Investment Rental Properties: When It’s Time to Buy or Sell

How does one determine when to sell a rental property investment? If you are going to buy rental properties – having a plan in place for the appropriate time to sell is important.

I have worked with many individuals over the years and showed them how to buy rental property. There are many things that need to be considered when purchasing for investment purposes. There is also – definitely – a time to sell.

How to Buy an Investment Property

- Is the property in a convenient location? Is it near shopping, in a neighborhood with good schools, and is it easily accessible to interstates and connecting roads?

- Does the potential investment property have a sound foundation? What sort of issues does the home have? If it needs a new roof or the foundation is sunken in and is creating issues within the structure, it might not be a good investment at this time. If the issues are only cosmetic (needs a new bathroom floor, or painting, or carpeting) it may be worthwhile. Inspection reports will reveal the property’s flaws so the buyer and real estate professional can make a good decision.

- Do you have enough of a down payment to purchase the rental property so financing will not be an issue? In the current real estate market, most lenders will see a down payment of 40-50% as a good risk. If you can invest 100% into the property – this is even better.

- Income gained from the property needs to exceed expenses. Identify a credit worthy tenant, a reliable property manager, and a solid lease to make your property investment profitable. Property management fees are tax deductible.

- For residential property investments, single-family homes as well as multi-tenant properties such as duplexes and fourplexes are great ways to build income and wealth. Some investors may want to consider apartment complexes. In this case a commercial property loan will be necessary to obtain financing.

- Use depreciation on the investment property as a way to receive an annual tax deduction. Check with your accountant, who will apply the depreciation deduction on the building, appliances — even window treatments. The government still allows tax deductions for accelerated depreciation on properties. Savvy real estate investors use this deduction to increase cash flow and net operating profit on a property.

When to Sell a Rental Property

I have a term for properties that need to be sold: alligator properties. These are properties that are eating the investor alive with carrying costs. When an investor looks at the bottom line on an alligator property – there is no profit – just expenses. An alligator property today may have been a good investment ten years ago. But some individuals will continue to hold a property until it depletes all of the profits they may have made in the first 5-7 years.

If a property has sentimental value (it was your first home, or your mother once owned it but now she’s deceased), some investors may tend to want to hold onto it. Having an emotional attachment to an investment property that is supposed to be generating income is not good. Sometimes an individual will hold this type of property even if it is not profitable. It may be time to consider selling this property.

- After a certain number of years, the depreciation tax deduction is used up on a property. Ask your accountant when this depreciation is no longer applicable. When the investment can no longer be depreciated – it’s time to sell that property, and purchase another rental.

- Consider selling the property and applying the 1031 tax code, so no capital gains tax is imposed on the profits. To paraphrase, the code states that an owner can sell one property in exchange for a securitized piece of property or tenant in common piece of property. Roll the profits from one property into a new investment to increase wealth and maintain it.

- On average, in the 12th year of property ownership — it is time to sell an investment. The decision to sell will depend on two factors. 1. Is there enough equity in the property to sell? Or, have you pulled out too much equity in the property? 2. Will the real estate market allow you to sell and obtain a nice profit? Ask a real estate professional for a custom market analysis on the property to see if it’s realistic to obtain a price that nets a nice profit.

- Alligator properties are not profitable for a variety of reasons. I am amazed at the number of investors who are not even aware that their property is losing money. If you have a property that might be losing money, then ask your real estate professional or accountant to perform a cost to income analysis. If it is indeed an alligator property — consider selling.

Investing in Rental Property – Key Facts to Consider, Part 1

Before investing in rental property, it is always wise to do a little homework and pre-planning. Such actions on your part can substantially improve the likelihood that your resulting rental property investment will be successful. The following are some key elements that every careful investor should investigate and consider before purchasing rental property and becoming a landlord.

Location, Location, Location – This is a familiar slogan in the real estate world. The location of a rental property plays a large role in the supply, or demographics, of tenants who are available to rent the property. It only makes sense to purchase properties located in areas where you’d be comfortable in dealing with the general population living there. Location also plays a significant role in the market value of a property, and its future appreciation potential. Properties that are located in poor or decaying areas will not have the long-term market value appreciation potential as properties that are located in better neighborhoods.
Condition of Property – A low-priced bargain “fixer upper” investment property, while looking attractive on the surface, can turn into an expensive money pit to make the necessary repairs and upgrades. One reason is that neglected properties in poor condition commonly have “hidden defects” that must first be corrected before the planned upgrades can be made. For these types of properties, not only must the additional renovation costs be absorbed, but also the “lost rent” opportunity cost must be factored in. In this respect, purchasing a more expensive and reliable “turn key” rental property that is in good condition may actually turn out to be a better overall investment.
Price and Financing – Knowing the actual fair market price of an investment property is a necessity in order to prevent paying too much for the property. The fair market price for an investment property can be found from a comparable market analysis, or CMA. Another method for determining the fair market value of an investment property is through a method known as the “capitalization rate”, or Cap Rate for short. The Cap Rate of a rental property is found by taking its net operating income, or NOI, and dividing it by the property’s market value. This ratio, expressed as a percentage, should be equal to (or greater) than the average cap rates of similar investment properties in the area. For the rental property purchase, the financing method and costs should be investigated and determined prior to making an offer on the property. In this manner, it is also wise to get pre-approved for financing at a lending institution. Getting pre-approved for a mortgage definitely provides a buyer with more credibility, clout and leverage in the marketplace with the seller.
Property Management – To manage or not to manage, that is the question you must ask yourself. This is because once you purchase a rental property, you’ll have the choice of either managing the property yourself as a diy landlord, or you can outsource the day-to-day property management tasks to a real estate property management firm. Factors that can influence your decision are the size of the property, the amount of personal time that you can dedicate to managing the property, your property management knowledge and skills, and your temperament for the job. If you find that managing the property yourself “is not your cup of tea”, then hiring a property management firm is your alternative. Property management firms typically charge a percentage of the rents collected as their management fee. But beware – not all property management firms are created equal. There are plenty of unethical firms in the property management business. They’ll be glad to place a poorly screened tenant into your vacant apartment, just to collect a quick “one month’s rent” commission for filling the vacancy. Then shortly thereafter, all sorts of problems with the tenant begin, disrupting your rental operation until the tenant is evicted. So, if you choose to hire an outside management firm, exercise caution and investigate their credentials and client track record thoroughly before hiring them. The time you spend checking their history could save you plenty of grief and money in the future.
Rental Income of the Property – In an attempt to inflate a property’s sales price, an unethical seller can falsely overstate the rental income that is actually produced by the property. To prevent this and verify actual rent levels, it is best to mail “estoppel letters” to all existing tenants occupying the property. The tenants will then have to respond by providing written confirmation of their actual rent levels charged as well as other facts about their rental or lease agreements. These could include security deposit amounts that will have to be transferred to the buyer by the seller upon sale of the property.

About the Author

John Turchetta has been an experienced diy residential landlord for more than 23 years. His website, [http://Great-Landlord-Info.com/] features a wealth of terrific information on the residential landlord business that all residential landlords, from novice to experienced, can benefit from. He has also written the comprehensive “Landlord’s Library” series of e-books that cover the complete spectrum of subjects on the residential landlord business.

Rental Property Financing – Learn About Financing Your Rental Properties

There are a number of articles and books out there that will tell you all the secrets of rental property financing. These tips and secrets can help you become very successful within the property market in the future. When first interested in getting finance for your potential investment, it is important to decide whether you are going to use your own money or you want to take a loan out from a bank or other lending institution. There are a number of difficulties and obstacles involved in obtaining a loan that is associated with this type of finance.

Financing for properties tends to be harder and more expensive to achieve as compared to regular property financing. The rates charged for rental properties are generally more higher, the fees for processing can be higher, terms and conditions for the loan are stricter, credit ratings need to be higher and a number of other factors make it difficult for investors to get mortgages on good terms.

For any real estate investment, the key issue is catching hold of a good potential property investment. The main techniques of rental property involve buying a below market value or old unit or property that is in a good area even if it is in bad condition. Many properties before being sold need cosmetic repairs in order to make an impression and attract potential buyers.

Smart and using the correct methods of property financing can help you fasten the process of making money. However, if you are interested in investing money in a rental property, you will need to be patient and work hard so that you can make this investment highly profitable. If you do not have the desirable budget that allows you to purchase a perfect investment property in one go, you can take the alternative route. You can go in for a rental property unit that is in poor or low condition and then make improvements to it. You may then be able to rent it out at a future date easily at a satisfactory market price.

Budgeting Basics For Rental Property Investors

Before you go into any business venture, it is vital that you do your homework where finance is concerned. In the rental property business, you need to be doubly vigilant about how much money you would be spending in starting your business due to the fact that it is a lucrative business given the price of real estate properties.

If you are seriously thinking about having your first rental property, make sure that you know what you are the things that would involve you shelling out the money. This way, you will be better prepared as you go into this business venture.

First off, you have to make sure that potential tenants are aware of your business. This means spending money on advertisements. Although marketing through word of mouth is a great way to start getting calls and messages from potential tenants, it may not be enough to fill a sizeable rental property complex. If you are therefore investing on numerous units, you have to also consider how you will advertise your business to fill the place up with good tenants.

You also have to consider the fact that if your property falls into obsolescence, you cannot possibly expect to be able to command high rent. In your business plan therefore, you should have a plan for keeping your rental property in tip-top shape and even plans for upgrades whenever possible. The repairs and upgrades would then need finances and that is why it is important that you keep this in mind when setting a budget for your business.

If you are going to work with a property manager, make sure that you ask them for a quote on the expenditures of the day to day operation of the property. This would give you a concrete idea how much money you would actually need as you run your business.

You also have to take into consideration the fees for the property management company. While you can opt to handle the management of the rental property by yourself, there are some cases when you would need the help of professionals even in one facet of operation like repairs and tenant screening. If you are going to work with a rental property manager, you have to of course pay for their services and it would be wise to be aware of how much companies like these in your area charge for a specific service.

Full Rental Property Financing

Rental Property Financing

Rental property financing is usually more expensive and harder to get than regular property financing.

Rates are higher, fees are higher, loan conditions stricter, credit ratings higher, and other loan factors all add up to make it harder to investors to get mortgages on good terms.

Recently some mortgage lenders have begun to offer 100% financing to rental property borrowers.

This includes many different property types, including single family residences, condominiums, townhouses, and 1-4 unit properties.

Generally larger properties (5+ units) do not have 100% financing currently available. These types of properties usually require a much larger down payment.

Advantages of 100% Financing

This type of financing allows the borrower to get the maximum possible leverage on their real estate investment.

In this case the most a borrower needs to come up with is closing costs, which may be 1% – 2% of the loan amount. A borrower may also be able to have closing costs included in the loan as seller credits – if the mortgage lender allows for this option.

An investor can use this type of leverage as part of a multi-step process. A real estate investor can purchase a rental property with 100% financing and if the property increases in value use the additional equity as leverage to refinance into a lower payment.