Questions to ask BEFORE buying your next rental property!
Updated: Dec 11, 2018
So, I'm located in Fayetteville, NC. We've got a pretty unique market (perhaps Jacksonville, NC will understand this), in that we have a relatively stable market. Believe me, we do have our fair share of foreclosures and short sales, markets trending towards buyers in "low" times and towards sellers in "high" times. What makes me say we're stable; however, is the fact we have a large military installation right next door: Fort Bragg. We have a constant, rotating door or military personnel in and out of our community as a result. There are certainly pros and cons to it all, but overall, I think it's fantastic.
Because of our market, we have a lot of rental properties. For investors in this field, it can be a beautiful place to be. Not all persons who are stationed here want to buy a house here, and that's okay! They may be here for training temporarily, or have their heart set on moving home to their home of record (aka right back where they started from). So finding a comfortable, reasonably priced, reasonably updated home to rent, is all they need.
As an investor, it's easy to find homes to buy. Some years are easier than others in that regard, but finding a home for $65,000 is still something that can be achieved. In addition to knowing your numbers: your short term and long term costs versus short term and long term returns, is always important, and a good starting point. The condition of the house is important, too: is this going to be a money pit like Tom Hanks had back in the 80's?!
I've seen it time and time again. Investors have cash to burn, and they fail to take perhaps one of the single most important steps they can take: getting a home inspection. Do that, first. Your agent should be able to let you know what implications of some of the items that appear on that report will be, but also talk with your property manager. They can put things into context from a rental perspective, a sales agent may not understand. A good example of this: polybutylene pipes. What happens when they break in the wall and leak overnight into the laminate floors and carpets? Who is responsible? Even if you were not aware of the type of pipes you had in your home, they may not be a covered item with your insurance, since they are known to have issues, and the recommendation was to have them replaced YEARS ago. It's not a matter of "if" something happens, but "when".
Does your sales agent understand what it means for a home to be "safe, fit, and habitable?" as it relates to NC Landlord Tenant Law? Go ahead, ask them. Unless they have an extensive property management background, they shouldn't be saying yes. Talk with your property manager. Just like the situation with the pipes, your manager can identify the repairs that MUST be completed prior to any tenants moving into the property, in order to keep you compliant with the Law.
What about rental returns? Who is actually the one preparing your rental CMA? We're working with an owner, now, expecting to get $1,000/month on a house, because their sales agent told them they can get it. Really, their neighborhood can only command $800/month. That's a huge difference! So make sure you're getting the numbers on rate of return for rents from your manager!
Buying a property that already has a tenant in it? Sweet! That means you'll at least have instant cash flow, even if you have to spend it on repairs! You're that much closer to a profit! Did you know your sales agent should be using the Additional Provisions Addendum to your Offer to Purchase and Contract? The reason: it addresses an existing lease, as well as the security deposit and how it will transfer. But wait, there's more! What about your rent?! Yes, YOUR rent. If you own the property December 15th, and the seller has already collected rents for December, shouldn't you get your pro-rated share as the new owner? Did you know that has to be requested separately?! You do, now. All of this should flow through your closing disclosure or HUD-1 statement for your records, too! Plus, the buyer has a certain amount of time they are required to remit copies of the lease agreement for your review, BEFORE the end of your due diligence period! You should also probably make sure there are not any outstanding invoices on the house, either, or you might be stuck paying for them....
Last, your property manager is going to need a lot more than just a lease and security deposit. They'll need the extra keys, the inspections (photos and reports), the tenant's ledger to see if they are all caught up or if they are good to go, and any other information that could be useful, such as unpaid invoices, ongoing work orders, and more. The more we can get, the better.
So, all this to say, there's really only ONE question you need to ask, and that's for your property manager's involvement in your purchase. Your sales agent is absolutely well equipped to handle your sale, sure, but unless they know your market and how management is done in your market, involve your manager, too. It will save you time, money, and headaches as you move forward.