Buying Rental Property - Avoid Sellers Tricks
Be careful when buying rental property. We stayed at a motel for a week one winter. The bill showed twice what it should have, but since I already paid the correct amount in cash, I thought nothing of it. When we noticed that the lobby and swimming pool were unheated, we thought it was frugality. Only a year later, when I read a news story about a new owner struggling to make the motel work, did I realize what was going on.
The owner had been planning to sell. To prepare, she was using the two most basic ways to inflate the appraised value: decrease expenses and increase reported income. By stopping repairs and quietly adding $100 in income every day, she may have shown $45,000 more net income for the year. At a .08 capitalization rate, that means the appraisal would come in $562,000 higher than it should have. Oops! The poor guy who overpaid!
Do you want to avoid a mistake like that when buying rental property? You need to watch for tricks like these. You also have to understand the basics of appraising income property.
It starts with the capitalization rate, or "cap rate." If investors in an area expect a return of 8% on assets, the cap rate is .08. Net income before debt service is divided by this to arrive at the value of a property. I explain this further in another article, but the primary point here is to remember that every dollar of extra income shown will increase the appraised value by $12.50 with a cap rate of .08, or by $10, if the cap rate is .10.
Sellers Dirty Tricks
If sellers of rental properties increase the net by honest means, then the property should sell for more. Unfortunately, there are many dishonest ways, both legal and fraudulent, that are sometimes used. Unlike sellers of houses, who may cover foundation cracks with plaster, the tricks used by sellers of income properties aren't about appearance. They are about income and expenses.
Income can be inflated by showing you the "pro forma," or projected income, instead of the actual rents collected. Ask for the actual figures, and check to see that none of the apartments listed as occupied are actually vacant. Also, be sure that none of the income is from one time events, like the sale of something.
Income from vending machines is a gray area. Smart investors subtract this from the net income before applying the cap rate, then add back the value of the machines themselves. If laundry machines make $6,000, for example, that would add $75,000 to the appraised value (.08 cap rate), if included. Since they are easily replaceable, adding the $10,000 replacement cost instead makes more sense.
Hiding expenses is the most common of seller's tricks. Paying for repairs off the books, or just avoiding necessary repairs for a year, can dramatically increase the net income. Demand an accounting of all expenditures. If a number in an expense category is suspicious, replace it with your own best guess.
Analyse each of the following, verifying the figures as much as possible, and substituting your own guesses if they are too suspect: vacancy rates, advertising, cleaning, maintenance, repairs, management fees, supplies, taxes, insurance, utilities, commissions, legal fees and any other expenses. This is how you make buying rental property safe.
Steve Gillman has invested real estate for years. To learn more, and to see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com
Related Articles:
Experience Complimentary Luxury Maui Vacation Rentals Along Beautiful Wailea Beach
New Wailea Beach Villas offers luxury Maui vacation deal with special “Buy Six, Get One Night Free” offer.
Costa Rican Lifestyle and Property Market an Attractive Prospect for Investors
As the strategy of real estate investment continues to flourish as an increasingly popular wealth building strategy, investors are recognizing the potential of underutilized international destinations such as Costa Rica.
The First Truly International Residential Property Site - the Global Property Guide
If you're looking to buy residential real estate in another country, the Global Property Guide (www.globalpropertyguide.com) created in September 2006, integrates all the information needed by house buyers in 131 countries - a first.
How to Finance Foreclosure Property
While many investors have found that buying foreclosure properties a great way to invest in real estate, they have also found that getting the financing to get started can be a bit tricky. This is especially true if you already hold a mortgage for your own home. If you want to begin building your real estate empire with foreclosed properties, then you need to have a good understanding of all the options that are available to you. Knowing how to finance foreclosure property can be just as an important piece of your success as the property itself.One way to finance your purchase of foreclosure properties is to utilize low interest lines of unsecured credit. These loans are given by a bank and are generally designed to be given as a general pu...
Tips on how to Sell, Buy, and list your property
When it comes to property, first impressions count, so make sure yours is looking its absolute best. Making the most of your home doesn't have to cost a fortune, and a few inexpensive improvements can make all the difference. Put yourself in the shoes of a potential buyer and, starting from the pavement outside, take a complete tour of the property. Work out a plan of action, and if necessary, draft in a friend or an objective other for a second opinion - you'll be amazed at the cracks and crevices, often that have gone unnoticed for years, that suddenly come to light. Once you?ve made a list of what needs to be done, work out a budget and priorities accordingly. There's no point throwing money at making unnecessary changes at this...
How To Make Money With Investment Property
Owning investment property can be a profitable endeavor, even for the neophytes in the field of real estate. The crux of the business lies in finding affordable investment property that is likely to be lucrative. Although there are scads of books, guides and other online sources of information, loads of advice at the outset can often leave a newbie investor perplexed as to what?s the right road to follow. It?s best to know the basics first, and then move on to the avant-garde tips and tricks of the profession.
Planning to Invest in a Property Overseas and Partly Finance by Letting?
Recent TV programmes have been advising investment in property overseas as capital appreciation is predicted to be high and rental incomes can give good ongoing income. But be sure you decide which type of property will work best, the holiday lets market is getting swamped. Your best bet maybe that town apartment being let long term.
Buy-to-Let Booms as Property Market Halts
While the overall mortgage market has slowed in the wake of recent interest rate rises, buy-to-let mortgage lending has surged This is a clear indication that buy-to-let property investing has returned to favour following a recent period of uncertainty
French Property Hunters Get Their 'Ideal' Site
The new French property portal has been created to give searchers not only a bigger choice of properties than other 'France-only' sites, but an overall better user experience on the site, too.
Tenerife. It's Attraction to Property Buyers Looking For a Piece of Paradise
The Canary Islands, a group a volcanic islands, owned by Spain, Las Canarias, and situated of the western coast of Spain, offer a wide variety of experiences to the traveller and those looking to move to a little piece of paradise One of these islands and the most well known is Tenerife