There are multitudes of avenues you could take when stepping into the real estate world. If you’re unfamiliar with this business, it can be a little overwhelming and leave you wondering, ‘How do I know when a property is THE ONE?’ Well, it all starts with a solid plan, and every solid plan begins with the golden question. How much money do you want to make each month to live the lifestyle you want to live?
“Whatever your number is, now there’s a goal to build towards. Through that, you can narrow down the specific types of properties to fit your income goal. Once you start finding properties you want to write offers on, you can verify all the other essential things. The escrow process, or the time between writing the offer and closing, is the period you should be doing all your due diligence.”Robert Slattery
There are a few things to verify about a property before you close on it that will tell you whether it’s the right fit. Something you’re going to want to know is how much money property is bringing in a month, so how do you find that out? The seller/listing agent will provide projected rents, but that doesn’t always reflect the actual monthly cash flow of the property. To verify, you should ask the seller for something called a rent-roll. This is a spreadsheet that lists who is in each unit, how much their security deposit was, their move-in/out dates, and how much money they pay monthly. You should ask for an extended history of rent rolls, a few years’ worth if possible.
Another thing to ask for is maintenance records. You want to know about any and all fixtures that the property has, like propane tanks, satellite dishes, or laundry machines. What do they cost to maintain and what income do they generate? Anything the property has to offer should be taken advantage of.
If the listing agent can’t provide a rent roll, then you should request an estoppel letter. This is a statement of fact from one party to another, in this case from each tenant to you. This will provide you with some basic information about each tenant, who they are, which unit they reside in, their move-in date, monthly rent, etc. Although it may not be legally binding, it’s better to have as much information as you possibly can. On top of this, you’ll want a copy of every individual lease agreement.
So now that you know what you need, how do you ask for all this? It’s important to have a good real estate agent, and if possible, a good real estate attorney. Get a copy of the purchase agreement, and run it by a lawyer to make sure it meets all of your needs. Many states have a template available, so go to the department of real estate website and give it a read. When putting your contract together, make sure you have some contingencies in there to protect yourself. It’s important to have an out if your property isn’t what you thought it was.
First and foremost you need a financing contingency, which will protect you in the event that the property does not pencil financially and you aren’t able to obtain a loan for it. This usually includes an appraisal contingency, which covers you if your prospective property doesn’t appraise for the expected amount. An inspection contingency is necessary. You want a set of professional eyes to let you know the lifespan of major aspects of your property, such as the roof, siding, hot water tanks, etc. This will help you build out your maintenance plan for the next few years.
With all this information, you can confidently close on a property expecting it to build you long term wealth. It seems like a lot at first, but with a solid education and plan, you’ll be a professional in no time. If you need some help getting started, check out blackwellrealestate.com for more information on the best course in real estate investment out there.