Have you ever considered buying a rental property to provide passive income or as a tool to build your personal wealth? People know that owning investment property has financial benefits but it can be a daunting undertaking for the average person. Buying your first rental property is easy with these simple steps…
Do your Homework!
Owning rental properties is certainly not for everyone! First make sure this venture fits with your overall financial and personal goals. There will be surprises and unexpected expenses in owning rental properties. You will have tenants living in your property and while you can fully vet them, their actions will be out of your control. If you decided it’s for you, you’ll need to additional research:
What type of property are you interested in?
- Single family
- Condos etc.
What can you afford?
What neighborhoods are you interested in?
- Are you looking for class A, B or C neighborhoods? How does cash-flow vary by neighborhood?
What are the average rents in the neighborhoods you’re interested in?
What type of cash-cash return are you looking for?
Are you interested in managing the property yourself?
NEVER start looking for properties without speaking with a lender first. Financing terms for income properties is different than owner-occupied properties. Make sure that you’re aware of the terms in your area. In Colorado, you likely need to put 25% down on income properties. Once you’ve spoken to a lender and have a pre-approval letter, you’re ready for the fun part…
Get out and start looking at properties. Keep in mind criteria you’ve already put in place during your homework phase. This might seem overwhelming at first but the more you look at, the quicker you will at recognizing good and bad qualities of rental properties and which ones will provide the best return. Hire an agent that knows what they’re doing when it comes to rental properties, and listen to them! They are the experts. Which brings me to my next and most important point…
Evaluate Cash Flow
There are a lot of different models out there to help you estimate your monthly and annual cash flow. Bigger Pockets has a free and user friendly model which you can find here. When I’m working with an investor client, I always send them an estimated year 1 analysis before we even go look at a property. Below is a case study of an actual investment property that a client purchased last month. The numbers for rent, purchase price, loan, property management and taxes are actual numbers. I’ve included estimates for maintenance and repairs. Your ability to cash flow will depend greatly on your market. The Denver market isn’t seeing huge cash on cash returns right now but with appreciate at about 10%/year, most investors have a strategy to buy and hold. In this case, anything above a 4-5% cash-cash return would be considered a worthwhile investment.
CLICK HERE to Review the Harvey ROI Model
- Purchase price – $301,320
- Monthly rent – $1,950
- Annual Effective Gross Income (EGI) – $22,230
- Property Management – 8% actual
- Repairs, maintenance, supplies – 7% estimated (this house was recently updated so we’re not expected a lot in year-1, this could range anywhere from 5-10% depending on the condition of your property)
- Insurance – 3% (average for most homes)
- Taxes – $1,318 actual
- Cash flow after debt service – $4,819
- Cash-cash return 7.8%
Make an Offer
Once you’ve evaluated your property, it’s time to make an offer! Your real estate agent will guide you through the next steps which will including, going under-contract, inspection, appraisal, loan approval and closing. Don’t get too excited during this phase, it’s never closed until it’s closed but you’re making strides in the right direction.
I’ve heard many investors claim that a good property manager is worth their weight in GOLD. Some people want to manage themselves as it does save money and impact your cash-flow. However, once you own multiple properties and have a full-time job of your own, managing your own property can be overwhelming. A property manager will list your properties, screen tenants (background checks, referrals, credit checks), sign leases with tenants, handle ongoing maintenance and manage tenants vacating properties. The property manager is the one responding to emergency calls when a water line breaks or the heater goes out in the middle of winter. A good property manager also has preferred vendors for everything (plumbers, electricians, contractors etc.) and can likely secure you better rates than you would get yourself. Bergan & CO. is a great property management company that has been serving the Denver-Metro area for over 60 years! Please feel free to contact them for any specific management related needs.
More questions? Feel free to give me a call, I’m happy to help!
Photos of the Harvey property used in the above ROI model: