Becoming A Landlord Series – Part 3: Pulling The Trigger
In part one and two of this series I discussed some of the qualities you should have to be a landlord, and some of the things you should do you get yourself ready. In this third part of the series, I would like to talk about some things you should consider when you decide to finally cross the line from being not a landlord to being a landlord.
If you followed my advice from part two, then you should already have a pretty good chunk saved up for a down payment and an idea of the locations that you’d like to start looking for property. Your next step is to go to the bank and find out how much you can comfortably borrow. With this number in hand you begin your search.
Since you`re looking for the property upon which you will build your real estate empire, you should look for something a little less expensive than the bank says you can afford. That way you will have a little extra credit at your disposal should you need it for an emergency.
I did most of my preliminary searching myself online, and called each listing agent myself to go see their listing. I also asked them to bring me listing cuts for other listings they had that were similar in price and style. I found the property I eventually bought by seeing the sign on a lawn while I was driving by. The property was an exclusive listing, which was why I hadn’t seen in online before then, and it was $10,000 more than what I had told the Realtors I met what I was willing to pay which is why they didn’t recommend it to me. I eventually paid $20,000 below the $130,000 asking price, and that turned out to be too much.
In real estate, you make money when you buy. This means that your deal has to be profitable based on its current condition and terms. You can`t rely on market appreciation, or any other outside factors, to make you money. You have to purchase a property because it generates cash flow, or it is priced below market value, or there`s a way for you to easily add value to the property. Ignore this at your peril.
You also have to determine your exit strategy. Will you hold onto this property indefinitely, or will you try to flip it? Most people I’ve spoken to on this tell me that if you’re going to buy and hold a property, you must pay down the mortgage as fast as possible. Others tell me that you should sell once you’ve brought all the rents up to or above the market average. Whichever exit strategy you choose, should be decided before you buy.
You should have down payment equal to 20-25% of the purchase price. I didn’t do this on my first purchase, but I wish I had because a large portion of my net operating income goes toward debt service. I have to devote more of my own time to the property because I have less financial flexibility with this property than I would have if I had leveraged it properly.
My personal opinion is that the first property you own is one you will live in yourself that also has apartments in it that you can rent out. You don’t have to do this, I didn’t, but I think this would have been a better first step. The main reason is that you will spend more time with your property just after you purchase it, and as you are learning the business, than you will once you have everything running smoothly later on. Tenants will also be less likely to abuse the property if the owner is onsite regularly.
If you`re handy at all then you might want to think about buying a property that needs a little TLC. Be careful though, what a Realtor thinks is a little TLC could mean a whole bunch of headaches. What I mean is a property that is ugly, but could be easily improved with some new trim and a can of paint. If you have a little more skill, or have the finances that can handle having the apartment vacant for an extra month or two, then improving the kitchen and/or bathroom is the best way to improve the rentability of the unit.
Unless you are a professional yourself, hire a qualified home inspector that can offer an opinion on the structure of the property, as well as the mechanical (plumbing, heating and cooling) and electrical systems, windows, and roof. If those major areas are all given a clean bill of health then you should be good to go. if any of them are questionable, move on. Repairs to any of these areas can be costly, even if you can do them yourself, and they add no value to the property.
To illustrate: A friend of mine bought a duplex as his first home. He fixed up the upstairs apartment and rented it for about $200 more per month than the previous owner had rented it for. Then he started fixing up the downstairs apartment and moved into it. After a while the upstairs tenants moved out, so he moved upstairs and rented out the downstairs apartment for about $200 more than he was getting for the upstairs apartment.
Since he`s living in the building himself, the rent he gets doesn`t pay the whole shot, but it pays a big part of it. The value of investment real estate is in the income, so by increasing the rent he`s also increased the value of the property. In a few years he`ll have a couple of options: (1) he can sell the property and buy something bigger, or (2) he could refinance it and use the equity as a down payment on something similar. All he has to decide is if he wants to expand or not. I wouldn`t recommend that he do anything more to the building unless it would allow him to increase his rent.
Even though you took the time to prepare yourself for the big moment when you will sign your first agreement of purchase and sale, it’s hard to prepare for the excitement of closing your first deal. Still, be sure to do your due diligence. Do this by confirming the numbers the seller gives you for income and expenses. Also hire a building inspector and walk the property yourself. Talk to all of the tenants to confirm the rent roll and leases.
If all the numbers the seller gave you don’t check out or the inspection identifies something that needs to be addressed that wasn’t already disclosed, then revise your offer price accordingly, otherwise you close the deal. Ta da, you’re a landlord.
Tune in next week for the final chapter when we discuss the basics of property management.
The material contained on canucklandlord.com is intended for information purposes only, and is not to be taken as professional advice. You should always consult a professional before making any financial or legal decisions.