I have about $100,000 available in home equity and I was thinking about buying a rental home. With so many good deals out there on the many different foreclosures what should I look for to make sure I am getting a good deal?
— C.M., Almont
C.M., I think you are making a great financial decision. Now is a great time to snap up some good deals on rental homes. I highly recommend that you first hire a good Realtor who knows the rental business who can assist you. Since you are buying a home our buyer's agent services are free and you get my extensive knowledge and experience in the rental investment business. As an added bonus use me to purchase a home and I'll give you back $1000 of the commission I receive. Using a Realtor who really knows the rental business is paramount to your success especially since this is your first time. Using your home's equity is a great way to start into the rental business. Once you buy using your home equity line make sure to refinance so the loan is secured by the rental home not your primary home. Use the refinanced funds to pay off the home equity. This way you will get the full tax deduction of mortgage interest deducted directly from the rents received on your tax return. Also, the rates will most likely be lower on a first mortgage on the rental versus a home equity on your home. In addition this frees up your equity line to possibly purchase more rentals. The two keys to being profitable in the rental business are 1. BUY RIGHT and 2. RENT RIGHT! A great buy can go horribly wrong if you put renters in there that destroy the place. You'll have to be very thorough when deciding which tenants to approve but occasionally you may end up with a bad renter. This is a rare exception if you do it right. This is why most people refuse to invest in real estate. They are afraid of the risk and think that their free weekends will be spent maintaining the rental. Done right there is very little work and very little risk. If you are willing to take on this small level of risk you can reap great financial success. You can't always predict which renters will turn out right but you can always make the right choice in buying. This means crunching the numbers. Research what you could charge for a likely rental fee and multiply this by 9. This is a safe assumption that 25% of the time your home will be empty. Add the future tax bills, insurance, maintenance, and mortgage payment into a yearly total. If this is significantly more than the rent times 9 then you should think twice before going forward. You may also have to figure in repair costs especially if you are buying a foreclosure. Ideally you should be looking for homes that you can buy at 15% or more below market value. You may have to look at 100 homes to find one that is perfect. As I always say, "The deal of the century comes along every week." Be patient until you find one that is right for you.
Alex Lengemann is a licensed Real Estate Broker who operates RealtyVolution.com, a local real estate company. You can Ask Alex your real estate or mortgage questions by phone 810-664-1819 or by email Alex@RealtyVolution.com.