This post kicks off a 3 part blog series on real estate investing and how to buy an investment (rental) property. I will cover three different types of real estate investment strategies:
- Investing in Real Estate for Rental Income,
- Buy-Fix and Flip and
- Wholeselling Real Estate.
The one real estate investment strategy that I am most familiar with as a real estate agent is investing in real estate for rental income. This is the one area where I have personal experience as a new real estate investor as well as professional experience representing both buyers and sellers of rental properties. I’ll share with you my personal story a little bit later in the post.
Each segment or part of this blog series corresponds to one of our topics on our blog talk radio show called New Jersey Real Estate Today Radio! Replays of the show are available for download all day long on-line at http://www.blogtalkradio.com/njretoday.
Without further ado, let’s get into the meat of investing in real estate for rental income. Of the three real estate investment strategies that I will cover over the next three weeks, investing in real estate for rental income is one of the most passive, possibly even conservative real estate investment strategies of the three listed above. But please don’t misunderstand me. Each investment strategy comes with it’s own inherent risks, pros and cons. By passive and conservative, I mean that you are not likely to get rich or see huge gains off of one deal. Buying rental properties is a investment strategy towards building long term wealth.
If you are interested in building long term wealth and you have a great people skills, I would say that investing for rental income is a solid invest strategy for you. There are three components or elements you should look for to determine if the market is prime for buying an investment (rental) property (ies):
- Low Prices
- Low Interests Rates
- Stable Rental Prices (good school districts, easy access to transportation, less crime, community spirit).
The worst thing you could possibly do when investing in real estate is to buy a investment (rental) property in an over-heated real estate market.
6 Tips on How to Buy an Investment (Rental) Property
1. Know Your Market and Have a Plan
One of the most frustrating things for me as an agent when I meet a new real estate investor is meeting a real estate investor who does not have a clear plan or vision as to the type of investment property he or she wants to buy. By a plan I mean I’d like a real estate investor to know ahead of time which market areas he or she would like to buy in. I would also like him or her to know their intended monthly income/monthly cash flow goal. Some investors will say to me, “if the numbers work, then I don’t really care where the property is located.” When I hear this, I am immediately turned off by the investor because a serious real estate investor knows his location threshold and he or she should be able to describe the type of home that fits their investment strategy right down to the condition he/she expects to receive it it in and whether or not they want it occupied, vacant, in need of TLC, etc.
Of course as a real estate agent, I probe for this information and I provide my assessments on which real estate markets are prime for rental properties. I have one past client who buys single family homes in affluent neighborhoods with good school districts and expects to secure long term tenants. He’s happy with buying homes in “good” neighborhoods at a slightly higher price than most investors because he knows he can keep his tenants longer. (He buys his rental properties for cash and looks for 1-2 family homes). He typically wants the investment properties to be within a 20-35 minutes driving radius of his personal residence so that he can maintain his properties and collect his rents.
2. Network, Prospect, Build A List
Part of your development into a successful real estate investor is to network with other real estate investors so that you can learn about different deals and even have a team in place to help you conduct the research that is necessary to help you decide which investment properties are the “best” investment properties. This means having a few real estate connections with agents, different agents so that you can have more than one agent looking for potential properties for you. Most agents have access to the MLS database. So, you won’t need more than one MLS agent. You might have a need for an agressive real estate agent that places calls to the for rent signs in the neighborhood in hopes of finding a landlord ready to turn over his/her the keys to another landlord. If you agent is not making this calls, you might have to.
3. Know and Track Your Numbers/Profit Threshold
Bookmark this investment calculator. Long term profits on a real estate investment property are made at the time of the purchase. If you buy low and sell high, you should know ahead of time at what point should you be thinking about resale or leveraging the equity in the property to buy another income producing property. This is yet another reason why I said buying rental properties is a long term wealth building strategy. You will need to own several properties to create a retirement nest egg.
4. Get Your Finances in Order
- Set aside 20-25% down-payment of the purchase price if not buying cash, plus 3% of the price for closing costs upon purchase (of course, you can roll in closing costs). The more you put down, the less you will have to buy on credit.
- 3 Months of cash reserves for vacancies, repairs.
- Approvals, Proof of Funds
- 2 years of tax returns if you are financing
- 2 most recent pay-stubs if you are financing
- Proof of Employment
- Documented Experience with Owning Rental Properties
- Average Rents (Your Agent will provide you with this)
- Current Leases (Your Agent Will Provide you with this, if any exist).
5. Educate Yourself in the Art of Managing Tenants
Good tenants or the lack there of will make or break an real estate investing experience. I am affiliated with a website called RocketLawyer where you can download a simple residential lease in addition to a number of other forms you might require as you run your real estate investment business such as eviction notices. I am a big fan of understanding the laws with regards to tenancy. You certainly do not want to plan for problems with tenants, but you should expect them along the way and therefore have a game plan in the event that you have evict a tenant.
6. Hire Help
I am a firm believer in hiring help to somewhat detached yourself from the experience of managing your investment properties yourself, which might include hiring a property manager to assist you on attracting tenants when you have vacancies, making repairs, and dealing with tenants. Property Managers on average expect to collect 10% of the gross annual rents for their time, service and expertise. It benefits you to factor in this costs ahead of time. It also makes sense to hire this person so that you have help when it comes to showing the property to potential tenants, including screening tenants.
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