Now that you have decided to take the leap and become the landlord, there are several key steps you should take to be sure you get started on the right foot. Making good early decisions will help assure that you have a positive and profitable experience.
What type of investment property is right for you?
Owning investment property and being a landlord can come in a variety of forms. Two very basic options are residential or commercial property. Each carries different management options. Making a determination on which of the two best meets your personal objectives is important to assuring long-term satisfaction with your business.
Residential investment property is, sometimes, the most common and the most familiar option. Most people have some level of understanding how residential investment properties operate because they have at some point been renters themselves. In general dealing with residential rental property carries with it much of the responsibility for ingoing repair maintenance and upgrades to the buildings. Occupancy tend to be much more fluid depending on the type of tenants. As an example, if you choose to own apartments that are targeted towards self-sufficient retired adults you might expect to have much less turnover than if you invest in a college town where you may turn over tenants every year. You will need to decide if you want to invest in multi-unit buildings or single family homes or sometimes a mix of both. You will also need to decide who will pay utilities, do the yard work, and care for common areas. Of course residential property also carries with it the chance of the 10:00 PM call on Sunday that the furnace is out or the plumbing is leaking.
Commercial investment property generally command much longer lease terms typically anywhere from 3 years to 20 years in length. Although larger repairs and maintenance are the responsibility of the building owner, minor repairs to individual spaces are typically the responsibility of the tenant. Rent increases for commercial investments are built into the lease assuring revenue growth over the lease period. The barrier to entry for commercial property is higher due to the more rigid lending standards and the higher purchase price of the property. The on-going maintenance along with potential security issues created by commercial property being empty after business hours, make the hiring of a management company a must.
How much can you afford?
There are a couple of factors in play when you are determining how much to invest in your income producing properties. The first is the amount of cash available for investment. Since the downturn in the real estate market, banks and other lenders have become much more stringent in the amount of money they are willing to lend for investment property. Plan on investing at minimum 20% of the purchase price to gain approval for needed financing. The second consideration is onoing cash reserves. Rules of thumb for the amount of available cash or credit to make emergency repairs or pay the mortgage if you have a non-paying tenant vary broadly. You should be in a position to pay at least 3 months mortgage or hold $ 2,000 in cash or credit per unit to cover revenue short falls or emergency repairs.
If I am not living there is the neighborhood important?
We have all heard the real estate adage location, location, location. That holds true for investment real estate as well. Residential or commercial real estate will attract better tenants and command higher rents if it is in a good location. Good school systems are important for residential property. High traffic easily accessible location for customers is key for commercial tenants. One additional question you might want to ask yourself when evaluating a property, would I feel comfortable in this location if I have to come down to make a repair after dark. In the end, location does matter even if you are not living or working at the location.
The “shopping” process.
The process of shopping for a rental property is a bit different from shopping for your personal residence. The logistics can be a bit more complex because you will want to be able to view as many of the units as possible. This is one of the areas where your real estate professional can be major asset. Once you are able to gain the access you need, be sure and make the most of your visit. Focus on the high maintenance high cost items like HVAC systems, roofs and basements to be sure you are not going to run into any major repairs right out of the gate.
You are now well on your way to purchasing your first income producing property and helping to secure you 'near and long-term financial future.