Buying a Rental Property, Assembling the Team and Reducing Risk
- Written by Laura Fiebert
Buying a rental property is fun, but it certainly needs to be done with care and a ton of research. Since a rental property is a long-term investment, you want to make sure you review all considerations.
Are the local laws in your favor?
EVICTION LAWS! Find out what the eviction laws are before committing yourself (and money) to a particular area. Of course, you don’t want to have to evict a tenant, but if someone is living in your place and not paying you to rent for months, you got to do what you got to do.
How long does it take to evict someone? In places like NJ, it can take months to have someone legally evicted while you wait around losing money.
How easy is it to raise the rent? There could be rent stabilization laws in place to don’t allow you to raise rents as you see fit. How likely is it that you can use their security deposit for damages?
Getting answers to all these questions is super important. Start by looking for a place that are “landlord friendly states.” The top 8 states – Texas, Indiana, Colorado, Georgia, Kentucky, Mississippi, Arizona, Florida
General Property Grade
Location, location, location. The location is critical in buying a rental property. Each rental property you look at will have a grade, A through D. This will help you determine if the property is investment grade.
It’s In summary, buying an “investment grade” property is about focusing on the key criteria that will keep your property occupied and stress-free. Here is the breakdown of the ratings.
Newly built properties in the nicest areas. High-quality buildings that are newer (built within the last 15 years) They may include premium with top amenities attracting high-income families. You will also see much higher and much less maintenance, but it comes with a much greater down payment and lower returns.
The slightly older property, but still nice. Might be not quite as nice of an area. Tend to have middle-class tenants. Rental income is typically lower than Class A and may have some small maintenance issues. For the most part, they are in good condition, live in ready and will some upgrades can be moved to a Class A
Older properties, more than 20 years old and located in fewer desirable areas. Likely, they also really could use some work. However, for investors, these rentals have high returns
Run down properties in bad areas. The area and the property can be described separately. It’s possible to have a run-down property in a great area. Harder to have a great property in a bad area, though.
It’s important for an investor to understand that each class of property come with varying levels of risk and reward.
Understanding Vacancy Rates and Potential Tenants
When buying a rental property vacancy is inevitable. The vacancy rate is the percentage of all available units in a particular area that is unoccupied at a given time.
Look at the US Census data on vacancy rates in the area you’re seeking to purchase in. With 2 minutes of research, you’ll have a pretty good idea of what this number is. Just plug this into our rental evaluator.
Get as much research on the tenant as possible. Often your management company will do this for you in the form of credit reports and their financial history. If you’re going to Google someone you’re going on a date with, you’re sure as hell going to do some research on potential tenants.
If the person wanted privacy, they should have set it as such in their social media accounts. I’m just saying to use any available information to help you make the right decision.
When looking at potential properties, you may come across something called Section 8. It provides the tenant affordable housing support from the local housing authority. The federally funded Section 8 housing voucher is intended to disperse poverty.
- Regular timely checks from the government
- Easy marketing, there is a significant demand for landlords that rent to section 8 tenants.
- Usually, the rents are higher than the market average.
- Little recourse for damages. You have to appeal to the section 8 office.
- Guest house – Be mindful of guests offering space to additional family members not originally on the lease.
- The section 8 office can change the rent on you (+/- $50ish) and even change the proportion of the rent paid by your tenant with little to no notice. This could modify the viability of the deal.
Repairs and Older Construction
Things will break – how soon is the question. Roofstock provides an insanely detailed document on this, and you can inquire deeper if you have concerns. They want to remove all unknowns from the transaction; it’s not their property, and they want the deal to be a good one. You want to look for properties that aren’t going to need a roof in under four years.
Protect yourself against the unanticipated.
You want to prepare for the worst so no one things can ruin your investment. What sort of natural disasters could occur in your area (if any)? Global warming is a real thing. Look at the flooding in Louisiana as the latest example. Imagine what could happen and try to avoid it or plan for it.
Get the proper insurance for the edge cases. You want to keep your insurance costs low by using a high deductible. You’re never going to make a claim unless you need it. Otherwise, your premiums will rise.
So, get covered for the big disasters and plan for the small ones with your reserve account. Making insurance claims for minor fixes could increase your monthly bill for years. Over time that $500 window fix could end up costing you a lot more.
Don’t overbuy, shop around for the best deal. Most insurance quotes are a just an arbitrary number, and you’ll notice that between companies they will vary pretty dramatically for the same coverage. Ask for what you are paying for exactly.
Do you have a strong team?
Property management team
You won’t get white glove service – it doesn’t exist. Simply look at how much they get paid. However, you can find people with strong communication skills and an online system to track payments/costs that will keep the stress off your back. So questions to ask potential management companies are:
- What are the terms of the agreement?
- How much do they charge you to find a tenant or resign a lease?
- When work is necessary will they run the point and handle it for you? How much extra do they charge for that stuff?
When it comes to management fees, 10% is pretty standard. If there is any way to reduce the fee, take it. Negotiate lease signing fees. If you act like a big fish and they will treat you like one.
ExcaliburHomes in Atlanta GA started us at 8%, a fee pre-negotiated by Roofstock. However, we saved 1% by getting paid on the 23rd of the month instead of the 9th. I saved an additional 1% by getting my statements online. This increased the Cash on Cash by 2.25%!