Low interest rates may usher one of the most lucrative markets for investment properties this spring. There may be excellent opportunities to add to a real estate portfolio or even making a first-time purchase of an investment property. But you should be aware of these typical problems to help avoid financial or real estate law problems when making offers on investment opportunities.
Unexpected costs
This spring, low interest rates may cause higher home prices. If your potential purchase involves a bidding war, you should calculate whether higher prices will change mortgage costs. Next, search real estate sites such as Zillow for the estimated rent you can charge.
Capital will be the highest cost unless the purchase is made with cash. Capital will cost even more than other expenses such as real estate taxes, marketing, and tax preparation. Raising your bid will raise your cost basis and carrying costs. Paying cash will only impact your cost basis.
Taxes
Planning and research on taxes is important preparation. Tax estimates in real estate listings are usually based upon the home being used as a principal residence. You should calculate the taxes you would pay as an investor if the home will be used as a rental property.
States and cities may have different real estate tax requirements. Taxes are reassessed when a sale occurs in some states.
Repairs
Inspect the property before you make an offer. For a few hundred dollars, a professional inspector may perform a pre-inspection and prepare a report identifying anything that needs repaired. Hiring a professional inspector may ultimately cost much less than performing this inspection yourself and discovering expensive problems after you buy the property.
Tenants
If you purchase the property from someone who used it as their principal residence, perform due diligence and assure that there is a demand for rentals in the area. This should go beyond the city or town and include demand in the property’s street and surrounding neighborhood.
If the owner used it as an investment property and it is unoccupied, find out the length and reason for the vacancy. Research turnover by finding out the number of tenants who were in the unit for the last five years.
For occupied units, make sure that you are purchasing a feasible tenant situation. Review information held by the current owner such as the tenant’s background report, rent payment history and the lease. Request proof of rental payments over the last two years and learn when lease renewal is upcoming.
An attorney can advice you of your rights and potential legal problems and prepare necessary documents. Lawyers can also represent your interests in hearings.
