The appeal of income properties and the potential for what may seem like “easy” money and early retirement have likely crossed the mind of anyone who has heard of this business venture. There is a lot more to consider before entering the income property game than simply purchasing a property and watching the dollars roll in. Here are a few things to consider before launching into your new career.
- Can You Recognize An Income Property When You See It?
There are many features that make a good income property. Whether you are considering flipping it for a profit or renting it out to potential tenants, knowing what to look for is more than half the job. Can you realistically estimate what the cost of renovations to the property will be? Do you have reliable contacts in the construction/remodel industry or someone you can trust to supervise remodel work? Do you know what the value of the home will be after the renovations, based on its size, location, etc.? Do you know what the market rent would be for the property? If you can’t answer any of these questions you either have a lot of research and work to do, or you may want to reconsider.
- Not Scared Off?
So you think you can reasonably identify an income property and are still interested in making your first purchase. Here are a few tips for making that a success!
- Know Your Intent—Whether it’s flipping or renting the property, you should have a clear picture before you make the purchase. Have an estimate of what the renovations will cost as well as the profit margin of the investment, both in the short and long term.
- Consider Splitting The Costs—Many people who enter the income property market reduce the risk by having partners. Whether it’s a friend, relative, or business partner, this may be the right decision to minimize your risk in your first venture.
3. Make It Your Business—Whether you plan on doing this as an additional source of income or you are going into it full time, realizing that this is now a business will prevent you from losing a fortune. You will spend a lot of time getting to know both the real estate and the home renovation industries, and the more you know, the more successful you will be.
4. Know local and state laws—Many states have laws governing the rules of how a flip can be purchased, renovated and sold which may include getting a contractors license or ensuring you have a licensed contractor complete all remodel work. Knowing these laws before you purchase could save you time and money.
Deciding to get into the income property business can be a time consuming, but ultimately very rewarding, venture. Like any business, the effort you put in and the knowledge you have will determine the success you achieve.
Negotiating Contract Contingencies From The Seller
When the housing market is up and sales seem to favor sellers rather than buyers, negotiation contract contingencies may seem like a lost cause. But there are always cases where you as the buyer can effectively negotiate purchase protection into the contract of your home, and you may even be able to convince your seller to throw in a few perks. Here are some tips to negotiating contract contingencies from the seller.
Common Contract Contingencies
Knowing what contingencies are often included in home purchase contracts is the first step in getting what you want from the seller. There are a number of contingencies that are commonly included in contracts, and while this list is not exhaustive, it can give you a good idea of what you may want to consider.
- Appraisal—This is usually required by your lender, and while traditionally it is the responsibility of the buyer, in some cases you can get it covered by the seller.
- Home Inspection—This important step can find any major problems with the house or property that could cause a decrease in value, or make it an unwise investment.
- Loan Contingency—This is a term in the purchase contract that allows a buyer to back out of the contract if, after making a good faith effort to obtain a loan, the buyer is unable to obtain the loan. The buyer must remove the loan contingency (agree to proceed with the transaction) within the stated amount of time or withdraw from the contract. If a buyer withdraws from a contract because of failure to obtain a loan, generally the buyer is entitled to a refund of his or her earnest money deposit, less any costs actually incurred.
- Early Occupancy Agreement—This agreement can speed up the usual 45-60 day closing period by allowing you to move in faster.
- Existing Home Selling Clause—This clause makes the purchase of your new home contingent on you selling your existing home. This prevents you from being in a situation where you may be paying two mortgages at once.
In most cases if the seller is happy with your offer, and is looking to sell their home hassle free, they are likely to offer at least a few contingencies to a buyer. The best approach is to inform your agent of any contingencies that are an absolute necessity for you, such as an existing home selling clause, so they can clearly express this to the seller and the agent representing them.
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