In 2007, I bought 6 rental homes. This is what I would do differently.
1-Put 30% down. I put 10% down on 5 of my homes and zero down on one of my homes. These loans don't exist anymore, so you have to put at least 20% down depending on your credit score. The reason you want to put 10% down is to avoid paying primary mortgage insurance which in my opinion is a waste of money and just doesn't help with your cash flow. My PMI is $181 on one of my homes. It only insures the lender if I default. I get zero benefit at all. I later put 20% down just to get rid of it and my cash flow immediately improved.
2-Get a 15 or 10 year loan. I got 30 year loans. I barely pay down the loan maybe $100 per month. If I would have got a 15 year loan, over half my payment would go right towards principal and I would have a better interest rate. I still pay a 7.25% interest rate because hopefully I will sell these homes in the next few months. I could get 5% if I refinanced and planned on holding onto them long term. The benefit is you build equity faster and you make yourself rich instead of the bank.
Paying cash would be the ultimate situation if you could do it.
3-You pick out the home. I let the client pick out the home and then I bought it for them. I made them put at least $5000 down and pay the first months rent. So they had to put $6200 down for example and they got to pick their own home. The problem is out of the 6 people I did this for only one followed through and that was 6 months later that I had planned. Had I picked out the home. I would have picked a more practical home, and got a better price. Finding a renter is easy.
4-Buy in the $100,000 and under range. Rents here in Idaho go for about $300 per room high end. I do rent some of my homes for more than $900 in rent, but $800 is about where people want to be. When I first bought these homes there was nothing under $100,000. Now there are multiple homes. I recommend at least a 3 bedroom home with at least 2 baths.
5-Buy newer homes. I bought 3 homes that were 100 years old. They go down in value once they hit 100 years. They are outdated in so many ways and just fall apart. My older homes kept dropping in value. My newer homes held their value even in a declining market.
6-Make your money when you buy. They say you need to look at 100 homes make offers on 6 and you might get one. I hate to say this, but you almost have to get about a 20 to 30% discount when you buy in order to make any money.
7-Buy a practical floor plan and get a good location. I bought two homes that were 2 bedroom 1 bath homes because that it what the customer wanted. Then they gave me back the home and walked away from their $5000. Most renters want at least 3 bedrooms. Also, I bought one home right on a highway. No one wants to live on the highway.
8-Find the best investment by taking the list price and divide it by the square footage then go look at the home. I let them pick the home. Some of the homes I bought were not good deals and I bought at the peak of the market. If I would have bought the home right, when the market dropped, I still would have made money.
9-Plan on the property taxes doubling. I never counted on this. Not only did the property taxes double, but the county went through and reappraised the homes and jacked up the taxes. This took an investment that cash flowed and made it so I lost money.
10-Have your banker screen the person. I did this with all my people. The problem is the people who had so so credit that could have fixed it, actually had their credit get worse. Plan on the worse case scenario. I had renters trash homes just for the heck of it. I did nothing to upset them. Try and get as money as possible down when you let them move in which will help them be more commited. Lay out the rules. Renters do things that you wouldn't expect and so be prepared for it.
I am sure I could think of more things, but these are the main ones and can help you build a financially strong portfolio of rental properties.
Once we find the perfect rental, to write the offer takes 15 to 20 minutes.
Thanks Burke Bennett
Broker/Realtor of SE Idaho Homes
Find a home at http://www.seidahohomes.com
Call me at 208 589 5599 so we can go look at them.
Email me at burkebennett@hotmail.com with the multiple listing numbers.
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