As a REALTOR®, I get asked all kinds of questions when it comes to homebuying. Not everyone is buying a home for themselves; some people are looking to expand their investment portfolio so are interested in purchasing homes as a revenue property. Working on this type of investment property is rewarding and challenging for both you and your REALTOR® who will work with you on the marketing and selection of the revenue property.
One of the cautionary tales I often hear about revenue property owning is people didn’t realize what they’re getting into. Before you contact your real estate agent, consider what’s really involved. There are pertinent questions you need to consider – for example, tax implications and affordability – are best discussed with your financial advisor, but once you’ve made the decision to purchase a revenue property, you might want to start considering a few things.
Firstly, you need to have start-up capital. Most potential landlords consider the cost of purchasing an investment property but many overlook the costs to remodel. In other words, don’t expect start-up costs to end at the closing.
If you buy a damaged or out-of-date home, you could spend a significant amount to make it “rentable.” Any damage to the foundation, plumbing or wiring can cost thousands of dollars to repair. Even if you buy a property in good condition, you may still have to make changes to get it up to code. Factor in the need to keep money aside for future repairs. Landlord and tenant laws require you make serious repairs quickly. If you don’t, you could be held liable for additional damages. There are a number of things to consider when researching revenue property investments. Once you’ve established how much you are planning to spend, and work with your REALTOR® on where you are looking to purchase, you need to establish actual market value for the property.
• What are the current vacancy rates for the specific location?
• Are the reported expenses reasonable and complete?
• Does the construction of the building require immediate or deferred repair?
• What about other sales in the area? What are the comparisons?
• Are there existing tenancy agreements, month to month leases, or high turn-over?
• Is the reported rental income at market value, under-valued, or over-valued?
This is not to dissuade you from owning rental properties but instead to help you when looking at possible home purchases. Your REALTOR® is there to serve and protect you. They will provide you with past sales and revenues, ensure you have seen everything in your price range and give you a full explanation of the various intricacies in your area. Your REALTOR® can also recommend property managers, building inspectors, lawyers and notaries.
After all, your REALTOR® is your trusted advisor, there to help you make an informed decision.