Make the Most of a Financial Windfall by Buying <b>Rental Properties</b> <b>...</b>

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Owning One Unit in This Building Can Pay Off for Life - Allison Choppick

Investment real estate in desirable areas is one way to turn a financial windfall into a source of ongoing income that will grow.

When people come into a large sum of money there is a temptation to fulfill long-desired wants, such as buying a sports car or new furniture for every room in the house. A luxurious vacation would fit on this list as well. The problem with all of these ideas is that when the money that comes from:

• Inheritances
• Bonuses
• Lawsuits
• Lottery winnings

or any other kind of potentially unexpected source of funds is spent on items that do not produce income, there will be nothing left. For this reason, it is wise to consider buying rental property outright so that the money is tied up in something with low risk that will make payments to you every month it is occupied.

How to Buy Rental Property

The first thing one must look at is how much money has come in. For example, if the amount is $100,000, then purchasing a piece of property on Long Island would not make sense unless it is done at a bankruptcy auction and the buyer has a construction background. More modest areas like the suburbs of Buffalo, Niagara Falls, or Rochester, however, would allow for more flexibility.

Buying a home should be done with an experienced realtor and a property manager. The realtor will be able to show you preferable areas to buy for your needs, and the property manager will be able to tell you how much the house should rent for based on other homes in the neighborhood.

All buying should be conditional on a home inspection. The home inspector will alert you to defects large and small. Based on these defects, the price can be negotiated, or repairs can be demanded.

One trap to avoid is overextending oneself. Some real estate "experts" would advise you to divide your windfall among as many properties as possible, such as buying five $100,000 homes with 20% down payments. The problem with this is that you are probably not going to be able to withstand one month with five vacant houses, or having to do minor repairs on five homes at once. If this is your inclination, you are better off buying a sports car and a great vacation, because foolishness should be fun and freeing, not stressful and binding.

How Rental Property Income Works

It may be best to use a property manager. This person (or company) will prevent or absorb 90% of any headaches that may occur, such as late payments, repair people who screw up the house, and doing credit checks on tenants as well as evicting them. This is all done for a fee of about 10%, and the author can speak from experience to tell you that it is worth it.

A home that is paid off will bring in straight cash flow after insurance and any other costs. If a home rents for $1,000, the property manager gets $100, insurance may cost $50, and a future repair account should get $50, leaving $800 for the owner. If two properties are owned, the income is $1,600 while five will bring in $4,000 a month. This income will grow as costs for all things go up with some exceptions to neighborhoods that fall apart due to too heavy a reliance on one source of prosperity, such as a substantial factory or military base closing down.

For property owners with substantial incomes already, this new income can be saved to purchase a new property. A person owning five properties can buy a similar one in just over two years, and then another in about the same time. Over the course of twenty years, one could own two dozen rental properties outright, bringing in an income equivalent to nearly $20,000 a month in today's dollars.

Final Considerations When Buying Rental Property

A good rental location is one that does not have a lot of other rentals. People like to feel like they have a home, not just a place to sleep, and being surrounded by owners rather than renters will help give them a sense of stability. With this in mind, consider having the property modestly landscaped with a nicely mowed and edged lawn. Install new carpets, medicine cabinets, and have the rooms painted for a cleaner feel. A used or new playground in the backyard will likely seal the deal for a family with children.

When buying rental property, it is absolutely necessary for one to do his or her homework and to find experts. Experience is a great teacher, and that is why investors should consider delving into this area slowly with as little debt as possible.

Christopher Pascale -

Christopher Pascale is a consumer advocate and auditor from Long Island, NY

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