How to Buy Income Property

by Krantcents · 12 comments

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Buying income property is one of the best ways to reach your financial goals!.  Income property is investment property bought or developed to earn income through renting, leasing or price appreciation.  This can be a condominium, townhouse, home, apartment building, industrial property or commercial office building.  Have you ever thought about buying income property? 

Is there a great time to buy real estate? Some think a low interest rate stimulates more sales. Unfortunately when interest rates are low, prices are usually high. Just before the real estate bubble, banks were lending to anyone with a heart beat which is no longer true. Now you need at least a 20% down payment and really good credit. The real estate market has picked up since the recession and some prices have returned to pre-bubble prices in some cities.  Does that mean you missed the opportunity? No, but you will have to look a little more to find that one property that makes sense. I bought my first home in a similar markets and found a fixer. A low interest rate allows you to buy more home, but high prices balance any advantage. You still have to find the right property that meets your investment goals. I owned two (2) homes, vacation (ski) condominium, nine (9) units, twenty-four (24) units, ten (10) units and a shopping center. It helped me achieve financial independence! Here is what I did.

What I did and you can too!

  • Find a good real estate broker who specializes in real estate investments that you trust.  This is not an easy task because you are a first time buyer.  Most experienced real estate brokers do not want to teach you what you need to know to buy income property.  You can learn everything on your own or have a good real estate broker teach you.  I interviewed thirty (30) brokers before I could found one I could trust and would work with me.
  • Commercial real estate is different that residential real estate.  If you want to buy a home, it is in the Multiple Listing Service (multiple).  It is a semi public listing of real estate for sale.  Real estate brokers list their properties for sale in the multiple and can give a list of properties in your area which are for sale.  Although income property is listed in multiple, many times the brokers hold listings as pocket listings to market to specific clients.  Knowing the right brokers provide access to their pocket listings.
  • You have your broker and access to listings now what?  How are your math skills?  Income property is priced based on income!  What a surprise?  Your goal is to purchase a property with sufficient down payment to break-even with current income.  Is that all there is to it?  No!  Is the income at market rents or can you raise the rent? Is there deferred maintenance on the property?  You know repairs that should be done, but were not.  It could be a roof, equipment, or paint.  The expense may run from a nominal dollar amount into thousands.  Remember this is an investment that you wish to make a profit.
  • Next stop is financing, the lender will determine how much money is required for your down payment and if you expenses are reasonable.  They will calculate the rental income, expenses and reserves to determine your break-even point.  They add in reserves for vacancy, repairs and replacements to make sure you can make the payment on the loan.  Generally, they will require a higher down payment than buying a home.  A good FICO score helps you with your banker.  It is good to have your mortgage financing in place so you know how much you can afford.  This is the same rule of thumb that you would use buying a home.
  • You found your ideal property, whether it is a duplex or 100 apartment complex, you have the right to inspect the property.  What do you look for during the inspection?  Everything that could cost you later, this is your opportunity.  Bring along an expert such as a contractor.  You want him to assure you that there are no surprises.  He may charge a fee for this inspection.  A couple hundred dollars to uncover an expensive repair is  cheap if he finds everything.  The costs will be used to negotiate with the seller for a better deal.

You just closed your first of many deals!  I always enjoyed the hunt for properties and the negotiation.  Owning or operating the property always presented opportunities for profit and expenses, so it was hardly fun!  If you selected the right real estate broker, he can help you find good repair people, management and teach you what you need to know.  Learning landlord/tenant laws, how to find tenants, marketing the property and things to watch out for are just some of the pitfalls.  Buying income property can help you reach your financial goals!

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{ 12 comments }

Holly@ClubThrifty April 21, 2014 at 5:15 am

We own two rental homes that will be paid off in about 12 years. That sounds like a long time from now, but it really isn’t. We will only be 46~ Right now we put all of our profits back into the rentals so I’m looking forward to the payoff date =)

Krantcents April 21, 2014 at 6:54 am

Good for you! You can sell anytime and roll the equity into another property (1031 exchange).

Zee April 21, 2014 at 11:51 pm

The only property I own is my house, but it’s a 3 bedroom and I rent out 2 of the rooms. While this is nice because it makes my portion of the mortgage much lower, I’m realizing that 7 years later my priorities have changed and I would rather not have roommates. The only part that makes selling the place and getting a smaller home not seem like a good option is that after 7 years, my portion of the mortgage has shrunk significantly…..

Anyways, do you find that commercial properties are easier to manage or are more profitable than vacation homes or duplexes, etc.?

Krantcents April 22, 2014 at 7:01 am

Size matters! I preferred 8 or more units, because I could give a tenant $50-100 off to manage the place. Bigger buildings can have more problems, but have more opportun ity to earn more too.

Kay April 22, 2014 at 3:31 am

Great post! I want to buy an income property at some point but don’t feel like I have the time to dedicate to it. Did you start buying income properties while working a full time job?

Krantcents April 22, 2014 at 7:02 am

I bought my first building (9 units) when I was working in Corporate America. I was 31 years old and it was just an investment. When I traded it for a 24 unit, I knew it could be a business.

Alex April 22, 2014 at 9:36 am

The best blog on personal finance and planning. I love your posts and read all of them every week. I am into investment properties. Do you have any suggestions on how to cacluate or what reference books to use for making sure the numbers make sense before purchasing an investment property? Thanks.

Krantcents April 22, 2014 at 1:44 pm

You have to validate everything the seller tells you. You can check the market around the property to see if you can raise rents. Ask for invoices for the expenses and have a contractor check the place out for deferred maintenance. With interest rates so low, you should not buy a property that does not at least breakeven immediately. More importantly, you should make sure there is upside potential so you can raise the rents. If you buy a single family home, you still want the property to breakeven immediately on a rent that yo can raise. Good luck.

Marie April 22, 2014 at 10:59 pm

My mom used to have a rental property before, but she sold it because managing a property from the distance is quite difficult for my mom. But we are saving now so that we can purchase a rental property near our place.

Krantcents April 23, 2014 at 6:57 am

It is always best to have rentals in your local area! You can start with a home or condo and build it into a real estate portfolio. Good luck.

Kylie Ofiu April 23, 2014 at 3:08 am

I love rental property. I don’t currently have one, but would like to own them again. My dad had a few when I was growing up, as do my uncles, so it was something I grew up around and learned about from a young age. I think I am the only one of my siblings that wants properties like this and I know I am the only one who has had any.

Krantcents April 23, 2014 at 7:00 am

Rentals require a lot of upfront work! If done well, it is much less work.

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