This week’s show picked up where last week’s left off. We covered the basics of real estate investing, discussed the different routes to acquiring rental properties, and established criteria for determining whether your finances are organized enough to allow you to invest. Once you’ve decided that real estate investing is right for you, and after you’ve structured your finances to ensure you can invest wisely, the next question is: What now? And that’s the topic of this week’s show.
Contrary to popular belief, buying a rental property is not the first step toward owning a rental property; it’s the last. The first step is assembling a team. You do not want to wait until you have a particular property in mind before you start assembling your rental property team. You need to have these players in place first, well before you make a move on a property. An ideal team will consist of three, or perhaps four, people:
- A real estate agent, to give you access to the MLS, negotiate on your behalf, and handle the details of the purchase agreement or contract;
- A loan officer, to arrange for financing this property, explain your options, and figure out how much of a house you can safely afford;
- A property manager, to handle the operations of your rental property, from finding tenants to collecting rent to overseeing repairs and maintenance, and;
- A contractor or handy man, to inspect the property before you buy it and handle repairs and maintenance after you own the property.
The last two individuals, while highly recommended, are optional. If you’re only dealing with one or two single-family residences, a property manager and contractor may not be necessary if you feel comfortable handling tenants, collecting rent, and making repairs on your own. However, as living units add up—particularly for duplexes and fourplexes—the daily operations can take their toll, especially if you have a separate day job. Most property managers change only 5% of net rents, so the cost is usually well worth their efforts.
After you’ve settled on an agent, secured financing, and found a rental property, you then need to find renters. I have personally used rentals.com for years and have had tremendous luck finding exemplary tenants, probably because anybody using a task-specific website is tech-savvy and more likely to be good renter. Other options are to have your property manager handle the advertising (which they typically do anyway), advertise yourself on Craigslist, or recruit through friends and family.
99 times out of 100, prospective renters will be strangers. You need to develop a system for screening out bad renters. Eviction law heavily favors the renter, so once you have a renter in place it can be very difficult to remove them before their lease expires. A few standards I follow are: 1) Nobody with FICOs under 640; 2) Nobody who can’t afford the first month’s rent and security deposit up-front, and; 3) No unkempt borrowers. A person’s physical appearance and the way they present themselves can tell you a lot about their personality, temperament, and financial habits. I evaluate their appearance, the condition of their car when they pull up, and their general attitude when evaluating them as potential renters.
We’ve already covered a lot, and we’ve only just scratched the surface! The second hour of the show covers strategies for increasing the value of your rental property as it’s being rented. This is available in the archives. Over the next few months, I’ll have more shows dedicated to different facets of the rental property experience, so stay tuned for those!
8-16-2014 Come With Me Now! Part I
8-16-2014 Come With Me Now! Part II