The Right Way To Buy Rental
Property
By Omar Johnson
The author has permitted the reprinting and redistribution of this
article.
One of the surest pathways to wealth through real estate has always
been the acquisition of cash flowing rental properties. However, as
with any business, for every successful, happy landlord there are eight
or nine others who are either struggling, sitting on the sidelines, or
completely washed out. Despite this fact, the principles and practices
involved in running such a business successfully are quite
straightforward and easy enough to follow with just a little bit of
quality advice and common sense. Let’s examine where you can
go right and where you can go wrong in acquiring rental properties.
The are at least three primary advantages of rental properties sought
by portfolio investors.
The main one is passive cash flow; once acquired, rental properties
generate income without the landlord actively working. In addition the
owner typically enjoys gains from appreciation as well, as property
values tend to rise over time. And finally, the tax advantages of
owning rental properties can be substantial, the primary one being
claimed depreciation. Although most properties go up in value year by
year, the IRS allows property owners to deduct depreciation losses from
their reported income as if the property were actually declining in
value. Consult your CPA or tax professional for specifics on this
subject.
So how do aspiring landlords go wrong
Generally in one of four ways. The primary sin is paying too much for
the property. To operate at a profit you must pay wholesale, not
retail. Generally speaking, retail price is what the seller wants you
to pay. Wholesale price is the price at which you can buy the property
so that it will cash flow at an acceptable cap rate after accounting
for all expenses mortgage payments (including principal, interest,
taxes, insurance), maintenance, management, vacancy, and any deferred
maintenance.
Buying wholesale means buying at a price where the property will cash
flow today, not after improvements are made or rent is increased. The
second pitfall is buying a property that is unrentable or located in a
neighborhood with a soft rental market. The ideal solution is to buy
properties that are already tenant occupied, but if you do buy a vacant
property make sure there is plenty of rental demand in the neighborhood
or better yet locate several potential tenants before you buy.
The third roadblock comes from using conventional financing and
reaching your lender’s loan limit. After you have a certain
number of rental properties your lender will cut you off and not loan
you money to buy more. The best solution for this is to avoid using
conventional financing and acquire properties by alternative financing
methods, such as subject to, seller financing, or private financing
whenever possible.
The final hurdle to overcome is landlord burnout, which is what happens
when green landlords try to manage all of their properties themselves.
If you want to be a business person and not a hobbyist, plan to use
professional property management services, and figure them in to your
costs when you buy.
Omar Johnson is a successful real estate investor and author of the
home study course Renegade Stealth Marketing For The Savvy Real Estate
Entrepreneur For more info visit
httpwww.renegadestealthmarketing.com
If
you would like to take advantage of the market and learn how to invest
in real estate and you are local to the Dallas Fort Worth area, I know
a really great teacher and mentor here in Arlington Texas. Please take
a look at his web site: DennisJHenson.com,
Dennis has a great Mentoring and training program, I know because I am
one of his former students. I learned a lot from his one on one
teaching technique. - Michael Harman 817-457-7572
mchfun.business@gmail.com
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