real estate investment strategies | InvestingInProperties.com

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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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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Is Flipping Houses Right For You?

The art of the flip renovation

There is such an abundance of television programs that show you how to flip houses, you’d think everyone in the free world would be house flipping by now. But realistically, it ain’t for everybody. And more to the point, deciding if flipping houses is right for you by simply viewing television shows on the subject is akin to thinking you can learn how to play piano by just listening to a great concert pianist. Obviously, not gonna happen.

Devotion to house flipping

Having a true passion and devotion to the flipping process is integral in doing it correctly, and more importantly, making a profit at it. You’ll first need to ascertain whether you have the time and inclination towards flipping. In addition, ask yourself if you have the stomach for the risks involved in such an undertaking. If you’re paying all cash for a property to flip, you’ll be tying up a huge amount in investment with no leverage. And that’s even before you put more into the project in renovation costs…sometimes renovation costs are double, triple and even quadruple acquisition base costs for the property.

Keep in mind that if you take on a mortgage for a house flipping project, you’ll be taking on a large amount of extra closing costs. And those costs will be paid back in (hopefully) a short period of time when you place the house on the market again, fully renovated. A quick turnover is great. But keep in mind the financing costs are magnified when paying the mortgage off in a short period of time. I’m a big proponent of using other people’s money for leverage. Just be sure you’ve researched the lowest cost alternatives for a short-term financing goal.

Basic questions to ask

Will you be doing the work yourself, or hiring a crew of tradespeople to oversee? Or, will you hire (at a premium) a full contractor who will be in charge of hiring subcontractors to perform the necessary renovations. Do you have any design sense to pull off a large scale renovation? Most beginning property investors leaning how to flip houses will certainly make mistakes early on. Mistakes like not understanding the need to design and renovate with as little of your emotional self as possible. Learning that an investment property is not a home, and certainly not a vanity project. Renovating a downtrodden house just so you can be proud of how it looks after you’re done does not a profitable property investor make.

Your first foray into house flipping

The first time project in house flipping is the most important. It’s where you’ll make your costliest, most egregious mistakes. But if you have the passion, and have allowed a wide berth of a financial cushion for yourself. When buying the property (by purchasing a house substantially below market value, for example), you’ll have a canvas on which to paint your first property investment masterpiece. Even if it ends up looking like a pre-school exercise in finger painting. Just consider it a great learning experience. Then move on to the next project with lessons learned from experience.

photos courtesy of islaythedragon.com, askmen.com, cbsnews.com, home.howstuffworks.com, foreclosurequestionsguru.com

Property Flipping Dangers

Renovating 101

As a real estate broker in my area of northern New York state, I come across some rather interesting…OK, questionable, investor-renovated properties. Thinking they had the knowledge, foresight and taste to capitalize on purchasing a “fixer-upper,” and rehabbing it, then placing it on the market for a quick sale, these property investors are nothing if not fearless. I would say that any property investor burning to rip-it-up and find a great rehab project to invest in and redo, must be prepared to go in with as much fear and trepidation as possible. Self-preservation of your own capital is of the utmost importance. And too often I see botched rehab jobs up close and terrifyingly personal…

A fun, yet instructional horror story

The latest horror story I ran across was this past weekend. I was showing properties to a young professional woman looking to purchase her first home. One of the local homes we toured was a property investor-rehab job. Neat, clean and presentable? You bet! And that was about it. The nice first impression the property investor so desperately tried to make – and did very well, I might add – soon came crashing to the ground as my potential buyer started to tick off the drawbacks of the renovation. The investor scored high marks for painting every room a different, subtle earth color, but then things fell apart quickly…

Functionality, functionality, functionality

Oh, did I mention functionality was severely lacking in this particular redo? It started with a kitchen that was completely redone, but lacked much sense of design thought. From a serious lack of cabinetry, to installing ceramic wall tiles on an area between sets of wall cabinets. But the tiles were above the kitchen sink. WTF??? What were the tiles supposed to protect? Why wasn’t the range top moved to this section (or more aptly, vice-versa? And for heaven’s sake, why have a portable, tiny island? Ludicrous. If you’re going to be investing in a total kitchen renovation, make sure you get some expert advice. At the very least, design and plan it out with the help of your cabinet supplier. (Yes, Home Depot and Lowes have excellent, experienced pros who can assist admirably in this endeavor.)

Basic amenities

If you’re going to redo an entire house, make sure basic amenities are there – or at the very least, provide the essentials to allow a potential buyer to not be left in the dark. Most buyers don’t have foresight and practice in renovating. You supposedly do. In this particular home, there was no washer/dryer. That’s not a deal killer per see – though having basic necessities is still pretty important. But this home did not even have a washer/dryer hook-up. That boys and girls, is a major sin. And one that the property investors for this property will end up regretting not having addressed.

Psychological effects on buyers

In addition, simple items left out can have a major downward psychological effect on any potential buyer. In the house in this example (a Cape Cod style home), the second floor access stairs to the bedrooms was missing a railing. Now, that’s a simple fix. But it left my buyers wondering how the property could have gotten a Certificate Of Occupancy (C/O) from the local building department after all the renovations, if something as basic and required as a handrail up stairs to habitable space was not there. (Answer – there’s no way they could have gotten their C/O. That begs the next question – was a building permit for all the renovations ever applied for by the property investors? If not, any deal with a potential buyer will get hung up before closing – creating a major problem for all concerned.)

Cost structure

So you may have a sense of knowing what the current mass of buyers desires and likes, you may have good design sense, and you may understand basic functionality. But unless you have all three, or can at the very least rely on the help of other pros who do have what you lack, be very wary of entering the rehab arena. Of course, the most obvious of all these disciplines – the cost structure of the entire project best be something that you can afford, and that will return – easily – two to three times the amount you’re investing. Otherwise, skip the project, and keep looking for some other investment property in need of work that will produce the returns you need.

photos courtesy of kristinandcory.com, home.howstuffworks.com, brokersbestmtg.com, home.howstuffworks.com, aglasgowskeptic.blogspot.com, brokersbestmtg.com, buildingmoxie.com

Commercial Property Leasing Tips

Major differences in commercial versus residential leases

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

Viability of tenant

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

Length of lease term

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

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

Lease arrangement factors

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

Allotments for options

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

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

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Convenient Truths About Property Investing

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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Investment Property Dangers: Your Tenants

Heed the warning signs

Here are some basic no-no’s to be aware of and avoid when acquiring investment property. These are related to strictly tenant issues here for brevity’s sake. When you understand how you can get burned, you tend to steer clear of these pitfalls more easily, and heed the warning signs that are associated with these particular set of investment property dangers.

The Tenant Slide

The slippery slope of leasing to tenants is a definite learning curve. Hopefully, you can scope these common dangers out before they hurt you financially. Tops among tenant problem areas is that, by and large, renters have a bundle of legal rights that protect them. So, for example, you can’t simply throw a tenant out if they don’t want to leave, without first going through an eviction proceeding. They didn’t pay you rent last month? They won’t allow you n to inspect their unit? You’re getting complaints from other tenants in the building about them? Tough. You still can’t legally throw them out until you go through the formal eviction.

You’ll still have to pay an attorney to take you through the eviction process – and win. And this not only costs in terms of their fees, but the time spent could be several months – of lost rent. Not to mention the clean-up and repairs after the tenants trash your place. How to prevent this? Always find good tenants. And that’s not always so easy to do…

Vacancy issues

And speaking of lost rent, vacancies are another lurking property investment danger. Even in a tight rental market, when one renter leaves, you still have to show the unit and usually clean it up, or even simply paint it, before the next one can move in. That’s a month of lost income right there. Naturally, you build in a vacancy rate for all your units when figuring out your cash flow – but don’t think you’ll escape unscathed in softer rental markets, or areas with stiff competition for apartments. Don’t be surprised if you’re losing several months’ rent when you lose a tenant.

The “bad” tenant

Of course, another key investment property danger is the Tenant from Hell. And yes, there are a few of them out there. Most landlords can relate their “Tenant From Hell” story. It ain’t pretty. A seemingly “normal” renter can become a bad tenant almost overnight. Your unit will suffer the most. Bad tenants have a nasty reputation for tending to destroy units. It’s usually not willful…think of it as more “playful” destruction of your property. It’s just in their genes. And it will cost big bucks to repair said unit after you successfully remove the tenant through the aforementioned eviction process.

Lawsuits and you

And also don’t forget this fun investment property danger: when your tenant sues you. They could slip and fall on a patch of ice in your parking area, or fall on a cracked walkway, or trip on a poorly lit stairwell in the building. Whatever the reason, if the tenant is determined to see some cash from your misery – they will be relentless. This is mainly due to our legal system, as well as how our insurance companies work. Naturally, as any smart landlord, you have adequate liability insurance on your building. (Remember my article on you and your insurance agent, right? The one where the agent tells you his recommendation for how much liability insurance would make sense for your size building?)

Well, even with the right amount of liability insurance, a suing tenant will traditionally have hired a personal injury attorney who only gets paid if there is an award of cash damages. They traditionally receive a third of the award. Then they sue you, your insurance company’s attorney reviews the case, and in long order (yes, it takes months if not years in some cases), the insurance company authorizes a settlement amount to pay out to your tenants and their attorney in order to avoid a lengthy and potentially devastating court case and heftier damages if they lose in court. This is our judicial system. Welcome to it. Yet another potential investment property danger just waiting to snag you.

photos courtesy of investors.housez.ca, kristinandcory.com, mcclurepropertymgmt.com, tenantchecker.com, clickpropertymanagement.co.nz, tenantscreeningblog.com, thegreatestrealestateblog.com

Are Your Tenants Ruining Your Life?

The pitfalls of being your own property manager

When you’re just starting out as a property investor, and purchasing your first or second investment property, you’ll most probably be on the tightest of budgets in order to ensure a positive cash flow on your investment. However, when you act as your own property manager, and you’ve never done it before, you’ll most probably be in for a startling awakening. Yes, you’ll save the ten or fifteen percent of gross rents a property management company would traditionally receive. But you will definitely earn that money in your time, expense and frustration levels. Traditional property investing advice would dictate that you should consider it a learning experience of incredible magnitude. Take a deep breath, and don’t let what’s to come get you down. Instead, prepare for the worst – the worst tenants, that is, by doing two things. One, choose only good tenants. Two, never let a tenant control you. You must set proper boundaries – otherwise, they will eat you alive.

Choosing the right tenants

Properly vetting your tenants before you sign them to a lease is crucial. It’s not simply that you’ll want to run a credit check on them (you must), or check their work references (ditto), but most importantly, you’ll want to check with their past landlords to see if they have any history of causing problems. If all their references check out, you’ve met them and feel comfortable with them (don’t underestimate your own good instincts and judgment), and , naturally, their income is sufficient to support the rent you’re asking, then by all means install them as your new tenants. Some of the best property investing advice I can share, is that choosing good tenants is the most important way you can control how big a headache being your own property manager will end up being.

Controlling your tenants

The key to controlling any tenant is setting proper boundaries. Without these boundaries, a tenant will run roughshod over you as the property manager. Do you think a tenant will ask for “favors,” or ask to show them how an appliance works, or both, at any hour of the day if they are dealing with a property management company? Not ‘gonna happen. That’s because professional property managers do several things you’ll need to do. They have set hours during the daytime that a tenant can call with problems. They have supplied the tenants on their first day with loads of written information about how things work in their unit and/or building…where and when the trash gets put out, what emergency exits are to be used, and their location…you know, basic information about the running of the building.

And so should you if you’re going to act as your own property manager. Make sure you have a boilerplate document that details everything a tenant should need to know, including who to call – and acceptable hours to call – in case of emergencies. And of course, you need to specifically spell out what constitutes an emergency. No heat? Yup. Broken pipe? Sure. An explanation of how to work the microwave? Nope. Boundaries…it’s all about setting proper boundaries. Once set, your life as a property manager, while still difficult, will be made much, much more palatable. And you can take this property investing advice to the bank.

photos courtesy of drkimfoster.com, realtybiznews.com, iresvegas.com, funagain.com

Scary Property Investing Environmental Hazards

A Halloween reminder for property investors

This seems like the appropriate time to remind all property investors of the major environmental hazards lurking out there when searching for investment real estate. I have previously written about these hazards in depth (see my article here from May 30, 2011 entitled “Locating Investment Property – Basic Environmental Concerns.” It’s fitting that on this spooky day, I remind property investors of the most major hazards that may confront you as you look at multiple properties for a real winner…

Remember, I always recommend you use a house inspector to rule out all hidden defects that may be unseen by the naked eye (or that you do not have the experience to catch, even by eye). Also remember that these environmental hazards all pose grave risks to your potential tenants, so must be addressed before you purchase any piece of investment real estate.

Hazards 101

One of the more basic hazards includes asbestos. It was primarily used as an insulator of pipes in basements of older homes. Asbestos is a known carcinogen, and if fraying and airborne, it is a very real and present danger. Another major hazard are underground oil tanks. The older the tank, the greater the probability of a leak. And any oil spillage into the ground is cause for concern, as it poses a public health risk to all local homeowners as well as your property, due to the possibility of soil and aquifer contamination.

Hidden dangers

Among the top hidden dangers lurking in any potential investment property is lead paint. The majority of houses built prior to 1970 traditionally used lead paint. There are swab test kits available to determine if lead paint is present, however, you may want to use your house inspector to run the test for you. Lead paint that is chipping could possibly be eaten by young children, and are also known carcinogens when ingested.

Another hidden danger is radon gas. This odorless gas can only be detected through a radon test kit. However, you can purchase a kit at your local hardware store, and send the test in for the lab results to show any presence of the gas in the house. You should also be aware of any well water that might be tainted. If the house is fed by a well system, you’ll need to run a water test to determine the potability of the water supply. Keep in mind that homes that have remained vacant for any appreciable period of time run a greater risk of forming high levels of dangerous bacteria in the wells, and will most probably need to be treated with chlorine (known as “shocking” the system) to rid the water supply of the contaminants.

Be on the lookout for the hazards

So this Halloween, be especially on the lookout for these environmental hazards lurking within your next potential investment property. If you find them, at least you can prepare ahead of time to mitigate them – and ask for remediation as part of any offer you decide to make on the property.

photos courtesy of freefever.com, pooboy.com, pacificgroupdevelopments.com, sema.dps.mo.gov