I often get asked by my clients to help them purchase income property (or multiple income properties). They are looking to expand their real estate investment portfolios and ideally generate extra income from the units.
Here are some income property buying tips I recommend, along with some specific info you will need to know:
Types of Income Property
It’s important to know that income property can be categorized in a few different ways:
- Residential (Single-Family)—A singular house, condo or apartment for rent
- Residential (Multi-Family)—Duplexes or apartment complexes with 2-4 units
- Commercial—Property designated for industrial, retail or restaurant use or any properties with 5 or more units (including residential apartment complexes).
Purchase as Many Units as You Can
I recommend buying as many units as you can or investing in a multi-family or commercial property over a single-family home. This offers you more diversity and flexibility with your property (or properties) and also helps offset any vacancy periods. If you own four units and one is vacant, it won’t hurt your income as much as a single-family home that remains vacant for a significant time period.
Leverage is an important topic to understand if you are seeking a mortgage loan to fund your investment property purchase. Lenders will have different mortgage approval criteria based on the type of income property. Residential units will be treated differently than commercial investments.
If you are not financing your income property purchase through a mortgage loan, then you will want to make sure you have your financing (cash, investor backing, etc.) lined up and fully budgeted before you start making any offers.
Rent control is always a hot topic in the greater Los Angeles area and the San Gabriel Valley. Some communities will enforce rent control, which can add some complications to your income property strategy. Do your research and know if the area where you buying property has any rent control laws. Ideally, it’s best to avoid rent control. However, it is not necessarily a deal-breaker. Just make sure you are buying the property at a fair market value if in a rent control location. If the property is priced too high and has rent control laws attached, you may want to look elsewhere.
Next, you need to determine if the property you are planning to buy is worth the investment of your money, time and other resources. You’ll need to calculate the monthly costs of owning the property by adding up the following expenses:
- Mortgage Payments
- Property Taxes
- Renovation Costs (if the property needs work before it can be rented out)
- Maintenance & Repairs
- Property Management Fees (if applicable)
- HOA Dues (if applicable)
I also recommend accounting for average vacancy periods in between tenants and setting aside some petty cash for unexpected repairs and ownership expenses that will inevitably come up from time to time.
Next, you will want to project your income potential. What kind of rent prices can you realistically expect to charge? How often can/should you raise rent? Compare your projected average monthly income against your average monthly expenses from the list above. If you are doing things right, the property should pay for itself and ideally make some profit each month.
The other thing to keep in mind when investing in income property is that it should generate long-term earnings, as well. If you are buy at a fair price in a healthy market, the property’s value will surely appreciate over time. This will allow you to raise rent in the future, or you always have the option to sell it when the time is right.
Obviously, we’re just scratching the surface when it comes to buying and managing investment property. It’s a tricky business that can be extremely fruitful when you know what you are doing. If you want to be successful as a real estate investor, you have to do your homework and develop a strong business plan.
Watch my full video on this topic below:
For help with buying income properties in Southern California (or any home buying or selling needs you have) contact The HD Group today for an introductory real estate consultation.