buying rentals what to look for?

Question

I thinking about buying a duplex with renters already in what should I look for and questions should I ask. how to break down the numbers to know if its a good deal or not? Im nerves because it will be my first deal if I do it. please if me some info thanks

David Beard · Answer

Scott -- on decent 2 to 4-unit properties in the mid-west, I've been looking for gross annual rent yields of 30% if tenants pay their own gas/electric, and 38% if the landlord is paying for the units' gas heat and/or their electric.  Always find out right up front who pays the utilities, if it's not posted in the ad.

The denominator in this calc is your purchase price plus any rehab that you need to do right up front to knock out deferred maintenance.

This should get you to a 15% net return after all expenses, vacancy assumption, and replacement reserves for roof, mechanicals, appliances, etc.

The numbers above will serve as a filter when looking at many properties.  When you're honing in on your best candidates, sharpen your pencil.

Look up the property taxes for the property on the county assessor web site, or call if necessary.  Find out the assessed value, so that you then can back into the property tax rate.  You're probably buying for way under the assessed value, so you'll be able to appeal the property taxes.  Don't bank on being successful with this appeal, but it'll be gravy if/when it occurs.

For property insurance, I usually assume about .7% of cost (purchase+rehab).

Assume 10% for vacancy, 13% for property mgmt+leasing expenses, 10% for repairs/replacement reserves (maybe 15% if the bldg is very old but this is subjective and depends on degree of prior renovation)

Call the gas/electric company in the area to get the average paid by the landlord (the master meter) durding the prior 12 mths.  Ask the utility company to confirm the # of meters and separate billing accounts for the property.

Call the water company to do the same.  Water/sewer are almost always paid by the landlord, and around here runs $40/unit/mth or thereabouts on average, depending on # of occupants.

Since the tenants are already in place, make sure they are current, find out if they're Section 8, and how long their leases run.  I always view the units with the tenants home so that I can ask them questions.  They love to talk about any issues they have, and if they plan on staying.  Ask them to confirm their rent, their security deposits, and what utilities they pay.  Ask them how much their utility bills normally run.

You can also evaluate them at that time, even though you're stuck with them through the duration of their leases.  I ask to see their rental applications and tenant file to make sure it appears that they were properly screened and not just passed in so that the seller can say "fully rented!!" in their ad.

At a minimum, proper screening means:  gross income three times rent, no evictions in last four years, copy of recent pay stub, continuous work record in prior six mths, and ideally some evidence that prior landlord was called.

David

Harry M. · Answer

I bought my first duplex last July. The fully occupied thing was a big draw for me - the theory being you make the purchase and there's rent coming in from day 1. Well, little did we know that the tenants on one side where in the process of buying their own place - they gave us notice 2 days after we closed. The vacancy was 70 days, and it cost a few thousand in repairs (deferred maintenance, the tenants left it in good shape). The property has been doing well since November of last year, but it was definately a bumpy and educational start. So treat the fully occupied thing as a bonus, definately don't count on it.

There was one other thing I was looking at incorrectly when I was property hunting back then. I would look at the current rents vs the asking price, and if the ratio looked good, then to me it was a good deal. So using this math, a 150k property that rented for 1900/month would be no better or worse than a 173.5k property that rented for 2200/month. Not exactly. I've since learned that every market has a rent sweet spot for each different type of property. In my market, I'd now consider the first property (the 150k one)  the better deal, because 950 per side is right in the sweet spot for a duplex. At 1100/side you might have trouble renting it, even if that property was every bit as worth it as the cheaper one. Why? At 1100, you can afford to rent a SFH which most people would prefer over renting a duplex. So, moral of the story, do your market research, find the sweet spot for rent, and work from that as your starting point for deciding if a target property is worth pursuing.

Steve Babiak · Answer

So, what do you think will happen with this tenant come month number 2?  You have a problem, since this tenant has a problem coming up with enough money to cover their obligations ...

Ben Kevan · Answer

Glad it's not just me. I purchased an occupied property, and first months rents were short because one tenants "rental assistance" started weening down. She's trying to cover it though.

Jeff S. · Answer

On your earnest money agreement make sure you get a credit for refundable deposits and prepaid rents (last month) and prorate lease which your escrow closer needs to know about.

Don Doji · Answer

great answers guys. Thx

George P. · Answer

When buying building OCCUPIED, you inherit the tenants and their problems - you didn't qualify them, you don't know what kind of problems they cause. I'd rather look for a vacant unit so that I can pre-screen the tenant myself.

Scott H. · Answer

Great tips Harry and David!

Scott H. · Answer

Jon and Tim give a great summary on what to look for in rentals starting out in this thread.

http://www.biggerpockets.com/forums/52/topics/57539-buying-first-rental-property-any-formula-

Scott

Scott Phillips · Answer

thank you for the reply I have to look in to it because its not around my area. but thank you

buying rentals what to look for?

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