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The Changing Nature Of The Investment Property Market

Current effects of the millennial generation

If you haven’t noticed, the entire landscape of the residential property investing marketplace has been going through a seismic shift over the last several years. Coinciding with the financial crisis that begain in 2008, demand for single family homes has plummeted. At the same time, rental prices have skyrocketed, making residential rental properties hot commodities of late.

Millennial characteristics

One of the main reasons for this is the millennial generation. They have come of age, and are taking their place in rapidly increasing numbers into the workforce. However, unlike their predecessors in the Baby Boomer and Gen X demographic models, millennials stay at home with their parents much longer, don’t feel this is a major social negative in doing so, are not fiancially prepared to obtain mortgages for their first home, and are quite scared of losing their jobs. Hence, these reasons effectively keep large numbers of them on the first-time home buying sidelines.

An increasing trend

However, statistics are now showing an increasing trend for millennials to start purchasing investment property to live in as their first home. Buying two to four family homes, and living in one of the units, allows them to offset the normal investment property expenses, pay their mortgage each month, and even create a small positive cash flow in the process. In addition, they are treated to the loophole of being able to utilize FHA and VA style mortgages, since they will be owner-occupants. This makes obtaining a rental mortgage much easier.

Friends with benefits

Many in the millennial generation also are purchasing multifamily homes with friends to offset their costs. The millennial generation (born between 1977 and 1998) share some rather unique characteristics that make then especially suited to do this style of investment property acquisition. Generation Y characteristics include a celebration of diversity, with an overriding sense of optimism about the future. They tend to be rather inventive. And while they may be used to individualism, they consider their friends quite dear – so much so that they may equate their friends as family.

Creating their own rules

In addition they are used to creating new rules, and they are certainly well-versed in the internet and the concommitant communication style that entails, including an easy acceptance of all new technological advances. They’re excellent at multitasking, and are used to feeling nurtured. All of these characteristics make them better suited for the ability to trade off the traditional first time home buying process for the non-traditional role of first time owner-occupant-landlord.

Priced out of the current first-time home buyer market

When coupling these characteristics with the fact that, in today’s real estate market, rental prices are very high, first time home prices are also quite high, and most first time buyers are unable to afford to buy a home in an area that they would like to live in, these millennials are basically priced out of the home real estate market. But not so with the owner-occupant multi-family rental property market.

The entree into the real estate market

The average first time investment property buying millennial has never bought a home before, and sees the rental property as his entree into the home buying world, while at the same time creating an inflationary hedge in real estate. They effectively get in on the ground floor, utilizing their rental units in the process. Again, many millennials may jointly purchase an investment property spreading the costs, while also renting out other units for cash flow. Remember, they hold their friends in high esteem – and aren’t afraid to live with them in the next unit over as co-owners. This is one of the many characteristics that give generation y the ability to make these bold, new, trend-setting investment property moves.

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Large Scale Property Investing Sell-Off

The current state of real estate hedge fund dumping

The latest news in property investing is that major corporate hedge fund investors are selectively dumping large chunks of their portfolios on the market. These large real estate investing hedge funds, who gobbled up foreclosure properties during the very worst years of the financial crisis, had been biding their time waiting for the real estate market to improve. Concurrently, they were taking advantage of the tight rental market, and had placed most of their portfolios into the rental market – becoming some of the greatest corporate landlords in history. Now, they have been quietly unloading some of their huge array of mostly single family units.

Small property investor as middleman

As reported in The New York Times last week (“Investors Who Bought Foreclosed Homes In Bulk Look To Sell,” by Matthew Goldstein, June 27, 2014), “a year ago, buying foreclosed homes to rent out was the sure-thing trade for investment firms backed by money from private equity companies, hedge funds and pension systems. But with the supply of cheap foreclosed homes dwindling, some early investors are looking to cash out a bit by flipping homes to competitors.”

Due diligence is key

So small, individual investors now need to make sure their due diligence is as accurate as possible. By dumping large amounts of single family homes on the market, primarily marketing them to other investors, any small investor should make very sure any potential positive cash flow is in fatc, going to turn out that way. My guess is that smaller investors will accept lower CAP rates, as well as smaller Returns on Investment (ROI’s) compared with these larger hedge fund investors. As a small investor, you can still come out ahead. But just be confident you’ve gotten all your numbers, and that they are truthful and most importantly, verified. Make sure any seller, especially an institutional one, supplies you with rent roll and expense data that can be checked – and double checked for accuracy.

Quietly unloading properties en masse

The Times article also pointed out that “the Waypoint Real Estate Group, one of the first companies to raise money from private investors to buy foreclosed homes, is quietly shopping as many as 2,000 houses in California that it acquired in the last few years in several private investment funds…The homes, which are largely rented, are being shown to other companies backed by investor money that have also scooped up distressed houses in states including Arizona, California, Florida, Georgia, Illinois and Nevada.” Mr. Goldstein also notes that “Waypoint is considering selling about half of its 4,000 homes. Some of the biggest institutional investors in the market for foreclosed homes — companies like the Blackstone Group, American Homes 4 Rent and American Residential Properties — have slowed their pace of acquisitions in response to an increase in home prices and a dearth of foreclosed homes that do not require significant renovation.”

Setting a new trend

The trend is obvious here. As foreclosures dry up (or, more accurately, have been gobbled up by institutional investor dollars over the last five or six years), it becomes more difficult for large investors to find units that meet their rigorous bottom line standards for profitability. The Times article went on to also point out that “the single-family home market, after a wave of acquisitions by companies backed by Wall Street money, is changing as institutional buyers now focus more on expanding their operations to manage tens of thousands of homes across the United States. Industry participants say that the rapid buying of foreclosed homes has ended and that they expect other early institutional buyers to sell homes to lock in profits. They say they also expect the business to consolidate into the hands of a few large companies.”

What all small property investors know

Interestingly, the bread and butter of operations management that is the backbone of the small, single property investor – namely, managing one’s own investment property – has been a potential downside for institutional investors who are new to the game. Mr. Goldstein goes on to illustrate: “The companies are finding that the most challenging part of the rental business is expanding their property management operations — often from scratch — to deal with leaky toilets, damaged roofs and tenants who do not pay rent on time. Blackstone’s property management business, Invitation Homes, for instance, has grown to more than 1,500 employees from just 14 two years ago. The rapid growth has not always been easy.” He then goes on to quote an industry professional about this downside for hedge funds: ““Most of these companies have 18-month track records as property managers, so they are still working out the operational details,” said Michael Gutierrez, managing director of operational risk assessments at Morningstar Credit Ratings. “There have been growing pains.””

How to profit from this news

The Times article concludes by saying “now, institutional buyers like Blackstone are more focused on fixing the properties they already own, renting them out and using the properties as collateral to back bonds that can be sold to investors.” So how can a small real estate investor profit from this news about the dumping of large numbers of single family homes onto the market? As you locate potential new acquisitions, ascertain if they are currently being sold by an institutional investor group. If so, make doubly sure of the accuracy of the rent and expense data they provide. And as long as you are comfortable the potential property fits your criteria for a proper ROI and throws off an acceptable positive cash flow, then you should certainly consider negotiating for it. Even the property investment world has middlemen sometimes – like the small property investor.

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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.

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Commercial Property Leasing Tips

Major differences in commercial versus residential leases

When evaluating commercial investment property, it’s best to take into account the major importance the property’s leases play in determining overall value of any given property. Commercial leases differ in several key ways from residential leases, and greatly affect the market valuation based on these differences. Here are the key elements that differentiate them, and why they play such a major role in property value…

Viability of tenant

In commercial property investing, always consider the credit capacity of any prospective tenant. While this is important in residential property management as well, it is more crucial in commercial investments, where longer-term leases come into play. You’ll need to feel very assured that the tenant you’re installing on a long term agreement has the capacity to pay you regularly each month. With tenants that have little or no track record, you, as their landlord, will need to ask for some form of personal guarantee to back up their lease agreement.

Length of lease term

In residential real estate, a one year lease is pretty standard. Two years would be rarer. But in commercial property investing, terms usually start at three years, and can extend many years out in many cases. Additionally, lease options allow prospective tenants to renew at certain years in their overall lease contract. Sometimes rent bumps are included as part of the overall lease. Sand sometimes rent bump options are included. As a landlord, anything you can do to lock a tenant into as long a lease term as possible is most beneficial to your bottom line. You’ll also want to keep the number of renegotiation periods (in the guise of rent bump options) down to a minimum. Not only will this help you be able to count on a set revenue stream down the road, but you won’t have the need to renegotiate at a future date with the same tenant either.

This also has a major effect on the total valuation of your commercial property. The more long term leases you can lock tenants into, without options, the more “set” you property will be for the future – especially when it comes time to sell your investment. Any new prospective investor will look at all your leases, see how set in stone they are, and a market valuation based on non-negotiable terms will be much easier to arrive at. And remember, the less future negotiating that’s required, the less turn over, with all its concomitant time, energy and fees (like commissions and repair costs) associated with installing new tenants.

Lease arrangement factors

Most property investors in commercial real estate want to try to negotiate triple net (NNN) leases with prospective tenants. In a triple net lease, a base rent is negotiated, and tenants are required to pay for all operating expenses associated with their premises. These long term leases tend to also build in rent bump increases pegged to some inflation average. This helps the landlord avoid future negotiations with his tenants. As mentioned above, it also helps “set” the future market value of any given commercial property.

Allotments for options

Commercial tenants and landlords tend to be diametrically opposed on the key issue of allowances for renewal options. While tenants like them for the ability to reevaluate their expense and space needs every few years, landlords want to ensure that tenants stay in place as long as possible, with rent increases set in stone in terms of regular inflationary bumps. So commercial landlords tend to be very stingy with requests from prospective tenants for any form of lease term option. Keep in mind that this may not always be a good decision on the part of a commercial real estate investor.

While locking tenants in is great on one hand, it also can be damaging on the other, in the fact that a landlord must then live with his decisions for a very long time. If he wanted to change the make-up of his commercial building to attract a different class or type of business operation, he would not be able to do so if he had no options built in to the original lease with his tenant. This could also affect future valuation of his property if a landlord finds, down the road, that he is lagging behind in collecting current market rents. So sometimes, locking a set of tenants into no-option style leases can be ultimately damaging to a commercial property investor.

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Property Investing Safe Haven

Commercial property alternatives

It’s sometimes easy to get too staid as a property investor. If you’re used to residential investing, you tend to stick with it, thus placing most all of your real estate eggs in one basket. If you’ve been doing this for a while, you might want to consider a safer haven for part of your nest egg….commercial property. And by commercial property, it can run the gamut from office and retail space to more niche-oriented, but relatively safe property investments, such as medical office space, hospitals and nursing homes. The entire medical care industry is a safe bet for tenancy in the mid to long term periods.

Building your safety net

You’ll soon discover that locking up tenants for long term leases is a whole lot safer and more predictable, let alone less expensive to administer, than finding tenants each year for every one of your residential rental units. The time factor of not having to constantly be advertising, screening, doing financial and background checks, and dealing with a multitude of residential tenant emergency issues makes renting to commercial tenants a great boon as an alternative.

Office buildings, for example

Consider the benefits of office buildings, where many leases with a wide range of tenants over multiple lease terms helps to increase their overall return on investment, relative to residential property. When one tenant in an office park leaves, the effect will be minimized on the overall performance of the building, compared with residential rental unit buildings, especially smaller multi-family dwellings with less units than apartment houses.

In addition, if you own commercial property, you’ll certainly be negotiating for longer-term leases than only one year. Typical commercial leases will range between three to five years on average. Some, a lot longer, depending upon how much remodeling work a business has to do prior to moving in. The more upfront costs they have to incur to get their store ready, the longer the lease they’ll be looking for, in order to help them amortize the total cost of their renovation in your building. On the other hand, a two year lease in residential property would be considered long. And then you have to spend the time replacing any tenant when they leave.

The upshot of the longer term leases in commercial property? Simple…you’ll be able to plan better, as well as realize a greater degree of security and consistency of cash flow by having longer-term tenants. The steadiness of the income stream is one of the chief advantages of commercial property over residential investments.

Other benefits of commercial property

There are several other key benefits of investing in commercial property relative to residential investing. Consider that commercial real estate offers a wonderful buffer against inflation. This is because most tenant leases, since they are mid-to-long term in nature, have bump-up increases in yearly rents. This acts as a hedge against inflation. This helps build in increased valuation for your commercial property over time. In addition, there tends to be less market volatility amongst commercial buildings. Especially ones that are at or near capacity for rentals. Relative to residential buildings, commercial property will show a much flatter growth line, with fewer sharp spikes or dips.

Lastly, commercial real estate offers the ability for certain tax breaks that may not be available for residential property. For example, if building or renovating in a central city a municipality may be offering commercial property owners certain tax-deferred tax breaks to spur construction in their city. This is just one type of tax benefit that may be available to commercial property owners relative to residential investors.

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The Best Property Investing Advice

Creating The Buffer Zone

All start-up businesses are plagued by the same problem: a lack of sufficient capital to get through the initial rough period where cash flow is crucial, and tends to be almost non-existent until the business hits a critical mass of revenue. The same applies for any beginning foray into the property investing field. The best advice I can impart is that you set aside an adequate amount for reserves to get you through your first couple of years of operation. This means, you’ll need self-restraint in order to not want to tie up all your available capital in the most expensive, or the biggest projected money-making endeavor. If you leave 15%, 20% or a bit more in adequate cash reserves, you will be able to deal much better with the obstacles that are sure to befall you as any beginning property investor would encounter.

Holding back

Sure, you’ll want to use up your full capital reserves to maximize your return. But don’t. Hold back. Keep that extra amount in the bank for the proverbial rainy day. It may appear so attractive to utilize the maximum amount of your investments to gain an even better deal, an even better (or greater) mortgage amount – but don’t do it. Restraint, restraint, restraint. This will ensure you create a safety net for yourself. Until you know how the business will go, and you’ve acquired sufficient knowledge to be able to predict better how each succeeding property acquisition will perform, lay back, and keep that certain rainy day amount in reserves.

Sleeping better

When interest rates go up, or the market tanks, or your tenants don’t pay on time, or your taxes skyrocket suddenly, you’ll be able to sleep better knowing you’ve planned for emergencies. The last thing you’ll want to do is go back into the borrowing pool to finance an already-extended property. That’s where things get disastrous fast. Especially when you can’t make your mortgage payment (see financial crisis of 2008 – 2011), and are forced to either go through a short sale , or worse, a foreclosure on your property. Or possibly worse – being forced to place your investment property on the market at a fire sale price in order to unload it quickly. Very, very hazardous, and not for the faint of heart.

Socking cash reserves away

So play it safe. Put those cash reserves away, and know it’s OK to make mistakes. Mistakes that I can guarantee, you will definitely make as a beginner property investor. You’ll certainly be best prepared for entering the property investing arena in this fashion. Finally, always take your time crunching your numbers on each potential property acquisition. The more conservative the numbers for rent and expense items you plug in, the better equipped you’ll be to handle any market downturns and surprises that will hit you financially.

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Investment Property Buying Tips

What the pros know

Beginning property investors often ask me for advice on how to obtain the best “deal” on any piece of real estate investment. The problem is that this assumes there actually is such a thing as a “deal” on investment property. In reality, there are smart moves one can take to place yourself in the position of acquiring a specific piece of investment property at below its current market value. That is all that you can hope for…since there is no magic formula for making an investment property “deal.” So step one – forget about trying to find such a thing as a “bargain.”

No substitute for numbers crunching

I always suggest that there truly is no substitute for doing your due diligence on any given property – and simply crunching accurate (and not estimated) numbers on the actual income and expenses on the property. If you do have to estimate (for example, if you have a vacant apartment in the building, and need to input a number for estimated rent), you damn well better have done your research and checked out rents for like apartments in the area. Otherwise, you’ll just be deluding yourself into a “hoped-for” number that may not be realistic. The same theory goes for all expense items as well. Everything needs to be verified.

Once you have your accurate numbers, and you run a simple cash flow analysis (see prior articles here on how to achieve this), you’ll be able back into a number that you’re comfortable with for acquiring the property. In essence, you determine what is a good “deal.” And what’s good to you may not be good to me, and vice-versa. That’s why the concept of a bargain is bogus. I always say that your top limit on what you should offer should not be affected by even a dollar. So, if you think you should only go as high as one hundred thousand dollars on a property, your line in the sand is one hundred thousand and one dollars. Let someone else buy it for that. You’ve already made your decision not to crack your upper limit. Setting limits is terribly important in property investing. It’s called having buying discipline.

Throw out emotionality

Closely aligned with buying discipline, is the ability not to get emotionally attached to any given property. Once you bend your rules, especially your upper limit rule, you’ll be overspending. While it’s definitely OK to re-run your numbers to double check your upper limit, it is not OK to fudge some of the numbers during the re-check process in order to make the upper limit soar…just so you can actually acquire some kind of “trophy” property. That’s called being emotional – and a great way to eventually lose money.

Find a buyer’s agent to work with exclusively

Who do you think is going to hear about properties that are just being placed on the market for sale? Real estate agents, of course. As a crucial member of your “crew” (see my articles here on crew formation), you’ll need to work with one exclusively, preferably acting as your buyer’s agent. In this way, you’ll get calls, emails, texts, etc. as soon as your agent hears about anything that hits the market that he or she thinks would be a great fit for you. The more you work together, the more opportunities will be sent your way. In addition, they will offer their expertise in research and negotiating that will prove invaluable over time.

Using time to your advantage

In any competitive bidding situation, let time be your ally. You can make better “deals” by having done your research and numbers crunching well before your competition. A seller that receives a lower offer from you today may not want to wait for a hoped-for buyer’s offer tomorrow that he thinks might be higher. He’d rather agree to your offer today. The adage “a bird in the hand” definitely applies here. When you can act fast to place an offer, you tend to make acquisitions happen – faster…and at a better price.

Consider attending property auctions

Auctions have the potential to allow you to purchase investment property at below market values. However, I suggest you attend a few without the intention of buying anything first. Just observe the process. There’s a lot to take in. And your competition will be fierce. The expert property investor really knows how to work an auction. In addition, you’ll usually need a cashier’s check for some minimum amount just to gain entry into most real estate auctions. And, as mentioned above, you’ll really need your numbers crunching to be exceedingly accurate, and your discipline (especially for that upper limit) has to be well-honed. With auctions, the best attitude is: let this one go, there’s always the next one to bid on. If you have this disciplined approach to auction buying, you should never get burned financially.

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Property Investing Advice For The Minimalist

So you want to build a real estate empire?

So you’d like to be the next Donald Trump. And maybe you think buying investment property will be a nice, secure way of achieving some kind of financial “freedom.” Well, the reality is that beginner property investors tend to get overwhelmed very easily at the prospect of where to start their investing adventures. Like any field with an overload of information available online, especially with the best way to do something as nuanced as property investing, it is easy to stop before you even get started.

How best to start the process? Simple. Treat it like a process, of course! Take step one, complete a few simple tasks, then move to step two. And repeat. Here are the most important steps to follow. Just know you don’t have to become an expert overnight at any one of these steps. Just accomplish a few tasks in each step, and then move on. Do them in order, and you will most assuredly become a property investor!

Is property investing right for you?

The first step is actually the most difficult. It requires you to be honest with yourself. Not an easy task in the least. In order to become a property investor, you’ll need the right temperament. Will you have the patience to deal with tenants? With emergencies? Do you analyze data well? Are you comfortable with numbers? Does risking a large portion of your savings in something new make you queasy? Be honest now. You’ll need a great deal of inner fortitude to whether the storms that most assuredly will arise as a property investor. Are you calm and level-headed? Or flighty? Property investors need to be unemotional about their property purchases, separating business decisions from personal whims. Can you do this? Again being truthful about yourself, with yourself, is crucial here.

Depending on your current financial situation, family status, and existing job security, are you still ready to move forward into unchartered waters? Do you have a good idea of your borrowing abilities at this point in time? Do you even know your credit score? Taking a deep inventory of your current financial health (not simply your assets) will lead you to a decision as well.

Setting realistic goals for yourself

This next step is another imperative. Ask yourself what you want to achieve as a property investor. Some common goals for investors include capital growth (when the property increases in value over time), cash flow (or the amount the property will throw off as net income from rentals), tax advantages (including offsetting gains from other sources), and diversification (to even out your overall portfolio of investments from other asset classes, that may also include stocks and bonds). Deciding which objectives are most important to you will help you move on confidently to the next step in the process, and will help to hone your expectations from property investing in general.

Doing your homework

Learning more about the process from sites such as this one is a good way to get yourself plugged in, and thinking of the intricacies required in each phase of the property investing process. You should also have easy access to your local Multiple Listing Service data, or at the very least, use the data from sites such as Realtor.com or Zillow.com to help you analyze existing trends in the neighborhoods you’re considering buying in. There’s a wealth of information on these sites. Enough to have you numbers crunching for quite some time…

Assembling your crew

Due to the relative areas of specialization within each phase of property investing, and their respective complexities, you’ll want to assemble your own personal “crew.” A crew of professionals that you’ll go back and use with each succeeding project you undertake. A crew you will implicitly learn to trust to offer you their expert advice. They will save you many times in your professional property investing career.

This crew will feature, but not be limited by, the following professionals: a real estate agent (preferably acting as a buyer’s agent), mortgage broker/banker, accountant, attorney and licensed house inspector. Eventually, you’ll also learn to gather your other “crew.” Your workers who will help do any repairs or rehab work on any property you invest in. This crew will consist of a contractor, and trades people like plumber, electrician, mason, painter, floor specialist and landscaper.

Searching for properties

Before you hit the pavement looking at properties, you’ll want to do your research to winnow down only the best property investment prospects available in your area. For this, you’ll need to have a good idea of the price range you’re looking in, the kind of property you want (multi-family, single family, residential, commercial?), as well as the exact geographic area you decide to be looking in. You’ll also want to crunch estimated numbers to determine if the net cash flow justifies even making an offer on the building. Too high an asking price means the seller is not being realistic, and that’s not someone you traditionally want to deal with in a negotiation. Read: don’t waste your valuable time.

Managing the property

Finally, once you’ve acquired a property, you’ll need to decide if you’ll be managing it or if you’ll be hiring a property manager to do so. Obviously, hiring a manager comes with costs (usually, ten to fifteen percent of total rent roll). Most beginners tend to cut corners, and feel they’ll be able to “learn as they go.” And they end up acting as their own property managers. I say: try it. Maybe you’ll have the aptitude for it. And if not, you’ll know that a property manager is in your future…or your very near future. Acting as your own manager means finding your own tenants. Be sure to read my articles here on tenant selection. This will prove very helpful and informative when doing it yourself. This is especially true because choosing a bad tenant can bring down your whole business. And we wouldn’t want that, now, would we?

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Investment Property Code Inspection Advice

Tips for all residential landlords

In a typical town, multifamily dwellings are normally inspected by the local building department in regular intervals. In this way, local municipalities can better protect not only tenants, but the overall housing stock in the community. This ensures that all multifamily units are up to code, risk of fire hazards are reduced, and saves the town the expense of over-usage of their fire department. In addition, logically, safe houses are going to remain properly-assessed houses on the village rent rolls. And this saves the municipality the added expense of writing down tax revenue losses when a fire guts a property (or set of properties).

A local example

As an example, a town near me, in Saranac Lake, New York, recently announced they would be starting their regular multi-family dwellings inspections – done in three year intervals in their municipality. (Interestingly, it takes the town almost two years to achieve the desired code enforcement routine.) According to an article in the Plattsburgh Press Republican this week (“Rental Housing Inspections Underway in Saranac Lake,” by Kim Smith Dedam), “all multi-family apartment buildings in this village are being inspected this year…The focus is on rental houses with three or more units and does not include duplex rental buildings or single-family houses.”

The article goes on to explain what exactly is being inspected: “Code requirements being checked include making sure the apartments and buildings have functioning smoke and carbon-monoxide detectors, cleared entries and exits, handrails in stairways and functioning windows and doors…A comprehensive list of what items will be inspected is sent along with each landlord inspection notice so the owners are aware of what is required.”

Quite the anomaly

The municipality of Saranac Lake is an anomaly in percentage of private homes versus rental housing compared with most small towns across the country. The article explains that “rental housing is about 52 percent of all units in the village, according to recent inventory data from the Community Development Office. As such, in this particular municipality, “according to rental regulations, “each multi-family dwelling (three or more units) must be inspected at least once every three years.”

Tenants have responsibilities too

But don’t think that it’s just the landlord that maintains all the responsibility. The article goes on to mention that tenants have their own set of responsibilities. To wit: “And, village regulations maintain, “although it is primarily the property owner’s responsibility to (ensure their) building is compliant with applicable codes, tenants also have the responsibility to maintain rented units in a sanitary condition and to (ensure) that all safety equipment, such as fire extinguishers and smoke and carbon-monoxide detectors, are functional.”

Be prepared

So any landlord should be mindful of checking their rental units on a regular basis. Not only for your own protection, but more importantly, to ensure safety for your tenants, as well as neighbors to your property. Be prepared for local building department inspections to occur at regular intervals. You’ll want to ensure all basic elements of safety well prior to any public building department inspection. If you don’t already use a property manager, whose job includes making sure your properties are kept up to code, it should be part of your regular inspections of your own building on a regular basis.

photos courtesy of mccomisinspections.com, bestlongislandhomeinspectors.com, constructiondefects.wordpress.com, homesinspectors.com, trexglobal.com, askmissa.com

The Great Investment Property Search Time Saver

Lessons for free

Finding a contractor you like, can work well with, who also has a flair for creativity, and makes money-saving suggestions is a real boon in the search process. If you can work with a contractor exclusively, you can narrow your search process down to several top picks, then ask him to ride along to view them, offering his opinions along the way. You’ll also be able to learn from his expertise as you go from house to house, picking them apart for what work needs to be done to them.

Avoiding the wrecks

Any good contractor can help you identify any foundation or structural issues with any given property. They can also help identify which flooring is badly sagging and in need of fixing. In addition, they can help point out any mold or mildew problems you may miss, that are not so obvious. Naturally, they’ll also search for any cracking in the walls or around windows, and will be able to teach you the difference between vertical, horizontal and sloping cracks – and what they each mean. They’ll also be able to help you cost out in rough estimates how much it will be to repair each item on the house to-do list.

Armed with this information, you’ll be able to identify which homes are best left for an investor with either deeper pockets, or who is more gullible and less savvy than you. Remember, you’ll need to keep it simple…create a renovation/repair budget and stay within it…before you even start your investment property search.

An acquired skill set

Knowing what your ballpark figure for renovation costs will be on any given property is a skill you need to acquire. It takes time, and can be learned with the help of a trusted contractor. Once learned, you’ll find that you really won’t need the contractor to identify all the major issues with any given potential investment. Then, you’ll be able to create your own ballpark estimates to narrow your search down. When you find the best property to make an offer on, you can always then call in your contractor to double check your renovation problem areas, and your cost estimates. Then, and only then, should you be considering making an actual offer on any given piece of investment property.

Working the process

This process will ensure you save yourself and your contractor countless hours of wasted energy trying to properly identify good properties to invest in. When you call your contractor in for “the one,” he knows you mean business. So, remember to use a contractor exclusively. Make sure he’s loyal, an expert at what he does, and creative to boot. Also make sure that he can show you the ropes and give you a good, solid education in identifying problem areas in any given building. And finally, he should be someone you can count on to review your final estimates before you go forward and make an offer on a property. In this way, you’ll really end up saving yourself great time and money as a beginning property investor.

photos courtesy of simplifypanama.com, insurancequotes.com, keypersonofinfluence.com, appraiserjobs.com, alwardwoodworking.com