Archives for October 2013

Scary Property Investing Environmental Hazards

A Halloween reminder for property investors

This seems like the appropriate time to remind all property investors of the major environmental hazards lurking out there when searching for investment real estate. I have previously written about these hazards in depth (see my article here from May 30, 2011 entitled “Locating Investment Property – Basic Environmental Concerns.” It’s fitting that on this spooky day, I remind property investors of the most major hazards that may confront you as you look at multiple properties for a real winner…

Remember, I always recommend you use a house inspector to rule out all hidden defects that may be unseen by the naked eye (or that you do not have the experience to catch, even by eye). Also remember that these environmental hazards all pose grave risks to your potential tenants, so must be addressed before you purchase any piece of investment real estate.

Hazards 101

One of the more basic hazards includes asbestos. It was primarily used as an insulator of pipes in basements of older homes. Asbestos is a known carcinogen, and if fraying and airborne, it is a very real and present danger. Another major hazard are underground oil tanks. The older the tank, the greater the probability of a leak. And any oil spillage into the ground is cause for concern, as it poses a public health risk to all local homeowners as well as your property, due to the possibility of soil and aquifer contamination.

Hidden dangers

Among the top hidden dangers lurking in any potential investment property is lead paint. The majority of houses built prior to 1970 traditionally used lead paint. There are swab test kits available to determine if lead paint is present, however, you may want to use your house inspector to run the test for you. Lead paint that is chipping could possibly be eaten by young children, and are also known carcinogens when ingested.

Another hidden danger is radon gas. This odorless gas can only be detected through a radon test kit. However, you can purchase a kit at your local hardware store, and send the test in for the lab results to show any presence of the gas in the house. You should also be aware of any well water that might be tainted. If the house is fed by a well system, you’ll need to run a water test to determine the potability of the water supply. Keep in mind that homes that have remained vacant for any appreciable period of time run a greater risk of forming high levels of dangerous bacteria in the wells, and will most probably need to be treated with chlorine (known as “shocking” the system) to rid the water supply of the contaminants.

Be on the lookout for the hazards

So this Halloween, be especially on the lookout for these environmental hazards lurking within your next potential investment property. If you find them, at least you can prepare ahead of time to mitigate them – and ask for remediation as part of any offer you decide to make on the property.

photos courtesy of freefever.com, pooboy.com, pacificgroupdevelopments.com, sema.dps.mo.gov

Property Investing Analysis Shortcuts

Tips for quick comparison of investment property

All property investors should be able to utilize a couple of quick and dirty techniques to ascertain whether to make an offer on any property. You’ll certainly want to compare comparably priced buildings (comps) to see if their recent sales prices are in line with what you hope the purchase price will be for any particular property. And as you gain experience, you’ll find you’ll get better and better at understanding local comp values in your particular area.

Return on investment

But the most important ingredient in determining the relative value of any given piece of investment property, is the projected Return On Investment (ROI) calculation. Determining the projected ROI on any property will allow you to quickly and easily compare many properties you see in any given day.

To minimize the sheer volume of properties to consider making an offer on, try to figure out the relative cost per square foot for each property you consider worth your while. Using a price per square foot comparison is a good way to rule out obviously overpriced investment properties from your offer list. This will save you time and running around town energy as you search for your next investment property to make an offer on. And it should help you create a range to compare apples with apples for different investments. However, this type of analysis won’t help determine what a good offer price should be.

Calculating ROI’s

The simplest way of calculating the return on any piece of investment property, you’ll need to first gather all the investment costs. These include your total down payment, your loan costs, any renovation/repairs costs, and your property taxes, insurance and mortgage payments. Make a projection for your selling price based on comps, then subtract the loan balance you’ll have left when you eventually sell it.

Once you subtract the loan balance from your sale price when you sell, you’ll have your net proceeds from the sale. Then just divide your total cost into your net proceeds, and voila, you’ll have your total return on investment. Then you’ll be able to compare other possible investment properties one to another. You can then choose the optimum ones to make offers on as you compare apples to apples. With this quick and simple technique, you’ll be able to fly through a large volume of potential investment properties, winnowing them down to a choice few that will provide the optimum ROI’s.

photos courtesy of flickr.com, carterrealtyagency.com, nathalykolp.com, newdenverrealestate.com

Elections and Property Investing

An important reminder

This past Spring I wrote here about a great threat to property investors. Namely, politically-motivated district attorneys who in their over-zealousness to create more prosecutions, and increase their “win” side to make themselves look good come election time, go after law-abiding property investors (as opposed to their tenants who are doing criminal acts in the landlord’s building).

I had previously noted: “let’s say you purchase a piece of commercial property. You then find a tenant for it, sign your lease, and start collecting rental income that will produce the intended positive cash flow on your commercial building.

Sometime down the road, you then find out that there is suspected criminal activity going on in your building by your tenant. You find this out by criminal charges being filed against you by the local district attorney. Now you have to fight – not simply for your right to make an income on your investment property – but to stay out of jail.

Sound impossible here in the U.S.? Think again.”

A chilling story

I then went on to quote from a local paper on this rather chilling story of a local landlord being victimized by such an overzealous prosecutor: “Recently, this story about a local commercial landlord was reported in the Burlington (Vermont) Free Press: “Chittenden County’s top prosecutor said filing criminal charges against landlords that host spas that mask as prostitution sites is the latest effort by the state in helping local communities combat the problem. State’s Attorney T.J. Donovan admitted state and federal investigators have had little luck in the past 10 years pursuing prostitution at the spas. “We can do better in this community than what we’ve done. And frankly our approach to this problem in the past hasn’t worked. We need a new approach.” Donovan made the comments minutes after a Burlington man pleaded not guilty to a charge permitting his building in Williston to be used for prostitution.”

And now the latest…

Fade in to this past week’s events in the case. The same paper, the Burlington Free Press reported: “The landlord of a former massage parlor in Williston pleaded no contest to a charge of knowingly allowing his prostitution in his building.” The article goes on to say: “Thomas Booska, 68, of Oakledge Drive in Burlington will be able to have the criminal conviction wiped off his record if he stays out of trouble for the next two years.

Vermont Superior Court Judge Brian Grearson imposed a two-year deferred sentence, which requires Booska to abide by the normal conditions imposed on defendants placed on probation.”

But wait – it gets worse…The article goes on to say “The U.S. Attorney’s Office has moved to seize the property at 5649 Williston Road that Booska bought in 2002.” So not only does the property investor plead guilty to not being able to prevent his tenant from running an illegal business, but he gets to lose his building in the process!

Ramifications for property investors

As I detailed before, “imagine the ramifications of this particular case for property investors. Any landlord leasing out rental office space would be liable for the actions of their tenant. Let’s say you’re renting to a hedge fund company that absconds with their investors’ money, a la Bernie Madoff, for example. You get arrested. Let’s say your tenant leases warehouse space from you. To store their ( place your preferred name of contraband here). You get arrested. Let’s say you’re renting out an apartment – maybe it’s your vacant apartment upstairs in a building you happen to also live in. The tenant sets up a meth lab. You get arrested. Or puts in more unrelated “tenants” than your lease allows. Again, you’re on the hook to be arrested.”

Property investors vote too…

Well, the good news is election time is rolling around in a few weeks. And it’s time to pay attention to your local district attorneys and how they’ve been treating local property investors. If you think they’ve been too harsh, too prosecutorial…too politically expedient, and in the process have been hurting property investors…well, then, be sure to vote them out of office! And to repeat what I’ve said before, besides our basic capitalist system being threatened, it’s your investment property dollars that are at stake.

photos courtesy of dreamstime.com, atascaderoins.com, thegreatestrealestateblog.com, tenantscreeningblog.com, nakedphilly.com, money.cnn.com

Student Rental Property Investing

Alternative rental options

A nice niche market in rental real estate is university housing for students. As an alternative to standard rentals, this form of property investment has its advantages and disadvantages. If you already live in a top university town, this type of investment could be perfect for you. Let’s take a closer look at whether this segment of rental investing is truly right for your situation.

Advantages of renting to students

One of the great advantages of student rentals is the ability to receive upfront payment for each semester period. So bad debt or collections can be reduced to very little in this segment. In addition, there is a constant flow of students in any given college town. So as most students become eligible to partake of “off-campus” housing (usually, universities allow this after a student’s sophomore year at school), it’s a good bet that you may have a student for at least one, if not two years. The less turnover, the easier it is to manage your property vacancies. Also, look for the ability to charge top dollar for student housing, as well as being able to collect several rentals into a single building, since students traditionally rent out rooms in the building, and share common costs.

Keep in mind that the “hotter” the university town, the greater the demand. Top student towns like Boston, for example, are major student hubs, and greater demand for student housing will invariably produce greater rent rolls and cash flow, in addition to increasing market valuation over time.

If you have children that are about to enter college soon, it may be a great time to consider investing in student housing. You can ultimately save on student room charges while they attend school, and then when they graduate, continue to rent the units out to new students. This assumes you’re going to buy in an economically viable hub college town, and not in a depressed area, with few if any, local colleges.

Disadvantages of student renting

Make sure you try to rent to upperclassmen and graduate students. Remember that maturity is a big asset in student renting markets. The more mature the better. In any event, even if you’re an absentee landlord, you (or a designated managing agent) will need to keep close tabs on your building with regular visits to ensure things do not get out of hand. I mean, students do party – and that will have a taxing effect on any building. Make sure you have adequate insurance on your building at all times in case of extreme emergencies.

Some negative factors to consider in renting to students is the down time between semesters. This is lessened if you buy in college towns that run on trimesters – basically year-round schooling. Rent rolls should cover any down time when students return to their homes. Many landlords of student housing tend to rent for full years, despite the fact that students may not actually be living in them year-round. This is yet another reason to check on the building at regular intervals.

photos courtesy of rentseeker.ca, multifamilybiz.com, mpmstudenthousing.com, theguardian.com, massrealestatelawblog.com

The Property Diversification Dance

Diversification into commercial property

If you already have a major portion of your property investments tied up in residential real estate, it’s always a good idea to consider some form of property diversification. Like any asset class, diversifying can be a great way to help weather any downturns in a given sector of the market. With so many large fund investors (who acquired foreclosures by the thousands in the past few years) beginning to sell off a large portion of them on the market while prices have risen in the past year, looking at the commercial sector to invest in now makes good sense, since prices will surely stabilize in the residential arena due to the sell-off.

Office buildings

If you look at office space as just one sector of the commercial market, there are numerous advantages over residential buildings. Since offices tend to have a much greater number of tenants, there is a built-in diversity to the type of tenants you will have in place. In addition, their lease time frames will all be different, and the leases will, on average, be much longer than any residential lease could be. It’s usual to see five to ten year leases in commercial space. Compare that with the typical one year lease in residential property, and you’ll quickly see some of the advantages of not having to constantly be soliciting, screening and installing new tenants each year – per unit. And with a wide variety of tenants, if one leaves, it won’t affect your bottom line as adversely, or as quickly as in residential real estate. In addition, the types of companies you attract may be larger firms, with proven track records of doing business. So their singular lack of risk of default, or of their going out of business, will greatly aid your cash flow in the long run. Thus, commercial property can afford you a higher chance of bringing in consistent income streams.

REIT’s

As mentioned in prior articles here about Real Estate Investment Trusts (REIT’s), if you’re not looking to own “bricks and mortar” pieces of commercial property, then investing in REIT’s that specialize in the commercial building niche make sense for you. While some funds lean more towards retail space (large enclosed malls, strip malls and stand-alone shops), and others towards office buildings, most will invest in some combination of the two. Some may specialize in medical office space, others in warehouse buildings. But all will diversify within a particular set of commercial buildings. Still others will keep a mix of commercial and residential buildings, mostly apartment houses of varying sizes and locations.

More benefits of commercial investing

Besides the advantages listed above, consider the fact that commercial property makes a great hedge against inflation. Since commercial leases tend to include annual inflationary rent bumps in them, you don’t have to worry about your rent rolls not keeping up with inflation. In addition, your property values will increase over time due to these lease-inflation bumps. And finally, consider that historically, commercial property tends to have less volatility in market valuations than residential real estate.

photos courtesy of arthurmurrayburlington.com, treehugger.com, browninsuranceservices.com, biz.thestar.com