Archives for August 2015

Make Duplex Investing Part Of Your Plan

Pros know how to diversify…

I was recently at a social gathering where a woman I knew, a licensed nurse practitioner, began telling me about her real estate investment holdings. As she went on and on, I was completely floored by her expertise, talent and farsightedness in planning out a long term plan for her real estate investments. She also property managed all her holdings, which included single family houses, duplex property, as well as three and four family homes. What shocked me most, aside from the fact that this was her avocation and not her primary means of income, was that I considered her a fairly shy, retiring individual. I could not see how she was able to handle so well the necessary dealings with all her tenants. I just couldn’t imagine that she had the temperament to do so and be successful. Boy was I wrong…and I got a good lesson in “don’t judge a book by its cover” in the process of our discussion on real estate investing.

Creating a plan

Frankly, she was an uber-pro at property investing as it turned out. She had been properly following a plan of using a local real estate agent to help her scope out possible acquisitions on a regular basis. A benefit of working with one agent through the years, she was able to develop a great long term professional relationship with him that created an easy shorthand when a potential investment property came on the market. It also made it easy for her to obtain market research as to current valuations for any different area or even street within the communities she invested in. And she would acquire her properties slowly, over many years, in a planned manner of acquisition.

Duplex expertise

My acquaintance also really optimized her use of duplex investing in particular. Many investors who look specifically for a duplex for sale are interested in living in one unit, and renting out the other unit. (What is a duplex, you say? Simple…a two unit building, most of the time with each unit side by side, with an adjoining wall between them.) For those investors, it’s hard to create a positive cash flow when living in one of the two units. Duplexes (especially duplex nyc or duplex in any metro area) are great for individual homeowners who are trying to lower their overall housing expenses. However, experienced investors realize that renting both units out is the best way to maximize profits from any style duplex.

Choosing the best tenants for her duplex units

In addition, she knew how to choose the best tenants for her units. In so doing, she kept away from bad tenants who don’t pay, or were late payers. It also kept her away from having to do expensive and time consuming evictions. It also helped that she kept her geographical focus close to home, only investing in properties within a short 30 minute drive of her home. This made staying on top of her tenants, their issues or questions, as well as building maintenance and repair problems, much, much easier to handle.

Knowing when to sell

She also was adept at knowing when to jettison an under-performing property – be it a duplex or any other style she owned. Instead of waiting many years to sell off any investment property that was not throwing enough income off to hit her target ROI (or worse, that was throwing off a negative cash flow), she was very good at understanding it does not pay to hold onto a bad-performing building. Better to sell it off, even at a small loss, and reinvest in a better property, or at least one that looks good on paper. She also was a master at time management – an imperative for someone who is investing on a part-time basis. She also had her tenants properly trained to let her know of problems with their units – but only at reasonable hours when she could be reached.

photos courtesy of activerain.com, denalipm.com, digonline.org, lets4u.net, tenantchecker.com

The Art Of The House Flip

How to start flipping houses

Forget the concept of the easy man’s way to riches is through flipping a house. The first of my house flipping tips is to realize that it’s going to take a whole lot of work – especially research – to be able to make any profit when house flipping. You should begin by knowing every fixer-upper that is on the market in your local area that you plan to do your property investing. That means not simply combing through Zillow or Trulia for all available houses on the market in your area. It means you must actually tour each and every one that is a viable candidate for your house flip dollars. Make sure you work with one local real estate agent exclusively. They can greatly aid you in setting up automatic searches on their local Multiple Listing Services (MLS) that will generate possible investment flips daily for you to explore.

Serious business

While many property investors approach this casually, you should take it quite seriously. Pick a day of the week to be able to tour all the houses that just came on the market that week, that are in dire need of repair. It is these fixer-uppers, where you can invest renovation dollars to earn you profits that you’ll need to zero in on. If possible, and your work schedule allows it, be able to visit immediately new additions to the market that represent tremendous profit potential. Either they are undervalued, or need work that is modest, but will yield high returns for your investment money. Naturally, you also need to do your homework on what similar properties to the house you’re considering flipping are selling for of late (within the last 6 to 12 months only). This is known as knowing the “comps,” or comparable properties. As before, use your real estate agent to help guide you in your research here.

Flipping houses with no money down

As I mentioned above, trying to flip a house with no money down will require even more of your time to locate the truly desperate properties on the market that are ripe for flipping. You may find, at best, ten percent of all fixer-uppers where the seller is offering some amount of owner-financing. But usually, they will also require a hefty down payment from you. It is incredibly rare to find a seller who throws all caution to the wind, and offers 100% seller-financing. That’s just plain stupid. In essence, you’ll need a great deal of luck to be in an area where you’ll find such a seller. And even if you do find him, there’s still the renovation costs that will need to be financed. You might be able to get a home improvement loan to do so – but just be aware that flipping houses with no money can lead to financial ruin very quickly, should you make even the slightest error in calculating the work to be done and/or the returns expected on your property, once you place it back on the market post-renovation.

Recent trends

Also, be aware of recent trends in the house flipping business. According to the latest article “Flipping Trends” (by Matt Lemmon in ZBuyerconnect.com, 8/14/15), the author notes that a story “from CNBC points out that latter-day flippers have a tougher time getting loans than they did eight or ten years ago, when banks gave them out like candy. Furthermore, the gradual clearing of low-priced, underpriced and foreclosed homes on the market mean investors wanting to flip – who can’t pay cash – are needing more cash to do it.”

Greater profits today

The author goes on to make the point that in today’s house flipping world, with fewer smaller players in the marketplace due to the tighter money situation from banks and these tougher lending policies, the average flip profit has been on the rise. He notes that “home flips made up just 4.5 percent of sales in the second quarter of this year, according to RealtyTrac, down from 4.9 percent a year ago. Flipping returns, however, the gross return on investment, increased to nearly 36 percent, up from 24 percent one year ago. Further, the amount of work going into flips is going up, as well. Smaller, lower-priced homes are seeing negative returns, while the more desirable flipped homes on the market needed far more work than most homes did during flipping’s heyday. The sweet spot, the article says, was for homes purchased at $100,000-$200,000, which returned an average of 44 percent.”

His main point? He sums it up succinctly, saying that “rules for successful flipping haven’t changed: Investors must know their local market. They need to buy right (i.e., low), price rehab costs conservatively and correctly, and choose the right comps in order to accurately predict exit timing and price.” In other words, do your homework – or you’ll end up making a bad buy.

photos courtesy of fixandflipnetwork.com, barnettassociates.net, cbsnews.com, home.howstuffworks.com, sandiegohomebuys.net

Are You Investing In Rental Property?

What makes a good rental property?

A simplistic answer to this question when investing in rental property would be, one that makes money. A better answer would be, a good rental property investment is one that makes money easily. And an even better answer to the question, is rental property a good investment, would be, yes, if it’s one that makes a better return on your investment than any other investment you have – and does so easily. So, let’s explore the real meaning behind each answer.

Are rental properties a good investment?

Unless you’re specifically looking for any rental property to throw off losses to offset gains from other income streams – be they earned income or dividends – most property investors will look to find rental properties that produce positive cash flows. In a basic cash flow analysis, you’ll want to add up your gross rent income the property throws off, then deduct all your expenses for the building. These include carrying costs (eg., your mortgage, taxes and insurance), as well as maintenance costs (heating, electricity, repairs and property maintenance). Don’t forget to include an amount for vacancy and emergency repairs.

Self-management

If you are going to manage the property yourself, you won’t have to pay a property management company for their services (usually 10-15% of your rent roll). However, make sure you’ve done a careful analysis of your own temperament and aptitude with this position. It certainly is not for everyone… How good will you be with finding excellent tenants? And collecting monthly rents? How about handling repair calls, especially emergency calls at late hours? You’ll also need to make regular inspections of your building to ensure proper maintenance is being done properly. (Is your lawn care guy mowing the lawn regularly? Does your snow plow guy show up on time and do a good job of snow clearing? You get the idea…) If you find that your potential rental acquisition will produce, at least on paper, a positive cash flow – then it may be for you – at the right price of course.

Return on investment

The next question, will your property throw off a better return on investment (ROI) than any other investment you own, is based on your understanding of what target ROI you will require to make the purchase of any rental property worthwhile. Is a 5% ROI going to be enough for you? Some property investors will say yes, other’s no. Only you can decide….And it’s a decision to be made for every potential rental property acquisition. As you purchase a property, and accumulate a history with it, you’ll be able to determine if the property is underperforming or doing well. You should make periodic adjustments to reflect this. Sell off underperformers when they are not doing well for an extended period of time.

Finding a good location

Finally, the last question to be answered, can you maintain your rental property easily, will probably be based a great deal on location. An investment property in a high crime area will require a lot more work, due to the type of tenant you’ll be able to attract. The poorer the tenant stock, the more work you’re going to have. Bad tenants don’t pay on time…some, not at all. Endless chasing them for rent, or worse, trying to evict them – is time consuming and costly. In addition bad tenants tend to not take care of your unit. This means more repair costs over time. So maintenance and emergency calls will increase. So if you can purchase rental properties in better areas, they may cost more, but you should be able to charge more in rent, and you will obtain better tenants. And better tenants will make your life much easier for you in the long haul.

photos courtesy of anchorloans.com, houstonmortgagetexas.com, ortak.com, stiles-law.com, lawofficewalterjennings.com

Basics To Consider When Buying A Fixer Upper

What are fixer uppers?

I get asked for a fixer upper meaning all the time, and it’s really quite simple: any property that requires some amount of renovation, beyond cosmetic work (read: painting). Whether it’s an old kitchen or baths that need to be brought into this decade, or an entire whole-house gutting down to the wall studs with complete rehabbing of new electrical and plumbing as starters, fixer upper homes for sale can represent a tremendous opportunity for any investor. You can pick up some cheap fixer uppers that, once you’ve completed renovation, can earn you a tidy profit. Fixer upper houses come in all shapes and sizes, but they all have the same major component: they are waiting for some entrepreneurial person to come along, see the vision in what they can be transformed into, and know where to invest rehab dollars wisely for maximum re-sale value when the house is ultimately flipped.

The power of “no”

In my view, the most important aspect of buying a fixer upper is the ability to say “no.” You can never get too emotionally attached to your vision of what a house can be transformed into – and sold for a profit – if you don’t properly crunch your numbers, and stick within your limits. I have seen too many property investors who make the mistake of “falling in love” with a potential flip, only to slowly keep edging their counter-offers up, beyond what they originally felt was their top limit for what they would pay for the property. This is a rookie mistake. Don’t be blind to the emotional pull of it – remember – it’s not your home we’re talking about…it’s a simple business decision. And if it’s not right financially, then you move on to the next best alternative property available to make an offer on.

An example of restraint

I recently showed a property that is in need of almost a total gutting – but it’s a historical house with a rich history, and a rich price tag for renovating as well. My buyer, who’s been property investing for a long time, made an offer on it after crunching his numbers. He reasonably estimated the fix up costs, already had his team assembled for renovation, and had researched what the property could fetch upon resale, all fixed up. After his initial lowball offer (about half of the asking price) was rejected without a counter-offer, I recommended he counter with his “highest and best” offer for the property. He did so, and he came up only a small amount in price in so doing. This offer was rejected outright as well. We asked for a “come-up-to” price from the seller, but the seller would not provide one. So my buyer simply walked away from the deal…

Next…

In property investing parlance, this is known as “Next!” And he went looking for something else that would be a money-maker for him. However, he did one very smart thing before saying goodbye to this negotiation. He left the door open. He had me tell the seller that his offer would remain on the table, allowing for the seller to come back to him somewhere in the future, should the seller be unable to sell the property at the price he wanted. Very, very smart maneuver by my buyer, the seasoned pro. You just never know when a “no” can potentially turn into a “yes” by a seller.

Heed these basic rules

So when you’re searching for fixer upper houses to purchase, be sure to heed these basic rules for flipping investment properties. Never get emotionally involved in the decision-making process. Always crunch your numbers – then double check them until you feel totally sure of your financial constraints, as well as what you feel your profit will be on the investment. And last, always stick to your final number when making an offer – and don’t deviate upwards, regardless of the temptation to finish the deal. Remember, there’s always the rule of “next” – and you should move on to the next available property to make an offer on, rather than go in over your head on a potentially bad deal.

photos courtesy of profitindetroithomes.wordpress.co, stiles-law.com, consumerinformation.ca, propertymanagerpsg.com, zillow.com