4 Steps to Buying a Rental Property

Prices on property are at their lowest in many areas and it puts the ball in your court if you're interested in buying. Buying rental property in a down market can be a lucrative investment but there are some factors you should consider before you jump in.

The following are the four basic steps for those considering investment property ownership:

1.Find out where renters want to live. Location, location, location takes on added economic urgency when purchasing a rental property. Ask your real-estate agent to show you properties that have an established rental track record going back two or three years, during which vacancies were limited to no more than three months at a time. Working a Realtor with Property Management experience is your best bet at getting some good advise.

2.Do the math. Before you buy, figure out whether the rents will cover your expenses and leave room for profit. To determine how much yearly rental income you are likely to receive, ask your real-estate agent for the going rates and scan the classifieds for comparable properties in the same neighborhood. Don't forget to take into account the possibility that the property may be vacant for a period of time. Then subtract annual mortgage payments and operating expenses -- insurance, utilities, projected repairs and maintenance and landscaping. Ideally, income tops outlays, and what's left is called cash flow. If outlays top income, producing negative cash flow, the property is too expensive. Either negotiate a lower price or continue hunting.

3.Assess the tax consequences. Anything left over after expenses is taxed as ordinary income. You can depreciate the cost of residential rental property, but not the land it sits on, over 27.5 years -- even if it is increasing in value. Suppose you paid $400,000 for a triplex on a sliver of property assessed at $50,000. Depreciation would come to nearly $13,000 a year, or, put another way, you could have that much rental income without paying taxes on it.

4.Consider a Professional Manager. Many new owners try to manage it themsleves. Neophyte landlords often fail to conduct a thorough background check on prospective renters. Such a lapse can be costly if the tenant stops paying rent or damages the property. Don't approve tenants until you have checked their credit and criminal histories and talked to references and employers. The lease should lay out rules about pets, parties, rent due dates and late fees. A Professional Manager can help you all of these aspects of renting that you might not be able to do yourself. If tenants already occupy the property when you buy, you will have to honor their lease until it expires.

The real estate market is ripe with foreclosures and standard sales at a great price. Many are in areas that are established neighborhoods for renters.

Want to know more??? Ask us!

Mark Andersen & Lauren Andersen-Ibarra