Despite the increasing possibility that the FED will raise the interest rates in one week, we still believe it’s a great time to take advantage of these low rates and buy investment property. But just like any other investment, buying income properties will require some planning. Here are the steps you need to prepare yourself for owning and managing rental properties:
Source of Funds: Unless you plan to buy these investment properties cash, you need to be pre-approved for a mortgage. Unlike loans for residential properties, loans on investment properties have very different guidelines. Ironically, 1-4 unit homes still are treated as residential investment properties and you will need to have 10-30% down payment available for your qualification. But if you are buying a building with more than 4 units,the loan will be underwritten as a Commercial loan and you will need more down payment to qualify for a loan.
Keep in mind that as part of the approval, many lender will need you to have enough reserves to cover up to 6 months of loan payments for when you are unable to get the units rented quickly. So a conversation with your favorite lender is a good place to start.
Choose your market: Identify a region or a city where you plan to make your purchase. You will soon learn that there is a direct correlation between the price of investment property and the rental income it can generate. For instance, in Silicon Valley where the rents are very high, the price of rental properties are high as well. But if you invest the same dollar amount in other states like Texas, Indiana or Florida, you will be able to buy more doors (units), but your rental income per unit will be much lower.
Plan for Property Management: Unless you have a huge rolladex of repair technical you should plan to pay for property manager to take care of your Silicon Valley rentals. For example, yesterday one of our tenants called with a broken AC and most repair shops were only offering appointments that were 2 weeks out! But we managed to get someone to visit this Los Gatos rental and fix the AC unit within a few hours of getting notified.
Don’t make the mistake that most novice investors make when they assume that the best investment properties are within 1 mile radius of their own home. Buying an investment property needs to be treated like any other investment with a serious focus on ROI and risks associated with owning and operating an investment property.
Tenant Screening: Insist on robust tenant screening to avoid getting the wrong tenant that you will eventually need to evict. Make sure the property management company that you retain has robust tenant screening process in place that will not expose you to discrimination suits for Sex, Race, Religon and National Origin. There are federal guidelines that define what is considered housing discrimination and the wrong property management could get you into serious trouble.
Contact us if you have any questions about buying investment property in Silicon Valley.