Top Ten Things You Should Be Doing Before You Buy Investment Property

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Prior to purchasing an investment property or rental property, there are several things that you should have readied, to make your ownership transition easier and more successful.

Here’s my top ten:

  • Develop a Team: One of the areas that new investors and seasoned investors alike stumble on is having a team to help them. Anyone that has been successful in business has relied on other people that were better at certain things to help them.
  • Having a great lawyer, tax person, handyman, electrician, plumber and carpenter are all huge assets. In fact, having great people in these positions that don’t overcharge is priceless. It took me years to find all of these people, but once you have them in place you know what to expect with the quality of their work and timeliness. I also spent a fair amount of money employing the wrong people. As a new investor I would ask other people who is best in each area and interview them before you work with them.
  • Get a mentor: Believe it or not, most successful investors want to help other people become successful. This is contrary to a number of other businesses because people often feel they are creating their own competition, but I have found that with the size of the Twin Cities Real Estate Market successful investors aren’t worried about one more person in the market. Their expertise can make or break another person’s future.
  • Have an exit strategy: You should study your exit strategy. An example would be that you look at what properties would be most attractive to buyers in the future (your point of resale). If you’re buying a property and are paying over the current market rate to do so, you may have issues selling the property in the future.
  • Get 3 different options for financing: Look at three different companies/lenders. You may find that one bank or credit union may offer a loan that other lenders don’t. Not all lenders are the same.
  • Get copies of leases that are legal in Minnesota: I had the pleasure of sitting in court one day waiting for a case with an eviction. One of the cases prior to ours was thrown out because the landlord used a lease that contained language that was not legal in Minnesota. Minnesota Multi-Housing Association in Bloomington has awesome leases/addendums that have carbon copies which you can give to the tenant and keep your copy. Use their lease or the one that is generated by the MN Bar Association.
  • Study as many properties as possible: I would look at as many properties as possible. This doesn’t necessarily mean walking through all of them, but you can look at the income and expenses of properties and also cross reference that with what you see for rents on craigslist.org and you will be able to learn about different neighborhoods and cities and what seems to be a normal return for each area. You will see some suburbs and neighborhoods that won’t have a positive cash-flow. Edina would be a good example. If you are financing a building in Edina you will find that you will almost always have a negative cash-flow. Some areas have escalated in value so much that the pool of buyers will be people that are looking to “subsidize” their living by owner-occupying one side and having the tenant pay a majority of their mortgage and expenses. The owner is happy to live in a more expensive neighborhood at a reduced rate. Investors will often struggle to find a good return in these areas if any positive cash-flow unless they are buying the property with cash.
  • Understand the numbers: You’d be surprised how investors both novice and experienced miss certain expenses or don’t understand how to assess expenses or income. A good example would be figuring vacancy rates. I have seen this percentage figured as high as 10% and as low a zero. If you use 10%, it means that you are expecting to have a vacancy for more than two months every year! This isn’t likely unless you aren’t managing the property well. You should have a new tenant lined-up for your upcoming vacancy months in advance. This will keep you from have vacancies. Over a ten year period of time, you will likely have a vacancy for one reason or another, you may have an eviction that creates a vacant unit or you may have a major renovation that requires a unit to be vacant for a month. I looked at properties I owned and over a ten year period I have one vacancy on over 400 possible opportunities. I had to evict a tenant and the unit sat vacant for one month. That was the only vacancy rate was less than 1%. The negative to figuring a high vacancy rate is that on paper you will make every deal look much less positive than it will be in reality, and you will certainly miss-out on good deals because of your poor analysis.
  • Define the neighborhoods that you want to invest in: Your Realtor cannot tell you where you want to buy or not buy – it is illegal. You need to come to your own understanding of which neighborhoods you feel comfortable owning property. One suggestion I have is to stay within 1 hour of where you live. If you have read “Rich Dad Poor Dad” Robert Kiyosaki talks about a mistake he made when he invested on a different Hawaiian island than where he lived. He said it was much more difficult to manage than the properties that were on his island.
  • Research rental income for your neighborhood: Like I mentioned previously, Craigslist.org is a great indicator of what rents will be in a neighborhood. Use the median rent for units, you will find that the cheapest units are often dumps and the most expensive units often don’t end up getting rented at their high asking price.
  • Have a reserve for unexpected repairs: I would have a fund of at least $5,000 for unexpected repairs. The repairs that are needed in an emergency, like a leaky roof, are expensive.

Feel free to call me at 612 332 9000 if you have questions or would like help.