25 Things You Must Know Before Buying Your Next
Multi-Family Home
Willie James Mandrell, III
1. Hire the right Realtor
2
2. What’s on your report?
2
3. Not all lenders are created equal
2
4. Government buying incentives
3
5. Prepare your checklist
3
6. Research your neighborhood
4
7. What’s your market rent?
4
8. Understanding the cycle
4
9. Buying out of town
5
10. It’s a business
5
11. Take notes
6
12. Patience is the key!
6
13. Know the law
6
14. Evaluate your income
7
15. Evaluate your expenses
7
16. Understanding foreclosures
8
17. Google Earth
9
18. Converted spaces
9
19. Simple structure & construction
10
20. A note on short sales
10
21. Let’s talk taxes
11
22. Get a C.L.U.E
11
23. Negotiating the offer
12
24. Hire a good home inspector
12
25. Are you ready to become a landlord?
13
1. Hire the right realtor The Realtor you choose to work with during the home buying process can make or break your overall experience. Not all real estate professionals are created equal so you should choose one who can provide you with the type of service that will meet your goals. If you are looking to purchase a multi-family home search for a Realtor who is familiar with the neighborhood where you are buying and who has a good understanding of the specific property type you’re interested in. A good Realtor will be able to guide you through the buying process step by step and ensure your overall purchase runs smoothly. Remember that purchasing a multi-family home is no small task, so you should be working with a professional who has the knowledge to do the job right.
2. What on your report? There are three major credit companies that offer you free access to your credit score: Experian, Trans-Union, and Equifax. These companies will give you a detailed breakdown of your credit situation. However, each report may not be identical. Since these reports are free, it’s in your best interest to get all three to be sure that you see the complete picture. When looking over the documents, doublecheck that your personal information is accurate. Beware of information that does not pertain to you or looks as if it might be fraudulent. It will be to your benefit to know what’s on these reports so you can handle any issues that may slow you down later in the home buying process.
3. Not all lenders are created equal There are a variety of different lenders to choose from. Each one has something slightly different to offer you. Consider applying to several different types of lenders from the large commercial banks to your local mortgage broker so you can evaluate the different types of offers presented to you. As you speak with each one ask about their rates, loan terms, qualification process and down payment requirements among other things. While you may not like what one lender is offering, another may fit your needs perfectly.
4. Government buying incentives If you know where to look you can frequently find financial incentives available to home buyers. The federal and local governments often have special programs and grants for low income buyers, seniors, and first home buyers. These incentives range from down payment assistance to financing opportunities with special rates or terms. There are also incentives for investors if you’re willing to buy within a certain area, rehab older structures, or provide housing to low income renters. During your search for financing you should also be searching for incentives that may be available to you. Here are a few good websites to start your search: Housing & Urban Development http://www.hud.gov/local/index.cfm?state=ma&topic=homeownership Mass Housing https://www.masshousing.com/ The City of Boston – Housing http://www.cityofboston.gov/residents/housingAndProperty.asp
5. Prepare your checklist! If you’d like to walk away at the end of your purchase with everything you want, create a checklist of property criteria. At the start of the buying process you should write down everything your ideal property would have as well as everything it wouldn’t. This written list should be regularly reviewed while you’re visiting properties with your Realtor to see where each property matches up. Try to be as detailed as possible with your criteria. You want your list to include everything from the number of bedrooms you’d like in each rental unit to the height of the ceilings. A properly written checklist allows you to avoid making irrational decisions while evaluating properties and will also help you to act quickly if a good deal presents itself.
6. Research your neighborhood Understanding the neighborhood where you want to buy may seem obvious, but some buyers underestimate its importance. Before getting started with the house hunting, do a little neighborhood hunting first. There are a number of resources online, such as municipal web sites as well as forums that you can use to find out about prospective areas. To help you determine if a neighborhood will be a good fit for you, try taking a walk in the area, visiting the local facilities, and getting to know some of the residents. You may also want to check out the area at different times of the day to see how things may change. A little extra work before the purchase can really make the difference in the end.
7. What’s your market rent? If you plan to purchase a multi-family home and rent out one or more of the units, it’s crucial you understand your rental market. Don’t assume that because the property you want to purchase is currently being rented for a certain amount that this income will hold true for future tenants. Before you purchase any rental property you should research what other similar units are renting for in the area and how that compares to your prospective property.
8. Understanding the cycle Real estate is a constantly evolving market that swings to favor either the buyer or the seller – hence the terms “buyer's market” and “seller's market”. While negotiating a purchase price on a home, it's important to know which of the two markets you’re in and which direction the market is trending towards. A seller’s market is one where homes are selling quickly and prices are increasing, while a buyer’s market is one where homes are taking longer to sell and prices are holding steady or declining. A good understanding of your real estate market can really help you while negotiating with the seller. In a buyer’s market you may want to continue exploring other options rather than pay a particularly high price on a property. Conversely, in a seller’s market you might consider paying a premium to avoid losing out on a home you really want. You should talk to your real estate agent about current market conditions and where things seem to be headed.
9. Buying out of town The process of purchasing a home can be a stressful experience, but if you are in the market to purchase an income property in a distant town or city, the experience can become even more challenging. Whether you are looking to invest in opportunities outside of your current city or looking to relocate, your best approach is to start with an experienced real estate agent in your prospective area. Your agent should be familiar with the area in which you are looking to buy as well as with the property type. In general, buying a home long-distance can have its obstacles, but with a little research on your part and the help of a knowledgeable Realtor, you can make the transaction a lot easier.
10. It’s a business The income property business can be a time consuming, but ultimately a rewarding venture. Whether you plan on buying an income property as an investment or as your primary residence, it is important to recognize that you will be running a business. Tenants, passive income, rental expenses, and certain tax issues are among the concerns of multi-family owners. You should become familiar with your responsibilities as a landlord and business owner if you want your rental business to succeed. Like any business, the effort you put in and the knowledge you obtain will ultimately determine the success you achieve.
11. Take notes This one is self explanatory. You are going to be visiting a bunch of homes and taking in a lot of information. It will be virtually impossible to remember every last detail of every property you visit. While searching for homes with your Realtor, you should always take notes and pictures when possible. Keep a log of what properties you’ve seen and the photos to go with them. These combined records will come in handy when you need to quickly refer back to something to make a decision.
12. Patience is key! Perhaps you will find the perfect property this week or maybe it will take a little longer. Some buyers find exactly what they are looking for right away, while others have to do a little more waiting to find the right property. Whether you’re a first-time homebuyer or an experienced investor, it's always a good idea to begin the process with an understanding that good things really do come to those who wait. You may see a number of homes, take numerous photos, even make an offer or two, but patience may very well be the key to finding the property you’re really looking for. New homes come to the market daily - tomorrow may be the day yours becomes available.
13. Know the law When you become a landlord, you and your rental property are subject to certain federal, state and local laws. Before you hop right into the purchase of a multi-family home, take some time to educate yourself on your responsibilities as a landlord and property owner. You should become familiar with what’s required of you as the landlord, as well as what you can expect from your tenants. Every Landlords Legal Guide is a great book for new landlords and covers all the required legal topics you will need to get up to speed. If, after doing some research on your own, you still have questions about your responsibilities as a landlord you should consult your real estate attorney for more guidance.
14. Evaluate your income The amount of income you can generate from a particular property should be one of your primary concerns when choosing which rental property to buy. Whether you are purchasing a 2 family home or a 20 unit apartment building, the total rental income that the property can produce will be a major factor in how that property matches up to others you’ve seen. You will want to have a clear understanding of market rents in your area and if possible, the specific rental history for the property you are buying. 15. Evaluate your expenses Understanding the expenses of a prospective property is just as important as your knowledge of the income being produced. Your property may be generating a terrific amount of income but actually losing money overall due to out of control operating costs. While you’re evaluating properties to purchase take note of the operating expenses of each and how they compare to other properties. Insurance, property taxes, utilities, and general maintenance costs are some of the expense items you should become familiar with. You will also want to know whether the utilities are shared throughout the home or if the tenants are responsible for paying their own.
“Like any business, the effort you put in and the knowledge you obtain will ultimately determine the success you achieve.”
16. Understanding foreclosures Foreclosures are homes that have been repossessed by a bank, typically because the owner(s) have failed to pay their mortgage. Since banks do not want to be in the business of owning homes, they will quickly try to re-sell any repossessed properties – often at a significant discount, and will potentially go for 20-40% under market value. Purchasing one of these “bank owned� properties can be a great way to find yourself an unbeatable investment opportunity, but there are some things you should take into consideration: 1. Purchasing a foreclosed property can be time consuming. Making offers and closing on these homes can take longer because you are working with a bank rather than one individual seller making decisions. 2. Often, foreclosed homes are vacant and in need of considerable repair to make them habitable. 3. There are some loan programs that will not allow for the purchase of foreclosed homes. Before making offers on foreclosed properties, you should speak with your lender to be certain that your loan will allow for this type of purchase. 4. There is also the consideration of your ability to pay for the purchase. Often foreclosed properties must be paid for in cash, so be sure you have the available credit. If you have any interest in purchasing a foreclosed home in your area, you should consult your Realtor for list of available properties. Your Realtor will also be your best source for leads on future foreclosed homes as they become available.
17. Google Earth You can save yourself a lot of time and money by learning to utilize the tools available to you via the internet. Google Earth is a great resource for homebuyers researching potential properties to purchase. Once you’ve downloaded the free program, you can simply type in the street address of a property you are considering and get multiple views of the location. You can see the home from a bird’s eye view, from a street level perspective and multiple other angles. Once you’ve seen the property, take an online tour of the neighborhood. What is the condition of other homes on the street? Is there street parking? Does the neighborhood look crowded? Is the house on a busy street? Is the home really in walking distance to public transportation? By simply clicking your mouse and taking a virtual walk around the neighborhood, these are just some of the many questions Google Earth can answer for you.
18. Converted spaces “Finished Basements” and “Attic Conversions” in certain homes can be tricky. Before you make a home purchase, ensure that these rooms are legal according to local laws. Sometimes a seller has made improvements without pulling proper permits with the city or town. In some cases the lack of proper permits will make the additional space unrecognizable to the municipalities and can cause you headaches in the future. You can consult your Realtor for help determining if permits for the improvement project were obtained and check with your home inspector to make sure everything is up to code. If you’re planning to have tenants occupying the converted space, it’s crucial to make sure that the extra space is legal and up to code.
19. Simple structure /construction Whether you’re planning to purchase a multi-family home as your primary residence or as an investment property, consider the overall structure of the home. When evaluating each property, note the complexity of the construction. While you definitely want a home that’s eye-pleasing to neighbors and potential renters, you don’t want a home that may be expensive to maintain. Look for properties that have simple, solid construction, and use relatively standard materials. These are generally the easiest and most inexpensive to maintain. Here are some questions you may want to ask yourself when evaluating each property:
How steep is the roof? How many angles does the building have? Does the home have a slate roof? How complex is the landscaping? How many different exterior paint colors are there? Does the home have any special features that may be difficult to replace at the local home improvement store?
20. A note on short sales A short sale takes place when the seller and lender have agreed to sell a home for less than what is owed on the mortgage, letting the lender pay the difference. There are generally two reasons why the bank would grant a homeowner a short sale: the seller has had a hardship, or the seller owes more on the home than the home is worth. As a buyer or rental investor, you could potentially be purchasing a short sale for a deeply reduced price compared to the market value of the home. Similar to foreclosures, short sales present buyers with great opportunities but there are some things you should be on the look out for: 1. The entire short sale process can be lengthy and take 30 to 120 days to complete – or longer. 2. The ultimate decision as to the price the home sells for is up to the bank. Sometimes you can make an offer that the seller accepts but that the bank later rejects. 3. Short sales can be very involved and complex transactions. Be sure to hire a Realtor who is familiar with this type of buyer representation.
21. Lets talk taxes Rental real estate provides more tax benefits than almost any other investment. The more you understand about these tax breaks the more you can take advantage of them. Before you buy your first income property you should introduce yourself to a CPA and learn how to your tax situation will change after the purchase. A real estate CPA will be able to provide guidance on the income and expense records you should be maintaining, the difference between current and capital expenses and how to minimize your tax liability every year. If you are currently filing your taxes with a national franchise service or local preparer without any real estate knowledge, stop! Find a CPA familiar with preparing taxes for rental property owners. While he or she may initially charge you a little more, the professional advice that you will be receiving is certainly worth it when it comes to your bottom line. Don’t leave everything up to your CPA. Take a proactive approach and do some research on your own. Stephen Fishman’s, Every Landlord's Tax Deduction Guide, is a great book for new and experienced landlords trying to stay inform about current rental tax deductions.
22. Get a C.L.U.E. Once you’ve found a property that fits into your criteria and has passed all of your preliminary inspections, you request that the seller provide you with a CLUE report. CLUE stands for Comprehensive Loss Underwriting Exchange. The report is similar to a credit report for a home, and contains all the pass insurance claims taken out against the property. The report covers a 5 year period and will show you if the property owner has filed a claim for fire, water damage, mold and various other types of potential lose. Having this record of the property’s past insurance claims is a good way to determine the future insurability of the home and to gather a better understanding of the homes history. A long report may reveal some trends that lead you away, while a clean report can provide the comfort you need to move forward with the purchase.
23. Negotiating the offer When it comes to buying a home, the ability and willingness to negotiate is a must. In general, sellers ask for more than they are actually willing to accept and buyers offer less than they are actually willing to pay. As the buyer, you will have the best chance at a successful negotiation if you research the price of other comparable homes in the area before making your offer. The best way to determine what you should pay is by considering what other buyers in the area have paid for similar properties. Your Realtor will be able to provide you with a comparable market analysis for the prospective property, which will assist you in finding these recent sales figures. Lastly, be realistic when you’re ready to put in your offer to buy. Nothing will hurt your chances of future negotiations more than insulting the seller with a low-ball offer. Remember that the trick to landing yourself the best deal is to find the balance between your high-water mark and the seller’s low-water mark. You want to work with the seller to find a point where both parties come out feeling good about the transaction. You should also remember that not every offer is accepted, so don't be disheartened if your first offer isn't a winner. In most cases, the seller will make a counteroffer for your consideration and negotiations can continue from there.
24. Find a good home inspector Knowing the condition of the house and all the units you are going to purchase cannot be left to appearances or promises. Some undetected problems can be more costly than the price of the house itself. Making sure you have the services of a knowledgeable & professional home inspector can prevent what should be a great investment from becoming a financial disaster. Though experience is always a good indicator of qualifications, consider hiring an inspector who also has a background in multi-family homes and is familiar with the area where your property is located. While the costs involved in purchasing a new home can add up quickly, the temptation to skimp when hiring a home inspector should be resisted. If a serious problem with the property goes undetected, what should be your greatest investment may turn out to be your greatest liability. Have your Realtor provide you with the number of a good home inspector.
25. Are you ready to become a landlord? Throughout the buying process you should be preparing yourself for the tasks that come with being a landlord. Whether you’ll be a first time landlord, or you already own several rental units, once the purchase is made, you’ll be required to management your property and tenants. Unless you plan to hire a property management company to take the task off you hands, here are some things to consider. 1. Opening a separate checking account just for your rental property business. You’ll want to have details records of income and expenses come tax time and separating your rental business from personal business will make you job a lot easier. 2. Get names and numbers for a good local plumber, electrician, and general carpenter and get familiar with them. Don’t wait until there’s a need and be force to pick and random contractor from the phone book. 3. As a landlord you will want to keep up to date on home value trends, rental market news, property management news, local law changes, and more. Find a local, reliable information and news resource and follow it regularly.
P: 617-297-8641 F: 617-849-5679 Willie@AtHomeBoston.com www.BostonCashFlow.com Twitter: www.twitter.com/wjmandrell Facebook: www.facebook.com/wmandrell YouTube: www.youtube.com/wmandrell Linked In: www.linkedin.com/in/WJMandrell
Willie James Mandrell, III Realtor, Notary Public
As a lifelong resident of Boston, Willie is very familiar with the city’s neighborhoods and has a deep understanding of the local real estate market. He spent his early years watching his grandparents acquire and manage rental property throughout the city and was able to learn many aspects of the business early on. Now, as a current landlord and real estate investor, he prides himself on staying current with local sales and rental trends. Prior to entering the real estate field, Willie spent several years working in the banking and financial services industries, for firms such as Bank of America and Cantella & Co., Inc. During his corporate years he earned many industry licenses and gained valuable experience evaluating the risk and rewards of various investment assets, including real estate. Willie earned his Bachelor's degree from Northeastern University and is currently working on his Masters in Business at Suffolk University. Willie has a real passion for the multifamily industry and specializes in representing buyers and sellers of local income property. He strives to share his knowledge and experiences with every client and make every buyer and seller representation a pleasant and rewarding experience.