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Welcome to the first part of a two part series about getting into the investment property business.
After riding the ups and downs of the stock roller coaster for a
while, an increasing number of investors are looking into property
investment as a more stable alternative. With hot markets in many parts
of the United States, the time may be ripe for you to get into this
potentially lucrative trade. I would suggest, however, that you keep
reading before you jump on the first property you find. You just might
find something in this article that will keep you from breaking the
bank and your back.
The hope of any investor is to build long-term wealth; this is a
fairly straightforward principle and probably the reason you’re reading
this article. There are however, some rules to play by in the property
investment game if you don’t want to end up taking a shotgun with you
every time rent needs to be collected. I’m talking about how to avoid
becoming a ‘slumlord’.
In order to best relate the rules of being a successful landlord,
let me share a story experienced by some extended family members. It’s
a great example of what NOT to do if you want to get the most out of
your investment property. After the story we’ll see what rules and
lessons we can learn. Names have been changed to protect the identity
of the innocent.
Ben bought a beater single-family investment property in a very bad
area and he his two sons, Josh and Nathan, all got busy. They put in
hardwood floors-don't want to have to replace carpet every time you
have turn over, right? And then they thought they'd use really good
paint-don't want have to repaint every time, right? And then they
decided to splurge on good cabinetry and bathroom fixtures-a happy
renter is a good renter, right? And to top it off, they put in nice
towels on nice racks that said, "We are Family." Renters would
appreciate that, right?
Right.
The first family to move in removed the bedroom and cupboard doors
for firewood, tore out the nice bathroom fixtures and sold them at the
swap meet, and fired small caliber rounds through the new hardwood
floors. Ben discovered this when he received a call that the roof was
leaking and he should, "Get your *** down here and fix it!" He
patiently tried to explain that roofs do that when you pull shingles
for kindling. Other wonderful visits ensued, prompted by similar calls.
It only took eight months to get them out of the house; turns out
that tenant rights as outlined by the county enumerate more rights than
the rest of us enjoy collectively. As the family moved out he noticed
that mom and the two older boys all sported matching shirts stitched
with "We are Family." The rest carried various pieces of the house.
Ben, Josh, and Nathan began to rebuild the house, finding all sorts
of interesting changes to its structure. Nothing really serious other
than a supporting beam was chain-sawed out (apparently more firewood),
tile pried up in one bathroom-no clear reason why, gang signs scratched
into all the glass and mirrors that weren't broken and other little
surprises. While crawling under the house to repair bullet holes in a
leaking plastic sewer pipe, Nathan found a bong and a bag a weed. I
guess if you're stoned you tend to misplace things.
While helping restring some crawl space electrical wire-later found
strung in the closet for hangers-Josh found a rusted out .32 caliber
handgun. Somehow the tenants had managed to pry bricks out of the
chimney, which Ben needed to replace in order to meet code. Apparently
someone had driven an M1A1 Abrams up the driveway; there was no other
way to explain the huge cracks in a driveway that had remained perfect
for 20 years.
What can we learn from this horrific, yet unfortunately true story?
Rule 1
Location, Location, Location. Ok, so this might seem a little
cliché, but it’s a fact that the location of your investment property
will determine the kinds of tenants you will attract, and how much rent
you can fairly charge. Remember, at some point in time in the future it
may become necessary for you and your family to live there; what kind
of neighborhood do you want to be in?
Rule 2
Don’t go overboard when you’re fixing up an investment property.
You ought to expect reasonable wear and tear. Keep in mind that
‘reasonable wear and tear’ means something entirely different to a
person whose renting than it does to an owner. And for goodness sake
forget the, “We are Family” hand towels!
Rule 3
Know how to make basic repairs. Luckily for Ben and sons they had
quite a bit of experience in various construction trades. Otherwise
they may have lost even more money than they did through hiring out
help. Knowing how to fix electrical wiring, repair drains, and replace
windows will save you quite a bit of money down the road.
Rule 4
Screen your tenants as if they were moving in to live with you.
This may be the most important step to avoid becoming a slumlord. Ask
for and check references. Call previous landlords and ask questions
like, “Did they pay rent on time? How was the condition of the
house/apartment when they left? Did they ever disturb neighbors with
loud music or yelling matches? How often would you have to make special
trips for untimely repairs?” Being as informed as possible about who
you rent to will make a huge difference in the profitability of your
investment property.
Rule 5
Know your rights as a landlord. Be familiar with the eviction
process in order to avoid long, drawn out disputes with tenants. Most
states and counties provide online information about tenant and
landlord rights.
Don’t repeat the mistakes made by Ben and his sons. Granted,
getting into the investment property business takes hard work and
you’ll have to put up with things you normally wouldn’t put up with. At
the same time there are steps you can take to limit your liability
while preventing yourself from becoming a ‘slumlord’.
In the next portion of this two-part article we will be discussing
some of the financial aspects you should be familiar with in order to
find the best deal possible on your first investment property.
by Cameroun Brown.
October 2007
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