Now that you've gathered all of the information you need to get your new Residential Investment Property Business off of the ground, you're ready to actually find a suitable property. The smartest investors always work with a very cool head and they always work with a financial goal in mind. The key word is patience. Don't expect the perfect property to be on the market the moment you decide to buy. If you have done the homework I outlined in my first blog on this subject, you're well aware of what you can buy, where it should be, a real good idea of what it should look like and what kind of rental income you need to make your investment goals a reality.

In this blog, I'm going to address one major thing that you should pay particular attention to when considering a property.

RENTS

There is a huge difference between Gross Rent and Net Rent. As a Business Owner...you need to know what your income and expenses are going to be. Gross Rents can be very deceiving. Net Operating Income (NOI) is the actual amount of money that you're going to have to service a mortgage and realize some form of profit with. It's the Gross Rents minus all of the expenses the owner is responsible for. Taxes, heat, hydro, repairs/maintanence etc.

If you're buying a large apartment building or strip mall, obtaining accurate financial data is common practice. When we're looking at properties that are worth millions of dollars with a huge rent roll, we expect that the books are current and accurate, however, I can say from experience that this same practice is not carried through down to the small investor.  Instead of good accurate pro forma data, one is more likely to get a piece of paper with "estimates" and "projections". It's up to you the "Buyer" to do your due diligence and one aspect of that should be investigating the income.

There are 3 major area's involving "rents" that you should pay a lot of attention to.

1) Accuracy and Detail. Can the present owner provide you with a list outlining the terms of each tenancy? Can he/she provide you with the previous 3 years rental inRental Trackerformation for the property? This is very important!! Remember, you are buying a business from someone based on certain representations and assumptions. Six months after you've purchased the property is no time to find out that the property has always been plagued with tenant issues because of the bikers that make the home up the street their summer hang out. The Seller doesn't have to disclose this to you by law, but if you had reviewed his last 3 years tenant records, seeing 16 tenants come and go out of a triplex in 3 years would of set off alarm bells.

2) Market Rents. There are many properties that have been stuck in a time warp with rents. Many small investors are asking a price for their properties that would result in you operating "not for profit" businesses, because they have owned the properties for many years and have not increased the rents in accordance with the guidelines on an annual basis. "Rented below Market Rents" is not a bonus phrase when you see it advertised unless the price of the property reflects the low rents. The lovely triplex may sit in a neighborhood of high priced homes, but unlike it's single family residential neighbors, it's value is tied into its income.

You must acquire a sound understanding of the Tenancy Act for your jurisdiction and find out if it's possible to increase the rents, under what circumstances and how long it will take. One of the biggest mistakes that a small real estate investor makes is not fully understanding their rights and obligations as a Landlord before they purchase their first property. Learning as you go can be extremely time consuming and costly. Be prudent and know your rights up front before you take title to the property.

3) Quality of Rents: Another huge oversight of many first time investors is not investigating the "quality" of the rents that are already in place. Are there leases and when do they expire? Does the owner have credit information on the tenants? If the owner has never had a rental application filled out, you know that he's not in the practice of obtaining a Credit Report on his tenants and laws dictate that you need "written" permission to obtain this information. Don't ever forget that it is your responsibility to make sure that you are not buying someone's headache. At the end of the day you're the one that has to collect the rents and make the mortgage payments.

This is not to say that you shouldn't buy a property that doesn't have good tenants or market rents. The point is be aware and "know" what you're buying. If your confident with your knowledge of the Tenancy Act you may be capable of "turning" the property around , acquiring good, quality tenants along the way, and legally increase the rents and improve your investment. On the other hand, if you're looking for an easy, turn key operation, one that requires this type of work is not for you . The key is know what you're buying and run your business like a pro!