You have your CDs, stocks, bonds and mutual funds. You now want to diversify more. Real estate is one good way to diversify your investment portfolio. There are some real deals out there in the current bargain market. Just like with any other investment, with real estate you have to do your homework.
You may have just purchased a real estate investment or you are currently looking. But have you ever managed investment real estate before? Have you ever rented out property or had tenants?
When looking to invest in real estate, the three most important factors are location, location and location. As part of your exit strategy, you will eventually sell the real estate.
If the property is rental property, you want to make sure that it has a positive cash flow. If a property has a positive cash flow, it is bringing in at least as much income each month as there are expenditures. You do not want to have to feed it each month with additional investments.
Once you have a property, your next task is to preserve and protect your investment. To assist you with this, you need adequate capital. For non-income producing property such as vacant land, you should have adequate capital to cover expenses for the period of time you expect to own it, times two.
For rental property, you want to be able to cover property expenses for at least three to six months in the event you have very little rental income coming in. In this market, you may want to extend this cushion to six to twelve months or longer.
Qualified tenants are the key to preserving and protecting rental property. There are a variety of ways to find tenants. Yard and/or window signs can be very effective, especially for prospective tenants driving through neighborhoods in which they want to locate.
You can purchase For Rent ads in the newspaper and/or list them with a realtor who, for a fee, will locate prospective tenants. There are both fee based and free online vacancy listing services. There is no one way that is a sure fire way to get good tenants, especially in the current market. It is best to use a variety of ways to get word out that your unit is available for rent.
Once you have a prospective tenant, you will want to screen them. To do that, you are going to need a full and complete application from the prospective tenant. The application should include driver’s license and social security numbers, former landlords with phone numbers and proof of income. A signed authorization that you can do credit and reference checks should also be included on the application.
With application in hand, verify the information. Check with prior landlords. I know some landlords who contact all prior landlords within the last five years. I recommend that you cross check the landlords and addresses listed with the reported landlord owner on the St. Clair County Register of Deeds website. It is not uncommon for some prospective tenants to list friends’ names and numbers as their former landlords.
Next, verify income with the employer or other sources. Always do a credit check. Nowadays it may be difficult to find people with good credit. However, if the bad credit is due to unavoidable expenses such as medical bills or an illness, it is a whole lot different than if people have just not been paying utility or Visa bills.
Do criminal record checks. Check federal and local court records to see if they have any Federal, State or local reported criminal violations or if they have been evicted before. Do not overlook the Michigan Department of Corrections list of convicted felons and the Michigan Sex Offender list. Most of these checks can be done online for free.
Once you get a good prospective tenant with good references who can pay the rent, enter into a comprehensive lease with them. Some landlords like month to month leases while others prefer one-year leases. I personally prefer one-year leases because I find that I get less transient tenants that way. As long as you have a comprehensive lease, you can generally evict somebody if they are causing any damage or disturbing the neighbors.
If you are new to the real estate investment business, it is best to affiliate with others who are also in the business. The largest, oldest and most comprehensive real estate investment and landlord association in the Port Huron area is the non-profit Eastern Michigan Real Estate Investment Association formerly known as the Eastern Michigan Rental Housing Association. This organization and its predecessors have been around since 1988. With this association, you can network with other real estate investors and landlords who can help you along and mentor you in the real estate investment process.
In addition, the association has a very comprehensive website at HYPERLINK “http://www.emrha.org” www.emrha.org through which you have a lot of tools to assist you with your real estate investments. The website includes a vacancy listing, various rental forms, agreements and leases. There are links on the website to the Federal and local court docket history, Michigan Department of Corrections list of convicted felons and the Michigan Sex Offender List. You can do credit checks on prospective tenants through another link on the website. The group also maintains an electronic listing of all evictions in St. Clair County since 1988 so you can check if a tenant has ever been evicted since that time.
The association also has regular meetings and periodical educational programs. This year included a free all day real estate investment seminar which was attended by over 40 real estate investors. The association staff is available to assist you Monday-Friday, 9:00 a.m. – 5:00 p.m. at 810-385-4335.
Membership in the organization is very economical, only $100 for the first year and $90 each year thereafter. If you can save just one month’s rental income, you will have paid for your membership for years.
So if you are going to invest in real estate, make sure that you do your homework and you are properly capitalized and properly educated. Happy investing.
By: Matthew M. Wallace, CPA JD
Published edited November 22, 2009 in The Times Herald newspaper, Port Huron, Michigan as: Portfolios can be diversified with real estate