I work with investors often enough to understand no two are alike. The appeal of becoming an investor is often due to the added income one might expect from collecting rent. There are many things to consider though and plan for before becoming one, which are typically not considered until I start asking questions. Understanding what a client’s long term and short term goals are is always a good place to start. Is the goal immediate positive cash flow or long term appreciation? Knowing these answers helps me start to fine tune what type of property and location might be best suited to meet those needs. Does my client want a tenant already in place? Who is going to manage the property and how much can someone afford as a down payment are all questions that need to be discussed up front. Typically, an investor is not going to have a monthly positive cash flow without putting down at least 20%. The down payment in itself can make one shy away. Understand, positive monthly cash flow can be a little as $50 a month after paying the mortgage, taxes, HOA and maybe even a property management company. There is also down time to consider. Once a tenant moves out, you may have one or two months with no income on the residence as you seek and make the unit ready for a new tenant.
Now let’s discuss selling an investment property. When you have a tenant in place that is indeed what you have. Unless the tenant is on a month to month lease, where you can give 30 days notice to the tenant if the unit sells — the lease conveys. Tenants have rights; one being the lease doesn’t become void, just because the owner changes hands. The lease itself often becomes a catch 22 when marketing the property. A good tenant is worth their weight in gold! If they are clean, don’t cause problems, pay on time, etc. — it is clear they have made your house their home. In return, investors often don’t hike up the rent on these tenants because they want them to stay. An owner may not be making any profit on these tenants, but they also have no down time and damages. These tenants are diligent about telling owners about repairs needed as they go along, so there are no surprises at the end of the day. Think about it. If you need to replace carpet, paint and do other repairs all at once — you not only have significant immediate expenses, but you also can’t rent the unit out while the repairs are made, which means no additional income.
A good tenant though can also hurt you when selling. Not only have you limited your buyer pool, to investors only, but they may not be paying market price on their rent. This may work for the current owner, for reasons I stated above, but it may not work for a buyer. For investors, this is a numbers game and if the current rent is too far below what the monthly expenses will be — that property is going to be passed by simply because the numbers don’t work.
Buying an investment property is often a great move, especially if someone has an out of state student who will be attending a college. Out of state tuition is often much higher than in state tuition. Buying a condo for a student will allow them become an in state resident can mean much lower tuition after they have lived in the state a certain amount of time. The differential between the in state and out of state tuition can be significant, making a little off-campus condo a more affordable alternative down the road.