Follow “No-Fail” Checklist When Purchasing Your 1st Rental Property

Follow “No-Fail” Checklist When Purchasing Your 1st Rental Property

Every new real estate entrepreneur needs to understand the concept of “No-Fail.” Real estate investments have been proven to contain significant advantages in providing a way to both earn financial rewards as well as to protect personal assets. In the world of financial investing, there is no such thing as being a true “No-Fail” strategy. There are risks associated with all real estate investments, but rental property can be purchased in such a way as to approach the threshold of being a “No-Fail” strategy. In order to take full advantage of the benefits of owning rental property, it is recommended that the beginning real estate investor consider drafting and following a 7 Step Checklist when purchasing that 1st rental property.

Purchasing Your 1st Rental Property

Step 1 – Understand the Case for Owning Rental Property. When you make the decision to own rental property, you need to be aware of both the advantages and the disadvantages associated with this investment strategy. Yes, there are risks associated with rental property. Many of these risks can be reduced or even eliminated when a “No-fail” approach to ownership is adopted.

SEE ARTICLE “Understanding the 5 Risks of Investing in Real Estate

As we examine the benefits you receive by owning rental property, you will quickly realize that there are five power advantages that should be important for almost all real estate entrepreneurs.

  1. Power Advantage of Leverage. Leverage can best be described as using financial instruments or borrowed capital to increase the potential return from the investment. If you own a rental property that increases in value by six percent and you had purchased that property with “all cash”, your return on investment for that period of time would be six percent. However, if you had put down a 20% down payment and the property increased in value by the same six percent, your actual return would on the investment of 20% would be five times the original amount. This same power translates across all the real estate investments and is especially true for rental properties that generate a positive cash return. Keep in mind the fact that as you increase the leverage, you also increase your risk. A good rule of thumb is to keep the leverage at a level that allows you to be positive cash flow on the property.
  2. Power Advantage of Potential Tax Free Cash Flow. Every investor will have individual tax issues, but rental property has the ability to allow the investor to receive a positive cash flow while still being able to deduct depreciation and other expenses that in essence creates free cash flow.
  3. Power Advantage of Tax Deferred Investment Growth. Rental property will generally increase in value as a direct correlation with the increase in rental income and profits. While the property increases in value in real time, your tax obligation will not accrue until you dispose of the property.
  4. Power Advantage of Appreciation. As you pay down the loan on rental property, the rental property will actually increase in value. This power has been demonstrated long-term across almost all properties. The one major caveat to remember is that you must select the right property at the time of purchase. Rental property can in effect produce equity for the future.
  5. Power of Cash Flow for Retirement. Tenants pay rent, which increases in amount over time. This cash flow continues and increases in size as the rental rates increase. Well-selected rental properties can provide a retirement income.

Step 2 – Evaluate Your Personal Situation. The decision to own real estate comes with responsibilities and that is especially true for owning rental property. Even prior to beginning your search for the perfect property, you should examine two areas of your life.

  1. Personal Abilities and Desires. As soon as you purchase that first rental property, you take on the responsibilities of being a “landlord.” There are ways to mitigate this responsibility when you are in the position of obtaining professional management.SEE ARTICLE Five Keys That Can Open the Door to Professional Rental Property ManagementYou should be realistic when purchasing that first property by realizing that you will be a landlord with “hands-on” responsibilities at first. Yes, it may seem daunting, but the rewards can be significant. Ask yourself the following questions and decide if you are personally ready to get started.Purchasing Your 1st Rental Property
    • Do you want to be a landlord?
    • Do you have the experience to do the repairs or can you find someone who can?
    • Do you have the time to collect rent, do marketing, and complete repairs?
    • Can you manage that first rental by yourself
      It is important that you be realistic in answering those questions.
  2. Personal Financial Situation. When you purchase that first property you will be incurring added financial responsibilities. In order to make the purchase as “No-Fail” as possible, you should take the following actions:
    1. Pay Down Debts. If you have outstanding credit card obligations and short-term debts, you probably have large recurring expenses. When you purchase that first property you will most likely have additional expenses that need to be paid. If you are financially burdened by debt, you may not be able to make these expense payments on time, which will put your new rental property investment at risk. As much as possible, try and pay down your short-term debt. The more you do this, the better equipped you will be to make your rental property purchase a success.
    2. Secure Cash Requirements for the rental property purchase. In most cases, this is the down payment required to purchase the property. Additionally, you will need the earnest money deposit along with funds for immediate repairs and improvements to the property that will help in securing rental tenants. Don’t go into a rental property without the funds necessary to complete the purchase and get the property leased.

Step 3 – Find “No-Fail” Properties. Not all rental properties are equal in value and not all such properties make good first purchases. As a new real estate owner, you need to find the best properties that will attract the best tenants who will pay the highest rent. Because this is your first rental property, you need to decide whether you are looking for a single unit or multi-unit purchase. In most cases you will be safer in finding a great single-family home as your first purchase.

Single family homes have the advantage of requiring just one tenant, while multi-unit properties will need to be filled with more tenants. You will want to find a perfect tenant for the purchase and it is easier to find one great tenant than many great tenants. As you experience success with your first purchase, you will soon learn the skills to find more and more great tenants. Keep in mind the fact that when you purchase a single-family property, repairs are less, there is less upkeep and management involvement is much less.

Purchasing Your 1st Rental Property

When searching for the great “No-Fail” properties, it is important to remember that location is extremely important. When future tenants choose between comparable properties, they will compare them the same way you would if you were looking for a new home for your family. Search for properties that meet the following guidelines:

  • Near to Quality Schools. It has been proven that young families use the proximity to good schools as a major factor when choosing a home or rental. The closer you are to great schools, the faster your rental will lease up.
  • Near to Shopping Districts and Malls. If you can find a rental property that is within walking distance to good shopping, it is a plus.  When you separate yourself from the shopping, you are eliminating much of your market audience.
  • Close to Amenities. Your new tenants will want to be close to amenities like movies, entertainment, fitness centers, day-care, and personal services.
  • Near to Job Opportunities. If you can find a property close to major employment opportunities, you will increase your potential list of possible tenants.

Purchasing Your 1st Rental Property

Don’t forget the condition of the property itself. The more desirable the property, the greater chance for finding a great tenant.  Unless you are specifically searching for fixer-up properties, stay away from properties that need major repairs. There is a major difference between choosing a “fixer-upper” and being dumped into one when you weren’t looking for one. Make sure you know what you are getting by getting a competent house inspection.

Finally, look for a home priced below market with minimal repairs. A little bit of paint can go a long way. Curb appeal is important.

The best “No-Fail” property is one that can be purchased below market value. We don’t recommend buying in blighted areas or in economic distressed areas. Rather try to find a property that meets the criteria of a great property that can be purchased at a reasonable price. Your ability to negotiate is important in finding the right “No-Fail” property.

SEE ARTICLE Negotiation Real Estate

Step 4 – Believe the Numbers. If you are purchasing a property that has been used as a rental prior to your purchase, make sure you get access to the true expenses and rental payments on the property. If there have been major repairs made to the property, you need to know what they cost. Numbers don’t lie.

Start by doing an accurate proforma on the property in question.  If you enumerate all the potential expenses before you start calculating the rents, you will be more in line with real world figures.  Make sure you include all the expense items as well as a reasonable reserve for repairs.

Purchasing Your 1st Rental Property

Unless you have a property that is already rented, you will need to use rental income that is accurately based on comparable properties.  Look for other rentals in the area and your projected rental rates will be more accurate.

When completing the property analysis, you should avoid extreme assumptions on both the expenses as well as the income. The more accurate you make your analysis and pro-forma, the more realistic you will be in determining value. In the end, the key is to do the math.

Step 5 – Draft a “No-Fail” Contract. Once you have identified a great rental property, you need to negotiate a contract that will give you the highest probability of making a regular recurring profit and positive cash flow.  What you agree to with the seller of the property must be codified in writing as part of the earnest money agreement and subsequent closing documents.  The exact terms of your “No-Fail” contract will be determined through your negotiation process.  There are, however, some key elements to consider when drafting your agreements.

Purchasing Your 1st Rental Property

  • Determine Who Is Purchasing the Property. It sounds simple to say that the answer is yourself, but, you need to determine how you will take title to the property.  A great many real estate investors have found that they can establish a fence of litigation protection by taking title to the property through a properly organized LLC or Corporation.  If you are unsure of how you are going to take title to the property, a good option is to make the offer “under your name and/or assigns.”  If the seller questions why you put “and/or assigns”, you can honestly answer that you are consulting with your legal counsel on the best way to hold ownership.  One final thought on taking ownership is to allow yourself the option of bringing in a partner if the need arises.  The “and/or assigns” allows you to have this option.
  • Acquire Competent Legal and Brokerage Help. If this is your first rental property purchase, getting proper professional help for the final legal agreements is a priority.  Don’t make the mistake of thinking you know everything.  This contract is the key to setting up your future, so don’t skimp on the expense.
  • Allow Proper Timing for Closing. Once you secure the property through a well-drafted earnest money agreement, you will want to begin the process of finding tenants, preparing for needed repairs, and finishing your due diligence.  Make sure you have left enough time to get this done.  Finally, try and avoid the clause “time is of the essence” unless your legal professional has some sound reasons.  If the seller includes this clause and for some unforeseen reason you are unable to close by that specific date, the seller would be able to sell the property to someone else.  Remember, you are looking for properties priced below market and you don’t want to lose the deal because you are a day late in closing.
  • Include Escape or Exit Strategies. It is doubtful that you have been able to complete a full due diligence on the property when you make the offer, and you want to ensure that you can get out of the deal if the property isn’t what you thought it was.  You also want to make the offer “subject to” your financing unless you have already make financing that won’t fail.  The “subject to” clause can apply to financing, approval of a property inspection or a myriad of other things such as property zoning for rentals.  This is especially true if you are purchasing a property for short-term rentals and you aren’t sure if they are permitted in that area.
  • Include Access to Existing Property Expenses and Rental Documents. If the property has been rented in the past, you want to verify both the rental contracts as well as existing utility expenses, taxes, repairs etc. Even if the property hasn’t been rented before, you will want to review these same items.
  • Include a Survey and Property Inspection in the Agreement. You want to make sure that you are in fact getting everything you think you are getting.  The survey will document the physical aspects of the property and the property inspection will ensure that needed repairs are addressed as part of the purchase.
  • Include a Clause That Allows You to Start Showing Property to Prospective Tenants Prior to Closing. Your goal should be to have tenants in place as soon as you take ownership of the property.  If the property is not presently rented, make sure you can show the property to prospective tenants even though closing hasn’t happened.  Keep in mind the fact that your rental agreement will also be “subject to” closing on the property.

Step 6 – Identify “No-Fail” Tenants. Your future tenants are in fact going to pay off the loan on the property through their rent payments.  This being the case, you want to make sure that you can find the best tenants as possible.  If the property is presently being rented, take the time to interview the existing tenants and to verify their payment history.  If you are going to change the rent amount, you will want to see if the existing tenants will balk at the increase.  During the time you will own the property, you will undoubtedly need to find new renters.  The following tips will help select tenants who will protect the property, keep it in good repair, pay their rent on time, and avoid disputes.

Purchasing Your 1st Rental Property

  • Start with Verified References. Ask prospective tenants for three to five references.  If they have rented previously, ask for the information as to that property.  Then follow up with the references and ask probing questions like:
    • Did the renter pay rent on time?
    • Did the renter do minor repairs and keep the property in good shape?
    • Were there any disputes between the renter and neighbors?
    • Were there any legal problems with the renter.
  • Ask for Social Security Information and Get a Credit Report. Avoid Prospective Renters with Past Delinquency Issues.  This pertains to both past rent problems as well as credit issues.  If the prospective renter has a poor credit rating, chances are that your rent will be late or non-existent.
  • Ask for Employment Information. If the renter has a good job, then your rent will be a lot more regular.  In addition, the renter will not like a bad report to get back to his employer that he is not paying rent on time.
  • Do a Personal Interview. Don’t just accept anyone as a renter.  If possible, you want to make sure that you are getting people of good character.  When you interview them, take the time to find out their interests and hobbies.  Doing so will help you avoid having a renter dismantle a motorcycle on your new carpet, which I can tell you has happened.
  • Offer a Discount for Auto Payment of Rent. This discount will pay for itself each month.  The auto payment from their checking, savings, or credit card should also have a substantial penalty if the payment is not made or refused because of insufficient funds.
  • Require a Reasonable Security Deposit. When taking the deposit, you should specify how the deposit will be refunded and what charges will be taken from the deposit.

Step 7 – Prepare Yourself for Ownership. The purpose of a great “No-Fail” checklist is to ensure that your rental property purchase provides a long-term positive return.  Once you close on the property, your ownership responsibilities will fall into two different categories.

  • Management Responsibilities. As soon as the closing takes place, you will be a landlord and will assume ultimate responsibility of managing the property.  If this is your first rental property, you don’t have to start from scratch.
    • Enroll in rental property associations. These people will have suggestions on management based on personal experience.
    • Read books on rental property management. There are numerous books online and in the bookstore that include sample forms and ideas on keeping the books and being a landlord.
    • Attend seminars and webinars on property management. These forums will provide advice and guidance.  Pay special attention to new ideas on increasing cash flow through management techniques.
    • Become friends with other rental property owners. If you are purchasing a property in an area surrounded by other rental properties, find out who the other owners are and meet with them.  Become friends and accept their help when first starting out.
    • Start looking at professional management. If you have chosen a great “No-Fail” property, you will soon be looking at a second and then a third property.  It won’t take long and you will realize the value that comes with well-chosen professional management.  When the time comes that you are ready for professional management, you will already have someone in mind.
  • Financial Responsibilities. Yes, your tenants will be paying you rent and helping you actually pay down the loan on the property, but you will need to be prepared to pay for repairs etc on the property.  Make sure that you have the financial resources to make these payments.  Financial preparation is the key to finding both short and long-term success in rental properties.

Your success as a real estate investor in rental property can be increased dramatically by avoiding the dangers that come by being unprepared.  This checklist can be your guide to finding “No-Fail” rental properties that create wealth and prosperity.

Purchasing Your 1st Rental Property

Understanding the 5 Risks of Investing in Real Estate And How to Combat Them

Understanding the 5 Risks of Investing in Real Estate And How to Combat Them

In today’s tumultuous times, investing in real estate may very well be your best bet in protecting your future while at the same time creating new streams of income.  On the other hand, real estate investments don’t come without risks and the unforeseen dangers of foreclosure and the loss of capital.  Just as there are potential advantages and benefits associated with real estate, the perils of real estate are also real.  Each real estate strategy has specific risks associated with the investment method.  Every real estate entrepreneur should take the time to evaluate both the real estate itself as well as his or her investment temperament.

There are five major categories of risk associated with most real estate strategies. When you fully comprehend the dangers, you will be prepared to confront these risks and use real estate as a tool to create wealth and establish new streams of income.

Categories of Risk Associated with Real Estate

  1. Risk of Unpredictability. The future is unknown and you can’t determine in absolute terms what will happen to any specific property at a future date. Long-term historical data has shown that real estate has appreciated, but the rate of appreciation has varied and at times has even dramatically dropped in value.  When you purchase a property, you control the asset without any ability to control outside factors which can determine the value of the property.  Even when you purchase the property you may believe that you understand all the information about it, but experience has proven this to not always be the case.  There are unexpected events or undisclosed facts that may appear.  Naturally you try to minimize these factors, but it may not always be possible to do so.
    1. Economic Downturns. Recent history has shown that when the economy stumbles or even collapses, so do real estate values.  Thousands of home owners found themselves owing more money on their homes than they were worth.  When you are upside down like this, the value of your real estate can fall dramatically.  Historically, the values have returned to their previous values and even appreciated, but if you weren’t prepared for this situation, you would have lost money.  These economic downturns can happen on a nationwide basis, but far too often take place on a local or regional basis.  If a major employer closes or moves to another location, there are naturally more properties that come on the market, which in turn can cause values to decrease.  It’s all part of the supply and demand cycles.  When demand exceeds supply values increase, and when the opposite happens, values can also decrease.  Good real estate markets are best characterized for having strong occupancies and regular increasing rents.  When a downturn occurs, occupancy rates fall and rents decrease, which in turn can lower real estate values.
    2. Interest Rate Fluctuations. The majority of real estate today is purchased using other people’s money through loans.  These mortgages are secured by the properties themselves.  These loans are based on interest rates that can change with major impacts on both cash flows and corresponding property values.  When you purchase a property, through a bank or a private lender, it is imperative that you protect yourself from interest rate increases.  Many real estate purchasers were unprepared for large balloon payments or the requirement to refinance the property under the original mortgage.  When this situation occurs and you are unable to meet the terms of the mortgage agreement, you can face the condition where you are forced to sell the property at a reduced price.  Whenever possible, you should lock in long-term stable interest rates on your loans.  Failure to do so is disaster waiting to happen.
    3. Changing Demographics. With urban development comes change and the changing demographics associated with “Baby Boomers” and other age groups, real estate values can change unexpectantly.  The demographics of a certain location may include the need for more rental housing while other demographics may suggest investing in other commercial ventures.
    4. Legal Entanglements. Because you control the asset, the real estate could become at risk through legal disputes that may occur against you.  You can also be subject to risk associated with accidents that may take place on the property itself.  Additionally, there may be zoning or similar issues that could create some form of cloud against your property.  Finally, we seem to live in a litigious society where lawsuits are far too common.  Fortunately, most of these types of issues can be combatted effectively when choosing the right professional and legal help.
  2. Risk of Negative Cash Flow. Negative cash flow can be the demise of the unwise and ill-prepared real estate investor.  When cash out exceeds cash in, you have a situation that may be short-term, but can be the start of long-term financial headaches.  There are many reasons for this condition to occur.
    1. Rental Property Negative Cash Flow. When you purchase rental property and the expenses; such as interest, maintenance, repairs, and management exceed your rental income, you face negative cash flow.  In some cases, this situation is a short-term occurrence, while oftentimes the negative cash flow is ongoing.  When this happens, you may face the problem of finding outside capital to finance the short-fall.  Failure to prepare or to avoid this dangerous situation can ruin you.  It’s critical to complete an accurate property analysis prior to purchase of the real estate.  Once this is done, you need to evaluate your personal financial situation.  Negative cash flow from rental property can be reduced or even avoided completely by using proven real estate strategies developed by professionals.
    2. Land Negative Cash Flow. Many real estate investors purchase land on the expectation of increased appreciation.  This increase may happen through inflation or when urban development encroaches on the property or zoning laws are changed.  Regardless of the reason for the appreciation in value, you may have interest or loan repayment obligations, along with other expenses such as taxes.  In these cases, you can immediately experience negative cash flow without any income to offset the expense.  Holding land for resale can be an effective real estate strategy, but you must be aware of and prepared for the potential negative cash flow.
  3. Risk of Liquidity. Real estate is often categorized as a hard asset, and as such it may be difficult to get needed cash from the property in a short period of time.  Real estate loans and the sale of the property itself can provide the cash liquidity you desire, but there is always time required to complete these transactions.  When purchasing or controlling real estate, make sure you are aware of your personal liquidity requirements as well as that of the property itself.  It is important to prepare for needed cash infusions into the property as well as to insure that you can meet your personal financial obligations.
  4. Risk of Depreciation. This risk has nothing to do with depreciation schedules for taxes and accounting.  Rather we are referring to the situation where the property actually decreases in real value.  Even though this is a less frequent risk in a good economy, it can happen.  Property values can decrease when interest rates are increasing dramatically, when there is damage done to the structures on the property, when zoning laws are adopted that decrease the uses of the property, or when the economy itself suffers.  These risks can be minimized or reduced by wise purchases and through the use of professional help.
  5. Risk of Management Problems. Almost all real estate requires management of some kind.  Rental properties require more management than holding land for resale.  Even if you are just doing a “fix up” on a property there is management involved.  Management of real estate can be done by the investor, property owner, or through professional management concerns.  The potential problems associated with management of rental property generally involve tenant problems and repairs.  As the real estate owner or controlling party, you will need to be prepared to meedd these management problems and expenses.

These risks are real and happen on a frequent basis, but there are proven strategies that can reduce these risks dramatically or even eliminate them altogether.  Here are 5 proven strategies to avoid real estate risk.

Five Strategies to Avoid Real Estate Risk

  1. Complete a Property Analysis. As an investor in real estate you must start by completing a comprehensive and accurate property analysis.  Regardless of the investing strategy you are using, you must start by accumulating accurate complete information about the property itself.  You want to understand the history associated with the property and all expenses, past and present, that can impact the value of the property.  Don’t rely on the previous owner’s representations.  Take the time to consult tax records, property management records, and local zoning and urban information.  Eliminate the unexpected by doing your ground work before purchase.  Numbers don’t lie.  Spend the time doing a complete analysis of the property using the investment strategy you have chosen.  For example, if you are going to do a rehab on the property and then rent it out, you would want to get bids on repair work, consult records on comparable properties, and work with reliable realtors.  Every property analysis must include the bad information along with the good factors.
  2. Control the Money. All real estate investments require capital of some kind.  If you are going to involve financing, make sure you get the best rates and repayment schedule that meets with your personal financial situation.  If you have the capital to invest, make sure you aren’t using funds that have to be replenished in a short period of time.  Your ability to control the money and the financing in a way that meets your investment strategy will determine if you succeed or fail.
  3. Understand your Strategy. It can’t be over emphasized how important knowledge is to real estate success.  There are a great many ways to profit from real estate strategies, and they are all different.  When you decide which strategy you are going to implement, take the time to learn as much about the investment strategy as you do learning about the projected property.  If you believe you lack information or expertise in adopting a specific strategy, find help in learning more about the real estate strategy.
  4. Get Proven Professional Help. The importance of finding professionals who can become part of your real estate team is paramount.  Theodore Roosevelt once said, “Believe you can and you’re half way there.”  The importance of his statement is as true today as it was last century.  You may believe you understand the real estate strategy perfectly and you truly are half way there.  Don’t be fooled into thinking you can go it all alone.  Use professionals to build a team that works together.  Find people who can do the things you can’t.
  5. Protect your Future. It all starts with protecting your real estate.  Use insurance to protect real estate structures and insurance to protect your title to the property itself.  You can also protect your future by insuring that you can meet your liquidity requirements.  Don’t allow lack of capital to spell disaster.

Real estate can provide a second stream of income and help develop wealth.  Yes, the risks are real, but the rewards and benefits are also real.  Your ability to recognize the risks and to take the steps to avoid as many of them as possible will determine your overall success.  It’s your discipline that will provide the key to your real estate future.  Warren Buffett is regarded as one of the world’s best investors, and he summed it up well with his comment, “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”  Use real estate as the vehicle to your future and success can be right around the corner.

What’s the Difference between Residential and Commercial Real Estate?

What’s the Difference between Residential and Commercial Real Estate?

Real estate is simply a property of land, a building, or land and the building on it, including the other resources in it. It has four major types. The two most common types are residential and commercial real estate.

Residential real estate is a property type that includes newly-constructed and renovated homes. These are properties that are either built or rented for residential purposes. This may differ in types in accordance with the neighborhood they belong to and the entity owning the property. Apartments and condominiums are considered residential real estate. They are both individual units in a certain building. The difference between them is that a condominium has facilities that are co-shared with other condo-unit owners, like pools, fitness centers, concierges, and more. Single-family and multi-family houses also belong in this list. Mobile homes, as well, are considered residential real estate even if they are movable on wheels. These, and a lot more, are residential real estate properties because they are acquired for non-business purposes.

On the other hand, commercial real estate (also known as investment or income properties) refers to properties intended to produce a profit. These may be structures or land properties that are either bought or rented for that said purpose. These include office buildings, industrial structures (more known as commercial buildings), warehouses, healthcare units, and a bunch more. Any type of structure that generates income is commercial real estate, even restaurants, hotels, resorts and malls. Even multi-family residences (apartments) can be considered commercial because of their profit-generating status. They do differ in various places and tax obligations.

Commercial properties are known to be more pricey compared to residential properties. Not always but most of the time, they are more expensive because they generate income. And, anything that produces a profit is eyed by a lot of possible buyers or renters. The higher the demand, the more reasons to increase in value.

Three Ways Real Estate Can Generate Wealth

Three Ways Real Estate Can Generate Wealth

Real Estate investors can generate millions of dollars through their real estate investments, but how exactly does it all work? Learn more about how real estate can transform into wealth.

For many, real estate is simply buying a home to live in. Real estate investors use properties to generate wealth in a variety of ways. Real estate can generate wealth for investors in the following three ways: appreciation, cash flow, and equity. Though there are many investment styles to choose from, real estate investors use a combination of these three ways to generate wealth from their real estate investments.

Appreciation

Over time real estate increases in value. This process is called appreciation. Though there have been some notable exceptions to this rule (2007/2008), real estate increases in value year over year. For example, home values in the US have gone up 6.7% according to Zillow.com[1]. They expect them to rise another 3.2% in the next year. So, if you bought a home for $200,000 a year ago, it could now be worth $213,400. Appreciation generated over $10,000 of wealth, in just a year.

Cash Flow

Cash flow is the term investors use to describe the amount of profit a rental property generates after revenue from rent and any expenses are accounted for. It’s most often expressed by this simple equation:

Rent – (Expenses + Mortgage Payment) = Monthly Cash Flow

Before purchasing a property, investors ensure that the final “Monthly Cash Flow” number is positive. For many buy and hold investments, this number can be modest; however, when you consider that investors generally have a portfolio of units, it adds up quickly.

Equity

Many investors take advantage of conventional financing to secure rental properties. For example, the $200,000 home they purchase, they put $40,000 down, and then take out a 30-year mortgage on the remaining $160,000. The rent the tenant pays goes towards that monthly mortgage payment. So the investor leveraged $40,000 to eventually build $200,000 of equity. Creating equity in a property is one of the ways investors generate wealth.

Generating Wealth Through Real Estate Investing

There is no simple formula for generating wealth through real estate investing; however, all investors use some combination of appreciation, cash flow and equity to create their personal wealth. Investment style, personal goals and market conditions affect what portion of the investor’s wealth comes from each element, but all work together to achieve the investor’s financial goals.

 

[1] https://www.zillow.com/home-values/

Due Diligence Checklist for Buying a Rental Property

Due Diligence Checklist for Buying a Rental Property

When you invest in real estate, you are investing in a physical asset.  For your investment to be successful, you need to ensure that your asset is in workable condition.  While the property doesn’t need to be perfect, you need to do your best to avoid unexpected expenses.  If you skip your due diligence, you could be setting yourself up to lose money down the road.  Due diligence falls into three categories: financial, physical and legal.

Complete all these items, and you can ensure that your rental property will meet your expectations.

Financial Due Diligence
Financial due diligence is much more than making sure you have enough money in the bank to make the down payment.  Before purchasing a rental property make sure:

  • The property qualifies for conventional financing (if you aren’t paying all cash)
    • You receive a copy of the past 12 months of utilities and/or any other expense items
    • You have copies of the lease and rental history if the property is currently rented
    • You research the tax history of the property

All of this financial due diligence will lead to you being able to complete this equation:

Rent – (Monthly Expenses + Mortgage Payment) = Cash Flow

You want the final cash flow number to be positive after your due diligence.
Physical Due Diligence
A home inspection is an important step in the real estate process.  Unless the property is a brand new construction, it is unlikely that it is in perfect condition.  As an investor, you should expect minor cosmetic renovations with each purchase; however, it’s the big-ticket items you need to look out for.  A home inspection will reveal when you need to replace expensive items such as the:

  • HVAC
    • Roof
    • Furnace

Major repairs like this can dramatically impact your monthly cash flow as an investor. The condition of the home contributes to its value, so make sure the condition of the home matches your monthly cash flow goals.

Legal Due Diligence
If you are purchasing a distressed property, legal due diligence is incredibly important. Make sure that there are no liens or judgments placed against the property.  Many liens convey with ownership of the property and will be your responsibility once you own it.  Consider hiring a professional title company to research the title and ensure it is free and clear.

Due Diligence + Buying a Rental Property
In the fast-paced world of real estate investing it’s easy to see a low-priced property and have the urge to jump on it! Making a snap decision on purchasing a rental property can have long-term consequences so be sure to complete this due diligence checklist before submitting an offer.

Zoning in on Zoning

Zoning in on Zoning

Knowing what you can and can’t do with a piece of property is crucial; it can make or break many deals. I highly suggest you determine this before getting started in any real estate transaction. This can save you a lot of money, time, and energy. I am not kidding about the money part. So what is zoning, and why is it important?

Local governments create zoning ordinances to map out the physical boundaries of different zoning districts, which can occasionally be modified. To determine what your lot is currently zoned as, you will want to go to the municipal building. Zoning and some other ordinances can often be found online. However, do not, I repeat, do not rely solely on that as your only resource. Always go to the primary source to double check your information, especially if it’s a deal you intend to do yourself or invest in.

Now you are probably wondering, why the big fuss over zoning? Well, zoning determines what land uses are permitted in each district or classification. Some examples of classifications may include, but are not limited to residential, mixed residential, commercial, and conservation. Zoning ordinances also lay out all the juicy specifics, like lot size minimums and maximums, setbacks, and height restrictions. Please remember that land use and regulation laws vary from state to state. Therefore, you need to be familiar with the states you work with or at least know where to find the right information when needed.

Like stated earlier, zoning is a very important variable when doing any real estate transaction. Please familiarize yourself with zoning before you end up paying to do it later. Either way, you will have to know it. Now, take this and get out there and apply it.

Understanding Home Inspections

Understanding Home Inspections

A home inspection is an important aspect to consider when buying a home. This process enables the buyer to identify the overall condition of the targeted property. This operation will save the buyer a lot of money in the long run. The result of any home inspection can greatly influence the final decision of the buyer. As a buyer, you need to be very sure about the subject of your investment in order to avoid future trouble.

A home inspection is usually done by a professional home inspector. The expected output of the inspection must be detailed enough to identify system conditions, deterioration, and other aspects of the home that will help the inspector come up with a good recommendation.

One of the common and important aspects to consider during the inspection is the structural state. This is very vital because nobody wants to have a home with a weak foundation. That is just one common example of things to check during an inspection. There are many other features you need to consider if you want your investment to be worth it. These include landscape condition, potential pests that will surely provide some inconvenience, the state of the septic system, and many other details that can potentially cause stress in the future.

A home inspection would be futile without a good inspector. You need to check if the one you hired is experienced enough to offer you a quality outcome. The inspector must be certified and preferably a member of a professional association. Because you are seeking assurance on the overall condition of the home that will shelter you and your family for a long time, it is essential that you are dealing with the right people.

The report after the home inspection can vary in form. It could be a narrative, a checklist, or any rating system your inspector prefers to give you a clear view of the overall state of the property. During the inspection it is also be helpful if you have certain knowledge about what to ask and what to check. You should not fully depend on the inspector. It would be a big help if the buyer is present during the inspection, giving feedback and asking for advice, because it could help the inspector come up with a comprehensive report for the buyer.

How to Use Market, Rental and Housing Statistics to Determine a Market

How to Use Market, Rental and Housing Statistics to Determine a Market

Statistics are used to identify market trends and to measure and evaluate the potential success of marketing programs. The most important statistics an investor should know are the rental and housing statistics. So, how does one use this data to determine a market?

According to current trends, the number people who choose to rent instead of buy properties has gone up. This, in large part, is due to the enormous wave of foreclosures that swept the nation after 2008 and the economic upheaval of the Great Recession. Because more people have decided to rent, the number of sales and the availability of properties has been impacted. Adjustments need to be made when this happens, from house prices to interests rates and transactions. One should look within these current statistics to find the market they should target. They need to identify the demographic and behavioral patterns within these statistics to make sense of which people to target. Focus on what problems can be solved and identify what the demographic needs. For example, those who rent spaces will most definitely rent, so they fall under the target market for rental homes or properties with a negotiable mortgage that would fit their income. The price and costs for housing and renting may differ a lot and the demand for certain properties varies from location to location, so these things should also be considered.

The fine point where all these people’s needs and wants meet in the middle is what should be identified and targeted, and a close observation of the behavior of this demographic will surely produce valuable data. The secret to successful marketing is to identify the target market accurately.

Determining Market Value

Determining Market Value

A key first step in real estate investing is determining the Market Value or ARV – After Repair Value of a property.

Criteria used by many real estate investors and professionals includes the following:

Properties that –

  1. Were sold less than 1 mile away
  2. Were sold less than 6-8 months ago
  3. Have square footage that is 20% more or less than the square footage of the property you are looking at. For example:
    1. If you’re looking at a property with 1,400 sf then your range is 1,200-1,600 sf.

You should be looking for 3-5 comparable properties that are as close as possible to the number of beds, baths and square footage you want. Also try to find the same style of construction, as it is difficult to justify comparing a single-story ranch style home to a multi-level property.

Look at both online sources and sources from real estate professionals. With that in mind, here is a 3-step process:

  1. Local real estate brokers and agents have a great source of market knowledge, especially for obtaining both the average price that properties are selling for and the average price per square foot that the same properties are selling for.
  2. “Paid Sites” has their advantage in that the software they have available pulls from both County Records as well as the Multiple Listing Service (MLS). Do your homework and look for online customer reviews and compare them with other websites with the same claims. Here is a short list of some of those sites.
    1. https://www.realquest.com/jsp/rq.jsp?action=switch&page=main
    2. You can also check with the MLS in your area and ask about the fee for their temporary/limited access for investors. This is a great tool to use for searching and evaluating properties and determining market value.

There are many others but these are quite adequate for getting started.

The Importance of Demographic Research

The Importance of Demographic Research

Demographics is statistical data relating to the population and the particular groups within it. It is the kind of information that makes working in the real estate world a pretty challenging feat. Also, it is an indispensable part of the business, since it plays a great role with marketing houses and properties.

How important is demographic research? Well, this research provides the data that describes the composition of a population, such as age, race, gender, income, migration patterns and population growth. These statistics are an often overlooked but are a significant factor in how real estate is priced, what types of properties are in demand, and who is interested in buying what. Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades. For example, the baby boomers who were born between 1945 and 1964 are an example of a demographic trend which will likely influence the real estate market.

There are numerous ways this type of demographic shift can affect the real estate market, but for an investor, some key questions to ask might be: How would this affect the demand for second homes in popular vacation areas as more people start to retire? Will they be able to even find buyers for their homes if they do decide to sell their property? These and other questions can help investors narrow down the type and location of potentially desirable real estate investments long before the trend has started. Basically, the ever-changing results in demographic research determine the demands, prospective buyers and also the prices of properties. Who is buying what? Who is interested with what? Is it part of their priorities?

Know this important data in your market because the more information at hand, the better decisions you will make.

The Importance of Rental Market Prices to Purchases Prices

The Importance of Rental Market Prices to Purchases Prices

If we are going to decide between renting a house or flipping one, we only make the right decision when we consider the appropriate guidelines. These guidelines include the aspect of home prices, mortgage rates and rental rates. By considering the above aspects, you will be able to understand if it’s more sensible to flip or rent a house on a long-term basis, economically.

We are dealing with prices, which automatically means doing math. And it is very important that you do the math correctly to avoid financial waste in the end. This is where the rent ratio comes in. A certain property will always have a fundamental price, and that fundamental price will be divided by the rental price. The product is the rental ratio. And according to experts, the tipping point of rent ratio is 15-20. The higher the ratio, the more it would require a spike in housing prices in the coming years to justify the price you are paying today. For example, in a market where a 2-bedroom house costs $250,000 and the annual rent for a similar home is $12,000 ($1,000 per month), then the ratio is about 21. It would make sense to consider flipping the property.

One more thing that should also be taken into consideration is our current financial stand. Buying a home always comes with a financial impact, especially when we are talking about mortgage rates, property taxes and homeowner’s association fees. If you are compromising future plans when buying a home, then it’s best to set aside rental ownership for the time being.

We will never know when high levels of economic uncertainty hit us. It is just prudent to make lifestyle changes that would suit your financial status. Be knowledgeable about the proper guidelines when deciding whether to rent a house or flip it. The financial income that comes with renting is always assured if you know how to calculate certain elements together with rental market prices and purchase prices.

The Importance of Zeroing in on Your Buyer’s Tolerance for Profit

The Importance of Zeroing in on Your Buyer’s Tolerance for Profit

The language of business is numbers. So it is with doing profitable real estate deals. There are three (3) very popular rules for calculating your offer. They are referred to as:

  1. “The 70% Rule:” (Offer equals the ARV (After Repair Value) times 70% less cost of repairs.)
  2. “The 75% Rule:” (Offer equals the ARV (After Repair Value) times 75% less cost of repairs.)
  3. “The 80% Rule:” (Offer equals the ARV (After Repair Value) times 80% less cost of repairs.)

The “80% Rule” offers the least profit. However, it offers much greater likelihood of getting the offer accepted than “the 70% Rule.” What’s exciting is that there are investors who use “the 80% rule” and still make more money on the deal than investors using “the 70% Rule.” You will want to find them.

Regardless of which rule is used, there are closing costs, holding costs, and selling costs. Generally, those costs total 15% and break down like this:

  1. Closing Costs: (3%) Paid to the title company to insure the deed is free of liens or encumbrances.
  2. Holding Costs: (6%) These costs are mostly the costs of borrowing the money to do the deal, but also include taxes, insurance and utilities etc.
  3. Sales Costs: (6%) Usually paid to the realtors who help close the deal.

As a wholesaler, it is critical to find the buyer who will pay the most for the property. Some buyers have their own money. This eliminates most of the holding costs. The same buyer may also have the property already sold or have an agent on board that eliminates their sales costs. The buyer who doesn’t have many holding or sales costs can use the 80% rule and make more profit than another buyer who has borrowing and sales costs but uses the 70% rule.

When we interview buyers, we want to find out their “tolerance for profit.” Do they have money? Are they an agent or do they partner with an agent? Going out to the job sites of successful bidders can help you find those buyers who do rehabs more efficiently and at a lower cost.

Asking this simple question can help you sort out the buyers who should be at the top of your list. “Suppose I have a property you know you can sell quickly for $300,000.00, but it is going to cost you $30,000.00 to rehab. Your ad says you buy houses, where would I have to be pricewise for you to buy this one?”

Simply put, the greater your buyer’s “tolerance for profit,” the more money you will make and the more deals you will do.