Real Estate Articles

The Nuts and Bolts of Purchasing Investment Property

Moise Nahouraii, broker/manager of Referral Realty in Cupertino, was back at the Cupertino/Sunnyvale District tour meeting today to brief SILVAR members on the nuts and bolts of buying investment property.

It's all well and good to buy investment property, said Nahouraii, but you need to run the numbers before buying the property. Not doing so, or running the wrong numbers, can make a difference between a profit or loss in your investment.

From an article written by Kimbrough Gray, Nahouraii shared information on what factors to take into consideration and how to get the accurate numbers:

1. Rental Income – It is important that the rental income you intend to charge reflects the market value in the area. Look at comparable leases, as sometimes properties are under-rented or over-rented.
2. Mortgage Interest – Get educated on loan options and run the numbers.
3. Taxes – Taxes have a big impact on your operating expenses, as they can go up drastically after a purchase. Unless you intend to occupy the property, your taxes will go up. Check the tax rate and purchase price to determine your future taxes.
4. Vacancy Cost – People tend to forget to check the vacancy rate in the area, which can really impact your investment return. Nahouraii said right now, Santa Clara County has a 5 to 8 percent vacancy rate.
5. Tenant Turnover Cost – Tenant turnover can vary depending on the location of the property. If the property is next to a college campus, a high turnover can entail significant cost in advertising for a new tenant, cleaning, repainting, etc.
6. Insurance Cost – Insurance on investment properties is typically higher than owner- occupied, single-family properties. You should also purchase liability insurance, which can be expensive.
7. Maintenance Costs – It is hard to anticipate maintenance costs of a property, but you need to take a close look and examine what to anticipate for maintenance work because it will impact your cash flow, said Nahouraii. Check the property type (type of roof, walls, balcony, deck, etc.); property size; location; and whether you will do the maintenance work yourself or hire it done.
8. Utility Costs – Check what tenants pay for and what the owner pays for, including utilities, lawn maintenance, parking lot lights, trash bin services.
9. Property Management Costs – Will you personally manage the property, or will you hire a property management company? It could save you 10 percent if you manage the property yourself.

Nahouraii said once you add all the numbers, you may find the property has a zero or negative cash flow. It doesn't necessarily mean you should not purchase the property. You should weigh the cash flow against the positive tax benefits to rental properties. Also, if you think the property is going to appreciate in the future, a zero or negative cash flow could still prove appealing. The point is, if you are going to consider purchasing investment property, you need to take all the above factors into consideration, Nahouraii said.

The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.

The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.

Variations of this article have appeared in local area newspapers.

For further information, please email or call the SILVAR office at (408) 200-0100.

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