Earlier this month I posted “Basic Screening Criteria For Buying Single Family Rentals,” a blog that suggested three initial screening criteria for rental purchases: location, price range, and configuration. Today, let’s go beyond the basics on our journey towards acquiring profitable investment properties. We’ll take a deeper look at properties on our screened list of investment candidates to see if there is one really worth buying.
To recap, we want to buy rental properties that are in neighborhoods that we have determined are good rental markets, and may be good future sale markets, too. The asking price needs to be within our budget, and the configuration of the property should fit the area (number of bedrooms and bathrooms). Now we have a list of properties that meet our basic screening criteria. We only want to buy one property at this time – so, what’s next?
We now look at each property on our “short list” to determine if it will be a profitable investment. Once again, we have three considerations:
Liens and Liabilities. We’ve already looked at purchase price, but there might be other costs associated with the property that could be concerns at time of sale and later during rental operations. We need to identify each of these costs and add them to either our total purchase cost or recurring operating costs calculations.
Examples of purchase cost items are: unpaid taxes or assessments, unpaid homeowner association dues (if house is located in a Planned Unit Development), unpaid utility bills, mechanics liens, and pending or current litigation (did mailman fall on the front steps or did previous owner add a second story that is blocking a neighbor’s view?). We’ll also create our first draft of a buyer’s closing statement to calculate escrow closing costs. And, of course, the granddaddy of them all – immediate repairs or upgrades needed to bring the condition of the property up to your investment standards (more on this in minute).
For recurring costs, we’ll look at the current owner’s utility bills over the past 12 months, the current year property tax bills (to determine the tax rate that will be applied to the new cost basis), get a quote from our insurance agent for the right coverage for this property, and estimate costs for general maintenance, pool service (if applicable), lawn care, and any other appropriate operating costs. We also research who must pay which utilities. For example, we work with an investor who owns a house in Nevada, where landlords are required to provide (pay for) water, sewer and trash service.
Condition. We will conduct inspections of the property to determine its general condition. Prior to making an offer, we will walk the grounds and go through all the structures looking for problems. I take pictures with a digital camera and make notes in the voice recorder in my iPhone during these initial inspections. Our focus is on finding major problems that need immediate repair or features that should be changed or improved as soon as we take possession.
Business Plan (Draft). Finally, we create a draft business plan for our investment, spelling out each of the tasks relating to purchase and operation of the property, including potential rent rates. In our plan we also create a draft exit strategy.
With our liens and liabilities identified, our initial inspection of the condition of the property completed, and a draft business plan before us, we now compare our investment goals and capabilities against the anticipated financial return to answer the question: Should we make this investment? Our underwriting of the opportunity should be complete enough to give us a reliable answer. But this answer is also a “draft” – as there are still things to be considered if we make an offer and proceed into the purchase phase of our investment.
Please subscribe to this blog or check back soon for the final steps to acquiring our investment!
PLEASE COMMENT ON THIS BLOG
I appreciate your comments, ideas, complaints, compliments, recipes, favorite wine, you name it…
If you have questions about home buying/selling/investing, drop me a line! firstname.lastname@example.org
Would you like to receive email alerts when a bank-owned (REO), short sale, or traditional sale property that fits your criteria comes on the market? You can search the MLS yourself and sign up for alert notifications by going to www.bayareaproperties.listingbook.com .
To receive the latest Bay Area, California, and national real estate market information, please stop by www.jsrealproperty.com and subscribe to our Housing Trends eNewsletter.