Purchasing Investment Property

Evaluating the Numbers

Purchasing investment property is a complex decision. Know where to get the numbers to see if the math works. You have the town, the location, the size, but how can you determine if this investment property will work out financially? This is where the Outer Banks realtor comes in. When you select a house(s) to see, ask for:

  • MLS Listing
  • The owner’s Residential Disclosure Form
  • The past three years rental history
  • Expenses for the past three years

Salvo sunset from our rear deck

The MLS listing will provide you all of the details of the Outer Banks rental property, including, in some cases, additional pictures. The Residential Disclosure Form may be much value, because in North Carolina the owner is not required to disclose any issues. The most important information are the last two bullets, the last there years rental history (or whatever you can get) and the expenses. With this information, you can then put together a working profit and loss trend on the house. It is very important to note that you want the ACTUAL Outer Banks rentals, not the projected. From this information, now add in expenses that you will experience. For instance, you have an idea what you will borrow, and at what rate, substitute their mortgage interest payment with your projected payment. Do the same with taxes and insurance. Also, add in what you project your rental commission fees to be based on what you’ve gotten so far from the rental companies you've spoken with. When you go shopping for a rental company, they will all provide a "rental projection" This is their best guess at what the house will do in their program along with their commission. They all want you in "their program", so take their projections with a grain of salt and focus on the actuals.

The most important information is what they want to charge you for commission and what is or is not included in the fee. Some things to consider from looking at the analysis: Do the rentals support the expenses of the house using only the “high season” (generally last two weeks in May through the first few weeks in September) or do you need to also be able to rent out the “shoulder season” (early April through May and late September through October)? I generally tried to get to breakeven with as little need for the shoulder season as possible. Your two largest expenses are generally the mortgage payment and annual insurance (wind, homeowners, flood and excess flood). If you can drive to breakeven, most people feel they will get the profits when they sell the house. However, the period from 2008-2012 has brought that into question further affirming the need to make a careful scrutiny of the numbers.

View of the Duck Landing beach

If you are evaluating purchasing investment property in a build scenario, this analysis is more speculative, as you do not have any rental or expense history. It is, however, no less important in the purchasing investment property process. Here you must rely more on the rental companies' projections, but with the following twist. Have them produce the rental history and expenses of houses in their programs that will be similar to the house you plan to build. This way there is some reality in their projections.

The final step in purchasing investment property using the build scenario is selecting a builder. Choosing a builder is similar to selecting a real estate agent, meaning, pick someone who you are comfortable with. Do they have plans that you can use or leverage? Get them to take you to some of the houses that they’ve built so you can see first hand the craftsmanship you should expect. They generally range from the one stop shop to the pure builder. The one stop shop has agreements in place to fit out the house with carpeting, tile, cabinets, appliances and everything else, except furniture, electronics and window treatments. The pure builder basically tells you to go to the hardware store or the rug company and the like and decide what you want so they can put it in. For us, the one stop shop was very appealing because of how far we lived from the Outer Banks. Plus, I didn’t find the notion of living in Home Depot the next twelve months picking things out very appealing. As far as actually managing the build phase from a long distance, the key will be developing a network of suppliers you will use both to finance the house as well as the ongoing rental management of the house. They have a vested interest in things being done right, and are usually more than happy to drop buy and inspect the house as well as send you pictures along the way.

After purchasing investment property, now how do you finance it?

Top of Purchasing Investment Property

Home to Outer Banks Revealed

Return to Investment in Rental Property

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