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Buying Rental Property

This Is A Summary Page
The below topics are discussed in much more depth
on our members' Buying Rental Property page.
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For a structured even more detailed discussion, see
RHOL's Buying & Selling Income Property e-Course

      There are a number of factors that must be considered when purchasing income property in addition to those of concern when purchasing a personal residence.  Some of these are related to existing tenants and would not be of concern if purchasing a new never occupied property.  Most of these additional concerns should be written into the purchase offer and should constitute contingencies to the purchase.  Subjects of special concern for rental properties include:

Legal Rental
      You (or your agent) should verify that all units are legal, both as to zoning and to building codes.

Licenses & Permits
      Depending upon the city, county, and/or state in which the property is located, it is possible that a variety of licenses and/or permits might be required for rental properties. 
      Some locations have a rental tax at the city, county, or state level, some at two or even all three levels. 

Documentation
      You should be sure that you are provided copies of all leases and other documents, including amendments, checklists, and house rules. 

Financial Records
      Your purchase contract should require that the seller provide financial records that show income and expenses for at least the past 12 months. 

Physical Inspections
      While one should be concerned about physical inspections when purchasing a personal residence, it is often of greater importance when purchasing income property.  There are several reasons why this is so.

Environmental
      This is another subject that is seldom of much concern for a personal residence, but can be important for income properties, particularly commercial properties.

Estoppel Certificates
      Although often not utilized unless required by the lender, as they usually are for larger properties, estoppel certificates should be used for every purchase of a tenant occupied property.  A sample basic Certificate is available in our members-only Forms Web .

Insurance
      Before committing to purchasing a property, be sure that you will be able to obtain the required insurance.  Premiums can easily turn out to be a significant operating expense and need to be taken into consideration when analyzing the property. Worse yet, it is possible that a particular property and /or landlord will turn out to be uninsurable.
      A property may be rejected for a variety of reasons and investors might be turned down for insurance for various reasons .
      The types and amounts of insurance coverages the landlord buys must also be based on the requirements of the lender.
      While the lender will usually require that insurance be in place prior to closing, if you are buying with seller financing or cash you may not be reminded.

Holding Title
  It is extremely important to give serious thought to the potential liabilities associated with owning rental properties and to take the necessary steps to minimize your risks. There are dozens of ways in which it is possible to lose your entire net worth if ownership is not properly vested.

Pre-Closing Statement
      As for any real estate transaction, you should be sure that you check over the pre-closing statement.  There are a number of things that you should look out for that are not usually of concern when buying a personal residence.

Transfer of Services
      Discontinuance of utilities or other services by the seller before you have them  turned on in your name can create havoc with your relations with your newly-acquired tenants. 
      There may be services other than utilities that must be considered , particularly for commercial properties .

After Closing
      Check the closing statement carefully.  If you are buying pre-1978 residential property and the seller did not have required lead paint disclosure documents for each tenant, get them executed immediately.

Summary & Conclusion
      When buying rental property, there are a number issues that you should be concerned about if you wish to avoid problems both during escrow and after close of escrow.  Most of these issues should be properly written into your purchase offer.
      Join RHOL so that you will have the information and tools necessary for becoming a knowledgeable and efficient landlord.  Services provided by RHOL for members include:

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