SET, READY, RENT
Considerations before investing in real estate
Falling home prices may have many wanting to take advantage of opportunity, but investors and homeowners wanting to convert their primary residence, who are considering the rental market should proceed cautiously.
Well advised and prudent investors study real estate cycles and those cycles, among other factors, weigh heavily on their decision to get in the market or get out. Investors and Real estate professionals who recognize key indicators in a real estate cycle will sell at the first signs of a market that is tanking, poising them to take advantage of an impending downturn. To invest in real estate prudently, you must understand the simple principal of supply and demand; as more rental homes become available, landlords need to lower their rates to be competitive. Too many investors get in at the wrong time for the wrong reasons.
As real estate prices decline, rental investments become attractive. Recently, investors are investing in real estate with deals that have huge upside potential; whether that be short-term or long term. Well-capitalized investors acquire properties at foreclosure auctions. Because they are guaranteed clear and marketable title, Investors prefer buying “at the court house steps.” Most properties end up in a lenders or servicers REO (real estate owned – property that goes back to the mortgage company after an unsuccessful trustee sale or (auction) which eventually end up on local Multiple Listing Service (MLS).
Reading trade publications is an excellent source to keep your finger on the pulse of the market. Default Servicing News is an excellent source to see the big picture but certainly cannot provide the real time statistics a competent real estate agent or broker can provide. Ask a Realtor
BUY LOW, RENT HIGH
As in any investment, rental properties can be more profitable if the initial investment can be kept as low as possible.
Like owner-occupants, investment buyers should consider properties that yield a return. Too many investors and agents use cost per square foot as a deciding factor. You should use price per square foot (PSF) to drill down but certainly not a deciding factor; location, location, location and deferred maintenance is more pressing. Think about where your tenants want to be, If your debt service is low and the property is well maintained, you can be the least expensive in the area and you’ll always be able to rent it.
There are no real secrets to finding a low purchase price. Foreclosure auctions are a great resource for finding low priced homes but the competition is fierce and you rarely have time to do a walk-through. You also have to pay cash within 24 hours of winning the auction.
You can find properties going to auction through legal notices published in local newspaper s or online by skimming the trustee websites.
REALTORS who are adept in bank owned, short-sale, or REO properties can help you locate rental properties. Realtors often know when a bank-owned (REO) property is about to go on the market and can help investors make an offer that makes sense. An agent should have the software and current market data to analyze a property in minutes. With a well thought out analysis, you can decide a price range of what makes sense. Most importantly, a prudent investor makes unemotional decisions and walks away without regret. You can find sensible deals in variety of places so consult a professional who is creative and organized versus relying on one source like the MLS.
BURIED IN MAINTENANCE
One of the hidden costs to rental properties is what many property managers call deferred maintenance. Manufactures know that postponing equipment maintenance to reduce immediate costs often leads to much higher costs down the road.
Investors should look at their properties the same way. landlords are usually in the business for the long term and want to have home that will provide a good return after the honeymoon phase. So, landlords whould also be responsive if a problem with a property arises. A quick response to a tenant call can mean the difference between a $20 dollar leaky faucet and a $2000 bathroom floor replacement. Most landlords do not have the luxury of Homeowners Insurance covering damage of this nature. Landlords should be willing to do handyman-type work, or have a budget for repairs when they need to be done. And having a little black book of tradesman is essential, ask around now. Owning real estate in Utah also means having seasonal tasks such as lawn care and Heating, Cooling, Air, and Ventilation (HVAC) maintenance. Finally, like any owner, a seasoned professional inspector should inspect your rental property before a tenant moves in.
The skills needed to choose a good tenant are usually acquired via the school of hard knocks. But if you want to minimize heart ache ask around and get ideas from real estate professionals and acquaintances who are adept at income property or are landlords too. The document you use to enter into an agreement with a tenant serves as a full-disclosure tool between you and your tenant. It can be as specific or vague as you like, but remember that you both will sign the document with the full intention of honoring the agreement. Call local attorneys who specialize in evictions and ask them for a blank lease, they usually give them out free of charge assuming you would use them to evict a dead-beat tenant.
The Lease should include an outline of who pays for what utilities, who is responsible for lawn care, when the rent is due, and how much you will charge for a late payment or bounced check. The lease should also include a detailed move-in and move-out list as an exhibit or addendum. Your lease should have house-rules that include a description of what maintenance the tenant is responsible for, i.e., furnace filters and what the fee will be if those tasks are not done during the lease and after move out. Your lease document must contain landlord access rules which clearly state what constitutes an emergency (un-notified) entry using the key.
THE LONG RUN
If you become a landlord with the intention of making a large profit, you need to commit at least five years to your new investment. Turning your home into a rental property may be a viable option to selling at a loss too.
Many property owners, who are lousy landlords but are still committed to investment properties, hire a property manager. Ask questions and look for a seasoned, well-organized property management company or agent. There is usually a new tenant fee and they keep 10% of the monthly rent they collect. Make sure the manager or company is bonded and licensed. Never sign a long term contract until you decide the dating phase is over. And, like with any contract, always make sure there is an attorney’s clause in the management contract.
After some calculations – which should include taxes, insurance and management, maintenance costs and reserves, as well as a value for own time – you might find that your profit margin is not as great as you originally hoped. But if you’re right side up and a bad tenant experience does not taint your commitment, you may have what it takes.