Criteria for selecting a rental property
FIRST-TIME INVESTORS
Part 2 of 3
Three-part series focusing on the simple strategies for the first-time investor.
NEXT SUNDAY: Rental demand remains strong
HONOLULU ADVERTISER Feburary 19, 2006
BY LISA SCONTRAS
Custom Publishing Group
You have no trouble saving for a rainy day, figuring out who the best CPA in town is, and even know how to allocate funds in your 401k; but when it comes to selecting a good investment property, you haven’t got a clue.
Experts agree that it’s not enough to simply look for the least expensive property. Cash flow, tax ramifications and vacancy rates are among the factors that must be evaluated if that studio has any hope of becoming part of a million-dollar real estate portfolio.
One thing is for sure: It’s all about picking the right property, says Rod Mukai, Prudential Locations, LLC, senior partner and 34-year veteran real estate agent.
Topping the list of selection criteria is location, he says.
“As a first-time investor, a Mainland property would be unfamiliar territory and not a good choice as a first-time real estate investment,” cautions Mukai. “The neighborhood where you live should be the first place you look. In addition to being familiar with the neighborhood, the property itself should be something you can observe, look after and care for immediately, if necessary. Anything between your residence and workplace would also be an excellent alternative to consider.”
Since the purpose of an investment property is to put money into your pocket, next on the list of criteria is cash flow.
“Probably the most asked question I hear from prospective investors is ‘Is the rent coming in going to cover my expenses?’” says Mukai. His answer: “It’s not often that you’ll have a positive cash flow right from the start.”
In Mukai’s 34 years of experience, the payoff from a single-family home investment usually takes somewhere between three and 10 years, historically, to materialize. But cash flow can also be increased by certain cosmetic renovations.
“One of the fundamental elements to look for in an investment property — that can affect cash flow positively — is upside potential,” advises Mukai.
Defined as the amount of upward price movement anticipated, Mukai indicates that finding a property that, for example needs cosmetic work like paint or new carpet, can be a pivotal factor in increasing the rate of return.
Other physical characteristics to consider — and to inspect — before you buy are the condition of the electrical, plumbing and the roof. Because these items can be costly to repair, it is critical to have them checked thoroughly by a property inspector and know their condition up-front.
Bottom line: Crunch all the numbers. In addition to knowing the condition of the building, you must also know the maintenance fees, real property taxes, gross excise tax, property management fees, what it will cost to obtain insurance, legal fees and mortgage costs, just to name a few.
First-time investor Judy Morita recently purchased an investment in the University area. She followed Mukai’s advice and says he simplified the process for her.
“As with any investment, you need to do your homework,” says Morita, who is co-owner of Vue Hawaii in Kahala Mall. “Get professionals to help you and make sure your calculations are correct — that the amount you think you can rent it out for is realistic, that you can make the payments even without a renter, that you can afford it...”
Should you buy a condo or a single-family home? Mukai says while the availability of cash, price range and carrying costs will likely dictate the size of the property, there are other considerations.
‘“With a single-family home, there are no maintenance fees, so you’ll have to plan for maintenance costs like painting, maintaining the yard, etc,” reminds Mukai. “You can’t just call the resident manager. Also with a 3-bedroom or larger, you’ll likely be renting to a family with children, whereas a 1- or a 2-bedroom is usually a single or professional person. There are additional expenses with some of these options.”
Mukai warns first-timers not to think short term. He says that though some developers and speculators are in and out of properties fast, many of them are contractors or tradesmen with certain skills. The average investor may not only have difficulty finding a person to do the renovations fast, it will like be expensive and not cost effective enough to be worthwhile.
OAHU HOUSING TRENDS
Shown in thousands of dollars, this chart illustrates sales by price range during the fourth quarter of 2005.
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