Archives for June 2014

Property Flipping Dangers

Renovating 101

As a real estate broker in my area of northern New York state, I come across some rather interesting…OK, questionable, investor-renovated properties. Thinking they had the knowledge, foresight and taste to capitalize on purchasing a “fixer-upper,” and rehabbing it, then placing it on the market for a quick sale, these property investors are nothing if not fearless. I would say that any property investor burning to rip-it-up and find a great rehab project to invest in and redo, must be prepared to go in with as much fear and trepidation as possible. Self-preservation of your own capital is of the utmost importance. And too often I see botched rehab jobs up close and terrifyingly personal…

A fun, yet instructional horror story

The latest horror story I ran across was this past weekend. I was showing properties to a young professional woman looking to purchase her first home. One of the local homes we toured was a property investor-rehab job. Neat, clean and presentable? You bet! And that was about it. The nice first impression the property investor so desperately tried to make – and did very well, I might add – soon came crashing to the ground as my potential buyer started to tick off the drawbacks of the renovation. The investor scored high marks for painting every room a different, subtle earth color, but then things fell apart quickly…

Functionality, functionality, functionality

Oh, did I mention functionality was severely lacking in this particular redo? It started with a kitchen that was completely redone, but lacked much sense of design thought. From a serious lack of cabinetry, to installing ceramic wall tiles on an area between sets of wall cabinets. But the tiles were above the kitchen sink. WTF??? What were the tiles supposed to protect? Why wasn’t the range top moved to this section (or more aptly, vice-versa? And for heaven’s sake, why have a portable, tiny island? Ludicrous. If you’re going to be investing in a total kitchen renovation, make sure you get some expert advice. At the very least, design and plan it out with the help of your cabinet supplier. (Yes, Home Depot and Lowes have excellent, experienced pros who can assist admirably in this endeavor.)

Basic amenities

If you’re going to redo an entire house, make sure basic amenities are there – or at the very least, provide the essentials to allow a potential buyer to not be left in the dark. Most buyers don’t have foresight and practice in renovating. You supposedly do. In this particular home, there was no washer/dryer. That’s not a deal killer per see – though having basic necessities is still pretty important. But this home did not even have a washer/dryer hook-up. That boys and girls, is a major sin. And one that the property investors for this property will end up regretting not having addressed.

Psychological effects on buyers

In addition, simple items left out can have a major downward psychological effect on any potential buyer. In the house in this example (a Cape Cod style home), the second floor access stairs to the bedrooms was missing a railing. Now, that’s a simple fix. But it left my buyers wondering how the property could have gotten a Certificate Of Occupancy (C/O) from the local building department after all the renovations, if something as basic and required as a handrail up stairs to habitable space was not there. (Answer – there’s no way they could have gotten their C/O. That begs the next question – was a building permit for all the renovations ever applied for by the property investors? If not, any deal with a potential buyer will get hung up before closing – creating a major problem for all concerned.)

Cost structure

So you may have a sense of knowing what the current mass of buyers desires and likes, you may have good design sense, and you may understand basic functionality. But unless you have all three, or can at the very least rely on the help of other pros who do have what you lack, be very wary of entering the rehab arena. Of course, the most obvious of all these disciplines – the cost structure of the entire project best be something that you can afford, and that will return – easily – two to three times the amount you’re investing. Otherwise, skip the project, and keep looking for some other investment property in need of work that will produce the returns you need.

photos courtesy of kristinandcory.com, home.howstuffworks.com, brokersbestmtg.com, home.howstuffworks.com, aglasgowskeptic.blogspot.com, brokersbestmtg.com, buildingmoxie.com

Buying Investment Property – With Friends?

Partnership agreements – it’s a business

You can have the best, most comprehensive partnership agreement that’s ever been written by the world’s brightest legal minds, but one should never confuse the difficulties that lie ahead for any property investor considering making a partner out of a friend. Or several friends even. It’s going to eventually become a sticky wicket. And fraught with a great deal of compromises, most especially your original friendship. Because of this, I am not a big fan of buying investment property with friends. There are numerous associations that act as good conduits towards investment property buying clubs. And I would always recommend looking into these buying clubs as a natural way to get involved in partnerships for the express purpose of property investing. But having a go at investing in real estate with established friends is just a risky endeavor. If you want to stay friends, that is.

How to easily wreck a friendship

Consider a few of the possibilities that could wreck a friendship, even with a written partnership agreement detailing how different situations should be handled. How about the concept of joint liability when new debt is taken on. (And of course, to increase your leverage over time, you’ll always be taking on new forms of debt as you add projects to your portfolio.) If one of your friends becomes ill, has marital problems, goes broke, has other debts, etc., and they can’t pay their share of expenses – you’ve got a problem. A problem that most assuredly will strain any friendship, regardless of what a partnership agreement calls for.

Think about the situation where a partner wants to be bought out. Will this be a reflection of your existing friendship? Will the other partners be able to buy the other out? And will it create a negative dynamic within the formerly close-knit group? If you create partners from afar, who were never your friends before, you’ll find a situation such as a buyout will become a simple business transaction. Nothing more. There can be no referendum on whether you will still remain friends. It’s obviously much cleaner. And safer emotionally as well. And you always want to invest without emotion whenever possible.

Managing partners – who best to choose?

Also consider who will be the managing partner? Or did you think you and your other partners could collectively manage a property, or set of properties, yourselves in concert? If so, good luck. What about if you hire a property manager to look after your investments? Who will be the main contact person with them? More importantly, will that main contact person get all the blame should things go wrong at any given time with any of your units (and, of course, they will).

What about when disaster strikes? A tenant sues you all collectively. Or one of your properties, God forbid, has a fire. Who deals with the insurance company then? All of you, or one? And gain, if just one, will the other partners second-guess the managing partner? Naturally, this could sabotage any friendship as well.

The bottom line

When looking for new ways to finance investment property, it’s good to continually be searching through many options. And clearly, utilizing partners is a great way to expand your buying potential. However, my advice is to steer clear of buying investment property with friends. It’s eventually going to have negative repercussions. Keep your friends. And make new business partners. That’s the safest approach to helping to finance real estate investments that you are unable, or unwilling to finance yourself as a lone property investor.

photos courtesy of starproperty.my, nytimes.com, theguardian.com, immo-annonce.net, goldcoastbulletin.com.au, ellisiumpartners.com

Turn-Key Property Investing: Buyer Beware!

Caveat empt-y

When you think of the term “turn-key,” what does it mean to you as a property investor? No heavy lifting involved? No hands-on dealing with nasty tenants? No emergency calls in the middle of the night? High positive cash flow guaranteed? Think again. If you’ve been sucked into a seller’s touting of their property as “turn-key,” rest assured you need to take a buyer beware stance, and be very wary of any information provided by the seller.

Seller’s income statement

The first data to check out is the seller’s income statement. In an effort to show as high a positive cash flow as possible, you can expect the seller will try to exaggerate income if possible, and/or lessen his expenses. He may also “abbreviate” his actual expenses. Make sure you pore over the provided income statement as meticulously as possible. Any expenses missing? You can expect the major ones will be there – mortgage, taxes, insurance, energy costs (if landlord is responsible) as well as maintenance costs. But are all maintenance costs included? Landscaping? Plumbing repairs? Electrical repairs? Painting? The list can be extensive. Make sure it’s itemized. Then go about actually verifying each expense item with the seller. You must see the actual bills the seller incurred, then check that they correlate to his income statement figures.

Vacancy figures

In addition, the seller should be including a “vacancy” amount as an expense for when tenants leave. Vacancy rates tend to be in the 10 to 15 percent range of total rent roll. Make sure this expense has not been left off the income statement. Vacancy expense is one of those “hidden” charges many new property investors fail to include in their income statement checks. Tenants are always moving around. So as a landlord, you must plan on some amount of units being vacant for at least a month between the time a tenant leaves and you find a new tenant and update (eg., paint) the unit before the new one is installed.

Rental income verification

Likewise, you also need to ensure each tenant’s rental income can be checked. Do they each have a separate lease, or are any on month-to-month rentals? If the latter, you’ll need to see the seller’s actual deposits of his monthly tenant rent roll. If there are any vacancies, also make sure the seller isn’t inflating a projected rent for the unit(s). Once you’ve been able to verify all the seller’s figures, and agree with them, then you can proceed to the next step in acquisition of the property.

Managing the investment property

Many property investors who like the idea of a “hands-off” investment, and are looking for turn-key property, think that a seller’s managing agent has done a good job, and may continue to run things. But what about the managing agent’s costs for property management? Are they in line? Were they even included in the income statement expenses? And, most importantly, what if the managing agent was a brother-in-law of the seller, and not being paid? You’ll now need to hire a property management company, at an average of 10 to 15 percent of monthly rent roll, in order for you to remain “hands-off.” Keep in mind, “hands-off” doesn’t mean liability-free. One bad tenant chosen and installed by a poor property manager can do tremendous damage to your investment property. And you’ll be totally liable for all the costs related to fixing up and renovating a damaged unit. So your choice of property manager is a key decision…not to be taken lightly. Your choice will be all-important to the overall financial health of your investment property.

One more thing…

Remember too, if you’re considering investing in property outside the geographic area you live in, don’t. You can easily fall prey to scammers. Never purchase an investment property sight-unseen. You’d be simply asking for trouble. And in the same vein, never rely on the accuracy of information given you by sellers of sight-unseen property – whether it’s a foreign country investment, or one on the other side of the country. You certainly won’t want to have to travel to the property in the midst of an emergency. And most importantly, it would be too easy for a scammer to make up data that looks great – like fake appraisals, for example. It’s always best to stick to property in areas you know and live close to – this will ensure you retain an extra layer of security.

photos courtesy of wealthasia.net, longislandbankruptcycenter.com, trexglobal.com, carterrealtyagency.com, tenantscreeningblog.com, digonline.org

Finding Perfect Tenants Is So Easy!

Not really…

However, there are several ways to scope out the best ones when investing in residential property. Consider the selection process just that – a process. More importantly, think of them as a series of checks. Checks that will eventually lead you to the good tenants. Follow these procedures step by step, and you’ll be able to hone in on the very best tenants to choose from for your investment property. Remember to utilize the steps together to better form an accurate picture of the tenant you’ll be installing in your unit.

Background checks

The prospective tenant will need to first grant you approval to run a background check on them. You don’t even need to find a special company for this service anymore. Many web sites are available today to provide the service. And the fees they charge are minimal. With a background check, you’ll be able to determine if a prospective tenant has any criminal convictions in his past that he or she is not telling you when asked. If so, you can then determine if the convictions are problematic or not. Keep in mind, no one is perfect. Mistakes from the past should not necessarily haunt someone moving forward with their life. As long as there is no potential for economic loss due to a prior criminal conviction, and assuming they told you about these convictions when you asked them, tenants should be considered honest and reliable. They should not be disqualified straight away for any past wrongdoings.

Credit checks

Likewise, with a credit check, you need to have the prospective tenant grant you access to have one run on them. And this should be in writing. Once approved, credit checks can also be done very simply on the internet. There are numerous sites that provide the service. A credit check may be the best way you can tell if a potential tenant will pay on time, like clockwork every month – or whether you’ll get stuck with a headache – and a possible bad tenant that may require an expensive eviction process. The credit check is your absolute best measure against an eviction process ever occurring. Root out potential bad tenants before you ever make an offer to them, and have them sign a lease! You don’t want to ever get stuck in that kind of financial and emotional bind.

Reference checks

Make sure you always speak with a prospective tenant’s prior landlord. You need to hear from the horse’s mouth that they never had any problems with late payment of rent or any destruction of property. Or accidents as well. It’s always important to find out if a tenant sued a past landlord! Even if the tenant was in the right, you’ll want to know if you have a litigious sort on your hands. In addition, make sure you check their work references. How long have they been at their current job? Do you feel reasonably secure they will be keeping their job long into their tenancy with you? And, of course, do they earn enough income to support your rent? These are the kinds of simple, basic questions you need to get answered when running reference checks on potential tenants.

Add the checks together

Remember to look at the entirety of all these types of checks, and the information you garner from all three sets for any given prospective tenant. Once you’ve ascertained this data, you’ll be able to get a clear picture of who the best tenants are to install in your investment property. Don’t rely on any one check. Make sure you utilize all three in concert with each other to make the best, truest selection from all available applicants.

photos courtesy of rentseeker.ca, victig.com, mcclurepropertymgmt.com, readharding.com.au, clickpropertymanagement.co.nz, brookdale-pms.co.uk