property investing safety | InvestingInProperties.com

Staying out of trouble

In an effort to keep any beginning property investor cognizant of the lurking dangers inherent in any investment plan, here are several key issues to recognize. When you’re aware of the potential pitfalls, property investing can become a much safer haven for your investment dollars. Once you have a long term strategy for property investing, you reduce your overall risk substantially. In creating your own strategy, consider each of these particular dangers to avoid…

Make sure fees don’t eat your profits completely

Whether you’re acquiring or selling an investment property, there are many fees associated with the process that will invariably dig into your profit margin. Consider that when buying, you’ll be paying for a mortgage tax, recording fees, attorney fees (yours and your lender’s) and other associated closing costs. Also, don’t forget the property engineering report done by a licensed property inspector, and any tests that need to be performed as part of their inspection of the property in question. Of course, you’ll need to include the overall deposit amount you’ll be putting down on the property, over and above your actual mortgage.

Getting emotionally attached to an investment property

This problem is a biggie. As a property investor, you must leave your emotions at the door. Actually, leave them before you even round the corner to the property. Unlike your home, you can’t afford to get emotionally attached to a piece of investment property. Why not? Well, for one, you won’t possibly be able to negotiate for the property to obtain the lowest price possible. You are guaranteed to overpay. Talk to others you are close with (friends and/or family) as a check on yourself. If they say you’re not talking about falling in love with a property, you can at least believe them. And vice-versa. Let them tell you you’re not in love with a potential income –producing property.

Don’t rely on capital appreciation

If you’re going to count on any possible investment property to go up in value while you hold it, stay away from investing in real estate. While it would be nice to think it might appreciate – don’t bet on it. Instead, concern yourself with the cash flow first and foremost – that amount that your pro forma income statement is showing the property will throw off in profit each year for you. Then throw in the tax advantages of holding the property These are the two main determinants of acquisition viability (along with the capitalization or CAP rate, written about in a prior article here). If the property will create a positive cash flow that’s worth your investment dollars, then any capital appreciation due to market valuation increases should be considered gravy. Just don’t rely on the appreciation factor.

Be realistic about days on market when selling

Most property investors feel their property will sell quickly. Stop thinking this way. Instead, research the average length of time on the market in your area for like properties. Check with your local real estate agent (the one you should be working with exclusively for the best results). You never want to place yourself in a desperate, “gotta sell” environment, where you take a very low offer because you’re simply fed up with how long it’s taking to sell your investment property. And you’re basically fed up, and you take a loss in the process.

Always calculate your maintenance costs

Many beginner property investors make the mistake of forgetting, or underestimating their maintenance costs on a potential piece of investment property Make sure you allocate enough funds in your pro forma cash flow to adequately cover your anticipated maintenance and repair costs. One axiom: the older the building the higher the overall maintenance costs will be. An energy-inefficient building that has not ben updated in many years, and is in need of rehabbing, s obviously going to cost a great deal in annual maintenance costs than a new building. To be safe, figure on at least five percent of your annual rent roll for maintenance costs on any older building.

Make sure you’ve got adequate insurance

Tenant accidents happen all the time in the property investment world. Fires happen. Flooding happens. Just be prepared, so you don’t get caught with a huge financial hit should a disaster arise. Your insurance agent will guide you as to the proper amount to adequately cover each of your buildings in emergencies, as well as how much personal liability insurance you should obtain. Make sure you’re also comfortable with the deductible you choose – that is, don’t scrimp on too high a deductible to keep your policy amount down. Being aware of all these potential pitfalls when beginning as a property investor will help keep you out of financial trouble. And keep you running with a positive cash flow.

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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

Convenient Truths About Property Investing