buying rentals what to look for?

[Scott Phillips]

I thinking about buying a duplex with renters already in what should I look for and questions should I ask. how to break down the numbers to know if its a good deal or not? Im nerves because it will be my first deal if I do it. please if me some info thanks

[David Beard]

Scott -- on decent 2 to 4-unit properties in the mid-west, I've been looking for gross annual rent yields of 30% if tenants pay their own gas/electric, and 38% if the landlord is paying for the units' gas heat and/or their electric. Always find out right up front who pays the utilities, if it's not posted in the ad.

The denominator in this calc is your purchase price plus any rehab that you need to do right up front to knock out deferred maintenance.

This should get you to a 15% net return after all expenses, vacancy assumption, and replacement reserves for roof, mechanicals, appliances, etc.

The numbers above will serve as a filter when looking at many properties. When you're honing in on your best candidates, sharpen your pencil.

Look up the property taxes for the property on the county assessor web site, or call if necessary. Find out the assessed value, so that you then can back into the property tax rate. You're probably buying for way under the assessed value, so you'll be able to appeal the property taxes. Don't bank on being successful with this appeal, but it'll be gravy if/when it occurs.

For property insurance, I usually assume about .7% of cost (purchase+rehab).

Assume 10% for vacancy, 13% for property mgmt+leasing expenses, 10% for repairs/replacement reserves (maybe 15% if the bldg is very old but this is subjective and depends on degree of prior renovation)

Call the gas/electric company in the area to get the average paid by the landlord (the master meter) durding the prior 12 mths. Ask the utility company to confirm the # of meters and separate billing accounts for the property.

Call the water company to do the same. Water/sewer are almost always paid by the landlord, and around here runs $40/unit/mth or thereabouts on average, depending on # of occupants.

Since the tenants are already in place, make sure they are current, find out if they're Section 8, and how long their leases run. I always view the units with the tenants home so that I can ask them questions. They love to talk about any issues they have, and if they plan on staying. Ask them to confirm their rent, their security deposits, and what utilities they pay. Ask them how much their utility bills normally run.

You can also evaluate them at that time, even though you're stuck with them through the duration of their leases. I ask to see their rental applications and tenant file to make sure it appears that they were properly screened and not just passed in so that the seller can say "fully rented!!" in their ad.

At a minimum, proper screening means: gross income three times rent, no evictions in last four years, copy of recent pay stub, continuous work record in prior six mths, and ideally some evidence that prior landlord was called.

David