The seesaw swings both ways with leverage
The main advantage of leverage
The main drawback of using leverage
Attracting good tenants is the lifeblood of any successful rental property investment. And there are some essential rules for attracting these tenants to your units. Keep these tips in mind as you continue buying rental property. These tips will also help keep you maximizing your cash flows when investing in real estate. Remember that you can always be learning new and better ways to maximize your profits in investment properties by becoming an even better landlord.
Any landlord worth his salt will ensure he performs proper maintenance on his rental property. As a landlord, you should not only make repairs in a timely manner on all defects you can see – but also on those you can’t. Remember, that when investing in rental property, since you’re not going to want to disturb your tenants constantly, make sure to ask them on a periodic basis what physical property issues are arising in their units. Is there a new small leak in the kitchen drain? Is their toilet working properly? Any gas or oil odors suddenly present? You need to ask to find out.
And you should be asking these questions about your investment properties on a regular basis. When you keep up with repairs to your investment property, you make your tenants feel more secure about you, as well as making them feel good about staying in your unit. This will aid in future retention. Obviously, the more tenants you can retain year to year, the less work you’ll have to do – since you won’t need to look for new tenants to replace them. Proper maintenance also keeps your overall repair costs down over the entire term of your ownership of the rental property.
If you’ll be using the services of a property management company, make sure you are stringent in your due diligence prior to hiring them. Check out their references, talk to their current landlord roster, and obtain referrals from local real estate pros like real estate agents in your area. Good property managers always stay in regular contact with all tenants. They don’t simply collect rent. It’s their job to maintain good relationships with all tenants. They are proactive at performing property inspections, and will take care of maintenance and emergency repairs as needed. And they will screen prospective new tenants for you as well.
If you set a rent that’s too high, you may profit from the incremental amount above market rent for a short time…but you’ll end up paying for it later when that tenant decides to move because his rent is too high. Again, looking for new tenants is always a costly endeavor. Not only time-wise, but also due to the increased vacancy that occurs every time a tenant moves out. On average, expect at least a month of lost rent due to any tenant moving out. Always make sure you know what current market rents for your area are. Check out your competition for like units. Go visit them. Talk to local real estate agents to get more information as to what constitutes market rents for comparable units at any given point in time. Check out Craigslist listings for rentals in your area. Become an expert on market rents. Know what other real estate investors in your area are charging at any given time.
Likewise, setting rent too low does you no good either. While you may get more takers for your unit, you’re not optimizing your cash flow, as you are giving up the differential between market rent and what you’re charging each month. Remember too that tenants that pay rents under market rate tend to not be so careful about keeping up the look of the unit. Ultimately, they may end up doing more harm to the physical space due to increased wear and tear, and lack of care. Basically, they’ll take much less pride in their living environment when they know they are paying a discounted rate for it.
Tenants that know how to work the system are the ones you’ll need to be most careful installing in your units. While tenants that don’t pay their rent on time need to be evicted as quickly as possible, some states allow the eviction process to last for months. All the while you’re losing revenue due to non-payment. And don’t forget the legal fees involved as well for retaining the services of a good eviction attorney. The best advice here for all real estate investors is simple: make sure you carefully check all references for any prospective tenant. This includes speaking with their previous landlords, running credit checks on them, as well as criminal background checks too. Do this, and you should properly protect yourself from those professional tenants who are gaming the system.
photos courtesy of regulatedtenants.com, iresvegas.com, newhomessection.com, lowesforpros.com, landerassociates.wordpress.com
Here are some quick search tips that will keep you pointed in the right direction when trying to locate your next piece of investment property. Trite but absolutely true, finding the worst property in the best neighborhood is axiomatically better than locating the best property in the worst area…regardless of the absolute price. Most beginner investors get too hung up on the bottom line price they’ll have to pay. Instead, worry about whether the cash flow will throw off enough return on your investment.
You should also be concerned about your ability to finance the project. While having enough cash on hand to pay the freight for the entire purchase is nice (and will always yield you the most advantageous negotiating position to obtain the best price on any piece of investment property), having the ability to finance and obtain a mortgage on a property is much more important. Leverage is the key, and you will not be using any leverage when you buy all cash. That said, keep in mind that you could employ the strategy of buying all cash in order to obtain the best deal on any given property, then finance it with a mortgage after you’ve purchased the property: in effect, the best of both worlds. Keep in mind though, that most lenders will require some form of “seasoning” (or amount of time for you to actually own the building) until they are able to give you a loan on it. Seasoning traditionally can be a year or more, depending on the lender.
Keep in mind that your pro forma cash flow will tell all you need to know about whether a potential investment property will be a good deal or not. You’ll certainly want to avoid any negative cash flow scenarios (also known as negative gearing), unless you have deep pockets, and are pretty sure you can turn the property around by raising rents substantially in a short period of time to drastically increase your cash flow…either through repairs – or through being able to replace existing tenants with below-market rents, with those that pay market rent.
Your pro forma income statement (also known as your pro forma cash flow) needs to reflect actual expenses on the potential property you’re considering making an offer on. Never take the word of the seller. Do your due diligence, and get confirmation of every figure a seller gives you. Pour over each lease. See each expense item bill for the last year or two the seller gives you. Talk to your insurance agent for accurate figures on what new insurance will cost you – and make sure you have enough of both property insurance, as well as liability insurance.
Make sure you can ascertain exact figures for the current rent roll, as well as common expense items such as taxes, fuel (whether oil, propane, or some other source), sewer and water charges, trash collection fees, electricity charges and insurance. Naturally, you’ll also need an accurate number for your projected monthly mortgage payment if you will be obtaining one.
Oh, and don’t forget to add in an amount for vacancy. While it is wishful thinking to create a pro forma cash flow based on 100 % occupancy, it’s not reality. You always need to build in some vacancy rate. The standard is 10% of the total rent roll. Depending on the area, and the ease or difficulty it may be to rent out a vacancy, the 10% figure can be tweaked up or down a couple percent. But the norm is 10%. (It’s just really hard to replace a tenant without some down time in between.) Also, don’t forget to add in the expense of .maintenance. This also is usually a small percentage of total rent roll (you can plug in any number you like – from 2 or 3 percent up to 10 percent , based on how liberal or conservative you’d like to plan for emergencies – like a burst pipe, for example…
Just make sure you don’t skip any steps, and do your homework, diligently. In this way you can best protect yourself – and identify the best investment properties on the market that are ripe for acquisition.
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The beginning of a new year makes for a perfect time to go over your property investing strategy. There are several key elements in any good property investing plan that should be reviewed at regular intervals…so why not now? It shouldn’t take very long to do this review, so let’s get started!
A solid property investing strategy is to review your annual rent roll to ensure you are maximizing market rents from all your units. If you don’t already have tenants under leases, consider creating set leases with small yearly bumps included in them. If you have current leases coming due this year at different intervals, make sure you have a good idea of what bump-ups you want to ask for. Market research is critical here. Go out and check your competition. See what the going rate is for similar units as the ones you have coming available, or that will be up for renewal. Never leave rent roll money on the table. Always be maximizing your cash flow in this way.
Have you deferred any needed repairs to your units and/or buildings from last year? Make sure you create a schedule for the needed repairs, lest they become even bigger problems that could cost you exponentially the longer you put off the fixes. Budget for the repairs, and include them in your pro forma cash flow expenses for this year to get a more accurate picture of exactly how much you will net from your property investing.
If you have long term mortgage notes in place from a long time ago, consider refinancing while rate s are still relatively low. This could end up saving you greatly in the long run. If you paid all cash for a property recently, consider whether this would be a good time to increase your leverage by taking out a mortgage on the property now. If you’ve added improvements to it in the past year, this would also help free up your cash. Crunch your numbers first, and see if the extra debt load from the new mortgage will still allow you a positive cash flow. If so, then a new mortgage may be a great way to help free up your cash for more property investing.
Prior to April 15th, the beginning of the year gets you to focus early on whether you are maximizing your depreciation on your buildings. It’s also an excellent time to get in to see your accountant to go over these matters – before they are snowed under with work come tax time in April. Maybe they will have some new suggestions about how best to maximize your day to day expenses, as well as your capital expenses to help offset your cash flow income, realizing a smaller tax bite come tax time.
Consider the beginning of the year as the perfect time to review your current building insurance policies. Yu should already be working with one dedicated insurance agent for all your property investing needs. Go over with him any adjustments he would recommend to make sure you are adequately covered in the event disaster strikes – or you have a negligent tenant. Also remember to review your current liability insurance policy on each of your buildings. This may the most critical insurance item to review. Make sure your insurance agent feels you are properly covered in the event of a tenant accidentally hurting themselves on your property, and suing you.
Utilizing this time of year as a great time to review all these key elements of any good property investor will help you substantially. You’ll end up maximizing your cash flows, as well as reducing taxes, and making sure you’re adequately covered in the case of emergencies or disasters.
photos courtesy of santabanta.com, activerain.com, acanthusandacorn.blogspot.com, omaharedcross.blogspot.com
Whether you’re flipping projects or remodeling rental properties, one of the most basic property investing tips is to develop a crew. A crew is a bunch of tradespeople that you want to call on over and over again for all your projects. You’ll need to trust them implicitly, and feel that you’re getting the best value from them. This doesn’t necessarily mean they will have the best price compared with any other local tradesperson. But it does mean you’re getting the best price from them. Consider it a most-favored-nation clause – that is, they are not offering any better deal to anyone else or to any of their other customers.
You should be comfortable with everyone in your crew. You must have full confidence in their ability as a craftsperson – be it in plumbing, electrical, carpentry, floor refinishing, painting or landscaping, to name some of the most important crew personnel. You’ll also need to feel confident about how they treat you, and the service they are providing for you. Another very important feature, is that everyone in your crew will need to interact properly with each other. If one of your crew doesn’t work well with one or more of the other tradespeople in your crew, then they can singlehandedly blow up your entire project, costing you more time, money and aggravation. Your project timing will be delayed, and you can then expect more in the way of overages from other crew members. So each tradesperson in your crew needs to fit together properly with the others. Since all trades interact on some level to either repair and/or renovate your investment property, you’ll need to make sure that each member of your crew is a good fit to the whole project.
In this way your crew can operate as a well-honed machine. Then they can come in for any given project that you have for them, and you know they’ll work well together. Each one of them can offer design ideas and suggestions to improve your product. And then perform the work on time and effortlessly with each one meshing well with the others.
Just as when you’re looking for a contractor for a larger project, scoping out tradespeople for your crew involves the most amount of work. This early amount of work will pay off handsomely in time though. Interviewing each respective tradesperson for your crew is like a contractor search- multiplied by ten though. Solid property investing tips say that you’ll want to interview at least three people for any particular trade position. Of course, you’ll need to check references for each potential crew member, as well as view some of their past work. You’ll also need to make sure they have no negative reviews with your local Better Business Bureau. And naturally, their prices should be in line for the area – though not necessarily the least expensive.
Ultimately, you’re looking for a combination of glowing reviews from past references, excellent workmanship, as well as work done in a very timely manner. And of course, you want all this for the least expensive price possible, if they’re going to become part of your crew. After all, you’ll be providing them with a steady stream of work over many years. So it makes good economic sense for them to want to be a member of your group.
Always be on the lookout for bad apples in your crew. Don’t ignore when one starts complaining about the other. Or worse, if more than one tradesperson is complaining about some other tradesperson in your crew. If so, you’ll need to lend credence to what they’re saying and see where their concerns are. You’ll need to scope out and investigate these complaints. It may require you to be on-site for a period of time to see what they’re saying and if the complaints are true. You should always be looking for ways to streamline your crew to find the best fit for all your projects. Immediately replace any trouble makers, or those that just don’t get along well with the others in your crew.
It will take time to develop your personalized group of tradespeople. Expect there to be a lot of trial and error early on as you go around choosing the different members of your crew. You’ll see from project to project which ones work best with each other. You can then fine tune the crew until you are fully pleased with the whole group. This may take several projects before you get your full complement of crew that works well together.
So once you finally have your personnel set, and you’re comfortable that they’ll all work together well with each other, then you should be hiring this group for every single project you do. It is in this way you will not only get the best product for the least money, creating incredible value, but you’ll also be saving yourself large chunks of time. No more looking for new tradespeople to fit the bill on every project. Since you’ll be trusting them, you won’t have to be on-site as much during the renovation. Lastly, these tradespeople in your crew will be offering you money-saving suggestions as to repairs to be made. For all these reasons, you’ll be saving yourself time, money and aggravation by utilizing your own personal crew of tradespeople. It’s a simple property investing tip that will yield increased savings, so you’ll realize a much greater profit when it comes time to sell your property.
photos courtesy of soundonsight.org, m8property.com, alwardwoodworking.com, jbblog.flopro.taco-hvac.com, theromanbuildingcompany.co.uk, insurancedealer.co.uk