Investment Property - A Practical Guide)
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Investors buy income producing property
for various reasons, but most are looking for either a short-term
(2 to 3 year) profit or long-term monthly income. These
approaches require different strategies. Here is an
experience-proven method for selecting, purchasing and managing
income-producing property. This is not the only method that
works, of course, but it does work well.
WHAT TYPE OF
PROPERTY DO YOU WANT? -- Before you invest, you must decide what type of property you want, e.g.,
a single-family house,
8-plex, 120-unit complex or a strip mall? Examine your goals.
Do you want a fixer-upper you can buy at an under-market
price, put some capital and time into, and sell at a
substantially higher price? Or, do you want to
purchase something that is less of a challenge, has less
risk, but stands to provide you with a relatively steady
monthly income? Answers to these questions define your
purchase goals, and the type, location, age and
condition of the property you will search for.
THE MONEY -- Depending on your
situation and goals, many questions
are possible. Here are a few of them:
How much can you spend?
How much do you expect to earn?
How much should you
reserve for improvements?
After the purchase, how
long can you afford to own the property with minimal
income, assuming you are buying a fixer-upper?
Cap Rate are you
Do you have
1031 money to
invest? Have you selected an intermediary?
How big is your down
payment and how much do you want to finance?
If your down payment is
less than 20 percent, do you have collateral
available? (Check your expected income less loan
payment and other expenses; 30 to 35 percent may be
Have you selected and been
approved by a lender?
Do you need to sell
something before you can buy something?
PROPERTY -- With your
ownership and financing goals defined, it's time to
select a property. Discuss your goals with a
realtor or consultant. Are you going to
manage the property yourself or hire a property manager?
If the latter, contacting a property manager at this
stage can help you select the right property. The
more homework up front, the fewer (expensive) surprises
OUT -- Properties have many sides, some of which you can
discover before purchase, others you will discover after
purchase. Here are some things you can do to
increase your understanding of a prospective property,
minimize your risk and build a budget for after-purchase
- Research the location.
What are projections for population growth and job
market growth (manufacturing/retail)? How much
new-construction for multi-family is there?
What do locals think about the prospects for rental
rate increases in the next 3-5 years?
- Visit the building and
record your own impressions.
- Examine financial
information provided by the seller. This
should be at least a
pro forma and a copy of the
Ask for a profit and loss (P&L) report and
income tax Schedule D, if available. The more
you expect to spend, the more thorough you should
investigate income and expenses. Look for
concurrence between rent rolls, pro forma, tax
records and other financial data. It is
possible for a seller to overstate income on tax
forms in order to mislead a buyer -- a little extra income
tax paid for a year or so is nothing compared to the
potential income from a
- Find the property on a
map (see web links). See where it sits in
relation to shopping centers, schools, bus routes and parks.
What elementary and high schools serve your
- Is the property
visible from a busy road? Advertising by sign
is much cheaper and more effective than any other
PVA to find out
how much the current owners paid for the building
and how long they've owned it. You can also
see what its current taxable value is. Look at
past records to see how quickly property values are
increasing in the area.
- Gauge the culture of
the property. Visit the building on a week day
and on a weekend night. Talk to a tenant or
- Look for maintenance
indicators. Are window blinds in good shape,
etc? Observe the grounds, hallways and parking
- Check out the crime
rate and the types of crime in the area by exploring
RAIDS Online, a "crime map" website partnered with the Lexington Police Department
that provides constantly updated information:
- Call the police
department's dispatcher and talk to the cops who
patrol the area, particularly during evening hours.
Find the appropriate dispatch office number here:
- Make a pros and cons
list. What does the realtor think? The
property manager? The lender? Your
MAKE AN OFFER -- Once you get serious about a property,
check out the building in a little more
detail. Inspect each apartment, and/or hire a
professional inspector to make an assessment.
Though costly, this gives you a quick sanity check of
price vs. value. For example: Look at
appliances, HVAC and electrical boxes. Are floors
solid, especially in the bathroom? Carpet, vinyl,
tile OK? Check plumbing,
window integrity, door condition and squareness (can
show building settling). Check
exterior walls, easements, property associations, and so
bank will probably order a professional appraisal, but
you can have this done pre-purchase at your expense, but
first make sure the lender will accept the findings in
making a loan decision (you don't want to pay for two
UPGRADE COSTS -- How much will it cost to bring the
property up to snuff structurally and cosmetically?
Are you doing a quick upgrade in order to sell, or are
you upgrading for long-term income? These
strategies usually have different to-do lists and price
tags. Have a property manager, general contractor or other
qualified person give you an estimate. Do you have
the capital for upgrades? Most banks will allow you
to finance some extra money for property upgrades if the
appraised value warrants.
MAKE AN OFFER
-- Now that you've done your homework, it may be time to
make an offer.
Before you actually purchase, you should protect
yourself from possible financial problems associated with your
investment property by incorporating (Inc. or LLC) and
purchasing your property under your company name.
Good luck, and make some money!