There's More to Owning Rental Property Than Location

Despite how cheap properties are in the current real estate market, buyers need to closely inspect buildings before making emotional purchases.

If you’re thinking about purchasing rental property, physicians are well positioned to take advantage of this market, according to Alan Wynne, an attorney with EpsteinBeckerGreen.

“Physicians have a little bit more income in terms of making an investment, and their portfolio is going to be a little more sophisticated, so real estate is a way to diversify that investment portfolio,” Wynne says.

And given the current real estate market, it’s a good time to buy.

“If the real estate market were K-Mart, it would be a blue light special,” says Michael McCreary, CPM, MPM, president of McCreary Realty. “There are bargains galore to be had. You just have to pick and choose wisely.”

Close inspection

McCreary explains that, generally speaking, when individuals purchase real estate they want to have a good feeling about the purchase. They want to have a personal connection with the property or they’re not going to buy. He calls it pride of ownership; wanting to drive by and say, “I own that building/house.”

Sometimes purchasers let emotions get in the way and they don’t look at the deal close enough. By getting the right people involved — real estate managers and certified home inspectors — the purchaser can make sure he or she made the right choice.

“You’ve got to have the right team around you, and you look at it from the numbers,” McCreary says. “Because when you buy investment real estate, it’s usually valued almost exclusively on the income stream, because the lenders are going to look at that. Can the property be self-sufficient? Can it live on itself without you having to feed it every month?”

Wynne agrees and says that while today’s economy has brought bargains galore, it has also created a potential problem for purchasers. Many properties are in foreclosure, which may not afford purchasers ample time for due diligence.

“A lot of the properties are sold as-is, so there are no warranties and sometimes no inspections,” Wynne says. “The property could need a lot of repairs that were unanticipated.”

Benefits and drawbacks

Wynne says that the short-term cash flow from monthly rentals is particularly attractive to potential buyers, as is the potential for owning something that should appreciate in value — especially where commercial property is concerned. Tenants there usually have longer-term leases, anywhere from three to 20 years, with preset options to renew. In contrast, a multi-family apartment building where shorter-term leases rule will likely require more professional management due to the frequent turnover.

However, commercial property is not without its share of drawbacks. People will always need a place to live, but they might not always need a place to work, so office buildings aren’t always a sure investment.

“So unless you’re in the right environment, generally speaking, it’s hard to beat a quality, three-bedroom, two-bath, single-family home in a high-quality school district,” McCreary says.

It’s also hard to beat surrounding yourself with the right team. Considerations with rental property include tax ramifications, legal implications, and how to best protect that asset. Estate planning may also come into play as far as transferring the ownership upon death. And in terms of management, Wynne says having a Certified Property Manager is particularly important where more sophisticated properties are concerned.

McCreary adds that, if you’re going to purchase rental property, it’s also important to be well funded. Typically, it’s good to have six to nine months of ready cash reserve for the unexpected challenges. This can help cover if repairs are needed and the property sits vacant for a few months.

And that money should be in a separate, stand alone bank account.

“Because the number one thing that gets people in trouble is when they try to run their real estate investments out of their household budgets,” McCreary says.