A Common Sense Approach to Purchasing Income Properties

You first steps on the road to purchasing income properties will be to obtain and review your credit history. Go to the web site www.AnnualCreditReport.com and get your free annual report. Correct any mistakes on the report. The lower your credit score is the higher your monthly mortgage payment will be. See the web site www.MYFICOSCORE.com.

Your second step will be to contact your local bank or mortgage company and do a mortgage pre-qualification to see what the price range is of how much property price range your can afford to look at. Be aware that most lenders mortgage programs are requiring at least 10 to 20% down payment in order to purchase non owner occupied property. For an example if you were to look for a rental property that was listed at $250,000 at 20% your down payment will be $50,000.

Closing cost and pre-paid property tax and insurance has to be paid as well. Check with your lender to verify what those closing cost and pre-paid cost will be. Many lenders also require that you have at least 3 months worth of mortgage payments in a financial account.

After you know what price range you can qualify for and you know your cost to purchase a income producing property you can focus on what type of property to purchase, the community and neighborhood location to search for. You also should decide whether you will purchase your property for cash flow and current income or if you want future capital gain.

I will be focusing on two types of income properties one is the single family home and the other property type will be the three of four family units. Each type of property has its strengths and weaknesses.

Let's review the single family home options as a rental unit. First focus on the properties location within the community. You want a neighborhood where the majority of homes are owner occupied. Look for at least 3 to 4 bedrooms with 2 baths house. When it comes time for you to sell your property the resale value of the 3 to 4 bedrooms will be higher price value thantwo bedrooms homes.

Review your communities zoning requirement with renting out a residential home. Make sure that you can rent out your home on a weekly basis as well as a monthly basis. Check with the local newspapers classified ads for the going rental rates, check with local real estate agents as well. Let's say that you can command $400 per week per bed room.

You purchase a four bed room home for $200,000 with 20% as a down payment. Your mortgage balance will be $160,000. If you qualified for a 6% mortgage rate at a 30 year loan, your monthly mortgage payment will be $959. Your annual property tax bill will be as an example $2,500 or $208 per month. Your home owner's property insurance will be around $950 per year. You will be responsible for providing heat and utilities say about $2,500 per year.

Here is the break down of your cash flow for this property;

Your annual rental income will be $83,200 rental vacancy factor x0.75% = $62,400 -Your annual mortgage payments $11,508

-Your annual Property Insurance $900

-Your annual Property Taxes $2,500

- Your annual Utility & Heating $2,500

1^st Year positive cash flow $47,242

+ Equity build up 1^st year $11,508

Total positive cash flow $58,750

Now the icing on the cake will be your ability to depreciate your building for 27.5 years In this example you will take the value of the building say $200,000 divide that by 27.5 years this will equal to $7,273 annual depreciation.

Too gain additional income put a coin operated washer and dryer in the basement. Build a large storage shed and rent that shed out as well.

1) When you are selecting your communities to purchase your rental income properties consider your commuting to that property. Limit your search area to within 30 miles of your primary residence. This will save you money in gas and time in commuting to that property.

2) Research your community's property values and home many property's are on the market. Check the local rental average for your community, also verify the vacancy rates and how long it will take you to fill that empty apartment.

3) Check the neighborhoods crime rate, your location of the neighborhood to shopping areas, schools, job centers, are your neighborhood on the bus line 4) Do a drive by of the property that you are interested in. Is the properties exterior in good shape such as the buildings foundations, roof, siding, windows. Is there plenty of parking for the tenants?

5) Do a property inspection of your potential investment property. Pay attention to the areas of the buildings foundations, windows, roofs, electrical system, heating systems, is there any lead paint in the property?

Managing a 3 or 4 family property is different than managing rental of a single family home. You can charge either a weekly rent or a monthly rent. In most cases the tenants will pay for their utilities and heat. As a land lord you have to pay the utilities in the common areas. Use the same strategy as above to gain additional income by installing a coin operated washer dryer in the basement and if the yard and zoning laws permit build a storage shed on the property.

The key to successful property rental management is two things. Your tenant screening process and a clear and legal rental lease. When screening tenants you need to be aware of the federal and state fair housing guidelines and regulations. If you violate those federal and state guidelines you could be facing jail time and hefty fines. By properly screening your tenants that will save both cost and wasted time in housing court pursuing the evection process.

The purchase of rental producing income properties can be a wise decision in any market. The process of purchasing rental income requires that you use common sense approach, do a cash flow analysis of each property. Also consider how long you want to hold that property for capital appreciation.