As a commercial real estate broker I get a lot of inquiries regarding income and rental real estate purchases from what we call in the business first time buyers. The level of sophistication about the business of rental real estate ranges from complete novice to informed buyers, but we all have to start somewhere. Notice I call it a business…it is. Many of the prospective buyers I counsel (and even some owners) look at their rentals as a passive business that never needs to have course correction or monitoring. As you can project, that attitude usually ends in sub par returns at the least or complete failure of the investment at the worst.
There is a lot of mythology out there in the mainstream press about getting rich and building your financial empire through the magic of rental real estate. Income property ownership can be a very lucrative endeavor when managed correctly, but like any business adventure you have to get educated and understand that you have legal liability, legally binding contracts, and a legal and social obligation to do the right thing by your tenants. You have to understand contracts, tax laws, landlord tenant laws, fair housing and ADA, and a myriad of other issues that come up as a property owner and landlord/landlady. It should come as no surprise that many of these laws and regulations have come about due to abuses of the system and lack of fair play from one side or the other.
You will usually have a partner in your property purchase, the friendly lending institution that made you the loan on your income purchase. I’m not going to go into your silent partner, i.e. the tax collector in this article. You can find that information out from your CPA firm or the IRS/State tax authority. It’s up to you to understand the numbers behind the financing and obligations to keeping your loan out of a default situation, which in investment property usually extends beyond the monthly payment. Invest in good calculator or download a loan analyzer spreadsheet. You may have submit yearly rent rolls, keep your insurance current (which should be obvious) and other reporting requirements. Many commercial real estate lenders are still nervous about income producing real estate after the last financial meltdown a few years and are keeping a tight leash on borrowers according to my lending sources. I recommend talking to some lenders before you go shopping with your agent, and many brokers will send you to lenders as a prerequisite for working with them so have your financial information ready.
So now that I have probably scared off a majority of the prospective investors here, where do the rest go for education and to get familiar with the very multifaceted world of income real estate ? In my experience over the years I think the best place to start is your local landlord association or real estate investor group. These associations and groups usually provide the following benefits:
- On going education to keep you out of trouble and informed
- Support for issues and questions that arise in rental management
- Forms and legal guidance (in some states)
- Legislative advocacy-more important than you think
- Vendor and service providers database and referrals
- Networking with industry peers and other contacts
The two I am most familiar with are the Arizona Multihousing Association (www.AZmultihousing.org) and Arizona Real Investors Association (www.azreia.org). There may be other smaller groups and each of these entities have a slightly different focus but both are dedicated to real estate investors and owners. You will have to decide which groups are the best fit for your needs as a potential investor and owner.
These groups will give you an opportunity to talk to actual owners and investors, network with other owners, vendors, and government entities. Take your time, don’t rush into any deals and decide whether or not the rental real estate business is for you. As the old US Customs brochure said, and still may, know before you go. And if you decide that the ever challenging world of income real estate isn’t for you at this time, that’s OK, but if you like what you see, welcome aboard.