This article was posted on Wednesday, Jun 13, 2012

MRLANDLORD.COM Tips on Management
19 Top Tips When Buying Property That You Plan to Hold and Rent

1) Buy what RENTS!  A great buy in the wrong part of town is NOT a great buy!

2) LOCATION!  The prettiest rental in the wrong neighborhood will never have as much potential as the ugliest house in the right neighborhood.

3) ALL profit is decided at purchase.  Pay too much and the rent or resale will not be profitable.  Pay way under market and you can reduce rents if needed. 

4) Debt is NOT your friend, no matter what everyone tells you. Only sophisticated, trained, experienced business people should consider debt to purchase a rental. A paid for house is fun because it gives you tons of money, which leads you to the next paid for house.  Learn the gazillion ways to buy without a bank.

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5) When many people know about the house for sale, (MLS, big ads, online foreclosure newsletters, etc.) the price will stay up. When nobody knows and the seller does not want to mess with realtors, you can negotiate a lower price. Best deals are found in the quiet sellers you search out – the ones that no one knows about. You are looking for “don’t wanters”.

6) Look for desperate sellers. Look for houses that are undesirable because of minor issues that you can fix cheaply. Look for the best deals and lowball offer them. Watch your capital expense to rent ratio.

7) A house worth $100,000 that you can buy for $60,000 and only needs $5,000 in repairs but only rents for $700/mo does not make a profitable rental, it may be a good candidate for a rehab and resale.

8) Don’t be too optimistic. Without exception, every deal/property I bought had more problems than I knew about, costing more time/money to fix than I planned. This is across the spectrum of bad tenants, poor income, high expenses, neighbor problems, city problems, crime problems, vacancy problems, too much turnover, seller lying/deceiving, bad partners – it really goes on and on.

9) Be friendly and personable to neighbors, especially to old people sitting on the front step with nothing to do.  They are a wealth of information on what is really going on with the houses on the block.  In fact, never make an offer on a house until you have talked to the neighbors on either side and across the street. Gossip is golden.

10) Discount your would-be offer if the property does not have solid, verifiable income from day one.

11) Keep your eyes open. The best deals are usually those you can’t find on the MLS. By the time it hits the MLS, too late. The last good deal I did was a large multi-unit listed in the paper by the owner. I got real lucky on that one. Three people told me now they would have bought it if they would have known it was for sale.

12) A GOOD home inspection always pays for itself or makes money. They expose things that you can use to adjust the price a bit. If not, it gives you warm fuzzies about what you’re about to get into.
13) Troll MLS listings by Flat-Fee Agents that have no pictures and a long Days On Market (DOM). I found a beautiful house that way.
14) The key is to leverage and cash flow. It is OK to buy a property in C type neighborhood. If you don’t have a lot of cash to invest that’s the best option. Properties in A and B type of neighborhoods might be the best but don’t cash flow and still have maintenance issues and stricter code enforcement in better neighborhoods. It is all about numbers and return on investment. Buying cash is okay but it does not allow to maximize return on investment, and a loan against the property is great in terms of asset protection…if you don’t have a loan, I would suggest recording one…check with your attorney to do it the right way, it is called equity stripping. It is way better than any LLC or other asset protection but it is a good idea to use all of them.

15) I have been investing for 13 years and have about 50 rental units across the economic spectrum (3/2’s all the way to a mobile home park). Inevitably, my most profitable deals are in lower quality areas. I can buy a small 2/1 house for $15K (purchase and repairs) that rent for $400. In my world, that is about a $250 positive monthly cash flow. In a better neighborhood, I will spend $80,000 (purchase and repairs) for a house that rents for $1,100 per month, a $300 cash flow per month. Given the far superior returns of the lower-end rentals, why would anyone want to buy in better neighborhoods???? The answer is management (time, money, and hassle).
My 20A+ properties are easier to manage than any five of my C- properties. Therefore, I can add 50-60 more A+ properties to my portfolio without having to add staff.  When I first started my investing career, I had more money than time. So – leveraging my available capital for the greater return by purchasing lower-end properties in crappy areas made sense. As I have grown my business (rehabs, wholesale, and rentals), my time has become more valuable so the volume of the C- properties is dropping. Don’t be too quick to dismiss the different strategies for creating income. One immutable law of the low-end rentals: No one is building 1,000 sq ft houses anymore and there will always be demand for affordable housing.

16) Watch out for property taxes when buying rental property! From county to county there can be wide variation. A 3/2 might have taxes of $3500 or $7500. I buy in decent bread and butter areas. Usually three or four beds. Two or three rentals are great from a cash flow standpoint, but will require more management time. Learn to judge the quality of roofs, windows, furnaces, hot water tanks, A/C units, etc. Look for evidence of water and termite damage. If a roof or furnace looks like crap, it is crap.
I don’t like buying with renters. If the current owner is such a genius, why am I stealing his house? I put my own renters in using my own criteria.
17) Don’t be too down on the MLS. Around my part of the country, the banks are literally giving houses away. That will change in a few years, but for now, there are many good deals on the HUD list and MLS.

18) I’ve had good success by being able to move quickly. I do a quick inspection, but I know what to look for. Many sellers KNOW the house has hidden problems and will sell cheap for a quick closing and NO PROFESSIONAL INSPECTION. Just did one – they wanted to sell fast and cheap. I found minor termite damage. Later found out they had a $20,000 repair estimate for the damage, panicked, and sold cheap. I fixed it for $1000. Another found mold. Called in some expert who gave them a $49,000 quote to re-meditate and advised no one enter the home for fear of death on this $30,000 house. They sold cheap. I fixed for $500.

19) Realize that there is no investment strategy that works for everyone. Read everything you can to get ideas and develop it into a strategy that works for your market, skills and personality.

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