I had been trying to find an investment property for 3 years now. Going through the motions every Spring. I tried in 2010, I tried in 2011, and now I'm trying in 2012. What's the problem you ask? I'll share with you some experiences and you can take the knowledge with you when you start to look for yourself.
All of these issues are a result of my experience and research-take them with a grain of salt or not-but if I knew then..oh boy!
1. My realtor primarily sold upscale homes in upscale neighborhoods. She was not affluent in fannie mae/freddie mac/or hud foreclosures. She was used to the FHA/Conventional straight shot sale.
1a. my finance guy was brilliant and knew how to get around every loophole, but again he was used to only 2 standards of mortgage, FHA and conventional
2. If you go the traditional route of conventional financing [which many people do] you are required to put 20% down and there are MANY rules about mortgages and condo complexes, such as % of owner occupied units. If you are going the regular route [such as searching for properties on redfin] please do yourself a favor and contact the HOA or listing agent to find out if rentals are allowed OR what % of the complex is owner occupied. Banks will not finance any condo that has a high transition rate. They want nothing to do with it, and finding a complex with a low rental % AND a unit for sale in your price range is like trying to find a needle in a haystack.
3. The absolute best thing you can do is use the homepath.com website. Fannie Mae foreclosures that are bid on [you can't do this your realtor must do it for you AND only the banks that specialize in homepath properties will be able to finance you but this should not be an issue there are multiples to choose from so make sure you price shop them and find out what their stipulations to loans are] directly through the website. Because of the way FM does this, you DO NOT NEED 20%! You do NOT have to pay PMI for an investment property!!! It's a god send for people that do not wish to fork over all of their cash to finance a rental.
Here are some rules of thumb I follow when researching a property:
1. don't fall into the bigger is better trap. The point of you owning this property is what? That's right, long term investment [unless you're a rehabber this post wouldn't be for you]. But even if you only want to keep the unit 3-5 years the purpose of renting is two fold. 1. to have your renters pay your mortgage and 2. to possibly get a little extra income a month right? Right. So that 3 and 4 bedroom you're looking at will cost a renter hundreds more a month right? That in no way means you're going to a. find a renter for it and b. sell the unit for more because you think bigger units will sell for more than a 1 bedroom will.
Look at the historical sale of the home [disregard the mid 2000's because anything between 2005 and 2007 was the height of the market and everything went to hell after that]. But see how far back you can go. The rule of thumb is, if this unit in question has ever sold for double it's value [of whatever it's listed for today] chances are it's a solid investment. In my experience the 1 bedroom condos that I review have been sold for 2-3 times their value, when the larger units have barely gone for twice todays asking price.
Bigger is NOT better and it will financially be your responsibility. Don't get sucked into that myth.
3. There are many miscellaneous costs associate with buying a property-these are also true of investment properties. You still have to think about the following additional expenses when financing.
*how many points are you going to pay at closing?
*do you have to find your own inspector or do they have one? and if they use their own what's the fee for that?
*do you have a laywer in mind to review your paperwork for closing? can your realtor suggest one? do your homework and shop around for lawyers that provide this service. I've found drastic differences in multiple people that provide the same exact closing service. My research has shown me a $250-$600 difference. That is literally the difference between paying for the inspection because that's typically what they run $200-$300 dollars. Be smart, it's your money.
*does the unit need to be dewinterized? Chances are if it's a foreclosure the answer is yes. WHO is going to do that for you? you? how on earth are you supposed to know what to do for that?!?! Make SURE you insist that your realtor or the sellers realtor takes care of dewinterizing the house and coordinating it with the inspection. You can't schedule an inspection without water, and you can't have the water on until the bill is paid. Now you may be responsible for past water bills on the unilt. IF THE SELLER MAKES YOU PAY THE WATER BILL MAKE SURE YOUR AGENT GETS YOU A CREDIT FOR THAT AMOUNT AT CLOSING!!! any leins you are forced to pay please make sure you save all receipts and that your realtor goes back to the seller and demands you receive a credit for them all at closing. This way you'll only temporarily be out that money.
4. Have you seen those HOA fees and taxes? Those alone will be enough to break the bank. You have to have something to offer the renter when he moves in, some kind of incentive. You cannot just rent the unit [unless it's extremely cheap] and say here it is, you get nothing with it. Price shop multiple units in the area you're interested in. See what the taxes are versus what the assessments are and how much you're getting. If you can find a low assessment that includes water and gas you're GOLDEN. Make sure you find a unit with reasonable taxes as well. Do the math, that monthly assessment + the annual taxes [divided by 12 for a monthly value] is a pretty hefty number [probably will consist of 50% or more of your monthy mortgage] and that does not include your mortgage or insurance yet.
5. Does the monthly payment quoted by the mortgage company include everything? Are your taxes and insurance going into escro or are you going to have to come up with a lump sum a few times a year? These are things you need to know going into it.
6. This is a rental unit, you're not going to live there. But you can't expect anyone to move into a dump, when the other apartments in the area are updated and look more modern. Steam clean carpets, paint the window cills if you can, give the apartment a good cleaning then figure out what needs to be replaced or painted.
7. MAKE A BUDGET for updates and repairs and STICK to it. Make concessions for youreself and change it up as you go. if you don't, your new investment project will turn into the money pit. Change out the hardware on cabinets, paint one accent wall white to open up the space. Deep clean carpets and the stove [no woman wants to cook in a dirty stove].
That's all I have for now. I'll leave you with this final thought. What goes down, must go up [unlike the stock market]. If you're smart and you have decent credit, with just a little bit of money you could secure yourself a solid financial future.
Good luck!
