When the Rent Isn't The Real Rent
We're all studying and working hard to become very successful real estate investors. Our business should be strong and profitable, without unnecessary risks, and should maintain a balance with the other aspects of our life. One of the most important factors in making a wise purchase is doing all of our due diligence to make sure that the property is as we believe it to be, and that any previous income and expenses are verified. We use the seller's numbers to get a picture of the profitability of the property, while applying our numbers and abilities toward a future prediction of income and growth.
One of the things that we look at carefully when considering a rental property for purchase is an examination of all the leases. We want to determine the lengths of leases, when the next turnover will happen, and how the rental amounts compare to competition in the market. Of course, we also want to know how long it will be before we can increase rents if the market justifies that action.
Don't leave out a critical evaluation activity when it comes to leases and rental amounts, as this one can really bite you hard after you've closed on the deal. Are the rents REALLY the rents? Require deposit records from the seller. Compare them to the amounts on the leases. There should be detailed records by unit by month, and you need to see them. What if one or more tenants are trading out services for rent? Or is there a nephew, neice or two actually paying below their lease amount because they changed jobs and uncle or aunt feels sorry for them?
It doesn't take huge discounts off the agreed-upon lease amounts to significantly reduce your profit margin. It is critical that you require and receive detailed documentation proving rental payments as in the lease documents. Too much cash changing hands could be a red flag as well. Checks indicate who wrote them and the account from which the rent was paid. Cash leaves no trail. Just be thorough in verifying that the rents are really the rents.