Viewing real estate for the first time can be overwhelming, especially when you are planning to buy it as an investment, a rental property or for owner occupancy. What do you look for? Where do you start? How do you know that this property is in good enough condition that it will cash-flow easily? Well, we intend to help you answer these questions and more.
Before you even begin to think about anything, it is good to vet real estate professionals and see which one best suits your goals. You will be looking for someone who may also be an investor themselves or maybe someone who specializes in working with investors. This person needs to be willing to work hard and have their ear to the ground to let you know when deals hit the market. Best of luck in finding the right agent; but don’t worry, it may take a few try’s before you find the right person. Don’t be afraid to fire an agent if they aren’t pulling their weight. Remember: They are working for YOU!
Before you set foot inside a home, you must lay out your criteria. You need to answer a few questions to help find exactly what you are looking for as well as clarifying your tolerance for risk. Before you refine your preferences, you need a basis:
Price range: How much are you willing to spend on a property? This is going to change based on your location and how many properties/what sized properties you plan to buy. Also, factor in if you want to purchase more than one at a time. You may be able to buy one for $200k, but that also might mean you can buy 2 for $100k each (ask your mortgage broker!);
Location, location, location!: You should narrow to your ideal markets, based on your price range and tolerance for risk. A close proximity is ideal, but having a trustworthy property manager will help if you seek something further. When choosing, you should do extensive research on the potential for appreciation in the market and what the purchase prices look like compared to rental comps. Do you see property values going up in this area? If not, you need to mitigate the risk with buying properties with higher cash flow and in stronger rental markets. Blast tip: A good rule of thumb is the 1% Rule: you should be looking for a minimum rental price per month of 1% of the purchase price. As a simple example, a $100,000 property should be bringing in a minimum gross income of $1000 a month;
Types of home or property: Some investors deal exclusively with single family homes, multi-family properties(2-4 units), or commercial (5+units & office/retail space). What can you afford and what seems to best suit you? We recommend starting small to learn to manage a small property, but don't hesitate to go bigger if you are comfortable. We are currently focusing on 2-4 family homes, mitigating the risk of long vacancies, by having more units.
Property Condition: Also related to your risk tolerance, are you willing to do work on the property immediately or are you looking for a “turn-key” property? Fixer-uppers tend to be cheaper, but cost you in cash and time after closing day. Some properties are in move in condition and may need a coat of paint, but still need to be rented. Some units are in good enough shape with tenants already in place. We learned quickly that prefer homes that require minor updates with tenants already in place. These properties are usually sold at a reasonable price, are already cash flow positive. Once our tenants move, we invest in cosmetic updates, and increase the rents for a future tenant, inherently increasing resale value. Whatever you prefer, make sure your Realtor has a concise idea.
The more you narrow down your preferences, the easier it will be to get on the same page as your agent to find something you are comfortable buying. Take notes on preferred locations and property attributes as you search to refine these wants more thoroughly.
Conveying to your Realtor
You now have a better understanding of where to begin. You’ve researched neighborhoods, home styles and know what you can afford. Now it is time to share that information with your agent clearly so that no one’s time is wasted when viewing property.
Make a concise write up to share with your agent stating the following:
Your desired price range for investment;
Your target buying locations;
How many units you are looking for; from condos to multiple unit buildings;
Desired condition; if you’re willing to do the work or you want a turn-key property.
At this point, your agent should create a search for you and hand you/send you a list of potential properties to view. After you look over the list and approve, let the agent know to make appointments.
Make sure your agent has worked with investors. Your agent can be of value, but they can be commission-motivated, so question everything yourself.
As you walk through properties, be aware of a few important things (Note: some houses may be lived in and messy, try your best to see potential):
Does this home need any immediate improvements? - Is it a fixer-upper or turn-key? Remember that your budget for buying should also include immediate improvements. If the kitchen or bathroom need a renovation, can it wait a few years or does it desperately need the work now. If a unit is vacant, 9 times out of 10 you are going to paint the walls and clean the unit thoroughly to rent it quicker. Account for this in your search and any offer you make.
What is the condition of the appliances and fixtures? - You will be inheriting every fixture installed in this house; including the stove, dishwasher, refrigerator, chandeliers, sconces, sinks, faucets, etc. Are they going to need to be replaced soon? These are added expenses to account for.
What is the quality of work done to this home? - Are there custom cabinets, granite countertops, and real tile or Home Depot quality cabinets, countertops, and floors? Are there hardwood floors throughout or carpet? Are the bathrooms outdated and poorly maintained or have they been renovated recently? Also note the details like the backsplash, crown molding and wainscoting; this is a sign of higher quality updates. This should already be accounted for in the listing price, if not, you should make your offer accordingly.
Are there tenants in place? If so, are they neat and do they look like they care for the place? If not, why? Also, be prepared to ask for rent-rolls and leases. You want to know how much the tenants are paying, if they are bound to the property with a lease, if the tenants pay on time or if you will need to track them down for your money. The last thing you want to deal with is an eviction. What you are looking for are nice people who take care of the property. If there are one or more vacant units, you want to ask ‘why?’ Are they in the process of finding new tenants? If they can’t fill the apartment, is it because the rental market has high vacancies? Asking these questions can save you a lot of time and money. Again, remember to look passed the crap and filthiness and see the potential.
The BASEMENT- If the home has a full or partial basement, this is where I suggest you take pictures (if the rest of the house seemed worthwhile to you) and pay the most attention. It is here that the integrity and lifeblood of the house lies. Look for bending in the wood, unevenness, or broken/fractured beams overhead. Also pay attention to the basement wall to see if it is intact and sturdy or crumpling/warped; this is a tell-tale sign that the foundation of the house is in poor shape and will need repair. Structural work tends to be the most costly repair to your home but if you see major damage, it might be a deal breaker.
When you are down there, take a deep breath in through your nose. Does it smell musty? If so, you might be dealing with mold, another costly and troublesome repair if left untreated. Keep your eye out on the walls or the rafters for black spots.
Take a look at the boilers/furnaces and the water heaters. Do they look like they are on their last leg? This is another five to ten thousand dollar investment you will need to make at some point. These mechanics are important since they provide heat and warm water for you. A new boiler is a huge plus since it is overly expensive and lasts for decades if serviced regularly.
As far as the basement foundation, mold and fixtures are concerned, you can always ask for them to fix those things if they are a concern to you as a contingency on your offer. A contingency is a fail-safe you put in your offers to cover yourself in case you want to back out of a deal, but don’t go overboard on these because another offer might be accepted over yours if their contingencies are less demanding; even with a lower offer. Keep in mind that a Realtor worth his commission should be able to guide you through the basement and tell you how to handle these types of issues.
Lastly, Would you live here?- Do you like what you see when you look out the windows? Would you feel safe and happy in this neighborhood to raise your kids or have a BBQ in the back yard? Would you live in here or in one of the units if it became vacant? Some people don’t care about this; they only care if it produces income. But this question also lends to the rent-ability of the property and the resale value.
As you search, you will find out what you like and revise your criteria, but make sure to keep your agent in the loop (We can’t stress this enough!). If you don’t like what you are seeing, but never say anything to your agent, how are they supposed to know that your preferences have changed?
Now that you know what you are looking for and what questions to ask yourself and your realtor, begin your search. If you find something that you love, don’t hesitate to make that offer because there is always another buyer out there looking to steal that home away from you. In most cases, investors are abundant, especially if the numbers look good in that particular area. Never assume you are the only investor.
Once you make and offer, know your highest price you would pay, even if it is over the asking price. You may be up against another investor, so know when to push and when to back down. There will always be another option. Once that opportunity comes along, you will know to act fast or miss out on a great opportunity. BUT, always do your due diligence before making an offer or at least put contingencies in place to cover yourself, because an inspection can save you a boatload of money if there is a drastic issue you missed.
If you ever need any advice on real estate investing or real estate in general, don’t hesitate to contact us, we love to help and share our knowledge. Also, if you are looking to invest in real estate, but don’t have the time, we often find great, moneymaking deals that we can offer great return on with no work on your part. As always, happy investing!
Chris and Joe have years of knowledge, stories, and experience to share with you. This is where you can access their minds, to learn about what they do and how homeowners can be more effective when in tough situations.