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4 Critical Factors To Investor Success For any landlord, success starts with buying the right property to rent out -- one that appeals to renters, minimizes your costs, maximizes your income and appreciates in value while you own it. Finding that property among the many foreclosed homes available takes some extra work -- and professional help.
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Here are some key local factors you'll want to pay attention to:
1. Location and demand.
Look closely at the location of any foreclosed property you are considering. You want to buy in an area that does not have a lot of other foreclosures, which could negatively affect the future value of your investment.
You'll also want to look in areas that have been consistently popular with renters in the past -- areas near public transportation, employment centers, shopping, good schools and/or colleges, recreational opportunities, etc.
We can help you:
- Check out rental vacancy rates in the area.
- Find out how long rental properties stay on the market.
- Research what economists and local experts predict about the future of the area, including its rental market and employment opportunities.
- Investigate plans for the neighborhood and general area, such as road improvements, industrial or commercial developments, new-home construction, etc.
- Find which types of properties are most in demand. In some areas, condos, townhouses or multi-family units may be easier to rent out than single-family homes. In other areas, the reverse may be true.
You can find U.S. Census Bureau statistics on rental vacancy rates by region, state, metropolitan area and type of property at: www.Census.gov/hhes/www/housing/hvs/annual04/ann04ind.html. Or, give us a call. We track rental statistics in our area and can tell you what types of properties in which locations have been in demand over the long term.
If you plan to manage the property yourself, be sure to select one that's conveniently located near your home or work so that on-site visits don't present a major challenge.
Choose a property that is in good shape and easy to maintain. (Read more under Finding Foreclosures/Picking A Real Bargain.)
Repair and maintenance expenses can seriously impact the profitability of your investment. Although some lenders and government agencies may make minor repairs or improvements before putting their foreclosed homes on the market, they generally recoil from investing much money at all in homes that they're already sure to lose money on.
Since foreclosed homes are usually sold "as is" -- meaning you, the new owner, will be responsible for bringing the property up to standards for rentals in the area -- you can minimize your financial outlay by selecting a property that does not require extensive structural repairs or major improvements.
Your best approach is to hire professional inspectors who will give you thorough reports on the condition of the roof, major systems (heating, air conditioning, plumbing, electrical), foundation, walls and ceilings, flooring, mold issues, radon gas, pests, etc. Then have a general contractor give you estimates on the cost of repairing or improving items that must receive attention before you can rent out the property.
3. Costs and benefits.
Before buying a foreclosed property as an investment, take a careful look at the numbers to make sure it will meet your financial goals.
- Purchase costs include the property's price and the cash you'll need for the down payment and closing costs.
- Ownership costs include monthly expenses for your mortgage payment, insurance and property taxes, and homeowners association or condo fees (if not paid for by tenants).
- Operating costs include expenses for maintenance, repairs and improvements, as well as utilities and property management fees (if any). Plan for a reserve fund to cover unexpected repairs and at least two or three months of vacancy periods between rentals.
- Income from the property should be calculated after you determine a competitive rental price. (We can tell you what typical rents are for different types of homes in the areas and neighborhoods you are considering.) Be sure to calculate income from the property with an assumption that you will have occasional vacancies -- thus no income -- between renters.
- Tax benefits should also be factored into the equation. For example, most property owners can take a tax deduction for mortgage interest, property taxes and a variety of other expenses, as well as depreciate the value of the home every year.
For authoritative information on tax issues, see IRS Pub. 527, "Residential Rental Property" and consult your tax advisor.
Bear in mind, even though you may not be able to cover all the costs of investing in a foreclosed home during the first few years of ownership, that doesn't necessarily mean it is a bad investment -- providing you have extra resources to make up the difference. By holding the property long enough, inflation is likely to increase the rents you can charge, eventually generating income that exceeds expenses. In addition, properties usually increase in value over time, rewarding investors with a capital gain upon sale.
4. Legal issues.
You'll want to ensure that local zoning ordinances and homeowners association rules allow you to rent out the property as you envision. Seek information about rental restrictions that may affect how long or how often the property may be rented and the number of people who are allowed to occupy the home.
Although federal laws generally apply to discrimination and your responsibilities with respect to environmental health hazards including lead paint and asbestos, the landlord-tenant relationship is governed by federal, state and local laws.
States laws may address discrimination and environmental issues as well as security deposits, housing standards, right of entry, eviction procedures, maintenance and repairs, and other rental rules. Local ordinances may regulate rent amounts and the frequency and amount of rent increases, among other matters.
Give us a call to find out about applicable laws in the area you are considering or check the following sources:
- Your state housing-services or consumer-affairs office.
- Local landlords' organizations.
- Online information sources. One of the most comprehensive online resources for landlords is provided by Cornell University's Legal Information Institute: www.Law.Cornell.edu/wex/index.php/Landlord-tenant.