Jan. 27, 2021
Do you Really Want a Rental Property?
Investment properties in Phoenix are extremely popular.
There are many reasons why you may want to purchase a rental property.
Suppose you have a child attending college in Arizona. It may make more sense to purchase a property versus having them rent for four years or longer. Owning the property can provide your child with stable accommodation and save money in the long run.
Suppose you’re looking to become a real estate investor in Phoenix and start to build your portfolio and generate additional income. Suppose you’ve decided that you’re ready to take on the role of landlord and you want to own a rental property in Phoenix. In that case, the first step is finding a reputable realtor who is an area expert with experience with rental properties.
Goals and Objectives
First, you should consider your goals.
Are you looking for a short-term or long-term investment?
What is your objective?
Do you want to purchase a fixer-upper at a lower price, or do you want to have it move-in ready immediately?
What is your budget?
Things to Consider
Suppose you decide to fix up your property and flip it. In that case, it’s not considered an investment, which does not qualify as a 1031 tax-deferred exchange or other tax breaks.
A 1031 Exchange is a way for sellers to part with their investment property and roll the profits into another investment property sale. A 1031 can be used for residential and commercial properties, but the investor must follow the rules outlined by the 1031 Exchange.
Choosing a real estate professional who has plenty of experience with this exchange is essential for tax purposes.
Something you may want to consider is having a buyer consultation. Many realtors offer a free consultation to discuss your wants and needs as a buyer. If you’re a new investor, this can be helpful for both you and your realtor, or if you’re a seasoned investor, you likely know what you’re looking for.
An investment property is slightly different from meeting with a realtor about a home you’re looking to live in. A home for your family needs to meet your needs and align with your lifestyle. A rental property looks a bit different, as it should consider maintenance levels, cash flow, what needs to be upgraded immediately and should make sense as an investment.
An investment home doesn’t need to be a property that you have an emotional attachment to or adore. It is more of a financial transaction.
Determining your budget is more than just how much money you’ll be putting down on the property or paying cash.
If you decide to pay cash, you will be required to show proof of funds from your bank statements. You will also need a letter from your financial institution as proof that you have the liquid funds for the transaction.
If you’re looking to finance your investment property, you will decide based on your down payment, HOA fees, and other fees you’re comfortable paying on a monthly basis. You will need to be comfortable covering those payments when the rental is vacant, or there are issues with tenants being unable to pay on time.
The Current Market
Before you start house hunting, it’s essential to understand the current market.
Your realtor will know whether it’s a buyer’s, seller’s, or balanced market, but knowing what the landscape is is important.
If it’s a seller’s market, you won’t be able to make lowball offers to get a steal of a price. In a buyer’s market, you are in control, and it’s likely you’ll be able to get your new investment property in Phoenix for lower than what the seller is offering.
Your agent should be able to provide you with a CMA, or Comparable Market Analysis, to help you understand if a seller’s home is priced fairly based on the market.
A CMA is an analysis of similar properties in a given area and comparable areas. Reputable realtors will offer a CMA to determine the listing price of their clients’ homes or buyers looking to get a reasonable price on a property.
While no two properties are the same, even if they have a similar floor plan or same square footage, the numbers are relatively accurate and can be a beneficial tool in the process.
A CMA compares homes that are currently listed, under contract, and recently sold homes. Adjustments can be made for renovations, similar to an appraiser.
How to Choose an Excellent Property
Here are some of the most important factors when choosing the right property for you.
Choosing a newer property will likely result in less immediate upgrades, building code issues, or other issues. While this isn’t always foolproof, as newer buildings can also have issues, it’s less likely.
Home investors in Phoenix have a better chance of renting their properties in traffic-heavy areas. Choosing a home close to transit, amenities, or popular businesses will be much easier to rent out.
If the neighborhood is established or up-and-coming, you’ll have an easier time renting out your home if the community is growing. With the addition of terrific amenities, it becomes more desirable.
Choosing a home close to excellent schools will allow you to get a better price for rent.
If you have the budget, choosing a more expensive home as a rental property could be the right move. Renters want desirable home options, so more expensive homes that they may not have a downpayment for might still be an option for them as rentals.
If you want to be a hands-off real estate investor in Phoenix, you want to choose a home that is relatively low maintenance. All homes will require maintenance, but there are high-maintenance building materials that could be avoided. If you’re concerned about the level of maintenance, you can ask to see previous records. Ensure you do a comprehensive inspection as well.
Account for all Expenses
Try to figure out every single expense you may encounter to ensure you have a positive cash flow from the get-go. Researching and paying close attention to insurance costs, property taxes, and HOA fees. It would be best if you also had money set aside for repairs and maintenance.
If the property is already a rental, ask to see the rental history and assess how long residents typically stay and if they pay on time. If there is no history, your realtor may be able to assess the area.
Once you’ve chosen your perfect property, your agent will do the Comparable Market Analysis to have some information to discuss the offer. Your offer will include the price you’re willing to pay for the home and the closing date, which is also the possession date.
Typically, there is a 30-day closing period, but it depends on the buyer and the seller’s scale and circumstances. This time frame allows for the loan to be processed, the inspection to be completed, and time for the seller to move out.
Once the offer has reached the seller, you may be in a situation where you are negotiating. If they accept your offer, then great! You’re almost there. If not, they will provide a counter-offer asking for a higher price, a different closing date, or other stipulations. Sellers in Phoenix are able to counter-offer on any part of your initial offer.
Once you receive the counter-offer, you can either accept the offer or return another counter offer.
Once you both have agreed, you have a binding purchase contract.
Once you’ve reached your agreement with the seller and you’re about to become the proud homeowner of a Phoenix investment property, you need to schedule your inspection.
The standard timeframe for the State of Arizona is ten days for the buyer. It would be best to have a reputable inspector inspect the home within ten days of the sale. Your inspector will check for severe structural damage, issues that impact the home’s safety, or the soundness of the home.
In Arizona, you will also be required to have a termite inspection completed as well.
It’s prevalent in Arizona for homes to have termites at some point if the home hasn’t had them already. The subterranean termites are a problem for Arizona homeowners, but they are easy to treat, and they move slowly.
Once your inspection is complete, you can ask the seller for repairs. Depending on how significant the issues are, you may want to ask the seller to take care of them before taking possession. If they are minor issues that you planned on changing anyway, you may just continue the process.
In the contract, there are certain items like electrical, pool equipment, or plumbing are warranted. If there’s significant damage to the roof, you may ask for it to be repaired before moving in. Of course, you are purchasing a home that has been lived in, and there will be normal wear and tear, so cosmetic damage isn’t typically written into the contract.
Once you’ve both agreed to any repairs and they’ve been written into the contract, you are almost ready to close.
When you’re financing your new Phoenix investment property, your financial institution will require an appraisal for the property. A professional appraiser will come by the house, measure each room, take photos, and compare to three similar properties that have closed within the last three months and three still actively for sale.
The appraiser will determine based on the comparison to similar homes whether your home comes in above or below the purchase price and deliver directly to the lender. If the appraisal is lower than the contract price, the seller will be asked to lower the price. If the seller refuses, you are back to negotiating, and you can pay the difference between the appraisal and the price, or cancel and head back to house hunting.
Once your appraisal is matched and sorted, the lender will submit your loan to get final approval through underwriting.
Once the loan documents request is sent, the title company can prepare all the buyer and loan documents for you to sign.
Once you’ve signed your life away, you will have your loan funded. The documents are reviewed to ensure nothing was missed, and every spot was signed. Your lender will wire the funds to the title company on the closing day.
On your closing day, the funds will be confirmed to have been received, the title company releases the file to the county, and homeownership is transferred.
Once this is completed, your agent will give you your new keys!
Now that you’re the proud homeowner and real estate investor in Phoenix, you need to decide how you will manage your property.
If you’re renting out the home to one of your kids attending college, you likely don’t have to do much to manage the property.
If your kids want roommates, they can help you find suitable ones, or if they have friends who also need accommodations, that’s even better for you.
If your home is being rented out to tenants, and you live in the Phoenix area, you can manage it as a landlord, or you can outsource to a property management company.
Depending on how busy you are and how hands-on you’d like to be for this investment, you may find investing with the help of a professional is worth it. They typically have access to running credit and background checks. Your realtor likely has some excellent contacts for professional property management companies in the area.
If you don’t live in the Phoenix area, a property management team can take care of issues, like late rent collection, repairs and maintenance, and scheduling cleanings in between residents.
Investing in a Phoenix rental property is an amazing opportunity for many people, and it’s the perfect way to start your real estate investment journey.