‘C-FIRST’ to the basics and your income property purchase should go smoothly
You found a fantastic looking income property, you’ve made an offer on it and now you only have a designated number of days to remove all your contingencies. Between work and other responsibilities, time flies by quickly, and the seller may not be willing to give you more time, especially since prices are ticking up and there may be a backup offer in place.
Here is a streamlined system you can use with an easy-to-remember acronym: "C-FIRST". These are the things you need to see first before you head to closing with your money.
COMPETITION: Check out the competition. For example, if the property you are buying is an apartment building, find out how many competing units are on the market, how much they rent for, and what they offer in comparison to yours. You need to have a good understanding of where you stand in the overall market. Good brokers and property managers can help you with this information.
FINANCIAL: Review the past three years’ income and expense reports (preferably Schedule E’s) as well as the rent rolls. Tie the rent rolls to the Schedule Es if you can. Develop your best proforma based on the numbers you’ve been given, your own research and whatever personal experience you have. Do a five-year cash flow analysis. Run all your ratios. Figure out your costs of purchasing, owning and operating the property. Figure out the return on your investment and compare it to other available investments. Have your broker review it and see what you are missing. Have your lender do a quick number crunch to see if everything falls within his parameters before you go any further on your financing.
INSURANCE: The bottom line is: if you can’t get insurance, you can’t finance the property, so you can save yourself a lot of time by talking to your insurance agent first, as well as the insurance agent who currently insures the property. Do this before you spend money on inspections and spend any more time pouring over the financials.
RESTRICTIONS: Check your zoning, property covenants, easements, encroachments, deed restrictions. Review a title report and check with the local governmental agencies to make sure your intended use of the property is legal. Make sure any rehabbing you plan to do is allowable.
STRUCTURE: Get your inspections done, and makes sure the property is structurally sound and safe to live in. Find out what repairs are necessary, quantify what necessary repairs will cost, what monsters may be lurking in the crawlspace, and so on. Check with the city or county to see if there is anything on record regarding the building that might be of interest, i.e. safety inspections, pending proposals, drawings and specs.
TAX: Check with your tax consultant and/or tax attorney before you make a move. See if there are any tax considerations you need to make before you pass go.
This list is not in chronological order. You will be doing some of these things simultaneously. Remember to C-FIRST and you will be sure to make a wise decision.
Julia Wert is the founder of the National Investors Mind Trust.