Archives for February 2012

Investment Property Information Series – Jettison Your Underperformers

Deciding when to streamline your portfolio

Even in a down market, it’s sometimes a good idea to “thin out the herd” to keep your total portfolio of investment properties operating profitably. If one or more of your properties is running at a negative cash flow, and has been for some time, you may decide it’s a good idea to unload it.

It’s possible that you find you have several investment properties at this point in time, but possibly you need cash for a better investment opportunity – or you need cash simply because of your personal financial situation. So you may decide it’s best to jettison one or more of your worst performing properties.

Why the negative cash flow?

Maybe you projected your investment property would increase in value but you’ve been unable to increase rents. Or you’re not attracting the right tenants, or you’re not able to increase your rent roll enough to break even. Your expenses could also be increasing at a faster clip than what you had originally budgeted, especially if they were for taxes or heating oil, which have been going up exponentially for property owners in recent years.

Other reasons for liquidating

Or, maybe you need the cash right now, or maybe you’ve just run out of patience with being a landlord. (Perhaps you find that you’re just not temperamentally suited for working with tenants. Maybe you simply don’t like the aggravation of emergency phone calls in the middle of the night when the boiler fails.)

Before you put your rental property on the market, it’s important to figure out exactly what went wrong. Perhaps you weren’t attracting the right tenants. Or perhaps you were stuck in an area where there has been a high rate of foreclosures, so home values as well as the overall look and desirability of the area have been declining precipitously around you.

Analyze your data

You’ll certainly want to analyze what’s not worked. Crunch the numbers, and find out what is the difference between your well-performing properties and your underperforming ones.

As you analyze your data to determine which property or properties you need to put on the market to liquidate, keep in mind that it’s still possible to sell in this current market. However, it’s just going to take longer to sell your property. In addition, you want to try to maximize what you can get for your rental property by doing a few things that are under your control, prior to placing your property on the market.

Fill up those vacancies

One of the best things you can do is to make sure you have no vacancies on your property. Vacancies are like a death knell for property sellers. Other property investors will swoop down on you like vultures to take advantage of your situation. For any vacancy they will impute a very tiny rent, as opposed to your finding tenants and renting out all your units, thereby showing actual rent income for the entire property.

Since actual rent is the main basis for the valuation on your property, you must make sure that you can try to get all of your units rented out in your building just prior to selling it. Obviously, you’ll also want to attempt to get the maximum rent roll you can get, prior to putting the house on the market.

Make those repairs

Another big item that’s under your control is repair work to your property. Make sure that you complete all the most important repairs prior to putting the building on the market. Again, savvy investors will swoop down on you like vultures, and will impute a much greater repair cost for any major repairs you have left for them to do. So if you know that you need a new boiler, this would be the time to put it in, and take the financial hit now. It’s ultimately going to save you a lot more than if you don’t do anything and leave it to another property investor to take over your problem.

Likewise, if you have any major plumbing repairs or electrical work that needs fixing, get them done prior to going to market with your investment property. Also, if tenants have been complaining about particular issues with their specific rental units, you should address them immediately before putting your building on the market.

Find a local Realtor

Once you’ve completed all necessary repairs, and you’ve successfully rented out all your units at the highest possible rent you can possibly get for your area, then it is time to finally put your property on the market. I always recommend using a Realtor who knows your area well to do the marketing for you. You’ll want to get as much exposure for your property as possible, and this can only be accomplished by using a Realtor. In addition, Realtors are also able to access many other investors very quickly who will take a look at your property.

Update your income statement

When looking to choose a local Realtor, make sure you give them an updated income statement on the property, with all your income and expenses laid out. Prospective investors are also going to want to look at your return on investment (ROI) that you’re projecting for your property. If you need help, have your accountant prepare the income statement for you.

Keep in mind that showing a negative cash flow on your property does not necessarily mean your property can’t be sold. Other investors will crunch their own numbers, and they may see things you don’t. For example, it’s possible your rents have been too low for too long, and they need to be bumped up – but you’ve been hesitant to do so with good tenants, fearing increased vacancy if you jacked up the rents.

Another investor may evaluate the situation completely differently than you. And they may feel you have an underutilized asset. Also, some investors are visionary, and can see that some small cosmetic work to units will also help to increase the rent roll on your building.

Setting your asking price

The next important thing to do before placing your property on the market is to set your price. Your asking price must be slightly below market value in today’s economic times. Since you’re looking to unload your worst performing property (or properties), there’s no point in trying to hold out for “your price.” Let several Realtors give you their opinions on the current value of your property (also known as Comparable Market Analysis, or CMA).

You should also be doing your own research. Find out what other like properties in your area are selling for. Check and see what they’ve actually sold for, either using your Realtor for help, or through a simple public records search. Then go back and try to average the CMA values you’ve gotten from several real estate brokers, and then come up with a price that’s at least 5 to 10% below market value. That should be your asking price.

With so many homes on the market right now, as well as with so many foreclosures just hitting the market, you must make sure that your price is slightly below market value to help spur interest in your property.

Time frame

Once you’ve selected a Realtor, make sure they take excellent pictures of your property, and are really drumming up some buzz about it. The broker should be talking to other brokers, running broker open houses and calling all their property investor associates as well. If you’ve priced your property properly, and are about 10% under market value, then you should be able to sell it within 3 to 4 months. This time frame also assumes you’ve made all necessary repairs to your property, as well as your having filled all open vacancies with good tenants.

However if you priced it improperly, have many vacancies, are in a terrible location, and have not fixed up your property, then you’re going to have a very difficult time marketing it. And then you may be waiting years to find a buyer.

Clean out the underperformers

So follow these tips as part of this investment property information series, and get rid of that negative cash flow property now. You’ll then be able to use the funds to help improve your financial situation and/or look for a positive cash flow property to add to your stable of properties.

photos courtesy of highpowerrocketry.blogspot.com,

universalnewswires.com, tenantverificationscreening.com,

773hotcold.com, debtoutof.com, nakedphilly.com, stjoerealtor.com,

answers.com, queens.about.com, apartmentguide.com

Investment Property Information Series – The Attic Conversion

Here’s another inexpensive way to add value to your rental investment property

Attic conversions can be a relatively low-cost way of increasing habitable space that you can then rent out for higher rents. In the process you’ll also be increasing the overall valuation on your investment property.

There are many different types of situations where attic conversions make sense. The first would be where you have an existing house and you have an attic space that has a full flight of stairs leading up to it. However, it’s just being used for storage right now. The attic has enough ceiling height to make a conversion very simple and easy. Ceiling height is usually afforded you when you have either a flat roof to the building or a mansard roof, where your steep slopes of the attic are always at the very extreme sides of the house. Converting an attic like this is a very simple thing to do and doesn’t cost that much – probably under $10,000 if you’re not installing a new bathroom.

Your local building department

Of course with all attic conversions you will need your local building department’s approval. You’ll have to obtain a building permit, then a certificate of occupancy after all the work is completed. It’s a good idea to check with your local building department first to help you understand what the local building code requirements are regarding converting attic space into habitable space in your particular area..

Running the numbers

In the case of an attic where there’s a minimal amount of work to be done, adding a second or third bedroom to an existing apartment is really a smart way to go. If you compare the cost with the incremental revenue stream from the conversion you’ll find the added revenue will pay back the cost in a very short time span. As an example, let’s say you have a two bedroom upstairs apartment that you’re going to add a third bedroom to through an attic conversion. If the cost is about $10,000, then full payback of your rehab cost can be achieved through the incremental rent over a short period of time. For example, let’s say you normally charge $800 for a two-bedroom apartment, but if you create the attic conversion and add a third bedroom, you may be able to get $1,000 a month. So you may be able to increase your rent roll by $200 per month. And over the course of the year you’d be adding another $2,400 in rental income. In this example, payback would occur in a little over 4 years.

Adding a bathroom

But you can also try adding a bathroom as well, which also increases your rent roll for that particular apartment. Figure a basic, simple bathroom will cost you another approximately $10,000 added onto the existing $10,000 renovation. You’ll be able to charge even higher rents with more total baths in the unit, and in addition, the valuation of your property will go up. Overall, it may take longer to recoup your marginal costs when adding a bath. But when it comes time to sell your building, you’ll be able to offset the incremental costs at that time as well.

Steeply sloped roofs

Now let’s look at doing an attic conversion for a house that has steeply sloped roofs. A good example of this would be in a Cape Cod style home. Let’s say you want to take a Cape that is a legal, existing 2-family house, but is currently being used as a single family house. You may be able to utilize the entire second floor (which could be only storage space right now), converting it into adequate habitable space. For the second apartment though, you will need a separate access to the unit, as well as a separate emergency egress. In most cases you will need to create that emergency egress from the attic apartment through a window, usually by adding a staircase on the exterior of the house. Again, make sure you check with your local building department to see what is needed in terms of emergency exits.

Adding dormers

In the Cape Cod example, where you have a very steeply sloped roof, you most probably will want to add some sort of dormer. The most inexpensive type of dormer is a shed dormer, which will take existing floor space, using the existing footprint of the house, then open up your roof line into a much less severely- sloped pitch. Whenever you are using the existing footprint of the house and adding space within the confines of the house, you’re going to be maximizing your renovation dollars. However, the renovation costs now will start to increase substantially whenever you add a dormer. Building departments are going to probably require you to have plans drawn up by a professional, most likely an architect. (As in previous examples you want to determine whether the added rent from a projected rent roll increase will warrant the cost of the renovation. )

Septic system considerations

Building departments will also help you determine whether you will be allowed to add another bedroom. If your property utilizes a septic system, most county Board of Health’s require a certain sized capacity septic system, pertaining to number of bedrooms. So when you start adding a second or third bedroom, your septic system needs to have the capacity for the extra bedroom. If not, you’ll need to install a larger system, which when designed by an engineer, could throw your entire budget off (especially when adding new septic overflow fields).

One way around this, is to not label added space as a bedroom. You can call it simply a den and let the new tenants do with it as they see fit. (Of course, you can’t advertise the unit as having this extra bedroom – only extra space.) Be careful however, that if you add a bathroom (in addition to the other converted attic space), the local building department may de facto call the extra space a bedroom by virtue of having a new bath there as well.

Keeping the conversion simple

Always remember the cardinal rule in this investment property information series: keep the conversion as simple as possible. To recap, attic conversions can be some of the easiest, most financially intelligent ways to add space and value to your existing investment property. Just make sure you check with your building department first, be diligent about crunching your numbers carefully (both costs as well as projected rent roll increases), and determine that your projected costs fit your budget.

Once you’ve decided that it makes financial sense, and that you’ll get an adequate return on your incremental investment to your property, then you should give yourself the go ahead. Find a local contractor (or act as your own contractor to hire the individual trades people yourself). Once completed, you’ll be able to realize a higher annual rent roll, and the overall value of your investment property will increase as well.

photos courtesy of absolutelofts.com, atticconversions.org, css2psd.com, restyleloft.com, derwoodhomes.co.uk, cbconstruction-sw.co.uk, corearchitect.co.uk, atticdesignideas.com

Do You Have The REIT Stuff?

Looking to buy investment properties, but want to avoid the Fear Factor?

If the prospect of middle-of-the-night phone calls from tenants announcing a flood in one of your rental units due to a broken water pipe is enough to keep you on the real estate investing sidelines, then consider investing in a REIT, or Real Estate Investment Trust. With a REIT, you never have to encounter tenants with late night emergency calls, or tenants that include the slow-paying or non-paying ones, nor ever have to go through an eviction proceeding with them.

But what you can do is garner the investment upside of the current wave of a boon in the rental real estate market, be it residential rentals, or commercial (office buildings, retail outlets or storage facilities, to name a few possibilities). Look to buy investment properties through one of the many categories of REITs available to the general public.

Public or private?

REITs can be either publicly traded companies, or privately held. Their real estate holdings are usually well diversified within the niche field they serve. Some are primarily vested in shopping centers, others more narrowly defined by apartment houses. But the bottom line for REIT investors is a proper income return on their investment. Right now, many REITs are offering yields in the seven to nine percent range.

One of the key benefits of any REIT is the ability to cash out when needed, just as you would with any stock holding. Of course, while not actually owning any investment piece of real estate (and having direct control over it), you also will avoid all the headaches of managing investment property.

Self-storage facility REITs

Some niche property areas within REITs have been doing very well over the past year. As an example, REITs that are heavily invested in self-storage facilities have benefited greatly by the overall foreclosure crisis. As homeowners are forced to walk away from their underwater mortgages, they tend to move in with family, friends, or smaller rental units.

And with usually less space, they have been forced to rent self-storage units for a large number of their possessions. According to the National Association of Real Estate Investment Trusts (NAREIT), this niche of the REIT market showed increases of about 35% in revenues last year.

Residential housing

In addition, apartment-focused REITs have also been doing extremely well, as rental housing prices have climbed and vacancy rates have declined in the past year. Overall, this REIT area has seen increases over 15% in the prior year. So this remains another excellent niche REIT to consider when looking to buy investment property.

Also, new demand for more rental property has been spurring an increase in multi-family home construction. And while population has increased over the last few years, very few new households have been created, due to the housing crisis. So naturally, demand for housing is strong – just not for homeowner purchase.

Other hot REITs

Another hot REIT area are commercial retail malls. This niche is covered by mostly publicly-traded REITs. According to NAREIT, this particular type of REIT showed gains over 20% last year. In addition, other hot REIT areas include health care (hospitals as well as other health care buildings), as well as pre-fabricated homes. The slowest growth area of all types of REITs in the past year has been the lodging/resort niche. This is obvious due to the overall slowdown in the economy, and the tightness of disposable income for most of the population. So hotels will of course tend to be hit hardest in the downturn.

Look for REITs specializing in office buildings to bounce back and offer some of the best yields on your real estate investment dollar during the next couple of years. As the economy slowly picks up steam, and the unemployment rate continues to drop, job demand will naturally create an increased demand for greater office space nationwide.

Letting the pro’s do the work for you

So if you lack the intestinal fortitude to be a hands-on type of property investor, consider REITs in one of their many niches. You can then buy investment property and collect solid yields without the normal strains associated with individual property ownership.

photos courtesy of themoviedb.org, thecampusdiva.com,biz.thestar.com.my, gainesvilleselfstorage.com, archibase.net, minnesota.publicradio.org, intomobile.com, treehugger.com,

Investment Property Information Series – The Basement Conversion

Adding inexpensive habitable space to your investment property

As part of this investment property information series, investors should understand the relatively inexpensive way to add value to an investment property, as well as throw off more rental income, by transforming an existing unfinished basement space into habitable space. Since you’re utilizing already existing space within the footprint of your building, the incremental cost to upgrade your property is substantially less than if you were to create an addition by adding an extension or entirely new level to your property.

The most important features

Basement apartments can be very attractive to prospective tenants as long as they feature several key components. First, there should be ample natural light in the unit. While basements typically are partially below ground, smaller windows are the norm. However, more light can be added by adding more windows to the unit.

You must conform to building codes

Secondly, you’ll need to make sure the basement conforms to your local building code. Your contractor or architect will advise you as to the necessary solutions to issues like emergency exits. As part and parcel of this, you can usually add an emergency exit by creating a large window exit, solving two problems at the same time.

Proper headroom is also a common problem that most basements lack. Your contractor or architect will also advise you whether your state will allow exemptions if you don’t meet the headroom requirements. (Building codes have headroom requirements not for the tenants’ sake, but rather for firemen. In case of fire, firemen with their helmets on battling a blaze in the dark need to be protected first and foremost from very low ceiling heights. It’s not something the average person thinks about – but makes a lot of basic common sense.)

Basement water problems

Third, you’ll need to make sure there are no water issues in your basement. Most basements have some sort of water problem, but there’s always a solution, depending on the type of problem. Dampness alone can be mostly ventilation-related. However, actual standing water is usually a sign of either poor landscaping around the perimeter of the house and the resulting water seepage through foundation wall cracks, or a high water table and/or hydrostatic water pressure, where water begins to seep through the basement flooring, and not through the foundation walls.

Water problem solutions

All these types of basement water problems come with relatively easy solutions. Ventilation problems can usually be addressed by adding more windows and/or room ceiling fans to create better air flow. Standing water can be dealt with through the addition of French drains. They function as an interior gutter system installed in the perimeter flooring of the basement. Water coming in from foundation walls is then collected in flexible piping. The water flows by gravity to the lowest perimeter point, where a sump pump is fitted into a permanently constructed sump pit. Water is then discharged automatically far away from the house.

Simple landscaping can also help prevent water seepage problems. This may involve building up berms around the sides of the house to ensure water rolls away from the building. However, sometimes a larger scale landscaping project is required to place waterproof barriers around the perimeter foundation walls.

Keep the rehab simple

Probably the single biggest rule in this investment property information series, is to keep things as simple as possible. Once the basement is water-proofed, a licensed electrician and plumber will be required when adding lighting, adding a kitchen and a bath, and ensuring that the new rental unit meets all building codes in your area. However, always remember to keep it simple when undergoing the cosmetic renovations. Keep the rehab on the bland side – nothing flashy, and make sure it appeals to most everyone, and that there’s nothing objectionable about the renovation. In this way you’ll appeal to the largest pool of tenants.

Once completed, you will have added value to your building by increasing the habitable square footage of the property, while at the same time increasing your rent roll on it as well.

photos courtesy of southeastmichiganhomeimprovementremodel.com,

customcomfortconstruction.com, decorateitonline.com,

roomadditions.us, nickgoodman.com, quality1stbasementsystems.com,

newjerseyremodelers.com

The Most Cost-Effective Projects When Property Investing

The top ten projects for property investing…

When evaluating any investment property that requires work to realize it’s full market value, consider these proven cost-effective investment property projects. They’ll return the most on every dollar spent.

According to Remodeling Magazine’s 2011-2012 Cost vs. Value Report, here are the top ten projects that will yield you the most bang for your buck in your property investment. These are mainly basic projects, most of which are exterior-related. But all have the highest return on investment, relative to all renovation projects.

1 – Exterior siding replacement with high-end fiber cement. This type of siding is one of the most cost-effective measures you can do for your property.

2 – Replacing an entry door with a mid-level steel door. It’s a relatively inexpensive upgrade that really helps improve the exterior look of your investment property.

3 – Adding an attic bedroom. An attic remodel is the least expensive way of adding space and/or a bathroom inside the four walls of an existing house. (A basement remodel would be the next most cost-effective way to add living space.) In both scenarios, make sure you check with your local building department for feasibility.

4 – A minor kitchen remodel job. This may involve simply adding new laminate countertops, new sink, faucets and appliances. Cabinets are usually resurfaced, not necessarily ripped out and replaced. And the floor remains untouched.

5 – A mid-range garage door replacement. New garage doors really add to the overall first impression when prospective tenants drive up for the first time.

6 – Next best is a high-end garage door replacement, for the same reason as above.

7 – Adding a new wood deck, since the space and openness is so highly valued by tenants.

8 – Foam-backed vinyl siding replacement improves the look of the house, and saves in heating costs, allowing you to attract more potential tenants, especially if they are paying for their own heat.

9 – Adding mid-range vinyl siding replacement. While not as expensive as foam-backed, and yielding less in terms of heat savings, the overall exterior look is improved greatly.

10 – Replacing old windows with new vinyl replacement windows that have low-emissive glass and high insulation values.

The bottom line for property investors…

Remember to spend your renovation dollars on the most desirable features for tenants, as well as those items that are standard maintenance items. Whenever you improve the look and feel of the exterior of your investment property, you’re naturally going to attract better qualified, and increasingly more potential tenants.

photos courtesy of brokersbestmtg.com, lifestylingsells.com, housebeautiful.com, eliteconstructionva.com, massrealestatelawblog.com