| So how do you determine what
Albuquerque New Mexico real estate to buy? What criteria is used to evaluate potential
investment houses? How do you buy them, and what do you do to get them
ready to rent? It is not really all that difficult, if you follow a few
simple guidelines. 1. TYPE
- The most important thing to
remember here is to follow the law of supply and demand. What type of
house or real estate appeals to the most people? In
most areas, this is a 3 bedroom, 2 bath, 2 car garage detached house
(3/2/2). This is not to say that a 4 bedroom is no good. If you come
across a 4 bedroom that is a great deal and meets all the other criteria
- by all means buy it. What about condominiums or townhouses or other
multi-family Albuquerque real estate types? While
generally not as good as a house, they do have the advantage of being
easier to maintain because a homeowners association (HOA) handles the
maintenance. That is also, however, one of the drawbacks to a
condo/townhouse. The HOA fees are often high ($100 per month or more),
and they often continue to go up. Furthermore, many HOAs hold the owner
responsible for the actions of the tenant. So you could end up getting
fines because your tenant doesn't park in the right spot or plays the
stereo too loud. Most of these HOAs have the power to put a lien
against the title of your Albuquerque New Mexico real estate for money they claim you
owe them, such as fines or special assessments. In extreme
circumstances, these HOAs can turn into ugly battlefields with bitter
disputes among neighbors. A condo/townhouse is usually harder to sell than
a house. They also tend to
have a higher proportion of renters than owners.
As a rule, the best Albuquerque New Mexico investment properties are in
areas where a majority of the residents are owners. A condo/townhouse
can be an excellent real estate investment, just make sure to do some homework. 2.
LOCATION - Look for an
average house, in an average neighborhood, to rent to an average person,
and, down the road, to sell to an average person. You want a middle
income area with the widest appeal. Avoid homes that are on a busy
street or back up to a busy street. If you can find a home on a
cul-de-sac or corner lot, that’s great. You should research home sales
over the past few years. A Albuquerque real estate agent can help you with this, or
you can go to your county records. Pick an area where values are
steadily increasing. As for age, a newer home will generally require
less in repairs, although this is not always true. 3. PRICE
RANGE - The key here is to
select a price range where you can get a positive cash flow or at least
breakeven while still being able to make the rent affordable to renters.
This price range is generally just below the average price in the area. For example, if the average home in your area is
selling for $140,000, the best rentals may be in the $110,000 to
$130,000 price range. In addition, this is a price range that should be
easy to sell in the future, when the time comes. High priced or luxury homes are generally not
recommended. They are usually hard to rent for enough to cover the
payment, and if they go vacant for a while it can cost you plenty. Many
tenants who rent luxury homes do so only for short terms, leaving the
owner with another vacancy. On the other hand, if prices are increasing
rapidly, a higher priced home may appreciate more in gross dollars. Lower priced homes are also not the best. The
main problem is management. People in low price areas are typically bad
money managers. They often live paycheck to paycheck, with no savings
for emergencies. When their car breaks down or there is an unexpected
medical bill, the landlord gets a sob story call saying the rent is
going to be late. Once a low income tenant gets behind in the rent, the
chances of them bringing it current are slim. Tenants in lower priced homes are also more
likely to abuse the property and neglect maintenance and minor repairs.
They often have many kids and pets crammed into a small house. Finally,
low priced homes are often in areas that have low appreciation. Of
course, these are generalities and not always true in every cash. 4.
FINANCING - There are many different ways to buy properties, but
they all fall pretty much into the following categories. CASH PURCHASE - This
is simple, just like it sounds. The buyer pays the entire purchase price
in cash without getting a loan for any part of it. In this case, the
buyer/investor would have a large cash flow because there is no mortgage
payment. There is nothing wrong with this, except that the buyer is not
taking advantage of the leverage of getting a loan and is tying up more
money than necessary. If a buyer paid cash for a $100,000 house, he
could have instead used the money to put a 10% down payment on ten
$100,000 houses and own ten homes instead of just one. Of course, most
people simply don’t have enough money laying around to pay all cash
for a house NEW MORTGAGE -
In this case (the most common) the buyer makes a down payment and
goes to a bank or mortgage company to get a loan for the balance of the
purchase price. The bank will put a lien against the property so that if
the payments are not made, they can repossess it. The buyer will be
required to fill out a loan application and the bank, depending on the
amount of the down payment, will run a credit report, verify the
applicant’s employment and bank accounts, and analyze the debt to
income ratio. The interest rates and fees charged can vary
significantly, so a prudent buyer is well advised to shop around to
different loan companies before going through the application process. SELLER FINANCING -
This is where the seller acts like a bank and loans you the money
to buy his house. For full seller financing, the seller must own the
house free and clear (no loans against it). The seller will usually
require the buyer to make a cash down payment, and then put a mortgage
(lien) against the property for the balance of the purchase price. The
terms such as interest rate, down payment, length of loan, etc. may all
be widely negotiable. The advantages to the buyer are that the seller
will often not require a full loan application and credit checks, and
the seller usually does not charge all the miscellaneous fees that the
banks normally do. The seller gets to earn a good return on his money
that is secured by the property, and will have the gain from the
property spread out over a number of years, which may help with the
seller’s tax situation. Seller financing is good if you can get it,
but a relatively small percentage of sellers own their homes free and
clear and many don’t want anything to do with carrying the mortgage.
It is always worth a try. ASSUMPTION - Prior
to 1988, all FHA and VA mortgages were assumable without qualifying.
Many investors scooped up properties by simply assuming these loans with
small down payments. Those days are all but gone. There are still some
of the old loans around, but the equities are big so that the buyer
either has to come up with a huge down payment. For example, if a
property selling for $100,000 had an underlying assumable loan of
$50,000, the buyer would have to put a $50,000 down payment. If the
seller would carry a second mortgage, then the buyer could put a down
payment of $10,000 and the seller would carry a second mortgage of
$40,000. Most all of the newer loans are not assumable or require the
buyer to qualify to assume the loan just like for a new mortgage. CONTRACT OF SALE -
There are many ways to use this technique, but the basics are the
same. The new buyer makes a down payment to the seller and takes over
the property, without notifying the underlying mortgage holder. The
buyer makes payments to the seller, who then makes the proper payment to
the mortgage company. Most all mortgages have an “acceleration
clause” that allows the mortgage holder to call the entire loan
balance immediately due and payable if title or interest in the property
is transferred without their permission. There are too many details and
possible situations to go into here, but suffice to say you can get into
a lot of trouble with this one if you aren’t careful. 5.
PREPARING THE REAL ESTATE FOR RENT - It
makes good sense to try to buy homes that require the least amount of
work, but sometimes the best deals are on homes that need some attention
before they are ready to rent. Do not make the mistake of trying to rent
a home if it is not in good condition. The only tenants who will be
willing to rent it are messy and figure that since the house isn’t in
good condition anyway, it doesn’t
matter if they trash it. So what does good condition mean? INSIDE - The
two best things that you can do, that make the biggest difference for
the least amount of money, (in addition to a thorough cleaning) are
carpet and paint. Fresh carpet and paint make a house smell, feel, and
look new inside. As for color, go with neutral, nothing flashy. For
paint, use an off-white with a beige tint for a soft, cozy feel. Don’t
use a gray- it gives a cold and drab feeling. Never put up wallpaper,
you will regret it down the road! For carpet, go with something in the beige-brown
range that is neutral yet will hide some wear and tear. Use a low to mid
range carpet but go with a higher end pad. The nicer pad doesn’t cost
that much more and it makes the cheaper carpet feel like a more
expensive carpet and it also makes it last longer. OUTSIDE - The
idea here is to “gingerbread” the exterior, give it what is referred
to as “curb appeal”. The house should look nice and well kept- the
kind of place people would want to live. The first thing to do is paint
the outside if it needs it. Again, you should use neutral colors that
are common to other homes in the area. As you buy more and more houses, you can save
money and confusion by buying large cans of paint and painting all of
your houses the same colors. It makes touch ups easy because you never
have to try to remember what color you painted it! Other items are
having a nice looking front door, mowing the grass and trimming the
trees and bushes, planting flowers, etc. Many people elect to do the repair work
themselves, and this may make sense in some cases. Never take time off
from work to do the repairs if you have a high paying job. It is silly
to take off from a job where you make $30 per hour to go do a
repair job that you could hire someone to do for $10 per hour. Often when you hire the job out, it gets done
much faster, meaning less time that you are making the payment on an
empty house. Plus, when you hire it done, you can write off the entire
cost of the job. When you do it yourself you can only write off the
materials. 6.BUY-FIX-SELL -
Many people like the idea of buying houses, fixing them up and
then selling them, hoping to make a profit. It is possible to do this,
but you must be very careful and know exactly what you are doing or you
will get burned. First, once you buy the property, you need to fix it
up. Depending on the amount of work, this can take a couple months.
During this period you are not only paying for the repairs, but also the
mortgage payment. Once the repairs are done, it can take several more
months to sell the house, which means more payments on a vacant house. When it does sell, the average selling costs
(with commissions, closing costs, taxes, etc.) are near 10%. It is easy
to see that you would need to buy the house for at least 25% under good
condition market value for this to pencil out. If you are off on some of
your estimates, or pay too much for the house, you can lose a lot of
money fast. |
