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The Ups And Downs Of Leverage

The seesaw swings both ways with leverage

Unlike other forms of investment, real estate investing affords property investors the innate ability to leverage their assets to obtain much greater returns over time. While this is a tried and true investing fundamental when purchasing real estate, there are also pitfalls one must be aware of before jumping headlong into the property acquisition process and obtaining any investment mortgage loan. To better protect yourself, here are the main pros and cons you’ll need to be very cognizant of when using leverage as you invest in rental property and take out investment property loans.

The main advantage of leverage

When utilizing leverage, the property investor is trying to use as little of their own investment dollars to act as a springboard to greater wealth. Return on investment (ROI) is traditionally much greater utilizing leverage than when only using one’s own

investment dollars to fund your projects. By obtaining a rental mortgage on one or all of your investment properties, you’re able to leverage the most amount of investment dollars while keeping the absolute amount of your own dollars sunk into investing to a minimum.

As an example, if a $100,000 rental property acquisition cost has a down payment of 30%, then you need only put up $30,000 of your own funds to lock up the property. If market appreciation is 4% a year, the property value in this example would increase to $104,000 on the rental real estate. But your ROI on it would be 13.3% ($4,000/30,000). And as you continue to grow your business, slowly adding properties, you can take out mortgages on each one, eventually using the equity in each prior one to help defray your new acquisition down payment costs.

The main drawback of using leverage

Traditionally, home values have remained quite stable over time. However, in periods of great flux or recession, they can decrease in value. And if you need to get out of the market at any given time, this can create a dangerous scenario for real estate investors. If, using the example from above, the $100,000 property decreases in value by the same 4% in a given year, the property would be worth only $96,000. And you, the property investor, still need to make interest and principal payments on the loaned amount (in this case, $70,000), regardless of the current market valuation. If you have leverage multiple properties, and we hit a bad real estate market all of a sudden, well…you can see the potential for financial destruction that could ensue.

Beware the dangerous housing “bubbles”

Luckily, these periods of “correction” or housing bubbles come few and far between.

But nevertheless, it is imperative when buying rental property that any prospective property investor understand the conceptual financial risks inherent when taking on investment property mortgages, thereby increasing their leverage. While leverage is one of the fundamentals of real estate investing, if you’re willing to take moderate risks, you’ll be able to manage using leverage to your advantage. However, always weigh the illiquidity of property investments, as well as the lack of diversification if you only acquire properties in, say, residential real estate and/or in one geographic area.

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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

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

Elections and Property Investing

An important reminder

This past Spring I wrote here about a great threat to property investors. Namely, politically-motivated district attorneys who in their over-zealousness to create more prosecutions, and increase their “win” side to make themselves look good come election time, go after law-abiding property investors (as opposed to their tenants who are doing criminal acts in the landlord’s building).

I had previously noted: “let’s say you purchase a piece of commercial property. You then find a tenant for it, sign your lease, and start collecting rental income that will produce the intended positive cash flow on your commercial building.

Sometime down the road, you then find out that there is suspected criminal activity going on in your building by your tenant. You find this out by criminal charges being filed against you by the local district attorney. Now you have to fight – not simply for your right to make an income on your investment property – but to stay out of jail.

Sound impossible here in the U.S.? Think again.”

A chilling story

I then went on to quote from a local paper on this rather chilling story of a local landlord being victimized by such an overzealous prosecutor: “Recently, this story about a local commercial landlord was reported in the Burlington (Vermont) Free Press: “Chittenden County’s top prosecutor said filing criminal charges against landlords that host spas that mask as prostitution sites is the latest effort by the state in helping local communities combat the problem. State’s Attorney T.J. Donovan admitted state and federal investigators have had little luck in the past 10 years pursuing prostitution at the spas. “We can do better in this community than what we’ve done. And frankly our approach to this problem in the past hasn’t worked. We need a new approach.” Donovan made the comments minutes after a Burlington man pleaded not guilty to a charge permitting his building in Williston to be used for prostitution.”

And now the latest…

Fade in to this past week’s events in the case. The same paper, the Burlington Free Press reported: “The landlord of a former massage parlor in Williston pleaded no contest to a charge of knowingly allowing his prostitution in his building.” The article goes on to say: “Thomas Booska, 68, of Oakledge Drive in Burlington will be able to have the criminal conviction wiped off his record if he stays out of trouble for the next two years.

Vermont Superior Court Judge Brian Grearson imposed a two-year deferred sentence, which requires Booska to abide by the normal conditions imposed on defendants placed on probation.”

But wait – it gets worse…The article goes on to say “The U.S. Attorney’s Office has moved to seize the property at 5649 Williston Road that Booska bought in 2002.” So not only does the property investor plead guilty to not being able to prevent his tenant from running an illegal business, but he gets to lose his building in the process!

Ramifications for property investors

As I detailed before, “imagine the ramifications of this particular case for property investors. Any landlord leasing out rental office space would be liable for the actions of their tenant. Let’s say you’re renting to a hedge fund company that absconds with their investors’ money, a la Bernie Madoff, for example. You get arrested. Let’s say your tenant leases warehouse space from you. To store their ( place your preferred name of contraband here). You get arrested. Let’s say you’re renting out an apartment – maybe it’s your vacant apartment upstairs in a building you happen to also live in. The tenant sets up a meth lab. You get arrested. Or puts in more unrelated “tenants” than your lease allows. Again, you’re on the hook to be arrested.”

Property investors vote too…

Well, the good news is election time is rolling around in a few weeks. And it’s time to pay attention to your local district attorneys and how they’ve been treating local property investors. If you think they’ve been too harsh, too prosecutorial…too politically expedient, and in the process have been hurting property investors…well, then, be sure to vote them out of office! And to repeat what I’ve said before, besides our basic capitalist system being threatened, it’s your investment property dollars that are at stake.

photos courtesy of dreamstime.com, atascaderoins.com, thegreatestrealestateblog.com, tenantscreeningblog.com, nakedphilly.com, money.cnn.com

A Tenant’s Nightmare

Being a bad landlord – from the tenant’s perspective

I was recently pitching in with a local United Way “Day of Caring” campaign. I was helping out by doing some yard work for a disabled woman in my area. While there I was told that she was a tenant of the house she called home. And while I was raking leaves and branches in her yard, I couldn’t help notice all the building code violations and generally unsafe conditions that existed around just the exterior of the house alone. Items like rotting window sills, rotting foundation beams, missing gutters and leaders and unsafe walkways to name just a few.

Without going inside, I knew from experience that there had to be general water leakage problems present. I asked her why her landlord had not made the necessary repairs. She said that he just doesn’t do anything. Basically, she painted a picture of a classic slum lord – except this house was not in an inner city, but rather more in a rural setting.

Reporting the violations – the basic problem

I then asked why she doesn’t call the town building inspector and report these violations. That way, the landlord would be forced to make the necessary repairs and create a safe environment for his tenant. But then her answer was chilling: “because he’d kick me out.” Folks, we’re talking about a blind woman with diabetes, who had recently suffered a heart attack. And she’s scared her landlord’s going to throw her out for reporting safety violations. So, for paying her rent in a timely manner, she gets the right to live in sub-standard, unsafe conditions. This truly gives all property investors a bad reputation by inference. For my part, I reported the problems to the United Way in hopes they can investigate and intervene.

Doing the right thing

I note this little story in the hopes that all property investors will be cognizant that running a cash-producing investment into the ground is unacceptable when other people’s lives, and safety, are at stake. Basic, minimal and constant maintenance is required of all hands-on property investors. God forbid there is a fire, or your tenant gets hurt in some way due to your negligence, it’s not enough to say, “I’ve got property as well as liability insurance. And that will cover it.”

All property investors belong to the same club. No one says you have to be a “people person” to be part of this club…Or want to earn as much profit as possible on your investments. That’s the goal, after all. But if you’re not going to treat your tenants – your customers – like human beings…well, please stay out of our business. You hurt the good name of all of us decent property investors.

photos courtesy of investors.housez.ca, neastphilly.com, 24dash.com, keypersonofinfluence.com

Creating Your Investment Property Exit Strategy

A crucial strategy

When buying any piece of investment property, you need to have your exit strategy in place before you spend your first dollar on that investment. By exit strategy, I mean a marketing plan for unloading your investment – especially when times are bad in any given real estate marketplace, and you need to sell fast. As with all good property investing advice, it’s best to be prepared for the worst.

Flipping out

When flipping a property, the exit strategy is set well before you buy: you’re already thinking of the end user, the speculative purchaser you’ll be selling your property to…In this scenario, you’ll be creating a psychographic picture of your potential buyer, after you’ve made all renovations to the house. This not only helps you define your marketing plan ahead of time, but you’ll be able to figure out your target sales price, and work backwards into your renovations required to please this prospective buyer, as well as determine exactly what renovations are crucial to help you move the house once it’s ready to place on the market.

Psychographic profile of your buyer

Psychographic data includes demographic information – basics such as age, income level, gender, size of family, and even ethnicities. But it also includes psychological quirks and leanings of your prospective buyers. For example, the location you are considering purchasing in will determine a great deal about your potential buyer. Is the school system of paramount importance to them? Are they Democrats, Republicans or Independents? Are they liberal, moderate or conservative thinking? How religious are they? Do local religious institutions need to be extremely close to the investment property you’re acquiring?

Likewise, do they value privacy, and are looking for a more remote property to make them feel at peace. What types of psychological stimuli will appeal to your prospective buyer? Once you’ve begun answering these questions, create a page write-up of what your potential buyer will be like – both demographically and psychologically. Proper property investing advice will show that with this “road map” in place, you’ll be in a much better position to figure out what your target sales price should be. And you’ll then be able to work backwards to come up with your renovation budget.

Rental properties

If you’re looking to acquire a rental property to hold for the long term, cash flow and purchase price are the two most important features that will determine your overall profitability on the property. However, you must also consider your exit strategy in case things go wrong. (And invariably, with some properties, they will go wrong. After all, it only takes one truly horrendous tenant to blow your cash flow to bits…)

Devising the exit strategy

So what exit strategy can you put together before you acquire a long term investment property? When things go wrong, they usually go wrong fast. So, plan ahead for this eventuality. Always make sure you have the best tenants. And always keep checking what current market rents are by constantly researching the rents of your competition. And then make sure you align the rents on each of your units accordingly, as leases come due. Also, never neglect the upkeep and regular maintenance on your property. Ever. In this way, if you need to sell fast, you’ll at least have maximized your rent roll, and kept your property up.

This will help maximize the amount you can obtain for your property when it comes time to sell – whenever that may occur… Even if that time is years before you’d like it to be. In addition, always have a regular Realtor lined up – one you work with exclusively. In this way, if you need to market your property quickly, a brief call to your very own Realtor will produce immediate results – thus shortening the time it takes to get your property on the market.

Keeping the exit strategy current

Whichever exit strategy you create – whether it be for flipping a property, or for longer-held rental units, make sure you stay on top of it, and tweak it regularly. This is especially true for your long-term holdings. Simple property investing advice states that you’ve got to stay on top of market rents, maximizing them at all your units, and keeping up with regular maintenance on all your properties. In this way you’ll always be prepared to place the best product on the market quickly, should the need arise.

Photos courtesy of starchilde7.deviantart.com, consulting-business.com, debugdesign.com, rockiesventureclub.org, crownglobalinc.com, greencpa.blogspot.com, betting.betfair.com

Political Property Investing

Will election night become election odyssey?

Tuesday’s election could be a potential windfall for property investors – if the stars align properly, that is. According to John Heilemann’s political article in New York magazine ( “The Zombie Election,” 11/5/12) in which he lays out four doomsday scenarios in Tuesday’s upcoming election for President, one is especially intriguing for real estate investors. The four scenarios he lays out include:

1) The Romney squeaker scenario, where he wins both the popular vote, and the electoral college.

2) The reverse Gore scenario, where Romney wins the popular vote (like Gore in 2000) but loses the electoral college to Obama.

3) The Recount (or recounts) scenario, which could make the 2000 Florida recount look like a day in the park by comparison

4) The Tie goes to Romney scenario, in which the electoral college is actually tied, and the states would have an equal weight in deciding the election – 50 total votes, based on each states’ Congressional majority (yes, Romney would most definitely win in this , the remotest of the scenarios).

The scenario to watch for

However, the one scenario that really would affect property investors, is The Recount (or recounts) outcome. In this remote, but plausible scenario, Heilemann presages a repeat of the 2000 election fiasco (where Florida recounted on their own terms, and the Supreme Court had to ultimately hear arguments as to “hanging chads.”) This naturally held up the process for over a full month before a winner could be decided. Well now, races are so close in several key swing states, that the possibility exists for recounts to be asked by the losing party – but in multiple states, thereby holding up the final decision of a President–elect for at least a month, or maybe two.

Of course, there will be court challenges, a closer examination of some states new voter registration laws, as well as potential new judicial rulings on the constitutionality of some of these registration requirements. Translated: a mess to be unraveled, taking an inordinate amount of time. Time in which the presidential election would remain in the balance, undecided. And this, of course, would create great uncertainty in financial markets.

Uncertainty = death

And if there’s one thing Wall Street does not like, it’s political uncertainty. An extended period of waiting could throw the stock market into a selling frenzy. The result of stocks taking big dips could be erosion of consumer confidence – which the real estate market has been helping to slowly build back up this entire year. Without consumer confidence, buyers sit on the sidelines, and everyone waits again. Meanwhile, house prices stagnate or deflate.

Add in one more key ingredient to this little doomsday scenario: the coming sequestration by the federal government if no deal is reached by Congress and the President to prevent severe automatic cuts to the federal budget – including deep cuts to the defense budget, for example. This “fiscal cliff” could easily be reached without a President-elect being chosen by mid-December. It’s a truly ugly thought…

The net effect for property investors

As house prices deflate after a year of building back up, consumer confidence drops, buyers sit on the sidelines, Wall Street tanks, and the federally mandated Draconian sequestration occurs, property investors should have a plan to make lemonade out of these potential lemons.

And the best lemonade a property investor could make in the event of this scenario, is to be ready to hunker down, hold properties, do not sell, and if possible, buy as the market begins to depress yet again. The window may be a short one though – say December through January – the normally slow house buying period anyway. But the double whammy of seasonality coupled with this Armeggedon of Presidential-elect deadlock due to all the recounts that may take place could be quite a boon for property investors savvy enough to plan for this remote eventuality. So on Tuesday, get ready for a potentially long and bumpy night into day(s) – or weeks – or months.

photos courtesy of pennlive.com, latimes.com, worldoil.com, nola.com, thewallstreetexperience.com, avenuecdc.org

The Sky Is Falling! The Sky Is Falling!

What the doomsayers are espousing…

In my article posted here on September 12^th, “The FED and you,” I concluded that the end result of all the money printing the FED has been doing of late will create a scenario where the next generation will have to pay the piper. And real estate investors today will end up having their heirs pay for this loose money policy.

There are others who are more doom and gloom than I in their predictions, however. One noted economist, Marc Faber, has recently said that “U.S. monetary policy will destroy the world.” He is referring to the most recent stimulus plan by the FED – also known as “QE3” or “QE Forever.” In an article posted last week in MoneyMorning.com that recapped Faber’s dire warnings (Faber warns everything will collapse. (n.d.) Retrieved from moneymorning.com/ob/Faber-warns-everything-will-collapse/), the case was made by Faber and other renowned economists that the dominos were in place for a worldwide collapse to occur. Besides the FED’s current policy of printing money to keep markets stable in the short term, the other key dominos included the major protagonists in the European financial crisis, including Greece, Italy, and now, Spain.

The article went on to describe how Chris Martenson, a global economic forecaster who’s recognized as an expert on the dangers of quick economic growth, had a theory that the world’s economies would collapse in short order. He was quoted as saying: “we found an identical pattern that guarantees they’re going to fail…This pattern is nearly the same as any pyramid scheme.”

Somewhat less than reassuring, right?

I do not subscribe to this Chicken Little philosophy of a oncoming train wreck that will be create a quick, devastating worldwide economic collapse. It makes for good, sensationalist copy – but hardly sound economic theory. I think the head of the International Monetary Fund, Christine Lagarde, would agree.

While governments in Europe and the U.S. have helped create these economic conditions through a combination of volatile spending with little austerity measures in place, governments also have the ability to right their own country’s economic fortunes (albeit with extremely unpopular political overtones). This righting takes time, certainly won’t occur overnight, and historically runs in cycles of five to seven years. What is new here though, is the interconnectedness between countries. That is at the heart of the aforementioned economists’ doomsday theory.

I still don’t buy it. Will the twenty-five percent unemployment rate in Spain bring the U.S. economy to a grinding halt? Possibly – but doubtful. There are too many other countries, investors, banks and extreme oversight in place to prevent a domino effect from occurring. Meaning: is it all a possibility? Yes. Is it a probable scenario? I think not.

Making sense of it all…

So what does it all mean for real estate investors here in the U.S.? I think doomsday scenarios are quite frankly, irresponsible. They can create a sense of economic panic that can affect markets worldwide…not just in real estate. While it is OK to advise about the possibility of a horrendous economic collapse, saying one is imminent is ludicrous.

That said, we are coming through an economic upheaval not seen since the Great Depression. But the downturn cycle that began in 2007 has already begun changing over the last year. And I think it will continue, slowly, but steadily. If you get into property investing, you do so knowing the inherent risks: it’s illiquid, and in a down market, hard to get your money out quickly. But if you’re in for the longer term, the ups and downs tend to even out. Historical data has proven this – and will keep the doomsday prophets at bay.

While the residential real estate market continues to slowly rebound, average national rents have done quite well – and continue to rise at about a six percent annual clip. It’s possible that short-term financial upheavals overseas may create a ripple effect of tighter credit here in the U.S., but nevertheless, renters are still going to rent. As the rental market remains strong, combined with low interest rates on existing mortgages, it makes for an excellent time for real estate investors to be building a portfolio of rental property.

photos courtesy of blogmosaic.knowledgemosaic.com, silverbearcafe.com, infiniteunknown.net, article.wn.com, davidicke.com, chicagolandrealestateforum.com

Investment Property Information Series – Jettison Your Underperformers

Deciding when to streamline your portfolio

Even in a down market, it’s sometimes a good idea to “thin out the herd” to keep your total portfolio of investment properties operating profitably. If one or more of your properties is running at a negative cash flow, and has been for some time, you may decide it’s a good idea to unload it.

It’s possible that you find you have several investment properties at this point in time, but possibly you need cash for a better investment opportunity – or you need cash simply because of your personal financial situation. So you may decide it’s best to jettison one or more of your worst performing properties.

Why the negative cash flow?

Maybe you projected your investment property would increase in value but you’ve been unable to increase rents. Or you’re not attracting the right tenants, or you’re not able to increase your rent roll enough to break even. Your expenses could also be increasing at a faster clip than what you had originally budgeted, especially if they were for taxes or heating oil, which have been going up exponentially for property owners in recent years.

Other reasons for liquidating

Or, maybe you need the cash right now, or maybe you’ve just run out of patience with being a landlord. (Perhaps you find that you’re just not temperamentally suited for working with tenants. Maybe you simply don’t like the aggravation of emergency phone calls in the middle of the night when the boiler fails.)

Before you put your rental property on the market, it’s important to figure out exactly what went wrong. Perhaps you weren’t attracting the right tenants. Or perhaps you were stuck in an area where there has been a high rate of foreclosures, so home values as well as the overall look and desirability of the area have been declining precipitously around you.

Analyze your data

You’ll certainly want to analyze what’s not worked. Crunch the numbers, and find out what is the difference between your well-performing properties and your underperforming ones.

As you analyze your data to determine which property or properties you need to put on the market to liquidate, keep in mind that it’s still possible to sell in this current market. However, it’s just going to take longer to sell your property. In addition, you want to try to maximize what you can get for your rental property by doing a few things that are under your control, prior to placing your property on the market.

Fill up those vacancies

One of the best things you can do is to make sure you have no vacancies on your property. Vacancies are like a death knell for property sellers. Other property investors will swoop down on you like vultures to take advantage of your situation. For any vacancy they will impute a very tiny rent, as opposed to your finding tenants and renting out all your units, thereby showing actual rent income for the entire property.

Since actual rent is the main basis for the valuation on your property, you must make sure that you can try to get all of your units rented out in your building just prior to selling it. Obviously, you’ll also want to attempt to get the maximum rent roll you can get, prior to putting the house on the market.

Make those repairs

Another big item that’s under your control is repair work to your property. Make sure that you complete all the most important repairs prior to putting the building on the market. Again, savvy investors will swoop down on you like vultures, and will impute a much greater repair cost for any major repairs you have left for them to do. So if you know that you need a new boiler, this would be the time to put it in, and take the financial hit now. It’s ultimately going to save you a lot more than if you don’t do anything and leave it to another property investor to take over your problem.

Likewise, if you have any major plumbing repairs or electrical work that needs fixing, get them done prior to going to market with your investment property. Also, if tenants have been complaining about particular issues with their specific rental units, you should address them immediately before putting your building on the market.

Find a local Realtor

Once you’ve completed all necessary repairs, and you’ve successfully rented out all your units at the highest possible rent you can possibly get for your area, then it is time to finally put your property on the market. I always recommend using a Realtor who knows your area well to do the marketing for you. You’ll want to get as much exposure for your property as possible, and this can only be accomplished by using a Realtor. In addition, Realtors are also able to access many other investors very quickly who will take a look at your property.

Update your income statement

When looking to choose a local Realtor, make sure you give them an updated income statement on the property, with all your income and expenses laid out. Prospective investors are also going to want to look at your return on investment (ROI) that you’re projecting for your property. If you need help, have your accountant prepare the income statement for you.

Keep in mind that showing a negative cash flow on your property does not necessarily mean your property can’t be sold. Other investors will crunch their own numbers, and they may see things you don’t. For example, it’s possible your rents have been too low for too long, and they need to be bumped up – but you’ve been hesitant to do so with good tenants, fearing increased vacancy if you jacked up the rents.

Another investor may evaluate the situation completely differently than you. And they may feel you have an underutilized asset. Also, some investors are visionary, and can see that some small cosmetic work to units will also help to increase the rent roll on your building.

Setting your asking price

The next important thing to do before placing your property on the market is to set your price. Your asking price must be slightly below market value in today’s economic times. Since you’re looking to unload your worst performing property (or properties), there’s no point in trying to hold out for “your price.” Let several Realtors give you their opinions on the current value of your property (also known as Comparable Market Analysis, or CMA).

You should also be doing your own research. Find out what other like properties in your area are selling for. Check and see what they’ve actually sold for, either using your Realtor for help, or through a simple public records search. Then go back and try to average the CMA values you’ve gotten from several real estate brokers, and then come up with a price that’s at least 5 to 10% below market value. That should be your asking price.

With so many homes on the market right now, as well as with so many foreclosures just hitting the market, you must make sure that your price is slightly below market value to help spur interest in your property.

Time frame

Once you’ve selected a Realtor, make sure they take excellent pictures of your property, and are really drumming up some buzz about it. The broker should be talking to other brokers, running broker open houses and calling all their property investor associates as well. If you’ve priced your property properly, and are about 10% under market value, then you should be able to sell it within 3 to 4 months. This time frame also assumes you’ve made all necessary repairs to your property, as well as your having filled all open vacancies with good tenants.

However if you priced it improperly, have many vacancies, are in a terrible location, and have not fixed up your property, then you’re going to have a very difficult time marketing it. And then you may be waiting years to find a buyer.

Clean out the underperformers

So follow these tips as part of this investment property information series, and get rid of that negative cash flow property now. You’ll then be able to use the funds to help improve your financial situation and/or look for a positive cash flow property to add to your stable of properties.

photos courtesy of highpowerrocketry.blogspot.com,

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