Almost all of us have looked back at purchases and said, “Oh, if I only knew then what I know now,” thinking that the coulda-woulda-shouldas might have saved us time and money. When it comes to investment property, experienced owners have a list of coulda-woulda-shouldas. That’s why we took time to talk to the pros to ask what’s on that list. Maybe this information can keep you from making the same mistakes.
Don’t go it alone
When acquiring investment properties, first time buyers often try to go it alone, but the pros recommend creating a team.
“We always recommend a team of people be involved in every property,” said Phil Purcell, Vice President of Commercial Lending for Hanscom Federal Credit Union. “Owners need to assemble a team of professionals with real estate management experience, including legal, insurance, real estate and accounting.”
The economics and structure of ownership is something the owner’s team can tackle. The legal and accounting arms of the team can look at the ownership vehicle (LLC, LLP, Trust). The legal team can develop lease structures, and ensure processes consistent with legal requirements. This is important to minimize later legal entanglements.
“For example, a plow truck is just one example of possible tax benefits for the owner, and professional input will help the owner to identify things like this,” said Purcell. “Fully understanding the cash flow implications and debt service coverage is also something savvy owners strive to master.”
When acquiring a property, the team examines every issue. Landlord associations and investor groups are often a good source of referrals for these professionals.
Many owners initially think of trade people needed to maintain the property, like plumbers, electricians, and carpenters. It’s important for owners to establish relationships with these professionals so that, in an emergency, they have someone to turn to quickly and at pre-negotiated rates.
“But new owners often go for a short-term Band-Aid fix rather than fixing the property correctly,” said Arthur Deych, Broker/Owner, Red Tree Real Estate. And that can cost you. “Over the course of time, it will always cost you more unless it’s a short-term investment.”
All rents are not created equal, as noted by Purcell.
“Investors need to examine every tenant relationship in an acquired property. Are the rents market rents, family rents or subsidized (all or part paid by a third party such as a housing authority)?” he said.
Subsidized rents are a hot topic for Nick Spagnola, manager of City Realty Group. “Buyers can make a huge mistake acquiring a rental property with subsidized rents on stop payment. Most buyer’s agents are not familiar with the subsidized housing process and how one ensures a smooth transition of rent payments from former owner to new owner. Often it takes several weeks for the change in ownership to update with housing. Moreover, if the buyer’s broker/attorney did not begin to work with the seller and housing authority before close, the former owner may continue to receive rental payments from housing while the new owner has to cover monthly expenses out of pocket.”
Purcell recommends investors plan for the “hiccup factor” and not overextend themselves as they plan acquisitions. “There will always be surprises whether it be vacancy, tenants not paying, or unexpected maintenance and repairs. By anticipating surprises, the investor is better positioned to deal with them when they happen,” he cautioned.
Keep up with the times
Investors also make mistakes when not understanding that their competition is consistently updating their homes to make them more appealing.
“The same styles as 10 years ago might not be as appealing today. Simple changes in fixtures, lights, doors and paint color can make all the difference,” said Deych.
Know the tenant
“Taking the best tenant over the top money is usually the most rewarding idea,” Deych continued. “Fifty dollars less in income per month will not make or break an investment, but it will give peace of mind knowing your property is being cared for and rent checks come in on time.”
“Another mistake rookie owners make is acquiring a rental property with the intention of evicting every tenant. Evictions are difficult, time consuming and costly,” said Spagnola. “They are possible and happen frequently, however a false expectation can be costly and delay any plans new owners may have. My advice for new landlords is to acquire the property, meet with each tenant and forget about giving 30-day [eviction] notice. Stabilize the property first, get the tenants accustomed to making monthly rent payments, and show there is a management presence in the building.”
Involving the right people up front will enable you to make a success of your investment property. “As a credit union, we want to partner and teach our members. So we ask our members to talk to us first. We want to understand their objectives in owning an investment property. Is it for retirement income or to pay off college, for example? We also help buyers make sensible use of their funds. For example, it makes little sense for a client to order an appraisal on their own. If we order the appraisal, we can use it in the loan process and the client only pays for one appraisal,” said Purcell.
To learn more about purchasing investment property with a trusted and experienced professional, contact Phil Purcell, Hanscom FCU VP of Commercial Lending. We also have this detailed eGuide on purchasing investment property that you can download at no charge.