Finding Good Investment Properties
Investing in a rental property is a good way to make your money grow, but it's not something
that lends itself to "autopilot" investing. Investments take discipline, a bit of work, and a
lot of research – both before and after the purchase – to make it succeed on the terms that
you'll want.
First of all, know what your time horizons are for the investments you're making. Real estate
isn't quite a fungible good, and the basics of real estate investment still apply: It's not
what you own that matters, but how well you maintain it and how well you market it that will
ultimately determine the success of your rental property.
Lastly, make sure that your retirement investments aren't tied to your rental property
ownership; as current headlines have shown, there is significant volatility in the housing
market, and that extends to rental units. Use your rental investments as one segment of a
diversified portfolio to cover you in your golden years.
Expectations For Investments In Rental Property
The typical case for owning a rental property is to hold it for about seven years. Your rental
income should cover the costs of maintaining the units, and cover your monthly payments on
financing the property; when your time horizon has been met, cashing out will be fairly simple.
For most privately owned apartment complexes, this is the usual time horizon for sales.
If you're holding on to the rental property for a longer time frame – say ten or twenty years –
you'll eventually be stuck with major renovations, like a new roof, new appliances, or repairing
of structural damage caused by settling or tenant negligence.
Both can be profitable investments; the trick is to know your time horizons so you can plan
appropriately for them. If you're a small investor, a long term ownership strategy ("buy and
hold") makes the most sense – it lets you ride out the market swings and slowly accrue equity,
while maintaining a cash flow that works for you. If you're using a long-term ownership
strategy, set aside 10-12% of your revenue stream for maintenance. Some years, you won't need
to touch it; other years, you'll be glad you have it.
Once your time horizon is known, it's time to dig into the basics of buying a rental property.
The keyword for real estate is "location, location, location". The watch phrase for real estate
investments is "connections, connections, connections". One of the easiest ways to find rental
property investments is to look for foreclosures; make friends with the county clerk, and you
can often get an early line on foreclosed properties.
Finding Rental Property Investments
Other ways to find rental property investments involve contacting landlords directly and making
an offer. A surprising percentage of first time investors bought the buildings they've rented
units in for years. The prior landlord was at the point where it was time to liquidate the
asset and move on.
A third place to look for acquiring rental property investments is around redevelopment
districts. While funding is currently on a lull for redevelopment of downtowns in America,
there is still some funding out there; more communities are trying to rebuild their
residential/retail/office mixes to de-emphasize auto ownership and make things more
environmentally (or pedestrian) friendly. While those new developments (or re-developments) may
not be suitable for investments, rental property near them may see a significant boost in
revenue streams.
Once you've got a rental property, you'll get invited to landlord association meetings; indeed,
this is a good networking opportunity; be careful at these meetings, and keep an ear to the
ground. Connections made here can lead you to properties for sale, and even to joint investments
on larger properties. Keep your overall investing goals in mind: Rental properties, like any
other investments, suffer from periodic ups and downs in the market, and your overall investment
strategy (building wealth while generating positive cash flow) may be jeopardized if you over
extend yourself in the rental sector.
Acquisition Strategies for Rental Investments
If you are going to get into rental property as an investment, be sure to check your credit
report, and take a 12 month "credit purge" first, where you pay down consumer credit (like
credit cards) down as much as is possible. The better your credit rating is when you buy the
property, the better your interest rate will be, and the lower your monthly payments will be.
Understand that the loan you get for a rental property will be on worse terms than your home
loan was; lenders are aware that many businesses fail, and that the risk of a default for a loan
used to cover a rental property are higher than for a home loan. Expect to pay a higher down
payment for these investments and expect a higher interest rate – even after your credit purge.
All that being said, always negotiate, always investigate. A truism in rental property flipping
is that the profit is made when you buy the property, not when you sell it; in this market,
overpaying can eat all your profits on re-sale. Unlike buying a home, a rental property should
be assessed dispassionately. Look at the numbers – try to figure out what the rents would be,
assume 80% occupancy, multiply by 12, and then multiply by 7 to 8 – that's roughly what the
property will generate in eight years of ownership, and that's a respectable ceiling for what
you should pay for it. Another formula is to estimate repair expenses and deduct them from what
you think the selling price would be – then reduce it by a third; that's the "flipper"
assessment for when it's time to walk away from a hot sale.
Lastly, make sure that you keep a good cash reserve when structuring your budget to acquire the
rental property. There will always be things to fix, advertising budgets to go through, and
unexpected expenses with new rental property investments; in general, trying to have at least
one month's rent for each unit on the property set aside to smooth over any financial bumps in
the road.
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