Value components of a rental property Part 1

In this post I want to discuss value components of a real estate investment. I also will suggest some ways to protect yourself from seller abuse. For those that are new to real estate investing especially, long term buy and hold there is more to your purchase than just the intrinsic value.

One of the important value points of rental property is cash flow. After all, that is why you bought the property to obtain cash flow which achieves a return on capital. You’ll often see the term “Cap Rate” thrown around which is basically what you are after.

When we first started out we found every shark out there to buy from and many times the promise of a return was deferred because we inherited a bad tenant. That not only caused a delay in revenue but incurred the additional cost of eviction.

In some cases, the seller may be antsy about you snooping around too much with tenant issues however; you need to know what you’re buying. Here are some things you can do to protect your purchased cash flow:

• 1) Use a Letter of Intent prior to contract with lease review as one of your inspection items.
• 2) Have the seller sign an affidavit of cash flow. Contact me at BP if you want a free copy of ours.
• 3) Have 3 months of rent escrowed and if you discover a deadbeat tenant the escrow fund pays for the rent until you can evict. If there are no issues the seller is allocated a month’s rent until the escrow is complete. The specifics of the repayment process and requirements need to be spelled out in the purchase contract. Make sure you go over the requirements with the escrow officer so an escrow account is opened.

This will help you protect yourself from the all inclusive “as is” clause. Now, it’s as is with assurances!

Of course, you can always buy an empty house and place your own tenant.