Archives for February 2016
Handyman or contractor…who’s best?
Let’s face it – if you’re just getting started as a novice property investor, and you locate a potential steal of a deal that needs some degree of work, you’re probably considering whether to use a contractor or a handyman. Naturally, you’d expect the handyman, the jack-of-all-trades fixer-upper who can repair just about anything, to come at a cheaper price than a contractor. You may be right… Or terribly wrong by the completion of your project. And only time will tell if you choose incorrectly, Grasshopper….
The case for the contractor
If the property you’d like to acquire is in need of a total renovation, it’s best to work with a contractor – or at least, a carpenter to act as your right hand man in all construction and rehab decisions. Handyman services tend to generally fall within the purview of more cosmetic repair services, like painting, light (and I emphasize the word “light”) carpentry, small plumbing repairs as well as light (there’s that word again) electrical work – such as replacing a light fixture.
Do you need a building permit?
Any work that needs a permit – be it electrical or plumbing, for example, must be done by a licensed tradesperson. Putting an addition onto a house needs a carpenter at the very least. Handymen tend to work alone, and as such, larger projects are outside their scope of endeavors. A local handyman can prove invaluable however, for small projects around your investment property.
Learn from my mistakes…
Unfortunately, I have a terrible of example of using the services of a handyman – and getting hurt financially by doing so. I had purchased a property that needed work, was new to the area I had bought in, and had received a referral recommendation from a local real estate agent I knew in the area. Sadly, his referral proved to be an expensive mistake.
Handyman prices tend to be fairly low – if you look in your local Pennysaver, for example, some may charge in the fifteen to twenty dollar an hour range for their work. The one I hired charged twenty-five dollars an hour, and I thought he would be a steal. He said he could do multiple disciplines, including carpentry (his specialty), plumbing and electrical work. Naturally, I thought I could save handsomely by using his services. And since he was referred by someone I trusted, I felt I couldn’t go wrong…
I went wrong. Horribly so. Turned out my estimated two to three week project turned into an almost two month project, with the handyman working every day. Simply put, he was slow, inefficient, and did extremely poor work. And I had to pay for the poor work by having him re-do bad jobs. One fun example: I discussed his erecting a stairwell bannister in the house, told him where I wanted it placed, and left him for the day to have at it. I returned to find the balustrades that hold the railings had been set in about six inches from the edge of the stairwell, making the stair opening very narrow, and really, really stupid looking. Why did he do this? Simple. He was an idiot. An idiot who was terrible at following the easiest of instructions.
When to pay the freight
Basically, by the end of the project, I would have been better off paying a contractor’s price and having the job done right from the start, rather than getting involved in what I thought would be a great money-saver in using the services of this particular handyman. Oh – and one other fun fact: once I had started with him, and work progressed at a snail’s pace, the project became, as they say in game theory, the “prisoner’s dilemma.”
Much like the Vietnam War or holding on the telephone for a real person for customer assistance – the longer you wait, or stay in the war, or in this case, continue to use the bad handyman, the more committed you become to seeing it through to the end. And so you continue to hold on the phone, stay in the war, or use the terrible handyman. As each day passes, you are more and more committed to NOT firing the handyman and trying to find a replacement contractor. And after a certain amount of time, whoever you try to replace them with is not going to be available immediately anyway…and you just want to get your project done as soon as possible, without interruption. So you continue to use the horrible handyman. You effectively become their prisoner. Do not make this mistake!
Start really small
While referrals are traditionally the way to scope out the worthiness of a handyman, I would recommend only using a handyman for a tiny, tiny project for starters – regardless of how glowing his recommendations have been. If you like his work, his attention to detail, his ability to follow your instructions and he does each job in a reasonable amount of time, then by all means you should definitely use him again for a different, tiny, tiny project. If you still like his work, then consider bringing him on for a medium-sized project to see exactly how he handles and manages that project. Please do not make the mistake I made of throwing a handyman into a large project from day one…all in the effort to save money.
Handymen and property management
Most of the time, handyman services will be utilized for regular property management concerns. A leaky toilet, a light that stops working, an apartment that needs painting…All light duties. If you are doing the property management duties yourself, certainly you can line up a handyman to perform these duties – this will certainly save you money in the long run relative to a contractor’s services. However, as before, let the handyman gain your trust by starting them off on small projects, one at a time. See how prompt he is, how courteous he is to your tenants, how he treats your property in general (does he do more damage by his presence than he fixes?), and also, is he intelligent enough to know how to save you money? In addition, make sure he’s not padding his hours. Ask him ahead of time what he feels the job will require in terms of his time, if you’re paying him by the hour. He should have some ballpark estimates. If not, use someone else!
Using a handyman exclusively
After using a handyman many times, and learning to trust one, you should use him exclusively for all your properties. You will gain an ally in the process. And this will not only save you time and money, it will save you your sanity as well. Also, keep in mind that if you are using the services of a property management company, you should designate what handyman they should be calling when tenants call in for repairs. Your property manager will take their marching orders from you as to the right handyman to use to help save you money. Of course, this will end up incrementally saving you considerable amounts in the long run, especially as you continue to acquire more investment properties.
Ah, Valentine’s Day…
And the purchase money mortgage is in the air. Just in time for Valentine’s Day, I thought it appropriate to bring up the analogy of seller financing as a romantic notion – to be avoided. Oh, how the heart races when you meet that special someone, especially so close to Valentines Day! However, if your heart races because you just located that “perfect” investment property – be very wary. Especially a property where the owner is offering a purchase money mortgage…Remember, owner finance can at first blush appear extremely attractive. But property investing is not meant to be done with the heart and emotions. This is a business – and a risky one at that. Make sure you keep your head about you, and coldly run through the numbers of any negotiation for any owner financed home, owner financed commercial property or owner financed land.
Some examples of owner finance…
As one example, I negotiated and eventually acquired a four-family house, where the seller was willing to provide the mortgage on the property. He had none on it at the time, so he was offering me a first mortgage on the house. He was very adamant about getting his price for the property. However, as we negotiated, he became very, very flexible on terms. So I was able to obtain a below-market interest rate, with a 30- year amortization period, with a long term (10 years) balloon. It wound up that, even though I was paying about ten percent above market value, the monthly mortgage payments ended up being so low, my monthly cash flow was ridiculously positive. So this property was a real money-maker for me.
Seller financing, example two…
Recently, as a board member of a local non-profit arts organization, I have been involved in deciding upon whether our group should attempt to purchase the building we have been renting for our various arts classes and performance space. It is an old warehouse that has provided the organization with a certain panache and branding as an edgy arts center. Purchasing the property would be a coup, if financially feasible. The owner of the property, to make things a tad messy, also serves as our group’s founder and current artistic director. Negotiations have begun between our board and her and her business partner, calling for them to hold the mortgage on the property in selling it to us.
What’s the property condition?
Unfortunately, the building is in need of many repairs and upgrades. In addition, back taxes are owed on it, and we, the organization, would need to come up with the funds to pay these back taxes as part of the buy-out. We are currently attempting to pull together all the necessary financials and doing our due diligence to purchase this commercial building. Most of our board are “on board” with the purchase. At this point in time, however, I remain skeptical until all my questions about the financial ramifications of the purchase – now, and into the future few years, can be answered properly. Let this be a lesson for novice investors: do not get swayed and overeager just because a seller is offering owner financing.
You must keep a cool head about you, and be brutally honest about running the numbers. Don’t just consider only the sales price, as well as your monthly mortgage payment. Be very aware of the condition of the property, and what improvements you’ll need to make in the short and long term! In the example above of my purchase of the four-family house, I had the house inspected, and found it to be in very excellent condition, and in need of no major repairs. The same cannot be said of the warehouse my organization is considering purchasing. Always listen to your inner voice of financial reason – and never ever get motivated with emotion when investing in any property – be it residential or commercial.
Major advantage of seller finance
I have written in prior articles here about the major advantage that seller financing offers you as a buyer of any investment property. I have noted that “any money you don’t have to put up yourself when you buy investment property offers you the opportunity to increase your leverage on the purchase. And if you don’t have to borrow from a bank (or worse, a hard money lender) then you will be saving your credit line possibilities for further down the road. And if an owner is willing to take back mortgage paper for at least some part of the purchase price, you will be ahead of the game. Even if that amount is small, or not a first mortgage, it will benefit you. Every little bit of leverage goes a long way. Of course, if you can obtain a first mortgage from the seller, even better still.”
Remember, the mortgage a seller gives you will most likely not be reported to a credit bureau, as it would if a bank held the mortgage. In this way, you can preserve your credit rating, as well as keep your credit line possibilities open more. It’s a tremendous way to gain crucial leverage on the property the seller will hold paper on, as well as allow you to retain your bank credit for another property at the same time.
Owner financed homes costs
I have also mentioned in prior articles here that “you can expect to pay for the seller’s attorney’s fees for preparing the mortgage. However, you’d be doing the same thing (paying attorney fees) if a bank was involved in granting you a mortgage. If a seller is willing to offer a first mortgage, you can expect to negotiate a break in interest rate if you are paying market rate or slightly more for the property’s purchase price. Conversely, if you have negotiated a great price on the building, expect to pay a slightly higher interest rate on the loan than a conventional bank mortgage would currently offer.” It is in this way that you’ll realize much better cash flows when operating your property on a monthly basis, yielding greater profits in the long run.
While owner financing helps you greatly in increasing your overall financing leverage and future options, don’t waste your time making it your number one pursuit when searching to buy investment property. It is still an elusive task and will take an inordinate amount of your time. It would be better to use your time more wisely – time that could be spent on more fruitful property searching. Don’t pass up a great deal simply holding out to obtain seller financing. But if you do manage to come across a willing seller offering some amount of owner financing, by all means, don’t pass it up.
Photos courtesy of pinterest.com, myccknowledge.com, triangleeaststorage.com, shouldersofgiantmidgets.blogspot.com, trustdeedinvestment.org, todaysfacilitymanager.com
An instructive lesson…
I recently showed a foreclosed property in my area to a prospective buyer family. The husband and wife were quite enamored of the home – before they actually saw it in person. Then, when they got to actually go down into the basement, things, well, fell apart for them. There was a wet stain on the basement floor along one side of the foundation wall, where it met the floor. It was originally assumed that this water damage was due to poor drainage issues with the house at the exact point on the exterior side. However, upon closer inspection, this was definitely not the case.
Though poor drainage problems exist with many houses, and a good home inspector can help suss this problem out, as well as offer suggestions as to how best to fix the problem with some basic water damage repair suggestions, this particular home did not have this problem. Instead, it was clear that a water heating pipe directly above the wet area had been slowly leaking for some time. Our best guess: the house had developed a freeze-up due to being vacant in the middle of winter, and the caretaker had not been doing a very good job taking care of the property. We inspected the heating pipe, only to find a gaping hole in it right above the wet area on the basement floor below. Whatever water had been in the pipe had obviously drained out, since the heat was already off in the house.
Finding the mother lode
For any experienced property investor, this is liking striking gold. You can certainly use the property owner’s misfortune against them when it comes time to make a bid on the house. While the average homeowner buyer gets scared off by the prospect of a huge bill to pay to fix the problem, the experienced investor knows better: it’s simple math to guesstimate the repair costs of utilizing the services of any number of water restoration companies available in the area, bracket those costs by adding in an extra overage percentage, then taking that amount and deducting it from the amount you’d be offering for a purchase price. It also offers one the opportunity to ask for an even greater amount off what the asking price of the property may be at the time – in essence, it offers a property investor the ability to make a very sweet deal.
Different types of water damage
In the case of a plumbing leak, either while the house is occupied, or, as I described above, with a vacant home, when the water has been turned off, you won’t be able to get a good idea of any potential problem lurking in the house, especially if there is the presence of much older piping. In this case, you must plan for the worst – and expect the pipes to have burst or leaked at some point in the past. Sometimes you just won’t be “lucky” like the family in my example above, where a leak is obvious. Using “caveat emptor,” you’ll need to either plan on a rehab of all plumbing in the building. Or simply be prepared to walk away. However, as I mentioned before, be sure to utilize this fact against the seller in any negotiation to try and make a great deal.
Ground water issues
I have written in prior articles here about the potential problems associated with ground water infiltration into basements, as well as high water table issues. I have noted before that it’s imperative you use a licensed house inspector, or commercial building inspector. They can scope out any potential property investment problems associated with high water tables in the area, poorly graded building siting, underground streams and the ever-popular cracked foundations. I have previously written how “sometimes existing water or mold issues can be easily fixed. For example, an unmaintained building may have damaged or non-existent gutters and leaders. Hence, rainwater is dropped right next to foundations, and in heavy rains, there will usually be some form of basement seepage. This can then translate into standing basement water problems and/or mold growth – which of course, can spread. The solution – repair or replace existing gutters and leaders where needed, thereby stopping the problem from re-occurring.
In addition, make sure the area around the building is properly graded to allow for property rainwater to escape away from the foundation walls. Simply sealing foundation cracks is usually not enough. The perimeter grading is what is all-important. Your inspector will also be able to tell if any underground streams and/or a high water table will require you to install an interior French drain system in the basement, complete with sump pump and outflow pipe considerably far enough away from the building. Mitigating water problem costs known before you buy can easily be figured into your offer price on any potential acquisition.”
Using water restoration companies
Most water damage restoration companies will utilize an interior drain solution. There are basically two common ways to waterproof a house – one involves landscaping and the other installing an interior curtain drain (also known as a French drain). Landscaping is the more expensive solution, and can involve not just re-grading the entire perimeter of a house, but installing an exterior curtain drain at the same time around the perimeter. Naturally, you should look for simple solutions to a water problem first. For example, if gutters are broken or missing, or if downspouts are emptying directly onto the perimeter, rather than being led out many feet from the house, these can be inexpensively corrected.
Installing a gravity-fed curtain drain system leading to a sump pit equipped with a sump pump inside the perimeter of the basement is the next best alternative for waterproofing. The main drawback: if the sump pump were to fail. That’s why, in a very flood-prone area, installing a secondary, battery run sump pump is always a good idea. Of course, if power were to go out for an extended period of time, you’re still going to have a problem. Unless you get a back-up generator to run during any power outage…mergency water problems with tenants
As a landlord, you’ll always be at the ready for burst pipes. These emergencies can be harrowing – but easily fixed. I have noted here that “any burst pipe will cause your tenant to call you – at any hour of the day or night…so you better have your emergency plumber (or two) lined up to call after you hang up with your frantic tenant. A plumber you can trust to get right out to your building and handle the bleeding, as it were, immediately. Sure, you’ll be paying double-rate for an emergency call – but think of the damage a burst pipe can do to your building. The worst-case scenario with a burst pipe, is when you don’t have a tenant in place to call you…Walking in on a flood as a property investor is one of the worst feelings you can have…So to hopefully avoid this, conduct regular inspections of your building(s), looking for potential water and or/pipe problems. Especially if you know you have any older, or rusting pipes. Maybe it would be best to replace them with pex (plastic) piping now to avoid any major problems later.
Do you have reliable tenants?
Beware the slow leak! This is the kind that your tenant never reports…the tenant with the long-term lease. The one who will “just live with” the minor annoyance of a small drip emanating from the base of the toilet, or under the kitchen sink, or behind the refrigerator. The leak you won’t notice until they move out, and you discover a warped floor, damaged carpet, or ceiling stains from above. Or worse – if you discover mold that’s been growing for quite a long time – requiring you to remove entire walls or ceilings, and completely replace them with new sheetrock, as well as painting them.
I have previously recommended that you train your tenants. And perform regular maintenance “visits” into your tenants’ units. Train them to call you immediately – if not sooner – when they discover the first drip out of anything in the unit Then call your trusty plumber to make the necessary repairs. You’ve budgeted for repairs and maintenance as part of your cash flow analysis – make sure you follow through and get your tenants to alert you to the smallest of problems as quickly as possible. In this way, you can avoid the much greater hassles in dealing with any growing water damage issues, and the overall monetary damage they can truly represent.
Photos courtesy of the-purest-of-treats.blogspot.com, mosbybuildingarts.com, home-dzine.co.za, brookfieldangler.com, quality1stbasementsystems.com, johnbatorplumbing.net, trexglobal.com