If you are looking for an asset that has the potential to bring in cash flow and grow in value rental properties may be just what you are looking for. Let’s face it, everyone needs a place to live right? With the current economic situation, it might be time to think about putting some of your investable income into rental properties. When done right not only can they cash flow, in other words cover their own expenses and then some. They also often can create losses on paper that can be deductible from your other income.
Below I have put together a list of steps I take when looking for my next rental.
- Make a Goal. You want to set a deadline for you to purchase your first rental. Let your family and friends know your goal. Stay committed to the idea and set manageable goals to view properties. You want to be specific in your goals. It often helps to write down your goals as you go along. Keep in mind that these are goals, and they are not written in stone. If you need to move them back because you don’t feel good about your options, then set a new time goal and go from there.
- Start Shopping. For me this is the fun part of the process. Get out and start looking at properties for sale. You can find a real estate agent that specializes in investment properties or if you feel more confident venture into for sale by owners. Though if you decide to go that route it would be wise to seek counsel from a real estate attorney for your own protection.
- Get a Spreadsheet. Develop a spreadsheet to help you analyze your properties and make sure your ROI or Return on Investment is where you want it to be, and it all makes sense. The spread sheet should be able to help you ‘rate’ your potential properties. I happen to have an excellent spreadsheet that I use to analyze perspectives (email me at [email protected] and put “Rental Analysis Spreadsheet” in the subject line and I will send it to you).
- Look at lots of Properties. Spend time looking at lots of prospective properties. There are going to be deals time and again. You do not need to or want to feel pressured into buying a particular property. Follow your instincts and don’t get pulled into a deal that you don’t feel good about. I would rather see you adjust your goal of when then for you to not feel good about your decision to purchase a property.
- Make an Offer and Start Due Diligence. When you have found the property that fits with your goals and you’re comfortable with it, make your offer contingent on due diligence. Don’t get attached to the property and be willing to walk away if things change and the deal isn’t as good as you thought.
- Even more Due Diligence. You need to look at this property from every angle. What needs to be done to get it ready to rent? Who is going to do the work? Have a home inspection and look for signs of covering up major defects. Research how to do good due diligence and read up on other people’s nightmare purchases and how you can avoid them.
- Open Escrow. Once you have been satisfied with your due diligence and you are happy with the property, start looking over documents and move towards closing. At this time if you are not involved with a real estate agent or attorney you should consider it. Also start working on your forming your LLC.
- Close and Deed the Property to an LLC. You don’t need to worry about closing in your LLC’s name. It’s a simple process to transfer your property to your LLC after closing. You also don’t need to worry about the ‘Due on Sale’ clause that is in most mortgages. The clause is designed to protect the lender from you transferring the debt to someone else, and not some much between yourself and your own entity. It is probably in your best interest to seek legal counsel regarding the transfer to avoid problems.
- Track Expenses. Keep track of everything you spend on your rental for tax purposes. This will include closing statements, and the costs you incurred prior to closing.
- Managing the Property. You did it! You secured the property now what? For a lot of people managing your own rental properties can be daunting with varying laws and regulations. It can be beneficial to hire a Property Manager to manage your property but that doesn’t mean you should just turn them loose with it. It is important to take an active role in your property by staying on top of what your property managers are doing and how your tenants are treating your property. Take plenty of regular pictures and drive by your property regularly.
There are many potential risks and pitfalls that can come from owning rental properties, but it is still my belief that this can be a very strong part of a retirement plan. It allows you to use the power of leverage to dramatically increase your own personal wealth. Just remember that there isn’t a rush. Take the time to do things right and minimize your own risks.