rental property investing | InvestingInProperties.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.

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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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The One Minute Rental Property Analysis

Numbers crunching on the fly

When searching for residential real estate, you’ll need to go and visit a lot of ugly ducklings to find a white swan. The property that screams out: profitability, high positive cash flow and excellent return on investment (ROI). Therefore, it is crucial that you have a quick and dirty system in place to analyze any given piece of real estate you need to evaluate. A system that can let you know before you even move on to your next potential rental property to examine, if the current one you’ve just toured is worthy of an offer or not.

This system, ideally, should be something you can do by rote. You should be able to crunch numbers quickly. If you need to do them on paper, fine. But as you get more experienced, you’ll find you can do the calculations in your head. Ultimately, they should take no more than a minute to analyze, once you’ve asked the right questions, scanned the listing data on the property, actually seen the property, and have done the basic math. Your ultimate goal, of course, is to be able to winnow down prospective properties to the best ones available to make an offer on, in the least amount of time possible. You can always continue the process for any “winning” rental properties in more detail prior to actually making your initial (and succeeding) offers.

Gross rent roll

Here are the main items you’ll need to plug in: On the income side, you’ll need to obtain the current rent roll. If there are any vacancies, you’ll need to ascribe a market rent for them, based on the size and condition of the unit, its amenities, and the overall location of the property. It’s simple enough to come up with a base gross yearly rental amount based on this information. Make sure you consider if the current rent roll is undervalued or not, and if so, what leases the existing tenants are under. In effect, how quickly before you can bump up their rents to full market value? Naturally, you should already have a good idea of your local market rents for like size units in different locales within the area. These must be researched before getting in your car and starting your searches.

Cost structure

You’ll then need to deduct your overall yearly costs in order to come up with a good guesstimate of your annual cash flow. The main items here include property taxes, which should be provided on any listing data given to you. Be sure to check that the property is within an acceptable assessment range. If it looks like the property is currently over-assessed, you’ll want to be ready to grieve the assessment to get your taxes reduced should you actually acquire the property. If the property is under-assessed – beware! You could get socked with a new assessment if the municipality decides to reevaluate the entire town, or if you make any improvements to the building that require a building permit. In either scenario, be prepared to increase the current taxes as you crunch your numbers.

Mortgage costs

You’ll also need to add in your mortgage costs, if you are not paying all cash. Remember that non-owner occupied rental property traditionally have slightly higher mortgage interest rates than conventional home loans do, as much as 1 to 1 ½ percent higher on average. And if your credit score is below the low 700’s, the rates can go even higher. You can also expect to have a higher down payment requirement than a conventional home loan. So instead of 20 percent down for a conventional home loan, non-owner occupied rental property can start at 25 to 30 percent down in most cases. With poor credit, it can go up to 40 or 50 percent down, depending upon the lending institution and their lending standards.

Utilities

Another cost to consider are utilities. Do the units pay for their own electric bills? This is usually the case. However, there may only be one furnace in the building, and you as the landlord will be paying for heating costs for all the units in the building. Are the rents high enough to cover this type of cost? And make sure you get the current seller’s records for heating usage to ensure accuracy. In addition, check to see if there are any other miscellaneous fees that go with the building, such as association fees. You’ll also need to obtain data on the current seller’s insurance costs, and check with your own insurance company to see if they are in line, or if you’ll need to bump up that figure as well. After a while, you’ll acquire a sort of shorthand with your insurance agent, so you’ll be able to estimate rough insurance costs for a year on the spot.

Vacancy rate and maintenance

The last couple of cost items are strictly a function of your gross rent roll. They include a cost deduction for unit vacancy. Usually, if you’re being conservative, you’ll account for 2 month’s worth of vacancy per year for each unit in the building. In a hot rental market though, you can cut this down to 1 or 1 ½ months of your gross rent per unit. And if you’re going to use a managing agent, you’ll have to figure in a cost of roughly 10% of gross rents collected. However, they will take care of all your tenant selection and placement. The final expense to include in your analysis is an amount for maintenance. Certainly, you need to figure on at least 10% of each unit’s gross rent. A more conservative approach would be to use a 15% maintenance figure. This will help cover expected maintenance items like plumbing or handyman repairs. But it should also be enough to cover unexpected emergency repairs.

Perfecting the one minute analysis

Once you’ve done this analysis on paper a few dozen times, you’ll find you’ll be able to run the numbers in your head. And you’ll also find that you will become proficient in doing these calculations while you actually are walking through a prospective rental building. Pretty soon, you’ll find you can get the total numbers crunching done quite speedily. In very short order, you’ll find that you too will have perfected the one minute rental property analysis. Then, it’s on to the next potential white swan laying in wait for you to discover…

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When The Whip Comes Down

The municipality law trap

As a property investor, you need to be aware of obscure, little known local laws that can financially kill you in rental property investing. And when that whip comes down, it can have devastating effects, and really turn you off from wanting to be in the property investing business. Neil, a property investor friend I know, recently told me a tale of woe that befell him a few months ago. It serves as yet another cautionary tale about how obscure local laws, possibly in your own municipality, can have devastating financial effects on small property investors.

Neil’s tale begins a long time ago – and, the seeds of his horrendous story about local property investing law were planted, unbeknownst to him. He bought a mixed-use building in the downtown, historic district of Saranac Lake, New York, a small town in upstate New York near Lake Placid, in 1985. The building housed his office on the main floor, as well as apartments upstairs. Three years after purchasing the building, which was located on one of the main streets in town, the road was taken over by the state. In so doing, the local village of Saranac Lake did not amend their local laws to account for this takeover of the street by the state. Hence, local laws protecting a property owner on this stretch of road were not grandfathered along with the state takeover.

Fast forward to the present…

Cut to 2013. Neil gets a call while on vacation. He is told the sewer line is backing up in his rental units. It is quickly is determined the old main clay sewer line from the street to his building has collapsed.

I’ve owned enough investment rental properties to have had occasional run-ins with sewer back-ups. And all my experience has taught me that the property owner is completely responsible for the sewer line from the curb into his building, regardless of the problem. And as I’ve written here on a number of occasions, good property investment planning calls for a budgetary line for “contingencies” each year when preparing your pro forma income statement. Something’s going to go at some point in any investment property, at any given time. And keeping a slush fund available for these emergencies is standard operating procedure.

Legal responsibilities you’ll need to know

But in my friend’s case, turns out the sewer line collapse, since it was connected to the main line in the road just in front of his property – was HIS legal responsibility to make all necessary repairs all the way back to the main line in the road. So, the road had to be torn up. To the state highway department’s specifications. Turns out when the state took over that portion of the road, and the village never grandfathered local law to include this state takeover, it left my friend holding the proverbial bag for the repair cost into the road. Insane? You haven’t heard the worst part…

For repairs to be made on a state-owned street (at least in New York, that is), you have to follow state regulations for digging, site maintenance, repair of the sewer line, and repair to the street. This includes hiring union flagmen to control traffic while the work is being done. What should have been a $5,000 project quickly ballooned to $20,000 due to state regulations. Consider the specialized engineer to be hired, plans to be submitted and approved, and delays due to state regulations. It was, of course, a nightmare. And let’s not forget the potential loss of tenants during this period (though they eventually did stay with him at the end of the ordeal).

Getting something for nothing

In essence, the state got something for nothing. That’s local property investing law for you… Neil made an impassioned appeal to the Saranac Lake village board, to no avail. Here is a portion of what he wrote (and spoke) to them:

“I had not realized that I was also responsible to reconstruct a NYS Highway and
abide by all of the NYS Highway construction criteria and requirements, at my
personal expense. This has become an expensive educational learning experience for me. We desired to expedite the repair of the sewer line as quickly as humanly
possible, however, we were impeded by NYS DOT regulations, which were followed to the strictest interpretation of the Law. I was told that before I would be issued a permit to open the Highway, that I was required to: develop an
engineering drawing, establish an earth restraining system, excavate a seven
foot deep trench below the Highway surface, protecting water supply mains and
fiberoptic lines, provide a ‘trench box’ for the protection of workers,
establish a traffic plan, hire ‘certified’ traffic flaggers, provide a road signage
package, have my road contractor provide a $10,000 bond, and provide an
alternate traffic plan. All this before I would be issued a permit. I was told
that if the work could not be completed within one work day, the trench would
have to be filled in, and again excavated the following day. I was told that to
request permitting for a road detour would add many more days to the permit
request process. All this extensive permitting process was required, before
work could be begun; before a toilet could be flushed or a bath provided.”

They still have not amended their law. And other property owners on the very same street – the one with the crumbling infrastructure – are potentially on the hook for the same type of repairs in the near future as well. Meanwhile, other adjacent towns and villages make allowances in their laws for this kind of financial trap. Needless to say, it’s been a horrendous experience, and an extremely nasty and unforeseen financial hit for my friend. Worse yet – if it had been the water line that had broken, and not the sewer line, the village would have picked up the tab from the curb into the street. That’s because village law covers water line breaks – even for state roads within the village. Make any sense? Of course not.

The excruciating moral of the story

So what is the moral of this horrendous tale? Never trust the government, of course! The fact that the road became a state road three years AFTER my friend bought the building strikes me as the cruelest blow of all…One minute you’re protected as the owner of an investment property. The next, you’re not.

So how can you best protect yourself? It’s not obvious (or logical) to read EVERY local law, or be able to predict EVERY possible bad event that could befall your property that involves governmental contact. But you can at least learn from this horrendous lesson. Go out and check now on your investment property…Who would pay if there’s a sewer collapse between the street and your building? What about the property you’re thinking of making an offer on right now? Have you done your homework on it yet? What protections are afforded it in such a bad situation where the state takes over the roadway in front of the building? And naturally, has your street been subject to a state takeover, or will it be soon?

Better make sure you know how that can adversely affect you in the event of a sewer collapse – or something else in the street – somewhere down the road. Use my friend’s story as a true cautionary tale to help protect yourself now…After all, sometimes it’s best to do nothing – rather than get yourself into a potentially disastrous property investment trap. Always be on the lookout for local law pitfalls like the one I’ve just described. That’s the best way to fully protect yourself from the unexpected, and get to fully understand you local property investing law.

photos courtesy of wallpaperup.com, evergreenrealtymaine.com, dansuich.com, ci.new-brighton.mn.us, philadelphiaseweranddrain.com, greenvillesc.gov, umazuki.net

Locating The Best Real Estate Investment

Maximize your property search

If you’re considering long term property investment, now is a great time to start building your portfolio of rental property. And there are a few tried and true rules of thumb you should always follow when first starting out, as you learn the ropes of basic rental property investing. Here are some of the best real estate investment ideas to use when searching for rental property.

Look for the unpolished apple

If you search for an investment in an area that is already proven – a “hotspot” so to speak – you’ll be paying a premium price for the ability to be in a risk-averse location. Consider searching for properties in fringe areas, those on the outskirts of hot areas. Or in areas that show signs of urban renewal and gentrification. Hint: let area restaurants act as a pointer for you. The greater the influx of higher-end restaurants to a particular town, the greater the likelihood of gentrification. When you by in up-and-coming areas, as opposed to established ones, you’re taking on more risk, but being rewarded for it with a lower purchase price for the property, and a greater chance for market value appreciation over time.

Search for rental property where few rentals exist already

The element of scarcity will yield a greater return on your investment, since competition for other rental property will be much lower in that area. Hence, you may have the ability to obtain a higher rent roll due to such scarcity of local rental units available.

Always be aware of the local job market

If there is lower unemployment in an area you’re searching in, you’ll have a much easier time renting out your units. Conversely, high unemployment and a dearth of local jobs will yield a greater vacancy rate, no matter how nice your units may be. Be sure to check out the local paper and web sites for jobs in the search area to get a handle on employment demand.

Study vacancy rates in your search area

You’ll want to make sure the local area is stable before you invest heavily in any rental property for the long term. You’ll want to see that there is a good mix of owner-occupied and rental properties, with also a good mixture of varied housing available to renters. In addition, you’ll want to check out how steady the local population has been. The most recent census data will help you greatly in determining the best local areas to key in on.

Locate properties in areas with excellent transportation

Real estate investors should be searching to invest in areas with a great deal of access to public transportation, as well as easy access to local highways. If the area you’re looking in has a higher degree of unemployment, but excellent public transportation like a commuter railroad and/or buses, then you can consider the overall employment picture for a larger geographic area in your investment analysis.

Just because a property is being sold “cheap” does not necessarily mean it’s a good deal

Even though a property may have been discounted several times already, it may not mean that it is being sold at market value. It may still need to come down even more in price before becoming a good deal. Only by crunching the numbers, and running a Comparative Market Analysis can you gain proper insight into what a property’s current market value may be. When in doubt, ask your local real estate agent for their help in running a Comparative Market Analysis for you.

Never feel pressured to make a deal

It is possible that after a long period of searching for rental properties to acquire, you just have not found a good, positive cash flow opportunity. That’s OK – because sometimes it’s simply fine to do nothing, rather than make a mistake. Be patient. Investing is a long term process. And good opportunities will present themselves eventually. As Warren Buffett has said, “when there is nothing to do, do nothing.”

Numbers crunching required

So be sure to utilize all of these rules of thumb to help you in your rental property locating. Remember that any good long term investing will require using these tips in order to find the best real estate investment. Running your numbers and doing these simple analyses for any potential property will point you in the right direction towards the greatest positive cash flow investments.

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Fiscal Cliff Notes

The Genie prognosticates…

In the aftermath of the Presidential election, so much has been commented about on television and written about in articles throughout the world about the proverbial fiscal cliff we’re about to hit here in this country. And property investors need to develop alternate plans as a means of grappling with this uncertainty. You’ll want to be prepared with several real estate investment strategies in place as we approach the end of this year.

At the time of this writing, it appears to be a 50-50 coin toss as to which way Congress is going to go regarding avoiding the fiscal cliff. With all the rhetoric coming out of Washington post-election about how conciliatory each side is going to be, it’s hard to take both parties seriously, and hard to believe that some compromise will come to fruition.

So my gut feel is some form of agreement will not occur by January 1st. It is possible all involved will come to an agreement on a further extension of time beyond January 1st for a short period to allow for more discussion on the matter, but buying time only prolongs the pain. We live in a time of extremes in Congress, when both political parties here in this country seem unable or unwilling to reach agreements. The concept of compromise is all but gone. This has been demonstrated numerous times over the past several years. So with recent history at our backs, it’s hard not to be pessimistic about a solution be worked out by the end of the year.

The sequestration effect

Without a new deal struck, and sequestration taking effect, property investors need to create a proper plan for this horrible eventuality. In this scenario, let’s see what will happen to your property investments in the short-term and long-term, then determine some proper real estate investment strategies moving forward.

Sequestration calls for deep cuts in government spending to all sectors, most noticeably in defense spending. These cuts will take place over the next ten years. Job creation will be severely affected, and so the overall drag on the economy will be a major hit.

World-wide repercussions

In addition, there will be repercussions seen across the world as Europe still struggles to climb out of its recession, and China is just starting one of their own. The psychological effect on the entire U.S. economy will be severe over the next year should sequestration occur. People, afraid for their jobs and having very little job safety, combined with little job creation in this country, will ratchet up saving for the proverbial rainy day. That means they will stop buying frivolous goods and services.

Effects on residential and commercial markets

With that, the small brief expansion of the economy that we saw this year will come to a grinding halt. The residential real estate market slowdown (and any appreciation that occurred over the past year) will come to a halt. Commercial property will also be adversely affected – probably more so than residential markets, as businesses struggle to either stay put, or end up contracting.

With very little expansion by the business sector, office vacancy rates will increase. So too vacancy rates in retail outlets, shopping centers and malls. Look for overall contraction in the commercial real estate investment market over the next year if sequestration occurs.

However, residential rental real estate, at least for property investors, should remain strong. House prices will at best struggle to stay level, and they will most probably contract somewhat as the sequestration puts an overall drag on the economy. However, as we’ve seen over the last several years, as the economy got worse, rental property cash flows went up.

Increased rentals

The reason was simple: buyers sat on the sidelines, preferring to rent instead of purchase. The increased demand for rentals increased the average rents in almost all areas of the United States over the last two years. This trend would absolutely continue with sequestration, as the economy continued to contract. So if you’re already holding rental property, you would want to continue holding it for the short term. You could expect cash flows to increase in the likelihood of this scenario.

In addition, if sequestration does take effect, property investing for the mid-to long-term will require more patience and fortitude. For one, you’ll definitely want to plan for longer-term acquisitions and hold onto your existing properties longer. You will not be able to rely on property appreciation to provide much in the way of returns on investment. Instead you’ll look for cash flow (and strictly cash flow) on your properties. In addition, flipping properties will be much more difficult as more people stay on the sidelines because they lack jobs or are fearful of losing their jobs.

If a compromise is reached

But what if Congress is able to reach some sort of compromise by the end of the year? What will the overall economic landscape look like then, how will it affect the property investor, and what real estate investment strategies should youy implement in this case? Well, for one, financial markets love stability. So if a deal is struck, even one with higher tax rates, Wall Street will invariably fall in line, calm down and stabilize as markets become less volatile. This will then have a ripple effect going overseas as European markets are subdued by the lack of volatility in the US market.

In the short term, things may get jumpy in the first quarter of the new year if an agreement is reached, but for the remainder of 2013 however, things should settle down and remain pretty much as they were this past year. That means: slow growth overall. Especially in residential real estate, and certainly in commercial real estate niche markets.

Increasing market valuations

Overall market values should slowly creep up over the course of the next year given this compromise scenario, and you can look for greater returns on your investment when you look to sell. Keep in mind that the rental market will soon be peaking as the economy stabilizes. So the best thing to do in a compromise scenario is try to quickly acquire more rental property before prices spike next year. Also, assuming the fiscal cliff is averted by the end of the year, look to possibly sell off some of your poor performing investment properties by mid-next year.

Mid to long term planning

In addition, mid-to long-term planning for property investors should include thinking about how to weed out poor performing properties and at the same time acquire better properties (even though appreciation will make it more expensive for you to do so). With the fiscal cliff averted, it will signal not just more stability in the financial markets, as well as an improvement in the overall U.S. economy, but an overall optimism from U.S. residents over what Congress and the president can accomplish together. This feeling of stability should translate into a very positive psychological feeling for most home buyers in this country. More home buyers will come off the sidelines over the next several years as this feeling pervades the economy. Look for appreciation to continue in the mid-to long-term (5 to 10 years).

Plan for both scenarios

So whether sequestration or compromise occurs, property investors will need to plan now for one of the two scenarios occuring, by creating several real estate investment strategies. With sequestration, make preparations for quick acquisitions and then the holding of rental property for the long-term. In the case of a compromise being worked out and disaster being averted by the end of this year, look to sell off some of your weaker properties and then acquire better properties for long-term growth next year. Also in this positive scenario, if you’re a property flipper, expect a very hot economy over the next few years. Either way, you’ll want to properly prepare as any good property investor should.

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Investment Property Advice: Beware The Angry Tenant

The stereotypical view

The “angry tenant” is such a classic stereotype in our culture, but the image exists, and dealing with a difficult tenant is always dreaded by property investors. Certainly the best investment property advice simply states that you must be wary of installing any potentially disastrous tenant in one of your units. An angry tenant can quite literally rob you through non-payment of rent, and take any positive cash flow investment down into an abyss of red ink in very short order.

“One Bourbon, One Scotch, One Beer”

In our culture, for me, the quintessential angry tenant is represented in George Thorogood’s 1977 recorded version of a classic blues song written by Rudy Toombs and covered by John Lee Hooker, “One Bourbon, One Scotch, One Beer.” In it, Thorogood created a mash-up of the original song by combining it with another Hooker recording, “House Rent Boogie,” which serves as a background storyline to explain the singer’s predicament.

“House Rent Boogie” describes the events that occur after the singer has lost his job. Unable to pay his rent, he tries to gain temporary lodging with a friend, but is unsuccessful. He then lies to his landlady that he has gotten a new job, and is then able to return to his apartment, but proceeds to remove all his possessions. He then goes to a bar and orders the three drinks to help him drown his sorrows. All the while stiffing his landlord:

“So I go back home I tell the landlady I got a job, I’m gonna pay the rent She said yeah? I said oh yeah And then she was so nice Loh’ she was lovy-dovy So I go in my room, Pack up my things and I go I slip on out the back door And down the streets I go She a-howlin’ about the front rent, She’ll be lucky to get any back rent She ain’t gonna get none of it”*

The cost factor

There can be quite a few interpretations when you mix a tenant’s anger, stereotypes of uncaring landlords, and blues music all rolled together. But let’s face it – as a property investor, you want to avoid the angry tenant at all costs. Obviously, because it will cost you plenty. Just as the song alludes…

I’ve got to wonder if George Thorogood owns any rental properties these days…you know – setting up that nest egg for himself. And if so, what does he do when encountering an angry tenant? Smash his guitar over the tenant’s head? Now that would make for a slightly ironic visual image…

Hold onto the good ones

One thing is for sure: the best way to avoid a bad tenant is to select a good one. But even more importantly, you’ll want to hold onto the good ones. Without a doubt, the cost to keep a good tenant is a fraction of the cost of dealing with the negative effects and destruction a bad tenant can cause.

We already know that for several years now, the U.S. has been evolving from a nation of homeowners to renters. As numbers rise for total renters, so does the incremental rise in real estate investors who look to buy investment properties. But only the savviest of investors will see positive cash flows on their investments.

A property investor’s misconceptions

Usually property investors who are not getting the returns they planned think they bought poorly. They think that either they didn’t buy a property in the right location, or they bought it for the wrong price. However, the more valid reason for not showing positive cash flows is that the investor did not do their homework properly. They may have underestimated their total expenses, or gross revenues from rent, or both.

But probably the single greatest greater factor in failing to buy investment property with a positive cash flow, is simply poor management of one’s properties. This includes doing a poor job of selecting good tenants.

How to find the best tenants

When you screen for tenants, don’t be afraid to research your prospects in great detail. This includes performing a credit check on them as a start. You’ll also want to speak with their current and previous landlords to get a sense of how reliable your prospective tenant may be. In addition, ask about any problem or complaints the former landlord may have had with them. Another good tip is to actually visit their current home. Look for how they maintain it, since this will be an excellent sign of how they will treat your unit. In addition, try to speak with their employer about their length of time on the job, as well as their prospects for future employment with the same firm.

Make nice with your tenants

Once you’ve chosen your new tenant, be sure to ingratiate yourself with them (thus helping to explode the stereotypical landlord image, noted above). On their first day, meet with them to go over the operation of appliances in the unit, as well as to discuss area amenities they should check out. It’s also a good idea to offer them a small housewarming gift too. Remember, this is a business. And it’s always easiest and least expensive for any business to retain clients than it is to search for new ones.

Collect in person

Finally, when it comes to collecting rent, do it in person. Time consuming? You bet! But you’ll have the chance to meet face to face with your tenants once a month, ask about any problems they’ve encountered with their unit or the area, as well as check on how well the unit is being maintained – all at the same time. And that’s what I call good preventative maintenance.

In addition, when you are acting as your own property manager, you should be acquiring properties that are no more than a half an hour away from your own home. If anything major were to go wrong in an emergency, you’ll be grateful you live close by.

Buy investment properties intelligently

With over three and a half million single-family rentals in this country right now, and growing daily because of increased rental demand and the foreclosure crisis, looking to buy investment properties is an intelligent addition to any investment portfolio. Just remember to crunch your numbers conservatively, and find only the best tenants when screening. Be sure to avoid those stereotypical “angry tenants” at all cost.

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jackbrummet.blogspot.com, songkick.com, rottentomatoes.com,

allpropertymanagement.com, abreupropertylistings.com, doityourself.com,

neighbors.denverpost.com, moneycrashers.com, activerain.com

Offering Ports In A Storm

The times they are a-changin’…

The current spate of rallies sweeping the globe, spurred by the Occupy Wall Street protests, taps into a great underlying fear for property investors: namely, is capitalism dead? Most of the protests stem from the wide disparity between the rich and the middle class in today’s economy. While the anger is certainly well-founded, property investors should be asking how they can utilize this current social volatility to their favor.

Any investing of your hard-earned income into rental real estate requires some faith that these unsettled times will abate and calmer waters lay ahead. However, investing in a storm of social and political upheaval can still yield great dividends. The main reason being, people are always looking for a port in a storm.

Offering stability

These days, the residential rental market remains quite strong, due mainly to the concept of simple supply and demand in this current storm of upheaval. With fewer people purchasing (and/or refinancing) homes, and credit markets remaining quite tight, renting becomes an extremely viable alternative. Renting is now a great housing substitute for a) potential first time home buyers, b) those who have recently lost their homes to short sales and foreclosures, as well as c) those who sold their homes, but have decided to wait before purchasing another home in such declining real estate markets.

Thus, residential rentals provide a true port in the proverbial storm for such psychologically changing times. And with current interest rates at historically low levels, this also represents a unique opportunity for property investors to jump in, and/or augment their residential rental real estate holdings.

The time is now for more leverage

It would make sense that the more rental units you can afford to leverage at this time, the better. Keep in mind that five family and larger houses and apartment buildings are considered commercial buildings. And lenders typically offer better rates and terms on residential property. Also, consider three and four family properties over single family or duplex houses to increase your leverage.

Take into account that in such volatile times, offering solid, attractive rental housing can bring greater positive cash flow due to your ability to raise rents on a very regular basis. People will pay more for that psychological feeling of security and serenity in their home environment – and you can be the one to provide it to them. They also don’t have to worry about the real estate market constantly going down and their homes losing value if they stay on the “sidelines” and rent, until residential real estate values begin to level off and rebound again. But that rebound now appears to be at least several years off.

So use these shifting social and economic times to your advantage. Look to augment your rental property investments by adding to your multifamily portfolio at this strategic and historic point in time.

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Getting On Board The Interest Rate Train

Falling interest rates…

The latest news is that long term mortgage interest rates have just dropped this week to historically low levels. Of course, this presents yet another enticement for property hunters to consider real estate as a go-to investment in such down economic times. So, is it the correct move?

Possibly. In addition to interest rates, two other key things to take into account when considering jumping in to purchase your next investment property are your property holding time frame, as well as optimum purchase timing.

Your investment holding time frame

If you’re planning on holding your next purchase for a mid-range to long-term time frame (ie. – at least 3 years or longer) then by all means you would meet this criterion for jumping in and purchasing now. The sluggish real estate market will definitely remain stagnant for the next few years, especially with the latest news that banks are now picking up their rate of foreclosures, after sitting on the sidelines. This is due to allowing time to soften the blow of negative publicity, as well as deal with the injunctions from state attorney generals nation-wide to the robo-foreclosure process that enveloped the lending industry late last year.

So now that foreclosures are up approximately ten percent over this time last year, you’ll need to hold any newly purchased investment property a solid three years at the least before expecting any increase in valuation from anything except your own improvements (ie. – building upgrades and/or new tenant leases that have rent bump-ups in them, that will raise your overall valuation of the property).

Purchase timing

The other main factor to consider when looking to invest now to take advantage of such currently low interest rates, is your purchase timing, and when it’s an optimum time of year to close on any deal. As I’ve mentioned in my prior article on the best time of year to buy investment property, August and January/February are prime months to be swooping in to make your deals. Right now, you have the opportunity to research and locate the best buying opportunities. But concurrently, you should be meeting with your lender to investigate how best to lock in these current interest rates for any Winter buys.

Lower rates and their effect on your bottom line

Also, keep in mind the effect lower interest rates will have on your bottom line. You’ll either be able to afford more investment property, or be able to yield a higher return on your investment with the advent of these lower rates. Obviously, purchasing a “larger” property (eg. – a four family house instead of a three family) should throw off more cash flow in the long run. However, by buying that three family now, and not stretching yourself to get the most house for your mortgage dollar, you should realize a more immediate greater cash flow return due to such low interest rates.

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How To Leverage Rental Properties

Start by creating a long range plan

In creating a long range plan for investing in real estate, you should consider how best to leverage any and all rental properties you may acquire. After you successfully start with purchasing your first rental building (this assumes you are, and should be, in a positive cash flow position), you’ll want to utilize the equity from the first property to help with the acquisition of your second property.

This “rolling over” of your equity in your first property is what helps give real estate a distinct advantage over other forms of investments. Your ability to leverage each property you own to aid in the acquisition of the next property is crucial to successful real estate investing.

How to leverage successfully

By laying out a long range plan, complete with your property investment goals for a 5, 10, 15 and 20 year period, you can see on paper how often you’ll need to purchase a rental property. This timing pattern is important for you to feel comfortable with accomplishing. It also creates a written “agreement” with yourself to adhere to. As an ambitious, but simplistic example, let’s say you propose to acquire one rental property each year for the next 20 years. Each property must throw off positive cash flow. If they don’t, your plan will have to either be adjusted to a different acquisition timing structure, or you’ll need to sell off the underperforming (read: negative cash flow) properties as you learn more about why they’re underperforming.

Work with only one lender

Next, you’ll want to have a good working relationship with one mortgage broker/lender. Someone you can talk to about your plans ahead of time, and who will essentially become your partner over the long haul of property investing. Working with just one lender will create a kind of lovely business shorthand – one in which there’ll be no need to continually explain what you are trying to do with each refinance of your investment properties. You’ll also be able to create a long history with one lender – thus increasing your credit rating, trust and potentially yielding better long-term mortgage interest rates, as well as greater loan-to-value ratios than your lender’s norm. Never underestimate a bank’s desire to work with the same, consistent borrower over and over again. Many benefits will accrue to you over time by doing so.

In the above example, after you’ve purchased your first property, it will be time to acquire your next one in a year’s time. After you’ve located the next one (and have crunched your numbers as to what you feel it’s worth to you), go to your lender and discuss what equity you can reasonably pull out from your first property. Then back into the amount you’ll have to cover “out-of-pocket” to make the second rental building purchase a reality.

Long term progressions…

In the same way, by the time year three rolls around, and it’s time to purchase your next investment property, go back to your lender to discuss the possibility of “packaging” both your first two properties, pulling equity from both of them, either by refinancing both mortgages, or adding a new mortgage to just the second property. In this way you can help pull out more cash for the down payment on your third “installment” of your rental property long range plan: your third rental building purchase.

So by now you can start to see the progression this “rolling” of your properties is taking, as you and your lender are always re-evaluating what your current stable of properties will fetch in terms of equity. The fourth year, you do the same thing – locate your next purchase, go back to your lender, and see how much equity your “package” of investment properties will allow – either individually refinanced, or as a group. In this way you can determine how much you’ll have to put in to the next deal out-of-pocket.

After several years in this example, you can start to realize the ability to invest in properties without putting in any cash on your own . You’ll simply be leveraging the equity in each and all of your stable of investment properties, and utilizing that equity to enable you to acquire even more properties. In this way, you can build your own real estate mini-empire – at least one that may throw off a sizeable amount for you to some day retire on.

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