. These are just examples and I’m not trying to discourage you, but give you an awareness.
The main takeaway here is that we don’t want you to be in the negative each month right off the bat. If your monthly payment is almost the same amount as what you can get in rent, that home is not going to be a good candidate. You absolutely want some cushion there.
One other item to consider. Are you going to market the property, screen the applicants and property management yourself or are you going to hire a service? There are many property management companies throughout the KC Metro. Some only do property management and others are real estate brokers who also offer prop management services along with their other offerings. If you are the sort of person who does not want to deal with the day-to-day operations of managing your rental, you might prefer an arms length solution such as this. I would recommend that you shop around on their fees and check reviews and client testimonials. Some will do it all for you or you might just want them to market/show property/screen applicants and you handle all the maintenance calls.
Safety Note: One item I’d like to stress. If you decide to market the property yourself, please use caution in your showings. You will be contacted by people you do not know to meet you at this home. Never go alone…bring a friend or two along and make the caller aware that you will be doing just that.
#6 — Are you a good landlord? Keep a good tenant happy.
Your tenant wants what you want in a service provider. Good quality, reasonable prices, good customer service and quiet enjoyment of the home. It’s not just good karma we are going for here. This is a business and we want our properties to stay occupied. Remember that cushion between rent and monthly payment we talked about above? There is zip cushion if the unit is empty. Not only is an unoccupied property costly, getting it prepared to go back on market costs money too. Tenants do move on and people don’t stay forever, but certainly don’t let your own demeanor and customer service “style” be the cause of that.
We’ve covered a lot of material here. Please feel free to give me a ring to discuss and I’d be happy to help you house hunt to find your property.
Terry Jackson — Broker Owner — Domicile One Realty — www.DomicileOne.com Terry@DomicileOne.com