By currently active, the rental home is in service with the tenant(s) in the home and a history of being rented for a reasonable period. If the home has only been a rental for a few months, there could be things about which you would want to be very careful. However, a home that's been a rental for a year or longer could be a great investment find.
Rental homeowners sell their properties for a variety of reasons. Some are retiring to a new area far away, and they do not want to manage the property from afar. Others may be selling using the IRS 1031 Exchange to purchase one or more other properties or to invest in apartments or commercial real estate. The fact that a rental home is for sale doesn't mean that there is some hidden problem.
As a rental home investment buyer, you gain an incredible benefit in that you can require the detailed rental and property records to help with your decision. Here are some tips to help you to make sure that you're getting the information you need, and it's accurate and validates your decision.
Tip #1: Are the rents really the rents?
Sorry, but this is business, so liking the seller isn't enough. You want to verify information, that old "trust but verify" saying. Sure, you're going to ask for and receive the accounting records. When it comes to the rents, you'll want a bit more. Ask for the bank records of the deposits and canceled checks. If the seller is offended, it could be a caution light.
Tip #2: Verify and evaluate the expenses.
Expenses should be verified with invoices to validate the accounting entries. Even more important, evaluate the expenses to see if they are out of line with what you think should be the norm for this property. This can be a really valuable analysis. If the owner is someone who doesn't negotiate well, they may be over-paying for repairs, maintenance, and other regular property ownership expenses. If so, you can improve the return on investment and cash flow by doing a better job of future expense management.
Tip #3: Are there personal expenses that will disappear?
One of the benefits of being in business is the ability to apportion some personal expenses as business expenses. Sometimes the owner may be skirting the line for taxes by taking deductions that are not going to be expenses you'll be experiencing. An example might be writing off a vehicle as an expense, or taking excessive mileage expense deductions. If this is the case, the profits and cash flow may be over-stated.
Tip #4: Are the rents at market rates?
Often a rental property owner will not increase rents when they can simply because they like a tenant or they don't like the hassle of marketing for and interviewing new tenants. It this is the case, you may find that the rents are less than you can charge in the current market. You'll like this situation when you bring up the rents to market value.
Tip #5: Negotiate the best deal assuming the seller has a locked-in appreciation bump.
Depending on how long the seller has owned the rental home, they should have enjoyed some appreciation in value. The longer they've owned it, the more equity they'll have in the property, perhaps owning it outright without any mortgage. Depending on their reasons for selling, you may be able to do some tough negotiating to get the price down. Be honest by telling them you have the current market value calculated and you want to buy at a discount to that value. An investor will understand your meaning.
Follow these five tips, and you'll find that there are some great rental property investment opportunities out there. You'll know how to make sure the opportunity as advertised and stated on the tax returns is real. It's a great way to buy a performing investment with cash flow.