Tuesday, May 11, 2010

How to evaluate and find a good investment/rental property.

There is no doubt that the current economic condition our country is in is far from what many people picture as a healthy and vibrant economy. With high unemployment, rising fuel costs, the limping housing market, and the multitude of banks and other businesses that are failing...our country is struggling to nurse our economy back to a healthy state. However, one thought to ponder is this... and I quote "during an economic recession, money does not disappear, it simply changes hands."

What this means is that even though an economic recession causes a lot of people financial problems, it also creates great opportunities for some others to make money. One great opportunity to make money right now is that of purchasing investment property for the purpose of generating rental income. Home prices are reaching lows that we have not seen for almost 10 years. Many reasons have contributed to the decline that we have seen in home prices. It is harder to get a loan to purchase a home now days, which has caused demand for homes to come down, thus decreasing home prices. Also, many banks that have foreclosed on properties are selling these foreclosed homes for much below market value because they want to get these "non-performing assets" off their books as quickly as possible. When banks do this, it also contributes to depressing the values of the homes around the homes they sell.

While home prices have come down, demand for rental properties has remained very stable. With less people able to buy homes now days due to stringent lending standards, there are now more people looking to rent. Also, there are millions of people who are losing their homes to foreclosure in our country, and these people are also now looking for places to rent. With that being said, demand for homes to rent is still strong.

With prices for homes being very low and rental rates still high, it is now easier than it has been in a long time to purchase a property, rent it out and have the rental income exceed the mortgage payment and other expenses of owning the home. There is now a tremendous opportunity for people who have a lot of idle cash and good credit. These people have the ability to buy property for very cheap, rent the property out and make a strong return on their investment. I have had the opportunity to help several investors purchase properties for great prices. These investors were able to rent out their properties and earn return on investments of around 9% or 10% a year. This is a way better return than can be earned by keeping your money in a bank. Also, keep in mind that the return of 9% or 10% does not even take into account the increase of the value of the property itself over time. I know it is hard to believe right now, but yes, property values will begin to increase again.

So if you are one of those people that has some money to invest and you have good credit, what do you need to do to begin finding great investment property that you can earn a high return off of? First off, you need to figure out how expensive of a property you can buy. If you plan on purchasing a property with all cash, it is very simple. You just decide how much cash you are willing to spend on a property. If you are going to take out a loan to purchase a good investment property, you can go to a local lender and after evaluating your income, expenses, assets and credit score, he/she can tell you what you can afford to spend on a property.

The second thing you need to do is get familiar with rental rates in your area. You can do this by talking to a competant real estate agent or property manager in your area. You can also get a good idea of rental rates by searching online at properties that are for rent.

Once you have figured out how much you can afford to spend on your investment property and you have become familiar with rental rates in your area, it is time to locate some potential properties. When you are searching for the right property, you have to take several things into consideration. The first thing is location, location, location. In my book, this is the number one thing to look at. A good location is going command a higher rental rate, it will make it easier to sell the property in the future and it will make it much more likely that the value of the property will appreciate over time. The third thing to look at is the condition of the property. If the property is very cheap, but you have to sink a lot of money into it, it might not be a good deal. However, there are times where you can get a very good deal on properties that need fixing up, so you just have to evaluate the property on a case by case basis and make a good business decision. Getting educated on property values in different areas of your town can help you with making this business decision. A competant REALTOR should be able to help educate you on property values in different areas in your city.

Once you have figured out what you can afford to spend on a property, you have become familiar with rental rates in your area, and you have located a few good canidates for investment properties, it's time to figure out your projected rental incomes and projected expenses for each property. Figuring out the the projected rental income for the properties you are interested in is fairly easy. Just find out how much the rental rates are for simalar properties in the same neighborhood. You can do this by knocking on doors and asking residents what they pay for rent, or you can search online or call the "for rent" signs in the neighborhood and inquire about how much people are asking for rent.

Figuring out expenses is a little bit more involved. Here are the following expenses you are going to have to account for and how you can figure them out.

  1. Principal and interest expense (if you get a loan to buy the property)- You can figure this out by plugging the numbers into a financial calculator. You just need to know how much money you will be borrowing, what your interest rate is for the loan, and how long of a period the loan is amortized over (i.e. 30 years, 15 years) If you don't want to figure this out on your own, call your lender and they can tell you what this expense will be.
  2. Taxes-You can get a very good estimate of your tax expense by calling your local property appraiser's office. Taxes are figured out by multiplying the sale price of the property by the millage rate in the area the property is located. So if you know these figures, it is easy to figure out on your own.
  3. Insurance-You can figure this out by calling your insurance agent. It is sometimes good to get a few different quotes from different companies.
  4. Homeowners association or condo association fees-Some properties are located in communities that charge association fees. Usually for the fees, the association will take care of things like road maintenance and lawn care in the neighborhood. Condo associations usually have the highest fees, but you also get more for the high fees you pay for. To find out what the association fees are in a given neighborhood and what the fees cover, you should contact the homeowners or condo association that the property is located in directly.
  5. Misc Maintenance expenses-A good rule of thumb is that yearly maintenance expenses will be about 1-2% of what you purchase the property for. This expense can vary depending on how old the property is, what the condition of the property is like and how much maintenance (if any) your homeowners or condo association takes care of. For instance, most condo associations are responsible for the roof. So if this is the case, you do not have to budget for replacing your roof.

Once you have figured out the property's projected rental income, and you have figured out it's projected expenses, you can figure out what the property's annual return on investment will be. You subtract your yearly property expenses from your yearly rental income to give you your yearly net cash flow (hopefully it's positive). You next divide this yearly net cash flow by the purchase price to give you your annual return on investment. If your projected return on investment is acceptable to you and you like the property, you can next proceed to making an offer on the property.

I have successfully helped several investors locate and purchase lucrative investment properties. If you have any questions about buying rental properties please feel free to give me a call at (850) 567-0037 or email me at nahoom1171@yahoo.com