How to buy rental property and ensure your investment is a good one? It's a hot topic among investors right now... are there any good deals available to buy? Values have increased substantially the past couple of years, are there still properties to buy that would yield positive cash flow? The short answer is yes. But how to buy rental property successfully in 2017 means being incredibly smart and strategic, exercising patience and doing really good research and your due diligence.
The real estate market is just about at 2007 levels again, before the great bubble burst. With prices in this range, it's important to make sure you do great research and find the best deals. And they ARE out there! There's a lot real estate for sale on the market in all conditions. Move-in ready, distressed, foreclosures, and lots of them are already tenant-occupied! The trick is being ready, and being THE FIRST to find the best deals. How do you do it? Enlist the help of an experienced real estate agent. They can make sure YOU are the first to know when new listings hit the market. YOU will get your HOTSHEET in email every morning, or AS SOON AS IT HITS THE MARKET! It's your choice. If you want to start getting your FREE HOTSHEETS... fill out the below form today, and you'll be getting your FREE HOTSHEETS in your email inbox by tomorrow!
First determine method of payment. Cash buyers, in most circumstances, get the best deals and have the ability to avoid some contract-killing potential pitfalls like appraisals and condo questionnaires. Will you be financing? Refinancing a currently owned property to take out some equity to spread into another investment?
If you are an all-cash buyer, make sure to have proof of funds handy, for when you submit an offer to a seller. Proof of funds can be your most current bank statement showing a balance equal to or greater than the amount you'll be offering on a purchase contract. If the money is in a trust or other legal situation, you can have an attorney write a proof of funds statement for you. It's always a good idea to work with an attorney if you are an all cash buyer. You can use them as your escrow agent, they will help protect you during the process and guide you with due diligence. Generally, attorney fees for real estate related services including escrows and closings are very inexpensive. And worth the money.
If you are looking for specifics on how to buy rental property with financing, make sure you start the whole process (even before you look at property) with getting a loan approval. You'll want to find a good mortgage broker, submit initially requested paperwork so they can pre-approve you for a certain amount. It's always best to establish this relationship first, so they stick with you and are there to help you through the process - which may be multiple offers on multiple properties before you enter into a viable contract and reach a successful closing.
Once you know how much you'll be able to finance, and have a mortgage professional's number in your cell phone ready to help you... find yourself a good, experienced, easy to work with real estate agent. Remember... service to buyers is free. And it's the real estate agents that have access to the most information about rental properties, if they are tenant-occupied, etc. If they are experienced, or preferably if they are landlords themselves, they will be able to help you screen the lease and tenant, provide a solid rental market value report on the property, and will be able to help you determine if the investment will be a good one... or not.
How to buy rental property with an excellent tenant already living there? It can be an ideal situation: identify a property with a longer term tenant already in place, who keeps the place clean and pays rent on time each month. They do exist, but it can take a lot of time to find these best candidates for how to buy rental property. Some really good research and due diligence is also very, very important.
You find a good potential rental situation. Now what?
Review the lease very closely, or have an attorney do it for you. When did it begin? When is it set to expire? Is it Month to Month? Do the occupants and pet situation still match the lease? How much security is being held? What are the outlined tenant and landlord responsibilities included in the lease? You'll be adopting the lease and tenant as it is, so you'll want to make sure the terms written into the existing lease are 1) valid in the state 2) terms you agree and can live with 3) wording or terms included in the lease you are able to change or modify if needed.
When was the last time rent was increased? Is it due? Chances are, the rent is lower than what you will be comfortable with once you've purchased the property. You've invested, and you'll want rent to cover your monthly overhead costs and any monthly mortgage payment. Will the lease allow a rental increase in an acceptable amount of time?
Do NOT buy property with a BAD TENANT in place. Why? YOU will be paying to evict them! If they are still in the property when you buy it, you adopt them as YOUR tenants. It can take several months and a couple thousand dollars (worse case scenario) to get them out.
If you are most interested in purchasing rental property within the affordable rental range... chances are you'll want to buy in a condo or condo townhouse community. For future value and sale purposes, you may want to find out if the community is currently FHA-approved. While it probably won't make a difference in the present, gathering this information is very helpful in the decision making process. Why?
If a condo community is NOT FHA-approved... it means there are some things happening. Try to find out WHY it's not FHA approved. Reasons could include: too many renters. Is that a bad thing for your purpose of buying good rental property? Not necessarily. Lots of renters means the rental rates are probably very healthy, and the condo association/manager will most likely have a solid, quick, tenant-friendly process for tenant approvals.
HOWEVER, it can also mean, if you decide to sell in the future... you'll have limited ability to sell. If the percentage of tenants to owner-occupied properties is too high, your future buyer won't be able to buy through FHA and may also have issues getting financing with a conventional loan. You'll be dependent on selling to a cash buyer, which will most likely undercut your profit by offering to pay far lower than market value.
If you're paying all cash, EXCELLENT! You'll be able to get a better deal. You won't be required to pay for an appraisal or inspection (but you may choose to do these anyway). You won't need to worry about the "condo questionnaire" and if a lender will reject the contract because of the association. And you'll be able to close the deal quicker.
Seeking financing for rental property starts out very similar to when you're buying a primary residence. Shop around for the best rates, but tell your potential lenders that the purchase will be for an investment property if you already own a primary residence. Your mortgage loan application will be slightly different, you'll have a little more documentation to provide for loans from larger banks.
Keep in mind interest rates on investment properties are higher than on a primary residence. Every lender is different, as well as every investment property's situation... but generally lenders charge about .5 - 1 percent higher for financing (and refinancing) a rental property. However, this still means in 2017 so far... your interest rate will BE AT A HISTORICALLY LOW RATE! Lock in that VERY low interest rate, and you'll be securing a better ROI from your rental income.