Resources for Investors

Factors to consider In Buying and Owning Rental Properties

When looking for an investment property, you need to consider a lot of factors, not all of which are likely to be achievable. So, in effect, you are looking for the best balance of the following factors:

1. Location, location, location
We don’t need to remind you – the same location that is likely to give you the greatest potential appreciation is also the one that will be most desired by your tenants. The least crime, best schools, access to employment and transportation are all important factors in making a property desirable for a tenant. (For instance, we think that the better parts of Reseda, Winnetka, West Hills, and surrounding areas are all great places to find affordable investment properties.)

2. Price, price, price
If you pay too much for a property, you will only be subjecting yourself to many years of negative cash flow, all for the possibly vain hope that you might someday make it all up on appreciation. This is what we consider to be speculation – try to find a property that makes sense the day you buy it. Currently, in the San Fernando Valley, we know of properties that are promising investments, although most of them will require a bit of work in order to market them as rentals that don’t lose money. As a rule of thumb, you are probably better off sticking with properties that cost less than 300K to maximize your cash flow.

3. Buy to Minimize Management (related to 1 and 2, above)
The better class of tenant you have (up to a point), the fewer management headaches and less turnover you are likely to encounter. Thus, we like to look for investment properties in areas that are relatively free of gang activity, major crimes, graffiti, etc. A lot of cheaper properties might look great on paper, but not once you factor in the difficulty of renting them, the vacancy costs, to say nothing of the damage that judgment-proof tenants will inflict on your property, and on your mental health. Someone owns there, but it does not have to be you. Stick with nicer, but still working class neighborhoods, and you will minimize your headaches. Make sure that the lawns are well-kept in the surrounding area – it is a sign that someone cares.

4. Other aspects of the Property
Pool: You don’t want a pool at your rental property. Really. The cost and headache of the old cement pond will not be outweighed by the increase in rent. You may know that drowning in backyard pools is the second leading cause of death among kids five and under – why buy a potential liability?
Safety Features And Code Compliance: You must make sure that the property you rent has all the code-required safety elements, smoke alarms, fire extinguishers and strapped water heaters, to name a few. We like to install earthquake valves on all gas lines.

Financing for Investors

Financing is one of the most important aspects of the decision to invest in real estate. If you invest using all equity (as some very conservative people do), you will miss out on the aspect of investing that provides the greatest protection against inflation in the future: leverage. The best news is that, after a bit of a tough period in the financial markets, fantastic investor loans are once again available for 1-4 unit income properties. I have a mortgage banker who can currently offer 10% down loans on up to ten properties to qualified individuals. Feel free to contact me for a referral.

My personal preference is the thirty-year, fully amortizing, fixed rate conventional non-owner occupied loan. In the current market, amazingly, rates on these loans are just slightly higher than an adjustable, but with a fixed rate that offers the maximum safety for the investor.

What is the Market Rent?

How can you figure out how much a targeted investment property will realistically rent for if is currently vacant? I have a couple of options. First, you obviously want to look for some comparable properties in the neighborhood that are for lease. Find out how much the owners are asking for rent – that will be some evidence of the market. Craigslist is a great place to look. If you can go to an open house for a rental property, so much the better. Like homeowners, renters will pay more, up to a point, for upgrades, so it will be helpful to see the insides of some rental properties. However, since you will generally only be getting information on “asking” prices, you need to dig a bit further. A great resource for further research is Rentometer. You will need to game the system a bit in order to get info from this site, but it is worth it. Go on the site, register as a “tenant,” put down the property address you are interested in, and estimate how much you think it would rent for when it asks how much your rent is. Presto! You’ll see all the other self-reported rents for similar rental properties in the neighborhood. (Of course if too many other potential landlords do this, the quality of the data will be degraded somewhat, but if you are in the ballpark on your guess, it won’t make much difference.) Your third method is to contact me, and I’d be happy to send you a list of asking rents from the MLS. If you use all three of these methods, you’ll have a fantastic estimate of the rents that your potential investment will command in the current marketplace.

Property Management

This is the main reason that the average person does not want to invest in real estate. All they can think of is the horror stories, the delinquent tenants, the stopped-up toilets. Yecch. There are a couple of solutions to these potential problems. The first is the use of professional property management. This is great, if you can afford it. If you cannot, the other solution is to become as good as a professional property manager. That means that you have to learn and follow proper practices in leasing and maintaining your properties. We recommend membership in the Apartment Owner’s Association of Los Angeles – using their forms and recommended procedures will go a long way towards avoiding management problems. It seems obvious, but we’ll say it: you have to screen your tenants carefully. That means checking the last two references (the latest reference may just be wanting to be rid of their own problem), and running credit and criminal background checks on every potential tenant. The Apartment Owner’s Association can help.

Insurance

Of course, you need to maintain adequate insurance and know what your policy does, and does not, cover. Shop around for the best coverage, price, and claims performance. Of these, price is the easiest to determine, but should not be your only consideration. You don’t want to have to sue your carrier just to get them to pay your claim. For claims performance, Amica is currently J.D. Power’s top rated homeowner’s insurance company – if Amica will offer you non-owner occupied coverage at an affordable price, you should definitely consider using them. We’ve been using Amica for a number of years, and we talk to the same person at the company every single time we call. Amazing! (The Auto Club of Southern California is ranked second by J.D. Powers, so they may be a good option too.)

Read and understand your insurance policy: you don’t want to be surprised to learn that your policy does not cover “dangerous breeds” of pets (such as pit bulls) or trampolines. And if your policy does contain such exclusions, you’d better make sure your lease prohibits anything that would be outside your coverage – and check to make sure that your tenants understand and live up to the terms of the lease.

What Are the Tax Implications of Owning Investment Properties?

This is a big area, and one for which you will need to seek professional advice. I’d be happy to provide a referral to a CPA. However, there are a few general things that you should be aware of so that you can ask the right questions, in particular the IRS’s passive loss activity limitation. In a nutshell, if your income exceeds a certain amount, the “passive” losses you can write off against your ordinary income may be limited or eliminated, unless you can qualify as a professional real estate investor. See the IRS guidelines or your CPA for further information.