Article by real estate agent Dan DelGreco
Not too long ago I received a phone call from my niece’s husband asking for advice on purchasing a 3 family property as an investment. After all, prices are low and he figured he would be able to make some money every month renting the property.
Here is the advice I had to offer:
First, figure out if you are actually going to make enough money to make it worthwhile. There are upfront costs associated with buying any property as well as monthly costs. Of course there is the purchase price, but don’t forget about things like transfer taxes, pro-rated property taxes, attorney fees, title insurance, home inspection costs, etc. Also, take into consideration any costs you may incur preparing the property for tenants. Permits, paint, carpet etc. Now that you know what it’s going to cost to buy the property, you need to figure out what your monthly expenses will be.
Your first and probably largest expense will be your mortgage payment, including escrow for property taxes and property insurance. Don’t forget about any utilities you may be paying for. For example, water and sewer bills, yard maintenance, trash pickup, snow plowing or anything else you may want to include. Then there is the monthly maintenance reserve. This is the amount of money you may want to put aside each month to cover unexpected or planned maintenance expenses. Are you going to manage the property yourself or are you going to hire a property management company? This is your Total Monthly Expense.
Now you need to know how much you will be charging for monthly rents.
Investigate the rental fees of similar properties in your area. Charge too low and you may end up with undesirable tenants. Charge too high and you risk having a vacant apartment. Once you have figured out what your monthly income will be subtract out about 5% from that number. According to Mike Summey and Roger Dawson, authors of The Weekend Millionaire’s Secrets to Investing in Real Estate, this is the vacancy factor. Over the years, you will have periods of time where you have a vacant apartment. It may only be for a few weeks or it could be a few months. This is your Net Rent.
Simply subtract the Total Monthly Expense from the Net Rent to figure out if you’re going to make money or lose money every month. If the number you end up with is acceptable to you then you can move forward.
Always, always, always get a home inspection from a qualified and licensed home inspector.
A big issue can be parking. Make sure you have enough parking for the amount of cars you expect. If not, tenants may get fed up with street parking or car shuffling in the driveway. You could end up with tenants not staying for very long and have a lot of turn over.
You should also check with the town hall to see if any building permits have been issued in the past few years just to make sure any work that has been done on the property was done legally and according to code. For example, if you see a brand new electric panel in the basement, make sure they had a permit to upgrade the electric service. Also, make sure if you are looking at a three-family, it is a legal three-family. A two-family is a legal two-family, etc. This information is available at the town hall. Check to find out what kind of permits may be required for occupancy.
Remember, investing in real estate is a business. If you do your homework, seek professional advice and understand what you are getting into, it can be financially rewarding.