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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.

photos courtesy of loyalogy.com, immersiveyouthmarketing.com, screenmediadaily.com

Real Estate Investment Fundamentals

One valuable lesson to learn

One of the fundamentals of real estate investing is quite straightforward and simple – don’t ever sell any of your investment properties. Once you sell, you’ll have to pay capital gains tax, and you’ll lose the cash flow from the investment (assuming it is positive), as well as losing the ability to leverage your equity in the properties for future investment acquisitions. This third feature is probably the most important and financially productive for your ongoing success as a real estate investor. It truly comprises one of the most basic of property investment fundamentals – namely, using other people’s money to grow your real estate investments.

Positive cash flows

Never selling any of your rental properties also means you’ll pay stricter attention to detail – like ensuring you always run at a positive cash flow for each property you acquire. I once purchased a four-family house with generous owner financing. I paid slightly over market value for the property because of several reasons. First, I knew I’d be holding the property for the long-term. Second, in return for “giving in” to the seller’s price demands, I secured an incredible below-market rate of interest with excellent terms from him directly. I didnt have to apply with a bank, or pay bank fees associated with closing one of their investment property loans.

But wait, there’s more…

In addition, the owner-financing was for a first mortgage with no balloon payment in a short period of time. And because of the term and interest rate the monthly payments were ridiculously low. I knew I had a cash cow from day one on this rental property. I was using other people’s money (in this case, the seller), and I had added another rental mortgage to my stable without incurring any hit to my credit rating for taking on more debt. (Private mortgages do not show up on credit reports). So I left my credit rating intact, and could still use this new property for future leveraging of my equity in it when needed for other rental property acquisitions.

Overpaying for a property as a positive move

So even though I knew I was overpaying in the short run, I knew I was adding a great positve cash flow to my stable of investment properties for the long term. And by holding onto it, I was deriving the benfits of the excellent cash flow it was throwing off, the ability to leverage my equity in it at will, and I did not have to pay capital gains taxes on it as long as I held it. It was truly a triple winning rental property combination. So be sure to analyze the cash flow aspects of any rental property deal when encountering a “stubborn” seller who “must” get his price. You never know when that stubborn seller may turn a dog of a rental property into a cash flow bonanza for you. Always ask for owner financing to obtain your investment mortgage loan, and see what they say. You could end up with a marvelous real estate investment acquisition in the process.

photos courtesy of houstonmortgagetexas.com, anchorloans.com, zillow.com

The Most Dangerous Hazards When Buying REO Properties

Foreclosure pitfalls

While REO properties (“real estate owned” bank foreclosures) can appear on the surface to be great deals, make sure you’re aware of these potential pitfalls that could mean unexpected gargantuan costs down the road. These hazards should normally be avoided even when acquiring non-foreclosed investment properties. However, there is an even greater danger with REO’s. In many instances, water and electricity have been turned off by the bank that owns the property. This safeguards them from further property damage in case of any leaks or winter freeze-ups.

However, banks that own REO’s tend to be sticklers in the adage “caveat emptor” (buyer beware) when they place their inventory of foreclosed homes for sale on the market – and they require all offers be in “as is” condition. Also, they usually refuse to turn the water and electricity back on prior to closing. So you’ll be in the dark, quite literally, regarding your house inspection.

When buying a foreclosed home, make sure you get a very experienced house inspection company to go over the property in tremendous detail. If they can’t make a determination about some of the following major hazards, you’ll have to build in a slush fund for the probability that one or more of these hazards are present. Crunch your offer numbers accordingly…

Mold

Buying a property with mold is a major headache. While the reasons for the mold problem itself is usually an easy fix, mold remediation is not. In addition, trying to get a mortgage on a foreclosure with mold present is going to be problematic, since the lender will want it removed prior to your closing on it. (I am currently representing a buyer in the purchase of a ranch house with mold in the unfinished attic. The seller foolishly had bathroom fans on the first floor empty hot, humid bathroom air without venting of any kind directly into the attic space…You can’t make this stupidity up. The situation had apparently been this way for years. In winter, the attic space would actually develop frost, according to one current tenant of the building. Naturally, there is an accumulation of mold throughout the attic now. And in order to sell the property, the seller must address the issue. And to do so properly, a specialized mold abatement company, licensed by the state, needs to be called in to properly remediate the problem.) So make sure there is no evidence of mold anywhere in any REO you’re considering purchasing. Especially since banks will still expect you to be making an offer on their property in “as is” condition only.

Structural problems

Any foundation cracks need to be inspected for size, shape and duration for how long they’ve been there. Different cracks mean different things. Let your house inspector make the call as to how big a potential problem any given crack could represent in the future of the property. If it’s simple settling over a long period of time – not a big problem. But if the issue means a total rebuilding of the foundation – well, obviously, this will be a major costs that could run tens of thousands of dollars.

Pest issues

Any good house inspection company will be able to ascertain very quickly the presence of pest infestations. Termites tend to be number one on the potential list. If evidence of past termite infestations is old and not active, and the damage to the house sills have been minimal, or repaired, there shouldn’t be a problem moving forward. But if the damage is active and extensive, calling for sill replacement, this could also pose a potential cost you didn’t expect that could run in the thousands of dollars. Be very wary when confronted with the evidence of termite damage in foreclosed homes.

Plumbing leaks

If the water has been turned off, you really won’t be able to get a good idea of any potential problem lurking in the house, especially if there is the presence of much older piping in place. In this case, you must plan for the worst – and expect the pipes to have burst or leaked at some point in the past. Using “caveat emptor,” you’ll need to either plan on a very expensive renovation of all plumbing in the building. Or simply be prepared to walk away. And make an offer on another property in the foreclosure process instead.

Electrical issues

Likewise, if an REO has no electricity on, it is impossible to ascertain the integrity of the entire electrical system. Are some wires old? Are some fixtures shorting out? A house inspector won’t be able to inspect anything that’s hidden behind the walls. They must have the electricity turned on to determine the potential hazards. With REO’s, just like with plumbing when the water has been turned off, expect the worst. You’ll have to decide if you’re prepared to rewire the entire house – or move on to another offer. Just be aware of the potential hazards.

photos courtesy of bestlongislandhomeinspectors.com, homesinspectors.com, 203krehabnow.com, 24dash.com

Best Tenant-Choosing Tips

Maximizing profits

Attracting good tenants is the lifeblood of any successful rental property investment. And there are some essential rules for attracting these tenants to your units. Keep these tips in mind as you continue buying rental property. These tips will also help keep you maximizing your cash flows when investing in real estate. Remember that you can always be learning new and better ways to maximize your profits in investment properties by becoming an even better landlord.

If you want good tenants, be a good landlord

Any landlord worth his salt will ensure he performs proper maintenance on his rental property. As a landlord, you should not only make repairs in a timely manner on all defects you can see – but also on those you can’t. Remember, that when investing in rental property, since you’re not going to want to disturb your tenants constantly, make sure to ask them on a periodic basis what physical property issues are arising in their units. Is there a new small leak in the kitchen drain? Is their toilet working properly? Any gas or oil odors suddenly present? You need to ask to find out.

And you should be asking these questions about your investment properties on a regular basis. When you keep up with repairs to your investment property, you make your tenants feel more secure about you, as well as making them feel good about staying in your unit. This will aid in future retention. Obviously, the more tenants you can retain year to year, the less work you’ll have to do – since you won’t need to look for new tenants to replace them. Proper maintenance also keeps your overall repair costs down over the entire term of your ownership of the rental property.

Hire a good property manager

If you’ll be using the services of a property management company, make sure you are stringent in your due diligence prior to hiring them. Check out their references, talk to their current landlord roster, and obtain referrals from local real estate pros like real estate agents in your area. Good property managers always stay in regular contact with all tenants. They don’t simply collect rent. It’s their job to maintain good relationships with all tenants. They are proactive at performing property inspections, and will take care of maintenance and emergency repairs as needed. And they will screen prospective new tenants for you as well.

Set realistic market rents for your units

If you set a rent that’s too high, you may profit from the incremental amount above market rent for a short time…but you’ll end up paying for it later when that tenant decides to move because his rent is too high. Again, looking for new tenants is always a costly endeavor. Not only time-wise, but also due to the increased vacancy that occurs every time a tenant moves out. On average, expect at least a month of lost rent due to any tenant moving out. Always make sure you know what current market rents for your area are. Check out your competition for like units. Go visit them. Talk to local real estate agents to get more information as to what constitutes market rents for comparable units at any given point in time. Check out Craigslist listings for rentals in your area. Become an expert on market rents. Know what other real estate investors in your area are charging at any given time.

Likewise, setting rent too low does you no good either. While you may get more takers for your unit, you’re not optimizing your cash flow, as you are giving up the differential between market rent and what you’re charging each month. Remember too that tenants that pay rents under market rate tend to not be so careful about keeping up the look of the unit. Ultimately, they may end up doing more harm to the physical space due to increased wear and tear, and lack of care. Basically, they’ll take much less pride in their living environment when they know they are paying a discounted rate for it.

Beware the professional bad tenants

Tenants that know how to work the system are the ones you’ll need to be most careful installing in your units. While tenants that don’t pay their rent on time need to be evicted as quickly as possible, some states allow the eviction process to last for months. All the while you’re losing revenue due to non-payment. And don’t forget the legal fees involved as well for retaining the services of a good eviction attorney. The best advice here for all real estate investors is simple: make sure you carefully check all references for any prospective tenant. This includes speaking with their previous landlords, running credit checks on them, as well as criminal background checks too. Do this, and you should properly protect yourself from those professional tenants who are gaming the system.

photos courtesy of regulatedtenants.com, iresvegas.com, newhomessection.com, lowesforpros.com, landerassociates.wordpress.com

Bricks And Mortar versus REITs

And the survey says…

A recent survey undertaken by overseas lender Homeloans Ltd. finds that real estate investors tend to choose bricks and mortar properties over Real Estate Investment Trusts (REITs) as the primary vehicle for their property investment funds. The singular reason? Most investors buying rental property prefer the “comfort factor” that a physical property affords them. Read: they want the feeling of security that controlling one’s own rental properties affords.

What the findings mean for small property investors

According to this report, the Homeloans Home Buyer Barometer, about half of property investors who took part in the survey preferred investing in rental property over purchasing shares in a REIT, regardless of the type of REIT (residential, commercial, or mixed). The comfort factor means that rental property buyers feel more secure in navigating their own destiny, rather than leaving it up to other real estate investment professionals to do so for them. They also want to realize a greater chance for capital growth returns, as well as higher cash flows from rentals that these real estate investments provide them.

Location is critical

As usual, the survey indicated that most property investors choose bricks and mortar rental houses that are close to transportation, jobs and local amenities. Naturally, this means central cities are the most popular spots for purchasing rental properties, followed closely by suburban bedroom communities. Rural communities rank last in desirability for rental property acquisitions. This is because rental demand is completely predicated on the proximity of services and amenities for prospective tenants. This also plays a major role in the ability for property investors to have an easier time of selling their properties when they deem it necessary to do so.

Additional findings of the report

The report went on to say that most investors would be in the market to purchase a rental property at some point in the next year. In addition, some 34% of the survey takers claimed they will be making their first rental property buy during this time. Some other highlights of the report indicated that close to one quarter of the respondents had bought their first rental property when they were between the ages of eighteen and twenty-nine. In addition, more than 50% had bought a detached house as their very first rental property.

Many prefer to buy close to where they currently live. About one sixth of respondents wanted the ability to drive by their rental properties on a regular basis to keep an eye on them. Also, about two-thirds of survey takers said they use a property manager, while a third self-manage their own rental properties. And finally, the average number of rental houses owned by the respondents was 1.6 properties.

photos courtesy of tenantscreeningblog.com, itimes.com, moneyaftergraduation.com, lawofficewalterjennings.com

The Current State Of REO Properties

Foreclosure dumps and the small property investor

As foreclosed homes for sale continue in a rapid pace, REO (“real estate owned,” by banks who have completed any given foreclosure process) buys from large hedge funds such as the Blackstone Group over the last few years have created a de facto wholesale-retail environment for these formerly bank-owned properties across the U.S. Though not getting as much press in the past year, buying a foreclosed home, thousands of times over, remains a mainstay of hedge fund buy-ups. States like New York that require legal proceedings for each and every foreclosure home, are now working through their years of backlogged homes that banks wanted to foreclose on. As they come out the other end, so to speak, of the legal process, they promptly go on the market for sale. Small property investors thus have to compete head to head with large hedge funds who are well-capitalized, and can easily offer all-cash for any and all properties they purchase. This is not so easily done with smaller investors. And this gives the hedge funds quite a leg up in the buying process. In addition, it also explains why they have been monopolizing the foreclosure buying industry in this country for several years now.

Making it simple for banks

These large hedge companies will purchase a property (or thousands at a time), and take the foreclosure in as is condition. This makes things very simple for any selling bank to make a deal with them. The hedge fund then hires renovation specialists, and they come in to do their thing right after the purchase is completed. These specialists will do the very simplest, most basic repairs to make the home livable – and attractive to a prospective tenant. Fresh paint jobs inside and out, and kitchen cabinet and appliance upgrades are the mainstays of these quickie rehabs. Then the homes are placed on the market as rentals only. In this way, hedge funds are willing to wait out the current tepid pace of the resale estate market until it comes time to unload their holdings. (In fact, some large hedge funds have been slowly beginning to do so to realize quick profits on their poorest performers.)

All-cash deals are preferred

When banks place huge inventories of their foreclosed properties on the market, you can be assured that all-cash deals are there preference. The safety of the all-cash deal, in which hedge funds tend to be the winners in locking up these properties over the small homebuyer who requires some form of mortgage financing, as well as the speed of the transaction, make it much more worthwhile for the banks to unload their property inventory at deep discounts. In addition, all-cash deals usually don’t require the bank to make any repairs…that is, the buyer is purchasing a property in strictly “as is” condition. Thus, the buyer is taking the inherent risk of finding some major defect with a property – and being placed in the position of having to fix it (at possibly at an exorbitant cost). Naturally, all-cash buyers make very lowball offers to protect themselves in case of this occurring.

The newly created wholesale-retail real estate market

As I’ve noted in a prior article here, hedge funds have just recently been starting to unload some of their poorer performing rental properties back onto the market to capitalize on the currently improving state of the real estate market. This creates a de facto wholesale-retail environment. The hedge funds buy up large amounts of bank REO’s for all cash, do the least amount of repairs necessary, and then convert these homes into rentals. In this way they are acting as the wholesalers of the residential real estate industry. After holding them a few years, they now look to take their gains by placing at least some portion of their portfolios back on the market for either single family homebuyers to acquire, or for small mom and pop investors to purchase. In this fashion they are acting as the retail merchants of the real estate business. Either way, they don’t care much about the communities their properties are located in. And this ultimately can have a deleterious effect on many communities around the country that have been plagued with large percentages of their housing stock ending up as foreclosures over the last several years.

photos courtesy of quickenblog.com, newsone.com, auroragov.org, infrawindow.com, newgeography.com

Investment Property Loan Financing Tips

Understanding the psychology of lender risk

The reason investment property loans are more expensive, harder to obtain, and more restrictive than loans on personal homes, is that investment property mortgages are inherently riskier than home lending. Fannie Mae and Freddie Mac charge higher rates for investor property loans, much more than for primary home loans because of these higher risk factors. It’s a simple axiom – the greater the risk, the higher the cost. Of course, the opposite axiom is likewise the same – the lower the risk, the smaller the cost. For lenders, real estate investors are inherently more dangerous as a group to make loans to than are homeowners.

Thinking like a bank thinks…

Banks have to look objectively, and ruthlessly so, at their bottom line. What’s their worst case scenario in any lending situation? Naturally, a foreclosure. And in the case of those investing in rental property who are unable to make their monthly loan payments, since they have no emotional stake in the property, they will be more likely to walk away from their loan obligations in any worst-case scenario. Much more so than any homeowner would, since homeowners are emotionally grounded to their home – which is most probably their single greatest asset. This helps explain why total mortgage costs run higher for real estate investments, as well as why investment property mortgage rates are higher than homeowner rates.

Real estate investors understand that buying a rental property is simply a game of numbers. A homebuyer views their purchase decision in much more emotional ways – deciding what emotional benefits will accrue him if he buys a particular home. Conversely, this makes it much more difficult for the homebuyer to give up “his baby” so to speak. And this single reason is what makes lenders value the homebuyer as much less risk than anyone buying rental property.

Mortgage rate differentials

Regardless of the specific area of the U.S. you may look to buy in, real estate investments will have mortgages that will generally run about half a point greater than home loans on average. In addition, many fees tend to be added to loans on investment properties – many more than home mortgages. Thus, the overall cost of any rental property mortgage will be greater as well. Some of the factors involved in the overall costs associated with an investment property loan include the borrower’s current credit score, the loan-to-value ratio for the loan, the property character (ie. – single family, duplex, multi-family, multifamily with owner-occupying one unit) and the specific mortgage program being applied (FHA, Fannie Mae, Freddie Mac or no government-insured program).

LTV’s

In many instances, when in investing in real estate, lenders set up loan-to-value (LTV) ratios at higher overall amounts than home loans. The greater the amount you put down on the rental property you’re trying to finance, the less overall risk to the lender. Most lender these days have maximum loan-to-value ratios of 70% of the purchase price, where you, the buyer, must put down at least 30%. But if you put down 40%, or even 50%, you’ll find your interest rate and overall costs of the mortgage loan will come down substantially. This is also because you are helping to substantially lessen the lenders overall risk. (After all, it’s much harder to walk away from a property you have 50% down in equity than it is if you had only 30% down.)

Using rents as income qualifiers

Traditionally, banks will allow 75% of gross rents currently in place on units in any property you’re thinking of acquiring to help offset the monthly carrying cost of the loan. Keep in mind that this applies only to actual rentals…not hypothetical “market” rents. In addition, the tenants need to already be in place. Typically, the same 75% figure can be used to offset monthly loan costs in any refinance situation for your rental property.

Credit scores

You should also remember that lenders usually require those buying rental property to have better credit scores than their homebuyer counterparts. Lenders like to see scores of at least the low to mid-700’s before extending any rental property mortgage. (That’s not to say that it’s impossible to obtain a loan if your score is in the 600’s – but it will be more difficult, and certainly, it will come with a much higher interest rate. The bank, after all, is always looking to defray their risk.)

photos courtesy of thelastembassy.blogspot.com, answers.yourdictionary.com, ehow.com, ocdwellings.com, chicagoagentmagazine.com, infinitecredit.com

Real Estate Investing Trade-offs

Analyzing risk versus reward…versus stupidity

How far would you go to get a great deal when investing in real estate? This story ripped from today’s headlines shows that most property investors (OK – no property investors to date) want to risk everything (and by everything, I mean their lives) to obtain a “killer” of a deal when buying rental property.

As reported in Forbes.com (“Investment Opportunity: Possibly Booby-Trapped Property Remains Unsold,” by Kelly Phillips Erb, 8/15/14), the following investment property recently came on the market, and was advertised as such: “For Sale: Home on 110 acres in Plainfield, New Hampshire. As is.* Minimum bid: $250,000. * Property may be booby-trapped.”

No winning bid?

As Ms. Erb wrote: “surprisingly, when this property went up for auction recently, it didn’t attract a winning bid. Crazy, right? I mean, who wouldn’t be interested in purchasing a “fortress-like” home on more than 100 potentially life-threatening acres?” She goes on to tell the story of self-professed tax protestors Ed and Elaine Brown, who were recently found guilty of defrauding the U.S. government, as well as tax evasion, among other numerous counts.

Apparently, the Browns had a unique defense involving self-jurisdiction. As Ms. Erb went on to explain: “at trial, the Browns argued that they were not required to pay taxes. They firmly believe that the federal government does not have jurisdiction to tax money that they earn and used the courtroom to explain, claiming, “We will once and for all show beyond the shadow of a doubt – not reasonable doubt, beyond the shadow of a doubt – that the federal income tax system is a fraud.””

The bottom line?

The Browns eventually decided not to attend the rest of their trial, and fled to their property, where they proceeded to booby-trap it. When federal authorities eventually caught them and subsequently placed the property on the auction block for property investors to snatch up, no assurances could be given any potential investor that all the booby-traps had been found and removed. Hence – a bit of a sticky wicket for any property investor. Make a potentially lovely deal while investing in real estate, or die trying.

Fixer-upper to the max

Quite frankly, I don’t understand why some real estate investor didn’t decide to buy the property as is, and then throw in as part of their “fix-up” costs a team of well-trained security bomb experts to locate any potential booby-traps. As Ms. Erb reported about the marketing of the site: “at auction, there were no winning bids. And by “no winning bids,” I really mean, “no bids.” And by “no bids,” I really mean no bidders. Despite the fact that the property was listed for auction, not one potential bidder showed up in the courtroom in Concord, New Hampshire, just an hour and half away from the property.”

Second chances abound…

But not to worry…a second auction is being planned. So if you missed out on the first one, and your appetite for risk is at hunger level, gung-ho property investors may certainly like to consider fully analyzing the potential risk versus rewards of this particular secluded New Hampshire retreat. Of course, like with any real estate investment – you could make a killing in the process…

photos courtesy of upscaleluxuryhomes.com, aaii.com, blog.guidantfinancial.com, realtybiznews.com

Best Renovations For House Flipping

Learning from other’s mistakes

As a licensed real estate broker, I recently had to offer my opinion to a client as to a current market value for a home that had recently been renovated. On the surface, and from the photos and listing data, it appeared a professional flipper who knew how to flip houses had purchased this unique lakefront home in order to rehab and then place back on the market for a quick sale. It had been purchased only two years ago from an estate, the house needed work, and now after renovations were done, the house was back on the market – for more than double what the seller bought it for. However, upon going to inspect the house as a preview for my client, I instantly could see that the seller was no flipper. Rather, they were simply stupid, short-sighted sellers, who bought the run-down home in a good location, but then proceeded to over improve the house to their own personal likes. In property investor parlance, this was a “vanity project.”

Avoid personal taste decisions

In the first place, the entire renovation and materials used were highly personalized to the owner’s tastes. The granite countertops in the kitchen were not a style a flipper would choose. When buying property flips, you should always consider selection of materials that will appeal to the largest segment of buyers – not a small niche who might also happen to coincide with your own design sense. In the case of the kitchen counters, a highly stylized granite top was used – and a whole lot of it to boot – meaning, if a buyer didn’t like it, it would cost a ton simply to re[lace it. Otherwise, any buyer is going to learn to have to like it. Or pass on the house. Which, sadly in this case, most will do.

Adding insult to injury…

Creating further turmoil in this particular rehab, was adding a new radiant heating system to the entire house. While very energy efficient, this kind of upgrade is certainly far above the style of most homes in the area. Unless many other homes on an area of the property you’re considering flipping already have this upgrade – your investment in something so expensive is downright foolhardy. Especially if the house can’t take the extra cost, relative to the neighborhood it sits in.

What not to do

Another example of over spending in this particular rehab that screams “vanity project” is that the owners removed the former floor to ceiling massive stone fireplace to allow for their large, 100K plus kitchen redo, then added steel interior exposed girders for extra support afterwards. This smacks of an overzealous owner who is simply not in touch with the real estate market next door to them. This also told me they weren’t professionals when it came to flipping houses.

Ultimately, the seller must have run into financial issues, since they are trying to sell it, and also trying to recoup their renovation cost (in this case, probably close to 300K). Of course, this seller now owns the most expensive home on the block. And one of the basic tenets of property investing is to never get stuck buying or owning the most expensive home on the block.

To make matters even worse, this particular house is a Contemporary – which also negatively affects market value, since most buyers prefer Colonials. From the granite countertops to cherry cabinets and top of the line appliances, radiant heating, new floors throughput and new high end bathrooms added as well, the seller went seriously overboard in the renovations.

Setting the asking price

Another important point to remember when learning how to flip houses, is to never let your own vanity come into play when setting your asking price. The market always dictates the price. And most certainly not the cost of your renovation. In fact, the cost of your rehab should have no bearing whatsoever on the final asking price you set for the property come time to place it on the market. It is the comparable properties in the neighborhood that will ultimately help to set your asking price. As well as the final market value, once it is sold. Never go into a project with your own blank check for renovations. You must make the most tasteful design decisions at the right price. Rehabbing an upscale home with top flight materials makes a lot of sense. But doing so in an area of lesser priced homes would be foolhardy. The rehab would dictate a lesser grade of materials.

Pricing correctly

Remember too, that when it comes time to put your flipper on the market for sale, pricing it too high can have disastrous results. When a property is priced unrealistically high (for example, more than 10% over market value), most buyers don’t want to even make offers, for fear they are too “insulting.” Thus potential buyers may stream in to view your property, but you’ll end up with no offers on it. This is because you’ll have scared them off with too high an initial asking price.

The best renovations

Keep in mind the basic rehab areas listed below when trying to flip houses. These are the simplest ways of adding value to any rundown home. But always remember you’ve got to improve to the level of the next door neighbors – and not way above them. This is the safest way to keep your renovation costs in check.

The kitchen rehab

Keep things simple if possible. If you can get away with sanding and painting the existing cabinets, and then replacing the old appliances, do so. If not, keep your kitchen redo budget in line with like homes’ kitchens. Don’t forget that new track lighting, a new sink and new faucet can really spruce things up inexpensively. Laminate countertops are OK, unless everyone else on the block has granite. Then you must spring for the granite. Avail yourself of planning and design help from local home improvement centers.

Bathroom remodeling

Again, try to keep things simple. If you can just change out existing toilets, sinks and towel bars, you’re lucky. But sometimes old tile walls look terribly dated, and/or you’ve got to spring for a total gut renovation. Keep the material costs down by using Lowes or Home Depot materials. Some of their cabinetry can look as good as designer cabinets at half the cost.

Plumbing upgrades

If a house hasn’t had any plumbing upgrades in the past 20 years, you really need to consider changing out all lead pipes to the more recent plastic tube piping of today. While the labor cost is high, the materials cost is low. In addition, any dated plumbing fixture should be upgraded as well – from dishwashers to washing machines, and everything in between.

Flooring changes

Carpeting is still the cheapest way to go – but it has no “wow” factor to it. Refinishing old wood floors is a great way to go – if the existing floors are hardwood to begin with. If not, consider using some of the new engineered hardwood flooring available on the market today. Or, one can simply upgrade with the “look” of wood, using laminate hardwood flooring. This is what most buyers today expect. Naturally, if you do go with any carpeting, keep it very neutral colors – beiges or grays, to appeal the largest group of buyers.

New interior paint

Like carpeting, stick with lighter, neutral, off-white colors. The more extreme the color you choose, the narrower the range of buyers who may fancy it. Also keep in mind that light equals bright. And bright is a flipper’s moneymaker. Remember too, that keeping the whole house the same shade of color keeps an evenness to the potential buyer’s eyes as they move from room to room. This makes for another positive impression on any house you’ll be flipping.

Putting it all together

If you utilize all these suggestions for the best property flipping renovations, you will invariably be playing it safe. I can’t overemphasize the need to keep your vanity out of your design decisions. Especially when it comes time to place your investment property on the market for sale, and setting a realistic asking price. A price that will absolutely invite many offers. If you can get buyers into a bidding war, you’ll have done your house flipping renovation job properly.

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The Diversification Model

Safety versus reward…

When I was just starting out buying rental property, an investment opportunity came on the market that totally captured my fancy. It intrigued me so much, I came very close to acquiring it – and making a major error at a very early stage of my real estate investing career. The property was an eight unit set of townhomes, all attached, and owned by a local bank that had taken them over when the developer defaulted. The project was totally finished – nothing had to be repaired, fixed up, renovated…a truly turn-key operation among investment properties. Of course, new tenants would need to be found for it, which would take several months after a closing to gain full occupancy.

Thinking pragmatically

I negotiated directly with the bank, and they were willing to provide the loan, with investment property mortgage rates that were very beneficial for me on the property. And the numbers, which I got into a habit of crunching several times a day, every day for a few weeks, kept making more and more sense. So – why didn’t I acquire the property? Simple – it would have used up every penny I owned in available capital. Any mistake on my part in my numbers crunching meant I could potentially lose money as I was just learning about investing in rental property. And it could happen quickly – without any means to tap a “slush” fund for emergencies…not only for the townhomes, but for myself personally. In effect, I could lose everything I owned on this one set of real estate investments.

Listen to your inner self for the danger signs

I could sense the danger every day I got more and more serious about closing the deal. Ultimately, common sense prevailed. While the upside was also quite large on this grouping of townhome investment properties, and would have set me up, in theory, quite nicely moving forward, the downside, as I evaluated it was equally nerve-racking. I just didn’t have the stomach. So I backed out of the potential deal.

A self-taught lesson in fiscal restraint

This offers a good lesson – as I taught myself – in the need for diversification in any type of real estate investing. To have put all my eggs in one basket, at the beginning stages of my property investing career, would have been a very risky, and probably fool-hardy thing to do. When I applied reason to my analysis, I came away with other options, like picking and choosing smaller multifamily homes, one at a time, that were much less risky. Again – not as much reward, but no one property would sink me like this townhome project could if I was wrong in my calculations.

Basic property investment theory

Diversifying is such an integral part of investing theory, and yet when confronted directly with the prospect of a “big kill,” the notion of diversification can easily go out the window, especially when dollar signs go up in the sky in big bold letters.

In real estate, this means diversification can have many looks. You can diversify across one class of properties – for example, sticking entirely within residential real estate, and acquiring individual homes as I have done. It can also mean spreading risk out over several classes, or types of real estate investments. Owning a small office building, a retail store property and a multifamily home at one time are a good way to diversify your real estate holdings.

Eschewing the big kill mentality…

With more diversification comes lessened risk – as a downturn or a financial hit to one segment won’t totally destroy your overall holdings. It’s slow and steady financial gains that are approached as an averaging of all your different real estate holdings in the diversification model. In this way, real estate investors can protect themselves, and can be ready in the event of any downturn…Ready to acquire another, different class of investment property moving forward.

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