A Google search of the phrase “making money in real estate” generates over 400 MILLION hits. If you are one of those investigating the potential of investing in real estate an important consideration is what happens once I obtain my first property and I take on the title of Landlord.
Owning and managing investment real estate can be at once satisfying and frustrating. It can open the door to a profitable secure future or bring about financial ruin. One of the keys to success is understanding what to look for and what to look out for in identifying properties, tenants and alternate revenue sources. Finding a sound property, keeping it filled with paying responsible tenants, and finding other ways for your properties to bring in cash helps ensure your adventure in landlording is a positive journey.
The first step down the road to successful real estate investment is finding a trusted Real Estate professional to assist with your search. Look for one that is experienced in income producing properties not just a residential specialist. Working with a Pro does not minimize the importance of educating yourself on the steps to finding the correct property for you. Remember you are the one putting the cash on the line.
Now that you have a professional to help with the search, it is important to find a property that is priced right, free of the need for major repairs, and lacking any potential tenant problems.
Pricing income producing properties is different than what you might be used to when shopping for your home. The value of your personal residence is primarily based on land and structure value dependent on location and amenities. These parameters are only one element of pricing of an income producing property. The most important value component is the amount of net income the property will produce. A term you will hear often and should understand well is Cap Rate.
Cap Rate is a simple calculation that is calculated by dividing the Net Operating Income of a property by the asking price. It is generally expressed in percentage. You should compare the Cap Rate of any property you are interested in purchasing to be sure it is in line with other properties in the same general location and with the same general amenities. One side note, the Cap Rate is also a loose comparison between the return on an investment in real estate and other non-real estate investments. For example, you could use a Cap Rate of 8.0% to compare to the expected return on the same amount of money invested in the stock market or a CD.
Nothing can sink your real estate investment faster than a major repair. When you do a walk-through of a property you should pay special attention to high cost / high maintenance items such as HVAC systems, roofs, plumbing and electrical systems. Before making any final purchase the property should be thoroughly inspected by a professional who is experienced in the type of property you are preparing to purchase.
One document that should be part of your overall review is the rent role from the current owner. The rent role lists each unit, the amount of rent being paid, and a listing of when the payments have been made. This should give you a snapshot of any current payment problems. In addition, note on your walk through the condition of the units, cleanliness etc. In addition look for any other warning signs that problems could be in the future. If you have a chance to talk to any of the tenants, listen closely. They will often share interesting and important insights. I once entered an apartment only to be granted by the current tenant's pet pit bull … not aggressively … but he had one. Later, another tenant shared that he was actually raising pit bulls in his apartment and that he had once been accosted by a litter of pups while he was cooking a steak on the grill out back of the apartment building. He was unharmed; Unfortunately his steak was not so lucky.
Owning and managing residential rental properties can be a rewarding and profitable experience. Just be sure and make the right choices along the way.