I’m Tim Durkovic, president of the Durkovic Group with Douglas Elliman Real Estate. Welcome to this installment of “Real Estate Tips for Investors”.
The focus of this video is – what are some things to keep in mind if you are considering purchasing income property.
As one of the top agents in the area, having sold in the 100s of Millions in property – I often get asked to help clients purchase income property as a way to build their investment portfolios. Here are some basic things I recommend you keep in mind if you want to start acquiring income property:
- I always suggest you purchase as many units as you can, rather than one single-family home to rent out. This keeps diversity in your rental property inventory and helps cut down on the vacancy factor.
- Keep in mind that there are different categories for income property–
1 – 4 units which is considered “residential” and 5 or more units which are considered “commercial.” One of the more important factors in these designations is leverage as there is different criteria lenders use when qualifying mortgages for residential vs. commercial purchases.
- Rent control!! It is important that you research the areas you plan on purchasing rental property in, so you understand if you are in rent-controlled areas or not! Being in rent-controlled areas is not necessarily a bad thing, if the leases you are inheriting with your purchase are at market value. If you are purchasing units that are under lease in rent control and they are not at market value and you are in rent control, you cannot just kick a tenant out and raise the rent! It’s important to note that single-family residences are generally not subject to rent control.
- Once you’ve identified a potential property to purchase, now it’s time to figure out if it is a good investment. Generally when purchasing 2 – 4 units you need 20 – 25% of the purchase price to put as a down payment if you plan on leveraging the property with a mortgage. For 5+ units, you generally need more like 30% to 35% to put down because it is considered commercial property.
- Calculate what your mortgage payments would be, what your taxes would be,
insurance, any expenses related to maintenance and repair, property management fees if any, allow for some vacancy, and I always suggest you put a bit away each month for unexpected repairs.
- Calculate your total rental income and offset your expenses to see what your cash flow would be.
- That the goal is ultimately to have the property pay for itself AND remember that not only are you making the income from rent, but you are also increasing your equity in the property, and benefiting from any appreciation in the market.
If you have any questions on this topic or anything else real estate related, or if want any additional information please don’t hesitate to call, text or email me at 310.738.8098 or firstname.lastname@example.org.