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Residential Investment Opportunities

Types of residential real estate investments – an overview

When we refer to residential investment property, the two main types are single family and multifamily houses. Land for development purposes is also another form of real estate investment, as are condominiums and cooperatives.

Single family houses

Single family properties are the most widely used investment types for property investors. They are traditionally the easiest to obtain and to finance, making them the preferred entry point for investing amongst first time real estate investors…

Multifamily houses

Multifamily houses are another attractive investment opportunity for beginner investors. They offer the investor the option of either renting all the units in a building out, or making one of the units in the property their own home, while at the same time renting the other units out and managing the entire property. The obvious advantage to this latter scenario, is that as on on-site landlord, you won’t have very far to travel when a tenant’s unit requires repairs, or when they have emergencies. There are also many tax benefits from being the landlord of your own building.

There are several types of multifamily properties you can invest in. The simplest ones are the two family or the three-family. Some two family properties are duplexes, which are side-by side homes, separated by one common wall. Likewise, a triplex is comprised of three side by side houses, each with a common adjoining wall. In addition, two or three family houses can look like a single family house, but be comprised of units on top of one another.

Four-family homes are usually comprised of four units on several levels – some are vertically grouped, with one unit in the basement, and the others on separate succeeding floors. Others have a couple of units on each floor. However, four-family houses represent the largest multifamily houses that can be financed utilizing residential mortgages. From five-family and above buildings, properties are considered commercial.

Land

Land purchases and development are not usually in the scope of beginner property investors. Most residential land purchases are done by experienced developers who have the deep pockets necessary to accept the increased risks of this type of investment. Purchasing tracts of land, whether small or large, requires a great deal of market research into the areas in question. Since mortgages are not traditionally given by lenders on land alone, developers require a great deal of cash on hand to finance the initial land purchase, prior to actually beginning the development of the property.

Condominiums

Condominiums (condos) can be created for any type of real estate – not strictly apartment buildings. Condos traditionally create a legal structure whereby some of the land of the condo complex is owned in common, but each individual unit (and the land under it) can be bought and sold under separate title. So each unit has it‘s own separate tax assessment.

In addition, bylaws are created for the entire condo complex. These bylaws, among other things, define the exact common areas of the complex (for example, a pool area, clubhouse, parking spots, tennis courts, etc.)

These bylaws also allow for the creation of an association of the owners to manage the entire complex. Each condo unit owner is allowed one vote in the association, and elects a board of directors to take on the duties of managing the complex. This board also sets the budget for the entire complex, including the amounts each unit will have to pay for property taxes, insurance premiums and costs for maintaining all the common areas.

Cooperatives

Most cooperatives (co-ops) are actually private corporations. The corporation owns the land and building with all of it’s apartments on it. The corporation also provides for the election of a board of directors (the co-op board) made up of some of the apartment owner/shareholders. The officers on the board take on the responsibility of managing the entire cooperative. Stock in the corporation is issued and sold to apartment buyers in quantities that are proportionate to the value of the apartments available for sale. In effect, buyers are purchasing a proprietary lease within their own company. These tenants are then required to follow the rules and regulations that were created in the corporate charter.

Co-ops can set their rules for buy-ins to the corporation. As an example, a co-op can require only all-cash purchases of it’s units/stock, so that it can attract strictly high-end buyers. But it also can control it’s own economic and social environment as well in so doing.

photos courtesy of 3dluxe.co.uk, philcebuproperties.com, newpointeestates.com

Types of Investment Property Loans

Conventional investment property loans

Most conventional investment property mortgages are standard income and asset verified loans. They can be conventional 30 year terms, or short-term adjustable rate mortgages (ARMs) with balloon payments.

These loans usually require a minimum of 30% down in most instances. In that case, you’d be obtaining a loan of 70% of the purchase price. Your loan-to-value ratio (LTV) would therefore be 70%. When buying investment property, you’ll usually want to try to obtain the greatest return on investment (ROI). Leverage (also known as cranking) is one of the ways you can purchase multiple properties over time, and thereby maximize your ROI. Depending upon your credit rating, as well as the type of property you’re purchasing, the down payment required may be higher, and could go up to 50% – and therefore your LTV would be a low 50% as well. In addition, the points charged on the loan (pre-paid interest) are roughly twice as high as for a conventional home loan.

There are some lenders today who will make no income verification, or no income and no asset verification type loans to investors. Due to the inherent extra risk of these loans (from the lender’s perspective), you can expect to pay more in the way of higher interest rates, as well as more points on these type mortgages.

Commercial investment property loans

When considering the purchase of 5-family or above rental buildings, or more typical commercial space (for example, office buildings, retail stores, warehouse buildings), you’ll need to obtain a commercial loan. Lenders have separate divisions to evaluate and extend credit on these type properties. Since commercial properties are much more specialized, their inherent risk need to be evaluated as a niche within most banks.

Lenders will rely very heavily on the expertise of commercial appraisers, who themselves are sort of like the Jedi knights of the appraisal industry. Unlike conventional residential mortgages, expect much heavier scrutiny of your assets and income, as well as the existing income statement of the property you’re considering purchasing. Also expect rates and points to be higher than standard residential loans.

FHA 203K (fixer-uppers)

If you know you’ll be living in a multi-family rental building, then you can consider an FHA 203K type of mortgage. If you won’t be living there, this type of loan will not be allowed.

If you find a 2 to 4 family rental property that needs a ton of work, and you’d like to finance the renovation costs as part of the first mortgage (rather than self-financing the improvements, or trying to obtain a second mortgage after the work is completed), you can consider an FHA 203K type loan.

Before the mortgage can be approved by the lender, your contractor will need to have all the improvements, their time frame and his payment schedule approved by the bank. (You can also choose to make the payments to the contractor directly, and then you’ll be reimbursed by the bank – also known as a draw.)

These loans can be structured in a step fashion. In the first step, you receive the funds to close on the property. In the next step, some funds are released to your contractor when he begins the renovation work. Funds are then released to him in succeeding steps based on the intervals of work completed on the project, until it is completed.

This type of loan is great for leveraging all the necessary improvements needed on a run-down multi-family property. It also helps increase your ROI on this owner-occupied type of investment.

Home equity lines

Use the equity in your home to create a credit line for further property investments. This is a great way to finance investment property. The costs for loan acquisition are typically low for home equity loans, especially compared with conventional mortgages. And you can structure the loan as a revolving credit line. So when you sell a property, you can pay off the credit line. Then you can take it out again when you’re ready to purchase the next house. And home equity lines typically allow for interest only payments during their first 10 years. This will help increase your cash flow on your investment properties, as your monthly costs, relative to standard mortgages, will be much lower, since you’re not paying back any principal in monthly installments. Rather, you’ll be paying the principal off when you repay the credit line when you sell off any given property.

Seller financing

Always ask a seller of a property you’re considering making an offer on if they will extend some form of seller financing. Most will usually say no, but it never hurts to ask. Even if they won’t (or can’t) extend you a first mortgage, try to obtain a second mortgage. Again, always ask if it‘s possible.

Hard money loans

When you’ve exhausted all other avenues of property investment loans, crunch the numbers to see if hard money lenders will make a deal workable. Usually used if you have poor credit, or poor cash reserves, as their name implies, you’ll pay for the privilege of doing business with hard money lenders. Their investment mortgage rates are usually at least double conventional mortgage loan rates. And their points charged (pre-paid interest) can be triple or quadruple conventional points charged.

photos courtesy of realestatesez.com, thehomeconsultants.wordpress.com, asmartremodel.wordpress.com, hodgesrealty.net

The Best Times of the Year to Locate Property

The historical perspective

Seasonal buying patterns in real estate historically have created wonderful opportunities for property investment in certain parts of the year. While we currently are in an overall buyer’s market, Spring months create a mini-seller’s market as more buyers flood the market to try to secure homes prior to the new school season that begins in September.

Even in down times, families with children historically begin looking by March and April to try to find a home they can get into contract by June, and therefore close by August. In recent years, this “Spring market” has been creeping backwards, with that traditional start time backing up from March to February (usually starting with the weekend after the Super Bowl now).

The next most active season…

Another secondary mini-seller’s market is also created in the Fall, traditionally from September to right before Thanksgiving. Buyers looking at this time of year tend to want to be closed and in their new homes by Christmas.

Both the Spring and Fall traditional home buying seasons tend to create a vacuum in between, a mini-buyers market if you will. Thus, the months of January and August tend to make for the best, most opportune times for property investors to place offers. You don’t necessarily want to begin looking in these two months. In fact, it’s a good idea to be looking throughout the year. But if you’re patient and wait until January and August to actually place your offers and negotiate, you’ll certainly have less competition. And therefore you should be able to obtain better values in purchase prices.

The best month of all…

January, even more so than August, represents the best time in which to place offers. There is definitely a psychological barrier that is broken in the mind of any seller that’s had his property languishing on the market for many moths without an offer. But that barrier is then compounded once Christmas comes and goes, and the cold weather months hit. Shorter days, colder, fiercer winter weather, combined with a house that’s been sitting for months translates into feelings of desperation, and a “need” to unload their property – almost at any cost. So sellers will traditionally be more flexible in January than any other month of the year, since an attitude of despair exists in most sellers. So making offers in January is the prime time for property investors.

What if a “steal” opportunity presents itself outside of January or August?

Jump on it – and hope for the best. If you recognize a steal and feel waiting would be disadvantageous, then by all means make your offer quickly. Just understand that you’ll have a lot more competition surrounding you very quickly. In this situation, you have to hope that moving quickly will create a great investing opportunity you can capitalize on.

In general, try to keep your searching a year-round activity. But do your “pouncing” in January and August. You’ll find sellers the most amenable to making a deal then.

photos courtesy of raleighrealestatetalk.com, meted.ucar.edu, kristinnicholas.com

Locating Investment Property: How to Minimize Your Risk

Property factors you can change

When you evaluate any property as an investment, you’ll want to look at all the negative physical characteristics that are helping to devalue the property. For example, many older homes have what’s known as functional obsolescence, and they are run down due to age characteristics such as no insulation, poor or inadequate wiring, old plumbing fixtures and pipes and/or no off-street parking, just to name a few items. The house may be in dire need of repairs – for example, it may need a new roof, new windows, a complete paint job, or possibly new flooring. All these items are property factors you have control over – you can change the run-down, obsolete parts of the house by throwing money at the problem.

Of course, you’ll need to first determine what the market value of the property will be after you rescue it, and turn it into a spectacular product. Then you’ll have to subtract your cost for making all the necessary upgrading repairs. You’ll then be able to figure out the price at which the property should be sold for you to make a profit that meets your own personal return on investment (ROI) requirements. If you think you have a chance to make a deal for that price, then by all means make an offer on it.

Property factors you can’t change

Now, figured in to your estimate of how much the property will sell for once improvements are made to it, is the neighborhood and exact location the property occupies. Obviously, you can’t change this factor.

I don’t believe in the concept of a “bad” neighborhood as a reason to deter you from property investing. Everything’s relative in real estate. An area with historically higher crime rates will have commensurately lower absolute house values. And these areas may offer opportunities for the property investor who’s just getting started, and who may not have the financial resources to buy in to a better area. If you look carefully block by block, even in an area with a higher crime rate relative to a lower crime rate area, or in an area where schools have students who perform more poorly on standardized tests than other districts that are better rated, you can still find blocks which look great, are well-kept up, and will hold their value over time. And there will always be great buys waiting for you there as well. You may not be able to change the entire neighborhood, but you can surely help upgrade it, and most importantly, make a nice profit by doing so.

Of course, in general people like to work close to their jobs, and so areas which offer better opportunity for commuting (close to public transportation or close to major highways, for example) will be more highly valued than those that are further away. Likewise, proximity to schools and shopping are also more highly valued.

Beware environmental obsolescence!

These are the set of issues that are the most difficult to overcome, and have the most negative effect on valuation. Beware of houses that are close to or directly on main roads, near to highways, commercial buildings, parking lots, overhead power lines, cell towers, train lines or any major source of noise pollution, eyesores, town dumps, factories (or former factories), or any source of past or present chemical pollution. These are the kinds of properties to avoid, because you cannot control public perception of negative environmental factors.

photos courtesy of johnbatorplumbing.net, pbase.com, bestbeginnermotorcycles.com, 123rf.com

Depreciation – A Valuable Tax Advantage of Rental Property

The concept of depreciation

When purchasing rental property to be held for the long-term, it’s important to understand the concept of depreciation as a valuable advantage come tax time each year.

Simply put, the IRS treats rental property as an asset that loses part of it’s value every year. How much is being lost? The IRS says that the building on the property (not the land it sits on) must be depreciated over a life span of 27.5 years. Why exactly 27.5 years? I have no idea. But hey – it’s the IRS…they’re allowed to be arbitrary.

So using what’s known in accounting circles as the straight-line method, you would be able to deduct 1/27.5 of the value of the building each year as a loss. This depreciation cost is further defined as the purchase price of the property plus your transaction costs, less the value of the land.

Paper loss

Obviously, depreciation is strictly a paper loss. Most assets will deteriorate over time, and in the case of real estate, a building will certainly fall down at some point in the future ( even if something was done to it to keep it standing for a longer period of time).

Of course, land does not deteriorate. So it is never included in the depreciation expense. So you and your accountant will decide on a “reasonable” amount to be attributed to the land value component of the total property value. (It would be bad if the IRS didn’t agree with this amount.)

Depreciation as a big contributor to loss

Most rental properties take some time after you purchase them to throw off positive cash flows. You’ll need time to make improvements that will attract better tenants that will enable you to charge higher rent, all adding to a positive net income. But depreciation, being strictly a paper loss, will help in adding a great deal of expense to your overall expenses on a property each year. And this may help show your property as having a negative cash flow. The loss on the property can then be used to offset your personal income, if your income is less than $150,000 a year. Consult your tax advisor on new tax treatments to this rule.

The great equalizer

Once you’ve determined it’s time to sell your rental property, however, it will be time to “settle up” with the IRS for all the prior years of depreciation that you took. Here is when you will have to subtract from the cost basis for the property, all the depreciation expenses you’ve taken since you owned the building.

As an example, say you purchased a property for $500,000, made improvements of $100,00, and took roughly $20,000 in depreciation each year for 10 years. Your new adjusted basis would be $400,000.

Original basis cost $ 500,000

Improvements 100,000

________

Adjusted basis 600,000

Depreciation ($20,000/year for 10 years) 200,000

________

New adjusted basis 400,000

If you now sell the property for $800,000, your new, lower adjusted basis due to depreciation will throw off a profit of $400,000. And, you’ll owe capital gains on this profit. (Of course, with the capital gains rate currently at 20% , it’s usually lower than your individual tax rate.)

So while the IRS giveth (in the form of the depreciation tax advantage you had while owning your rental property), it also taketh away (when it comes time to sell, and your cost basis gets reduced by the depreciation expense you received while holding the asset).

photos courtesy of wonderworkerpress.com, youshouldown.com, flaaccountants.com

Top 10 Property Investing Mistakes To Avoid

#1 -Not researching your area market values properly

Getting to know what houses are selling for in your geographic area where you’ll be doing your property investing is crucial to success. Work with a Realtor, study your local Multiple Listing service listings daily, check local Pennysaver listings, and of course, make a habit of visiting properties regularly – even if you‘re not considering them for purchase. It‘s imperative that you get a strong feel for housing values in your area at any given time. That way, you’ll be able to easily spot properties that are below market value – and you’ll be much less apt to overpay for any house.

#2 – Skipping meeting with a mortgage banker, and not obtaining a pre-approval letter before searching for a property

Before you can actively look for investment opportunities, you must have a financial starting point that’s grounded in reality. And the mortgage professional you choose will ground you better than anyone else can. He’s in the business of making loans – not trying to make loans. So he will be brutally honest with you about what you can afford. And once you have those numbers, you’ll be able to obtain that all-important pre-approval letter to show to all prospective sellers – your entry pass for being taken seriously when making offers.

#3 – Not researching and exploring all the possible ways to leverage a property prior to purchase

Really, when you think about it, the number of ways you can finance your investment property are almost limitless. It just depends how creative you’re able to get… While a mortgage banker is the standard way of financing properties, you can also try asking sellers if they’ll offer you some form of owner financing. In addition, you can try and obtain a home equity line on your home to help finance investment property. Already own other rental property? You can take cash out by refinancing them, and re-investing your equity in them. Family members? Another great source of other people’s money (OPM)…Credit cards with short term promotional offer balance transfer? Why not – as long as you’re fully cognizant of the financial dangers involved when they convert to their regular interest rates. There are also “hard money” lenders that investors can use. Of course, as their name implies, their interest rates and points charged on their loans will be the most exorbitant way to finance a property. It’s up to you to determine the optimum, most cost-effective and affordable way to finance your next investment property.

#4 – Not setting a time horizon for the property before you buy it (including when you intend to sell, as well as a conservative estimate for the time it will take to sell it)

When you spot a property that makes sense to go after purchasing, you’ll want to also set up a time line of how long you intend to hold the asset. This will help crystalize your thinking of your time horizon for the property. You’ll need to determine if you intend to turn it over quickly, or hold it until you’ve fixed it up and then sell it, or if you intend to hold it as a rental for a medium time frame (one to five years), or a long time frame (five years and over). Once you’ve set your time horizon, you’ll be able to plan how best to finance and utilize your asset.

# 5 – Failing to crunch your numbers – and re-check them before making an offer

This would appear obvious. However, too many beginning investors fail to properly crunch and re-check all their numbers – and unfortunately end up overpaying for the property.

# 6 – Falling In Love With a Property

Always stay disinterested in any investment property you’re considering purchasing. It’s not going to be your home, so creating an emotional attachment to it will end up blinding you to how much you should be paying for the property, as well as any improvements you will be budgeting for the investment.

# 7 – Not using a home inspector prior to purchase

Unless you’re an expert at home construction, you must protect yourself by hiring a home inspector once you’ve gotten an accepted offer on your investment property. Not using one to save several hundred dollars is simply foolish – you need to know everything that’s wrong (or potentially wrong) with such an expensive investment. With this knowledge, you’ll best be able to financially plan on current and future repairs. And without it, you can’t…which could be inviting a financial disaster.

# 8 – Not setting a realistic budget for rehab work

As mentioned in previous articles on finding a contractor and their role in any rehab project, you’ve got to have agreed on some basic budget prior to purchasing an investment property that requires renovation. While it is common to go over-budget for unforeseen construction issues that usually may arise, that base starting budget is critical. Otherwise, you’ll be bleeding money faster than you can imagine.

#9 – Not setting a proper and defined time frame for rehab work

Like the importance of setting a realistic budget, setting a defined time frame for any renovation is also imperative. Otherwise, your project will drag on – and go way off your time horizon you originally set. Time is, indeed, money.

#10 – Undercapitalization (Overspending – going way over budget and not having enough back-up reserves)

Undercapitalization is one of the major issues for any business – especially start-ups. Relating to having crunched your numbers properly, you must make sure, and feel comfortable, that you have planned for (and created contingency plans) for properly capitalizing your property investment project. In creating any budget, make sure you have a line item for the expense of cost overruns (usually 10% of the renovation cost). What other funding sources can you plan on to stay afloat until you either sell the property, or make it cash positive (if it’s a rental property)? Always plan on that rainy day being tomorrow…

photos courtesy of growingseattle.com, personalloanportfolio.com, 123rf.com, iheartbacon. maritzalive.com, cutcaster.com

Buying Your First Rental Property – A Tutorial In Eight Parts

Part 1: The basics

When you first try locating rental properties, start searching in areas that are close to downtowns of communities – and therefore, close to transportation, shopping, schools and basically, civilization. Most renters want to be close to all these services, and you’ll want to appeal to as large a pool of renters as possible.

Economies of scale

When evaluating rental properties, keep in mind the economies of scale of having more units in one building. Thus a two-family house is better than a single family, a three-family better than a two-family, etc. This is simply because your fixed costs will typically be quite regular and close in expense whether you have a single family property or a four-family house. You still have (usually) one boiler for both, one electrical system, one plumbing system, etc. Likewise, the yard, driveway and walkways that you’ll need to maintain will also be about the same cost for any of these size houses. But the potential income is obviously greater with the more units in a building. In addition, the loss of any one tenant (and the possible vacancy for some period of time) in a four-family will not be as potentially devastating as with a single family house.

Optimum number of units

Also keep in mind that in terms of mortgage financing, rental properties that are five-family and above are considered commercial property. And commercial property is treated quite differently by lenders. One of the main differences is mortgages on commercial property tend to have more stringent qualifying rules associated with them. In addition, interest rates and repayment terms are also usually more costly and restrictive relative to standard residential (four family and under) type houses.

Choosing the location of rental property

Like the selection process for houses an investor would look for to fix up and sell, many of the same factors are involved in the decision process for multi-family houses. Like homeowners, the preponderance of tenants want to be close to neighborhood services – transportation, stores, schools, etc. In addition, tenants certainly care about the crime rate in a given area they’re looking in. So you’ll want to check with the local police to garner crime statistics for the towns you’re looking to purchase in. Obviously, safer neighborhoods will translate into higher house values, and therefore command more in purchase price, because their rents will also be commensurately higher.

Also, don’t underestimate the value of a good school system. The higher the objectively ranked school system where your prospective investment rental property is located, the higher the price it will command. More tenants will be looking in those school districts compared with lesser-rated school districts. You can check on objective ranking data by looking online for ELA test results for elementary schools in your area. You can also check high school rankings based on SAT scores for your area as well.

How far away is the property from where you live?

Another part of determining the best location for a rental property, is to ask yourself this question: how far am I willing to travel in the middle of the night when I get an emergency call from a tenant? You’ll certainly want to live close by your rental property, at least initially.

photos courtesy of members.virtualtourist.com, 1915mears.com, fostercityblog.com

Watch out for gazumping in the rental sector (confused.com)

The Secret to Great Property Investing

Psst…

One of the greatest secrets to top-notch property investing is quite simple: you must become a ruthless negotiator. When you locate a potential money-maker property, you’ll want to treat your negotiation as basic warfare.

Win-win scenarios in negotiating?

Never. There should only be one party standing after a deal is concluded – and it had better be you. Machiavellian? You bet! Most investors in real estate make the mistake of taking pity on a seller, due to the circumstances surrounding a seller’s reason to leave their cherished home. A very humane, and admirable trait to be sure. But if you count yourself as one of these folks, do not go into property investing. You’ll get wiped out in short order.

The taking of grandma’s house. Boo-hoo.

So you’ve just walked through the home of the ninety-year old woman, living alone in the home she’s occupied for fifty years. Oh – and she’s suffering from Alzheimer’s as well. Now you get to be the one to make the astoundingly low offer on it. You should have no reservations about doing so…In fact, maybe you’re the first offer she’s gotten after many months she’s had her house on the market. You could be the answer to her prayers. She needs to sell her home, maybe to be able to move into a private nursing home. It’s not your business, nor should it be your concern. This is a business transaction, plain and simple. You should feel no remorse about “taking her home away from her.” Rather, you should only be thinking about how much money you’re going to profit from by renovating this property and then selling it.

Steal this house! (Some basic negotiating tips)

To paraphrase Abbie Hoffman, you should always be thinking about stealing someone’s house in any negotiation. Here are a few solid tips to effectuate getting a great deal on investment property:

From the first contact with the owner (and/or their agent), you should be trash-talking their house. Complain about every major and minor flaw with the home. You want to make them feel as though they will never be able to sell their property!

Lovers and other strangers…

Never fall in love with a property. Sounds easy, right? But be aware of your blind spots. For example, if you just happen to love antique homes with great character, period crown moldings, arched plaster doorways, stained glass windows and the like – it would be a good idea to steer clear of antique houses. You’ll unconsciously be drawn to renovating it to suit your own personal tastes, rather than what the preponderance of the market would like. You could easily be creating a money pit, for yourself, unknowingly. You’ll love the finished product. But you won’t enjoy the potential loss you may have to incur because you overspent on the rehab work.

Get ready for crunch time…

Always triple-check your numbers. When you crunch your numbers for any potential property investment you’re considering making an offer on, make sure you go over your pro forma income statement several times. Once you’ve determined the top amount you will possibly pay for the property, pick a strategy you’ll want to use when entering this negotiation (see article on negotiating strategies).

No time for wimps…

Become thick-skinned. Pay no mind to what the rest of the market is doing. It’s OK to make “insulting” offers (consider 25% or more off asking price to be “insulting”), as long as you fully understand the potential negative ramifications of this strategy – like having to bid upwards against yourself (more on this under negotiating strategies).

Time is on my side…Yes it is….

Use time in your favor. There are times when slowing the pace of your counter-offers down to a crawl can make the seller sweat. This tactic usually works well once you and the seller are getting close in price in your negotiation.

Calming the nervous seller…

Make sure you remove any doubts the seller has about your credit-worthiness. Next to price, the greatest fear of any seller is that you won’t be able to obtain your mortgage. They certainly don’t relish the thought of achieving a signed contract, only to find a month later that your lender is unable to offer you a mortgage commitment. Either be prepared to pay all cash for the house, or have your financing in place by having (at the very least) your pre-approval letter ready and current, to give to the seller when presenting your opening offer.

A riskier, but much stronger way to negotiate, would be to become pre-approved for a mortgage, and negotiate as if you were making an all-cash offer. Basically, you’d be signing a contract with no contingency for backing out, should your lender not extend a mortgage loan commitment to you. Your attorney will always advise against you doing this in order to protect your down payment that‘s in escrow. But you’re the investor here – it will be your decision if this is a risk you’re willing to take in order to negotiate from a much stronger position.

photos courtesy of atelurglurg.tumblr.com, spiderpic.com, managerial.ir, flickr.com, istockphoto.com, digilander.libero.it

Selling Your Investment Property: Renovations and Property Taxes

The property tax trigger

When it comes time to sell your investment property, any renovations you completed with a building permit will always trigger an increase in property value – and taxes. And your potential buyer will want to know how much more those taxes will be since you did the renovations.

The tax raising process

So let’s review the process by which taxes will be raised. Remember, you are helping to improve the overall quality of the community – and the community gets to share in this improvement as well – by increasing taxes on the increased value of the property.

When you obtain a building permit for any house renovation or addition, your town assessor will be notified by the building department. Assessors will want to see the work that’s being done, and will make a determination as to how much value is being added to your investment property.

After the town assessor determines the value added in any improvement to a house, he then must “equalize” the assessment value. Basically, this means he has to re-align the value relative to other neighboring communities within your state.

As an example, some communities will have equalization ratios that run about 20% of the real market value of the work that was done. (In a truly simplified world, all homes would be assessed at 100% of their market value, and no equalization ratios would need to be employed – but this is a rarity.) In this example, with the equalization ratio of 20% of real market value, a newly added deck that adds $10,000 of value to a property will be assessed at roughly $2,000. And if taxes were running, as an example, about $100 per $1,000 of assessed valuation, that $2,000 increase in assessed value would add roughly $200 to the annual property taxes on the property.

Construction cost is irrelevant

It’s very important to note that your exact cost for building that deck is not a salient point in determining your increase in assessment. Rather, the assessor only looks at the real market value as the base determining factor. Since assessors must be equitable, the assessor will treat two identical decks as equal – regardless if one was built by a contractor at a cost of $10,000, while the other was erected by your brother-in-law for half that amount!

The assessor will always look at how much value that addition is adding to your property, and he’ll always strive to assess equally.

Renovations like decks, extra rooms and baths are all relatively simple to determine valuation, since the assessor can use special valuation tables based on these basic types of house improvements. Square footage measurements are taken, and multiplied by a set amount per square foot for similar style homes. In essence, these types of renovations are easy to quantify as to value added.

House alterations

What makes an assessor’s job harder however, are more subjective alterations to a house. For example, a total kitchen remodeling job is much more difficult to assess.

In those cases, it’s a real judgment call on the increase in value. Decks, garages and square foot increases are more tangible and easier to assess. When in doubt, the assessor will refer to the building permit to see if the dollar amount of the work to be done seems reasonable.

If not, your assessor may adjust the added value accordingly. Most assessors would agree that assessing alterations is not an exact science, but assessments are equitable.

photos courtesy of activerain.com, exomatiakaivlepo.blogspot.com, westmainworldchangers.com

What’s The Trick To Locating The Best Investment Properties?

Top ways to locate investment properties

There are several great ways to start your search when trying to locate great investment properties. You can look for properties on your own, you can enlist the aid of local Realtors in your area, and you can also put your family and friends to “work” for you as well when trying to zero in on a potential property.

Looking on your own

First and foremost, you’ll want to try to locate properties by yourself. You’ll know what your most alluring prospects for investment will be more quickly than anyone else. You should make a daily ritual of scouring your local papers (online or in print) for the most recent homes to hit the market. Local Pennysavers are also good sources, usually for lower-end houses. You’ll never know when you’ll find a diamond in the rough – rare – but possible. Always look for coded words in real estate ads that are music to the ears of property investors: “needs cosmetic work,” “handyman’s special,” “needs updating,” “original owner,” or “owner financing available” to name just a few. Conversely, try to avoid any property ad with coded words like “move right in,” “just renovated,” “newly remodeled” or “updated in the last year.” Sellers of these houses will usually not be so flexible in their price, and it will be harder to add value to these properties. Make sure you track all these ads. Is the same ad appearing over a lengthy period of time? The longer the home has been advertised on the market, the better it is you’ll find a homeowner who will be more negotiable with you.

Another great way to locate properties on your own is to get to know your area extremely well. By your area, I mean the area where you can see yourself making your daily rounds with your contractor and trades people on your project. Trying to renovate an investment property from a distance, without daily contact, is extremely risky. It’s always best to set a bounded area for yourself that you are willing to work within. Once you know your area, create business cards for yourself. I have found that simply dropping a business card (with a short, hand-written note saying you purchase homes) into the mailbox of a home in your area that either looks vacant, is in dire need of repair, and/or looks like it’s right out of the “Psycho” back lot, can be very effective in locating a great deal.

The best way to locate investment property by yourself

As mentioned above, the longer a home has been on the market, the more negotiable the homeowner should be off their original asking price. Never assume a home will sell for close to the owner’s asking price, regardless of historical data in your area. That data is irrelevant. All you’re looking for is the truly desperate owner. The one that can’t wait another day to sell. The one that has lowered his price several times already. The one that has had a deal (or two or three) fall through. Or the one that had a deal fall through within the last few days! That’s who you want to be negotiating with. After all, you never know what a seller is willing to accept until you begin negotiating with them.

So here’s my secret for locating the best deal:

Always search first for homes that have been on the market the longest. Simple, right? But you’d be amazed how many investors waste their time on negotiating with homeowners who haven’t been properly “softened up” by time.

Here’s what you’ll need to do:

Make sure you have access to your local Multiple Listing Service (MLS) data. While this used to be only available to licensed Realtors, in recent years most realty agencies have made their local MLS data available to anyone that registers with that realty’s web site. Realtor.com is also another fine way to gain access to your local MLS information. Unfortunately, you will not be able to see all the data a Realtor will see on the MLS, but you’ll be able to run basic and advanced searches with this access. (Data you won’t see, for example, is the commission being offered to participating Realtors. This is unfortunate, since you want to know everything about the costs a homeowner is obligated to pay when they sell. However, on homes you’re considering making an offer on, you can ask your Realtor for this data before you negotiate. Likewise, in the same vein, you’ll eventually also want to use public records to research what the current homeowner owes on their mortgage.)

Create multiple searches that are strictly time related

With access to your local MLS, simply create and save multiple searches based on time. First, set your time parameters for homes that have been on the market 2 years or longer. Then set up your next search for homes on the market 1 to 2 years. Then break your searches down to 9 months to a year, 6 months to 9 months, and then monthly thereafter (5-6 months on the market, 4-5 months on the market, etc., down to the most current month). Next, look for the “trick” Realtors do to make a home look more current to the market…If a home has been sitting idle on the market for a length of time, Realtors will eliminate the listing and “re-list” the property (usually with a new, lower price), so the home looks “new” to the market. This gives the appearance of a fresh home hitting the market. Obviously, it’s not. Make sure you cross-reference homes from your older searches with these “fresh” listings to root out this trick!

Another fine way to locate property by yourself

Let your nose sniff out the best deals. Literally. One of my greatest joys in locating investment property is when I enter a home and become immediately nauseated by the smell! I can just smell the money I’m going to make…The more malodorous the better. Cigarette smoke burned into the walls and ceilings from years of a four-pack a day smoker is wonderful…But the best is a home with a ridiculous number of dog inhabitants, with owners who somehow lost their sense of smell years ago, or just lost their will to live. Either way, if you feel like retching the second you enter the front door, you’ll know you’ve got a winner on your hands. It’s simple supply and demand. For every one who made it past that front door, and didn’t turn around and exit within a nanosecond, there’s probably close to zero number of other potential buyers who did the same. Except for another savvy investor, that is. The moral: locate those stench-filled money-makers! (The olfactory repair costs for the house are surprisingly low by the way.)

Locating investment property using other people

Obviously, your local Realtors will be a great source for you. But Realtors like to work (and will work hardest) for clients they know are serious buyers. Therefore, I strongly advocate working with one, and only one Realtor in your area. Ask friends, check out local realty agency web sites, interview Realtors yourself. A good strategy when looking for that one local Realtor, is to ask to speak with the office manager (or principal broker) of each local realty company in your area. Ask them who in their office is best at, understands, and has closed the most deals on investment properties. It’s a very special niche within agencies, and the office manager or principal broker will know immediately who is best at it in their own office. Then, simply ask to see a few properties with several different agents. And see who you have the most rapport with. Ask them to do some research on these properties for you. Who gets you the data to your email the fastest? That’s the agent I’d certainly want to work with…

Once you’ve chosen an agent, make sure you give them all the search criteria you’re looking for, so that if they run across a strong possibility for you to invest in, they’ll contact you immediately. And certainly, if you’re going to be obtaining a mortgage on any investment property, be sure to give them your mortgage pre-approval letter immediately, and without them asking for it! (You need to also demonstrate to them just how serious a potential buyer you are, right?) Also make sure you get that pre-approval letter updated every three months without fail, and without your Realtor asking. They’ll love you for it…

Your friends and family

So much has been written about the advantages of “networking” within your family and friends for all phases of life, not just for work opportunities. And locating real estate investment properties is no exception. Simply let those you are in constant communication with know that you are actively looking for properties. Chat up with them exactly what you’re looking for, and ask them to contact you if they hear about someone they know who’s had a difficult time selling their home. Or if someone whose home is in desperate need of repair is about to place their home on the market. Or if their neighbor’s friend is going through a divorce/death in the family/life changing event that requires a quick sale of their home. The sooner you hear about it, the sooner you can act to locate your next great deal.

photos courtesy of auburn.wednet.edu, prematch.com.ar, utads.com, grundschulnews.de, thinkinginamarrowbone.wordpress.com, jupiterfl-homesforsale.com, activerain.com, feralpoetry.com, toad.sc34.info, eugenicsarchive.org