How to Buy an Investment Property

7 Keys to Real Estate Investing Success

Disclosure: it is extremely important to consult with your legal advisor and licensed financial advisor before undertaking any financial decision. This cannot be constituted as legal nor financial advice. It is only a narrative of what my experience has been as a successful real estate investor.

A multifamily home or an income producing property are great investment vehicles because you can generate rental income or sell it as a fix-and-flip to earn an immediate profit. I must warn you, however, that this type of real estate investing can be very risky especially if you don’t know what you’re doing. Here I have compiled some of the best professional and expert tips for buying multifamily real estate and income producing properties:

Multi family (“Investment Property”) tips:

1) Location is key but not everything

Always choose your real estate location wisely. You can always fix a property, knock it down and rebuild it from the ground up but there is nothing you can do about a bad location where no tenants want to live or a property you can not sell due to a bad location. Location is always going to have a direct impact on the available choices you have for tenants and therefore your rental income and future resale value will be directly affected by it. The location of your choice should be within a family-friendly community, near great schools, with easy access to hospitals, shopping centers, and should be generally considered a safe location.

Although location is critical to your success as an investor, we believe location with the right management is key. Have you ever seen prime real estate properties with great tenants but yet the owner fails to generate a profit? Plenty of these cases can be seen at a large and small scale.

2) Always Take Under Consideration Your Future Maintenance And Repairs

Feel free to overestimate your expenses and know what your best and worst financial case scenarios can be. More often than not, real estate investors underestimate rental property maintenance and repairs. That roof will eventually have to be replaced, all appliances do have a life expectancy and tenants also have the tendency to not care about your property the same way you do. For these reasons, real estate investing often calls for unexpected expenses in additional repairs. It is certainly best to overestimate your expenses, have a larger cash reserve than you need to avoid any costly surprises. I have seen real estate investors that perform no maintenance or repairs to their investment properties. This will eventually catch on to them in the form of city mandates, court orders, legal expenses, no insurance coverage, bad tenants, escalated property damaged or depreciated property value. All of which goes against your profits, cash flow and your future resale value. In one of my first rental properties I purchased, I was replacing a damaged floor. We ran out of two floor joists and thought it would be ok to leave it the way it was. 8 years later, it cost me $9,700 in collateral damage as part of the kitchen floor collapsed damaging the cabinets and countertop. This huge expense could have been a simple $125 repair job years earlier.

3) Always Consider Investing In Low Maintenance And Market-ready Real Estate

You may have to pay extra for an investment property that needs minimum work. But if you are not an experienced real estate investor, after all you are reading this article for a good reason, then you would be better off searching for a property that is ready to generate rental income. In my earlier years of real estate investing learning curve, I once had a property that was a “really good deal” at the time. I was excited and very inexperienced at the time. Even Though inspections took place, I did not pay close attention to the best and worst case scenarios for repairs the property needed. Within 5 years of my purchase I was dealing with a property that needed a new roof, new boiler, new retaining wall, new septic, a flooded basement during heavy rain and support beams that were infested with powder post beetles. I thought I could do it all but it really cost me a lot of money, time and a lot of headaches. For this same reason, I spend time reading through septic and inspection reports to measure my risk factor and calculate this into my financial projection for any new property I purchase. It is wise to get multiple quotes for any repair that is necessary now or in the near future to make sure you know the scope of the project before you decide to place an offer on any investment property. If it does not make any financial sense on paper, it will not make sense once you purchase the property.

4) Find Out About The Leases And Tenants That Are In Place

Try to talk with the existing tenants when you inspect the property as this may help you decide what tenants you want to keep and which ones you don’t want when their leases are up. This way, you will know what tenants you will be dealing with when you become the owner of your new investment property. Ask the tenants how they like living in the unit and if there are any changes they would like to see done. You will be surprised by the things the tenants share with you. Remember that some tenants might move out when they discover the property is for sale and it is up to you to express your desire to keep the tenants if you become the new owner.

I once ran into a tenant in the parking lot in a property that I bought. I parked in the wrong spot not knowing there were assigned parking spaces. I introduced myself to the tenant but he went off on verbally insulting me for taking his spot. He felt that regardless if I was the new owner I should not take his parking spot under any circumstances. Note: at the time the driveway had 3 empty guest spaces available. I calmly moved my car, apologized to the tenant and asked for his name. He provided his name with an arrogant tone and I calmly told him to look for a new place when the lease was up. Three months later, at the end of the lease, the tenant offered to pay higher rent. I declined because having tenants with this kind of temper is out of my investment strategy. Since then, I rented the place to a very nice tenant that really takes good care of the place and is super friendly. In my experiences, this makes the whole difference between loving or hating being a real estate investor.

Many investors believe that is all about the numbers. At the end of the day you do have to pay your bills. However, I recommend that you show caring for the well being of your tenants and have integrity in everything you do. Having an excellent relationship with your tenants makes your ownership a lot easier and will certainly place you on the road to be a successful real estate investor.

Other aspects to consider as far as tenants: are the rents low for the market or are they at market value? Are there any improvements you can make to increase market value of the rents in the future? How much money is on security deposit for each tenant? Are they up to date on paying their rents?

Always run background checks and credit reports on your potential tenants. Many times evictions, criminal cases and bankruptcies do not appear on background checks as the name/DOB/SSN do not match requirements for bureau reporting. I always suggest finding out the cities where prospective tenants have lived and directly searching the public records for any criminal and court cases in that particular city/state. In most cases this is a free search. You will be surprised by what you find. Many tenants know that some evictions do not show in their background checks due to loophole and proceed to misrepresent on the rental application “no evictions” in the past. I once denied an application in one of my investment properties from an applicant that had 3 evictions in the past 4 years. Yet, the fee-based background report presented on their behalf did not show any evictions. I have turned down many applications as a result of this free background search. Of course, you need to document the information to protect yourself on the reason for your denial.

It is also important to educate yourself on federal and state discrimination laws, city and state rental laws, security deposit requirements, disclosures and what it is that you can and cannot do as landlord. This is out of the scope of the article.

5. Generate a Spreadsheet With Cash Flow Projections

Before going into real estate, you have to have a financial plan and be clear on what your financial goals are before you buy any investment property. Be realistic on your financial projections. Your cash flow analysis should calculate mortgage interest, loan payments, federal/state/city taxes, repairs, maintenance, utilities, marketing, legal costs, inflation, reserves and property future appreciation/depreciation.

Also include some rate for when the property may be empty due to a tenant moving out. It typically takes me a month to go into a property, do some repairs and get the property painted for the next tenant. It is a lot of times a lot sooner than a month but renting the dwelling again takes time in running through prospect tenants and background checks. You have to decide what your financial goal is, the metric to use, your cash flow, cap rate, and return on equity (ROE). I use a Google sheet that I have perfected over the years for my financial projections. All these factors will help you decide what the new investment property is worth to you and what path to take to get the most on your investment.

Many first time real estate investors let their emotions influence their investment decisions. It is always exciting to purchase your first investment property, but always make sure you balance your excitement with an objective financial analysis.

6. Financing - Find a Lender to Help you Finance your New Investment Property

Disclosure: it is extremely important to consult with your legal advisor and licensed financial advisor before undertaking any financial decision. This cannot be constituted as legal nor financial advice. It is only a narrative of what my experience has been as a successful real estate investor.

Real Estate Partnership

I personally prefer to find an equity investor or partner to purchase rental income properties. I feel it is better to keep my money than to pay it to the bank in interest for so many years. This may not make sense financially to a lot of investors as you are locking up a large amount of your finances that could be split into multiple properties by using a lender. Evaluate the numbers with a financial advisor or tax professional that you trust. Also your cash flow spreadsheet may help you do a comparison between buying cash or financing your new investment property.

Remember that getting into a real estate partnership is always very important to have everything in writing on how the partnership should work and what expectation to have in the short and long term from each partner. It is extremely important to consult with your legal advisor and tax professional before undertaking any real estate partnership. Everything has to be layout and transparent to make sure your partnership operates smoothly. After so many years of partnerships, I’ve learned that this is probably the most important aspect of a partnership to eliminate any legal battles down the road.

Getting a Mortgage

If having a real estate partnership is not for you, then your next option is funding your investment property using a lender.

Today, there are many lenders on the internet to choose from. Finding a lender to finance your real estate investment purchase is a very tedious, demanding and challenging task. After the years, I have developed a good relationship with my mortgage broker which makes the whole process a lot smoother for me.

There are many options when getting a loan. Going to a direct lender may give you a better option on interest rates, points, fees and so but not always. Shop around and talk to mortgage and lending professionals about the various options.

When my clients asked me what I choose as far as terms, I always preferred to get the 30-year fixed mortgage with the lowest interest rate and the lowest fees I can get. This works for me but it may not be for you. Ask your mortgage broker. I have seen real estate investors that preferred different options. It all depends on their financial circumstances and goals. Only a professional can help you analyze your circumstances and goals better.

Be prepared with all your financials and investment property income/expenses when contacting your lender so you can present a transparent picture of your circumstances.

7. Work With An Experienced Real Estate Professional - That Is Me!

I am an experienced professional expected to maintain a higher level of knowledge of the process of buying real estate. Real estate purchasing may seem to be a very simple process: find the investment property you like, negotiate the price, pay for it and move in. However, there is much more to real estate investing than just that. There are laws, research, disclosures, inspections, appraisals, negotiations and other requirements that have to be met.

You need to take a break and think about all the questions to ask when buying a house. And as I always tell my clients: “If you have a question, ask it, no matter how foolish it sounds in your own head. There are no such things as stupid questions.” After all, you are making one of the biggest financial investments of your life, so it’s an excellent opportunity to tap into my expertise as a real estate agent and rental property investor.