"I’m ready to buy an investment property. Where do I start?"
It's PRIME SEASON for real estate investing!
Stellar Properties' resident investment and property management expert, Jennifer Fox, answers this important question for new investors:
Understand how much you can afford.
Investing in real estate is a great way to diversify your investment portfolio. Deciding where to invest and how much to invest is personal and based on your financial resources. Start with your financing. How will you buy the property, how much can you put down and how much can you leverage? It’s critical to understand your financial options as you start your search for an investment. We recommend you meet with a mortgage broker/banker to determine your borrowing power. Once you understand what you can afford the search can begin. Investors need to expect to put 20-25 percent down, with current rates at all-time lows. It’s a great time to invest!
Cash flow or appreciation...or both?
Cash flow and appreciations are the two most important measures of a successful investment. Will the property cash flow or at least break even or is the cost to purchase not supported by the rental rates in the area? Is the property in an area that is showing appreciation? Areas with space to build tend to appreciate slower than areas where building opportunities are scarce. However, these newer, more eastern areas of Boulder County tend to be more affordable for new investors. We find investors are more successful with their cash flow when they look for properties along the I-25 corridor (Thornton, Northglenn), in Longmont, Westminster, and other cities that are east of Boulder County. However, there are gems to be found in Boulder, Louisville, Lafayette, and Broomfield, and although cash flow might be tight in those areas, appreciation continues to grow at a higher rate than in the eastern areas.
If you have enough to invest, you can fund both rental properties and long-term appreciation properties. In some cases, one investment could be both types. You may be able to purchase and rent out a property now in a neighborhood with potential, earning cash flow on it for years until the values are high enough that it's worth remodeling and selling the home for a final payoff.
Where you invest will depend on your primary goal. When investing for cash flow, look for areas with strong rental rates and affordable investments. Different areas tend to carry different investment profiles so don't be afraid to look outside of the area in which you live.
Should I buy a fixer-upper or a turn-key investment property?
This depends on you, your ability to fund improvements, and access to vendors to do the improvement (we can help you there!). Properties that need improvements are a great opportunity. With the smart upgrades and updates, the property will be a successful rental and improve appreciation. Paint, flooring, kitchens, and bathrooms are most important to tenants and make a great first impression. However, many properties with deferred maintenance also may need a new furnace, new AC, new hot water heater. It’s important to evaluate the extent of work that needs to be done and make sure the purchase price plus improvements make sense. Fixer-uppers are not ready to rent immediately. You must have time and funds to absorb the months without rental income. These are perfect for some investors, not for all.
A turn-key property is move-in ready with very little preparation. If you buy a property that is ready to rent your property manager can be ready to market the property the day you take possession and very little time is lost looking for a tenant. Turn key properties might be a bit more to purchase, but they also start generating income more quickly. Many investors prefer these easy to rent properties.
When is the best time of year to rent my investment property?
The rental market is active and at its strongest between March 1 and Sept. 1. If your investment property is near an institute of higher education, August 1 is the preferred time to start and end a lease. Student properties are on a very predictable schedule. However, if your property is not catering to the student population we find that Spring is the most active time to rent a property. If you purchase your property in the fall or winter, the slower rental market may delay the finding of your first tenant. Most likely you got a great buy during this season and the poor rental timing is a short-lived issue when you’ve bought a long-term investment. We do not recommend that leases end between November and February so we work with tenants to create terms that have the lease cycle into the strong rental season. Do not worry about the time of year when you first purchase your investment property. It always works out and you can get the lease onto a good one-year cycle quickly.
How do I choose a tenant for my Investment property?
Vetting and choosing tenants is a very important part of property management. Many investors choose to hire a property management company for this reason alone. The application process, criteria for acceptance, and Fair Housing laws are all complex and must be followed to avoid discrimination and to choose wisely.
First, marketing must consider Fair Housing laws so that potential applicants are treated equally. Second, the application must be fair, fees must be justified per Colorado state law. Third, criteria must be set to help determine whether an applicant is a fit for the property. Household income, credit scores, background check, employment history, landlord references are all considered during the selection process. Sometimes additional deposit funds or a co-signer can help to strengthen the application if weak in some areas. Providing a lovely property and selecting qualified tenants is the goal.
Is preventive maintenance important?
Yes, like any asset, you should take care of it so it doesn’t break. Fixing something broken costs more than maintaining it consistently over time. Recommended preventive maintenance:
Furnace and AC Cleaning/Service: 1-2 x per year
Dryer Vent Cleanout: 1x a year
Gutter cleaning: 1-2 times a year (fall/winter)
Hot Water Heater: Flushing the system once every few years will extend the life of the unit.
Sewer Line Cleaning: This is important 1x a year if there has been a past issue or if there are older pipes and mature landscaping (roots).
Yard Clean Up: Tenants are normally responsible for general yard maintenance but a good Spring and Fall Clean up, removing all leaves, trimming branches, etc...will keep your property looking good and help your tenants care for the yard.
When you plan for these services, you budget for them and you have less surprise, fewer emergencies, ultimately saving you money.
QUESTIONS? Ready to explore options in the marketplace?
Contact Jennifer Fox, Investment & Property Management Expert
303-442-2448 (text or call)