The seesaw swings both ways with leverage
The main advantage of leverage
The main drawback of using leverage
When acquiring residential rental property, you should always be asking what improvements can you make that carry the greatest return on your investment. Obviously, the more attractive your property, the more attractive it will be to prospective tenants, and the more rent you can theoretically obtain. Your main concern should always be your competition, and what like rental units in your neighborhood look like, and can fetch in terms of rent.
Always ask if your property absolutely needs work. If so, what should be replaced and repaired? Upgrading a rental unit should only be done with an eye toward the incremental income to be derived from the upgrade. If yours needs work, then consider these repairs as allowing the greatest return on your property investment dollar.
Never underestimate what a little landscaping can return in terms of bringing in a better type of tenant to your building. A freshly spruced, attractive exterior will make a great first impression for any potential tenant. You want multiple applicants to be fawning over your unit. This will ensure you maximize the rent for that unit. If you can create a renter’s bidding war because of the desirability of your building, all the better.
If your rental unit has a kitchen that’s over twenty years old, you’ll need to decide if you want a complete kitchen renovation, or something simpler. If you can get away with simpler, by all means do so. Re-sand and paint the kitchen cabinets. Change the lighting fixtures from fluorescent to track lighting. Simple laminate countertops can replace old and outdated ones. Also consider replacing the kitchen sink and faucet together for a more up-to-date look. A trip to your local home improvement store will help give you ideas for some low cost solutions.
A very inexpensive way to modernize the look of a bathroom is too replace only the simplest of items in it. Consider upgrading faucets, toilets, towel racks, bars and accessories first. If the bath is older than 20 years though, you’ll definitely have to consider changing out the vanity, bath tub and/or shower fixtures. In either case, make sure you coordinate any upgrade with other rental units, or, at the very least, do the kitchen and bath together in the same unit. Then, you’ll apply economies of scale when hiring a plumber to come in and do both projects concurrently.
As long as you’re hiring a plumber, you should also consider if your building needs any major overhauls. This might include having him check all your pipes for corrosion, as well as wear and tear on your hoses and connectors to all your appliances in the building. Having him repair and or/replace faucets and other items now, may help prevent problems down the road.
If your floors are looking ragged due to worn carpeting, it most certainly is time to replace it. While carpeting represents the least expensive way of updating your flooring, it also is the quickest to wear out. Consider commercial grade carpet. Another way to go is engineered wood flooring. It will last 25 to 30 years, cleans up well and easily, and looks excellent. However, if you have old pine or oak floors under existing worn carpeting, you might also consider having them refinished. Gleaming hardwood floors are a great way to attract more upscale tenants, since they are so in demand right now. Consider replacing old, peeling kitchen tiles with newer, updated tile or linoleum, or as mentioned above, wood-engineered flooring.
If your interior walls are looking worse for wear, then repainting in a nice, light shade is always a good idea. Keep ceiling white, but consider off-whites and beige shades for the walls. Neutral colors always work best when renting your units. They’re also easiest to repaint when it comes time to find a new tenant and spruce up the unit. Make sure all rooms are painted the same. As for the exterior, keep the color in harmony with the neighborhood, with nothing outlandish. Remember, your building must appeal to the greatest number of potential tenants possible, in order to maximize your cash flow by keeping demand high for your units.
If you follow these most basic of investment property repairs, you will certainly keep your repair costs down, as you continue to appeal to the greatest number of tenants. And the best tenants at that. This will help keep your building in a positive cash flow for years to come.
photos courtesy of blakehomeimprovements.com, telegraph.co.uk, diynetwork.com, aglasgowskeptic.blogspot.com, apachemoving.net, bandspainting.com, roofingcontractordouglasvillega.info
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.
photos courtesy of torrentbutler.eu, images.cisdata.netmlsNY, allmandlaw.com, trexglobal.com, ericksonsdrying.com