Hi Guys,
First post here from a newbie getting into rental properties. I am looking at a single family home for sale with 3 bedrooms and the rent posted sounds too good to be true. How do you guys verify the income? Do you guys ask the seller to see current lease and previous tax documents??
Thanks in advance.
You can ask the seller to show you the rent roll on the property as well as the lease. If the tenant knows the property is for sale, you can just ask them what they’re paying too. If the numbers don’t match, then you have to figure out who’s lying.
A lot of banks are now asking for income tax verification for the past 3 years on apartment buildings to verify income/expenses, so I don’t think it’s unreasonable to ask the vendor to provide it for a single family rental. Whether the vendor is ok with showing it is another story. He may flat out refuse, which in that case, I recommend moving on to the next property, but that’s entirely up to you if you’re comfortable without seeing it. I’m sure you’ll find a lender out there that doesn’t require to see them.
I have often bought rental property where the tenants gave their notice to move out a couple weeks after I bought the building. They give any number of reasons like they want a better view, they found a cheaper place, they want to live in a different area, etc… Could they friends or relatives of the vendor that were just there to pump up the rents? Where they higher risk tenants that paid a premium because they had a dog, really bad credit or never paid last month’s rent? Hard to say. It’s best to assume that they won’t stay that long and under that assumption figure out what comparable properties in the neighborhood are renting for in case that does happen. Cover your downside and be realistic. Don’t base your rental projections on rents that are higher than neighboring properties; base it on market rents (and vacancy rates if you can get them) that you have verified from neighboring properties.
Thanks a lot for the replies, really appreciate them.
Regards,
Rav
If the person refuses to or for some reason cannot provide tax returns & other proof of rental income, you can also lower your offer amount too.
I never bother asking for tax returns when I buy a single family dwelling. I always ask for the lease, since the lease conveys with the property anyway.
I assume that any tenant I inherit will never honor the terms of the lease, so, I always do my cash flow projections using market rent and my own expense estimates.
BTW, if you inherit tenants, make sure you also get their security deposit from the seller and get the tenant to certify the amount of the deposit and the monthly rent amount they are paying. If you don’t get the security deposit from the seller, you are still liable for returning it when your tenant’s lease expires.
I have had enough inherited tenant issues that I only buy vacant properties.
rav,
It is mandatory that you know what the market rents are in that area. I would not base my analysis on what the current tenant is paying or what the current owner claims they are paying. You should use the market rent and factor in a vacancy allowance when running the numbers. If the tenant is paying above market rent, find out why. Good luck.
JP
are any taxes applicable for rental matters?