You have to make a plan before you make a purchase. Whether you’re buying your first or your twentieth investment property, finances and operation processes have to be in order. So, when you decide it’s time to buy, consider these key components of investment properties before you start the house hunt.
What to Consider Before Buying an Investment Property
1. Buy at the Right Price
As the investment proverb says, “You make your money when you buy, not when you sell.” Make sure you know the numbers in the market so that your purchase price is on target.
2. Determine Cash Flow and Appreciation
Then work through projected cash flow and appreciation figures. Monthly rent can be extremely lucrative if it brings in enough cash flow. So calculate what you can expect from income minus expenses to get a realistic financial picture.
3. Calculate Expenses
Not sure what numbers to include in your expenses? Check out this post to verify whether you’re forgetting anything!
4. Decide Who Will Manage Your Property
Will you manage the property yourself or hire a property manager? If you’re considering DIY, make sure you have the time and a local knowledge of the market. The right rental rate is key to the success of your property. And management takes time. Plan to be on call 24/7 for repairs or tenant issues.
5. Establish Management Processes
Handling tenants, evictions, leases, security deposits, and escrow accounts requires specialized knowledge to ensure you stay within the law and manage your property professionally.
6. Identify Necessary Repairs
What initial repairs will you need to take care of to get the property ready for rental? Consider the current condition and calculate potential renovation costs.
7. Ensure Recent Repairs Follow Code
If the previous owner remodeled the house, make sure they did the work to code. If not, you’re responsible for getting it up to city requirements. This could mean complete demo on work that looks great. But, if it wasn’t done to code, it will have to be redone. Plumbing, trusses, or rewiring could cost up to $20K to repair. You could have to demo an entire addition or break the concrete slab of the house to get to a pipe crack. These expenses add up quickly.
8. Plan for Ongoing Repairs
Who will handle ongoing repairs once the house is rented? Do you know someone you trust that can do the work quickly?
10. Market to the Right Tenants
The success of a rental property depends on finding good tenants who take care of your home.
11. Vet Potential Tenants
Do you have a process for vetting potential tenants? Plan an interview and referral process that lets you establish rental history, and choose a tenant who will take care of your property and pay rent on time.
12. Establish a Process to Collect Rent and Enforce Late Fees
How will you collect rent? How will you handle late fees? Be proactive in your collection procedures so tenants know how to pay and what to expect if they don’t.
13. Plan to Manage Tenants
How will you handle hostile tenants? How do you ensure tenants won’t destroy your property? When there’s a breach of contract, you need an action plan for handling it.
14. Legal Regulations
Both local and federal laws factor into investment properties. Without a proper understanding of your obligations and the tenant’s rights, you’ll easily find yourself in a legal mess. Before you buy, make sure you legally protect yourself.
15. Register the Property As a Rental
You can’t rent your property without the proper paperwork and inspections. Research the local process and regulations for rental property registration.
16. Set Up an Account for Security Deposits
Security deposits must be kept in an escrow account separate from all other funds. Plus, the law is very specific about when and how these funds can be used.
17. Understand How and When to File an Eviction
What justifies eviction? What warning should a tenant have before you file? When can you re-key the property? No one wants to file evictions, but you need to know how in case it’s necessary.
18. Understand How to Apply Rental Funds on Past Due Balances
Do you know how to prosecute a tenant that owes you money? Do you know what fees you can charge? Texas law allows you to charge a violation fee for past due balances, but not every state does.
Don’t walk into an investment purchase blindly. When buying an investment property, checklists keep you focused on the many factors that help you make the best financial decision. Make sure you’re equipped for the responsibility investment properties require. And if it’s too daunting, a good property manager can handle these issues for you.