Published On: Thu, Jan 16th, 2014

The Most Important Thing to Do with Every Rental Property Purchase

Recently, I identified what I thought was a dream property. This property reminded me of first rental property deal. It was one of those too good to be true deals.

I have a very simple criteria for every rental property.

Gross rents * 50% / purchase price must be greater than 20%

There are two ways I can figure out the gross rent, either I find properties that have existing tenants or I ask few real estate agents and my property manager in my network what average rents go for in that particular part of town.

You might be thinking, “Whoa, every property has to have a cap rate of 20% or more?” Yes, you read that right. I only invest for income, and I’m strict in my requirements.

So, when I find a property that matches this criteria I pounce quick with an offer. I’ve done this a few times without even seeing the property. Yes… sight unseen!

However, as the title of this article says “The most important thing to do with every rental property purchase” is to have contingencies, and I mean very specific ones.

With every contract, I have contingencies of the following:

  1. Subject to property management inspection
  2. Subject to sewer line inspection
  3. Subject to proof of rent roll and leases

Those 3 things have saved me dozens of times in the last few years.

So, recently I came across a property that met my cap rate requirements. I put in an offer, and everything was fine and dandy until the property management inspection.

These guys tried to put lipstick on a pig! The outside of the home was absolutely beautiful, they even proved they were making serious cash flow with the property, but the inside… oh my… the inside was horrible. The place needed thousands and thousands of dollars of work.

The entire inside of the rental property needed painting, the basement had standing water, and the tenants complained of sewer issues. The icing on the cake was that in one month the house will need to be reinspected by the city. Which means the nice tenants that lived there could legally stop paying rent if the house didn’t pass inspection (and it wouldn’t pass).

Moral of the Story

Always have a criteria and stick to your guns regardless of how awesome the rental property seems.

Dominique Brown

About the Author

- Dominique Brown Dominique Brown is a husband, father, financial planner, author of the book "How to Fix your Credit," author of Your Finances Simplified, owner of S&D Capital Holdings and a landlord. Mr. Brown's advice can be found on the Huffington Post, Business Insider, Yahoo, Madame Noir, HR Block and Ebony Magazine.

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Did you know?

African Americans are significantly more likely to have some type of debt (94%) compared with the general population (82%). Credit card debt, student loan debt, and personal loans are all significantly higher in the African American community.

Source: Prudential’s 2013 "African American Financial Experience" study