The property is primed and ready to go.  Now you have to figure out the best way to manage your investment if you are holding it for long or short term rental purposes.  Being a landlord encompasses numerous responsibilities and requires proper planning and attention to keep your investment strong and valuable.  Let’s break down landlord responsibilities and your options for management.

Landlord Responsibilities:  Owning real property comes with responsibilities and liabilities that carry both financial and emotional costs (we’ve all heard horror stories of late night tenant calls before).  Like they say, there’s no such thing as free money.

1) Maintain the Property:  Ensuring that the property meets municipal codes falls on the owner.  The owner must also ensure that the property is maintained and in good order for the tenant, as well as being used according to legal guidelines (abides to the local, state, and federal laws).  Be sure to consult with a local attorney and real estate professional to assure that you are well informed of these matters.

2) Tenant Relations:  The main deterrent for most people to becoming a landlord is tenant relations.  However, there are ways to minimize risk and maximize your investment if the proper precautions and steps are taken before leasing to a tenant. 

a)      Finding tenants.  The ability to find a “good” tenant is key in making sure your investment remains strong.  First step is to properly market and advertise the home.  Landlords can no w utilize the internet in advertising to gain wide exposure at minimal cost.  The next step in the process is screening.  Be sure that you screen fairly and without any prejudice to protect yourself legally.  You can also enlist the services of a real estate professional or management company to properly market and screen for tenants of the property.

b)      Draft and execute a strong lease with the tenant.  Be sure to protect yourself legally in all aspects of the lease and consult with a trusted attorney if necessary.  Again, you can enlist the services of a real estate professional or management company to properly aid in executing a lease as well.

c)       Ledger accounts and keep records properly.  You’ll need to keep accurate books and legal documents to protect yourself financially and legally.  Know the laws in your area and have proper legal representation in case the “worst case” scenario ever arises.

3) Protect Your Investment: It is in your best interest as a landlord to fully protect your investment.  Some ideas are to consider incorporating your property for legal and confidentiality reasons.  Also, require renter’s insurance for tenants to protect their personal possessions.  Take before and after photos of the property before leasing to a tenant.  Consider purchasing warranties for the property to reduce long term costs.  And lastly, conduct periodic inspections of the property.  This will allow you to catch issues before they grow too large, as well as establish a presence with the tenants.

Management Companies and their Role:  Whether or not a management company will be right for your situation depends on various factors which include: size of property and number of units, number of properties, location and proximity of properties to each other and you, availability of personal time, and ability to deal with tenants.  In any case, management companies can carry out an important role for you if needed.  The company can collect rent, pay expenses and fill vacancies in a timely manner, ledger records, execute or hire others to perform maintenance and repairs, and be your professional representative.  The typical cost of a management company is approximately 10% of the gross income for the rental units being managed.  If you have more than 25 units, the scale would most likely decrease. 

Tips and Alternative Ideas for Landlords: As with everything else in real estate, be sure to consult with a legal professional and an experience real estate professional before diving head first into a landlord situation.  Prepare a good lease and have proper documentation to fully protect yourself.  Prepare ahead of time with routine maintenance and warranty plans that protect your investment.  Also, consider using tenant incentives to keep tenants happy, paying rent, and keeping the property in good order. 

In the end, the value of the property will ultimately fall on how well it is maintained and managed by the owner.  Get informed, protect your interests, and don’t miss out on the great investment opportunities available in today’s market!

At this point, you have all the tools necessary to properly locate and value investment properties, so let’s talk about getting to the closing table.  As with all investments, time is money so you must be prepared and ready ahead of time. Investment properties are approached as business transactions, so there are certain factors to take into account.

Know the Seller: Understanding the seller’s situation will help you secure the property of your choice. Many investment properties in today’s market fall into the distressed home category. If you are dealing with a bank owned (aka REO) property, there are certain processes and timelines that you must follow or you will risk losing the deal. For short sales (pre-foreclosures), it’s important to know where the property is in regards to its processing with the lender. If the property has been approved, you have a much higher chance of closing than on a property that is still in limbo. In both cases, you’ll also need to be prepared to move quickly and be flexible with the seller. Further, expect to buy the home in “as is” condition with the responsibility of obtaining permits on the buyer.

Financing Options: Cash is king in the investment market, but unfortunately not everyone has the capital necessary to purchase real estate in this marketplace. With that said, you must be able to show that you are financially ready and able to purchase the property with the offer. Conventional financing programs for investments typically require 25% down payment and a minimum FICO score of 660. Investors also need to have 6 month reserves for projected mortgage payments, and rates will be according to risk-based pricing which takes into account credit and previous evidence of rental management. If you are looking for alternative financing options, there are non conventional avenues to explore as well such as transactional financing and hard money lenders who specialize in working with investors to “flip” properties. In any case, lenders want to know the numbers before giving out money, so do your research and know the market well.

**Note: FHA/HUD 203K rehabilitation loans allow buyers to obtain one loan to finance the purchase and renovation of a property that would otherwise be ineligible for traditional financing or undesirable to purchase. Being an FHA loan, the minimum down payment is currently 3.5%. Under current guidelines, the property must be a primary residence. However, there is news that the program will be expanded to the investment market in 2011. Stay tuned for updates.

Making an Offer: Remember that an offer is more than how much you are willing to pay for a property. The offer really consists of your ability to close, which is your funding and financial situation along with your timeline to close. The quicker and easier the transaction will be for the seller, the better deal you will get as a buyer.

Investors need to be networked with a strong team around them to be successful. This includes but is not limited to a Realtor, lender, attorney, contractor, etc.  Do your research and choose professionals who know what they are doing to ensure that you can create the best scenarios for your investment properties and begin building your portfolio with peace of mind.

Now that you’ve found the perfect candidate property, how should you go about making sure that this is a good investment for you? Whether you plan to rent the property or flip it, the cost of repairs is vital in determining if the home is a good investment or not. After you determine the repair costs, you’ll be able to see how much the property is costing you in real dollars before you are able to rent or sell the home. Let’s break this down into 3 phases:

Before the Purchase: This is when you’ll need to have a good list of items to look for in a “pre-inspection” checklist. Take down the condition of the major cost areas like the attic, roof and siding, basement if applicable, and heating/cooling systems of the home. You want to be sure that the home is structurally sound, and have a list of potential high cost repairs such as underground oil tanks, mold, and termite damage. Take into account the kitchen and baths and any updating that may be needed in these areas, as well as the overall cosmetic condition of the home such as flooring and paint condition. The more detailed your inspection and estimates, the better. Experience in knowing some rough costs will help here, but there are also materials out there to help on the web (older link but still useful for starters) and in the book stores in regards to repair cost estimates. Ask me for a sample of a pre-inspection checklist.

After the Purchase: Continued cost of maintenance on an income/rental property is important to know and estimate in order to keep a profitable piece of real estate. Keep accurate records of all your expenses which include insurance, utilities, repairs, capital improvements, and scheduled upkeep such as landscaping. Finding trusted contractors and/or handymen to take care of repairs can go a long way and directly affect your bottom line. Ask me for a sample of a profit and loss statement.

Expect the Unexpected: Although you made sure you completed your due diligence before you purchased the property, there can still be unexpected costs. As we all know, things break down over time. As a landlord, it is important to take preventative measures to protect your assets. Order warranties and perform scheduled inspections of your properties to prevent small problems from turning into big ones. Protect yourself legally as well and be sure to adhere to state and local codes. Keep updated with the market prices and avoid vacancies in your units by taking proactive measures with your tenants.

Here’s another great article to check out:

Investments are all about where the numbers end up, so let’s get right into some important terms and calculations that you’ll need to know when making your decision on RE investment properties.

Financial Metrics: The following metrics will help you determine if the “numbers” make sense.

o PNL (Profit and Loss Statement). AKA income statement or balance sheet. This is organized and easy way to keep track of the specific financials of an income property. List all sources of income (rents, fees, etc.) and expenses (taxes, insurance, maintenance, management, employees, vacancy factors, administrative or legal fees, and utilities).

o NOI (Net operating income) = Annual Operating Income minus (-) Annual Operating Expenses. Simply determine operating income from rents and other fees collected and subtract the total operating expenses (not including debt service/mortgage, and capital improvements).

Ex. Annual income = $90,900, Annual Expenses = $60,800
90,900-60,800 = $30,100 NOI

o CAP (Capitalization rate) = NOI divided by (/) Purchase Price. This is the ratio to show the number of years of positive cash flow to pay for the property if no capital improvements are needed. This rate is calculated before state and federal taxes are paid, or debt service and capital improvements are added. A CAP rate between 7-12% is generally favorable and of course, the higher the better.

Ex. NOI = $30,100, Purchase Price = $340,000
30,100/340,000 = 8.9% CAP rate

o ROI (Return on Investment aka Cash on Cash) = {NOI minus (-) debt service} divided by (/) Out of pocket expenses of purchase. The debt service is the estimated annual mortgage payments. Out of pocket expenses for purchase include down payment and closing costs.

Ex. NOI = $174,000, Debt Service = $127,680, Down Payment (20% of 2,000,000) = $400,000, Closing Costs = $50,000
(174,000-127,680)/(400,000+50,000) = 46,320/450,000 = 10.29% ROI

Valuating Properties: There are different approaches to valuating properties, and depending on your end goal with the property, some will be more effective than others.

- Income Approach (aka profit and loss) can be used for income properties since it deals mainly with the financial metrics used above. If the NOI, CAP rate, and ROI numbers look good, the property should be considered a good investment.

- Market Data Approach uses comparable properties to value the home. This is typically used for residential homes. For “flip” homes, this approach should be used to determine the market value of the home after repairs.

- Replacement Cost Approach uses the current day construction cost to rebuild the property as a measure of the value. Although uncommon, this can be used to help get another idea of the value of the property.

Now that you know how to financially analyze real estate investment properties you can get out there with confidence!  A good agent will help you find the numbers that you need to make a sound decision.  Be sure to investigate the history of the property so you can make the proper predictions for the future of your investment.  Stay tuned for more!

So, now that you’ve decided that investing in real estate is worth a look, how do you know what real estate to invest in? By definition, real estate is simply “properties in building and land” from Miriam Webster’s dictionary. But what building and/or land is worth your time, money and efforts?

When it comes down to it, there are really 2 main categories for real estate use: residential and commercial. The principles of investment are really the same for both: location and price. Let’s take a closer look at important factors to consider with your investment property:

Neighborhood and Location: Really? I know, it’s obvious, but none the less needs to be mentioned. If you are looking to rent your property, whether residential or commercial, commutability and accessibility matters. Look for locations that are close to metropolitan areas, financial hubs, established universities and hospitals. The closer you are to where people work, the better chance you have of obtaining long term tenants. Be sure that your tenants have supporting amenities nearby, and public transportation is a plus. Be aware of local surroundings and any potential off-site conditions that could negatively affect your potential tenants (i.e. high voltage power lines, major roads, influx of industrial buildings). Check into local schools, parks and recreation, crime rates as well as building and community amenities. The better you know the neighborhood, the more informed decision you will make; leading to a better investment for you!

Rental and Vacancy Rates: Check into the rental rates of the area and get an idea of how much income you will make from the property. You want to be sure that rental rates show a stable history and that there are no strict rent control laws. Be aware of the number of units that are competing on the market. If there are too many homes on the market, that might be a sign of potential vacancy rate issues. You want to avoid high turnover areas (with the exception of a college town).

Condition, Repair and Maintenance Costs: Make sure you know how much the home will really cost you. Perform your due diligence and fully inspect the property. Accurate repair estimates by a professional contractor or experienced investor is key here. In many situations, you will also have to deal with local and state inspectors to ensure the property is up to code before your purchase. Also consider the costs of maintaining the home. If you are purchasing a condo or employing a property management company, be sure to take into account the management fees. There’s a lot to cover here, so take a look at Determining the Real Cost of an Investment Property.

Financial Factors: If you can obtain a profit and loss statement from the seller of the property, this is a great starting point. However, if this is not available, do your best to find the income and expenses history of the property at the very least. From here, you can begin to see some of the “bottom line” numbers that you will be working with. Check out Finding the Right Investment Property Part 3: By the Numbers which will deal with using different financial metrics and determining the value of potential investment properties.?

Before making any investment decision, you need to know your limits. More importantly, you need to know what you are getting yourself into. With that in mind, here are some things to consider when thinking about real estate investment:

Pros:
1) Source of passive income. It’s nice to have cash flow coming in on a consistent basis.
2) Property appreciation and wealth building. Real estate works in cycles and homes are going to appreciate once the market turns. If you can cover your expenses now, the appreciation that is bound to come will be a cherry on top.
3) Diversification of investments. As someone once said, “don’t put all of your eggs in one basket”.
4) Retirement opportunity. The more you make, the less you work.

Cons:
1) Loss of freedom. It’s your property and you are responsible to take care of it and those who are paying you for its use.
2) Liability. Proper legal documentation and representation is key.
3) Dealing with tenants. Self explanatory.
4) Vacant properties. If the property is not making you money, it’s more than likely costing you money.

So, are you feeling cautious, excited, or both? The pros are great and the cons seem intimidating, BUT if you take the right steps and have the right people on your side, the cons can be controlled and handled. Again, the emphasis here is that you are not alone! Consult with professionals who have proper knowledge and experience starting with a qualified real estate professional. He or she will serve as your resource to finding the right property for your goals, and also to connecting you with the best resources to handle the rest of the process.

Get pumped up and be sure to come back for more as I’ll be touching on which factors to consider in finding your property!  If you can’t wait until then, feel free to reach out to me and I’ll be more than happy to help you reach your goals!

Want to invest in Real Estate? Let me show you how to build your own Monopoly.

As I’ve stated in a previous entry: opportunity is knocking! If you are looking for a place to invest your money, why not look at the possibility of investing into real estate? There are a number of factors that make this the best investment market for you, and here are just a few:

- Interest Rates remain historically low
- Home Prices are affordable
- Rental Prices are steady
- Inventory is high
- Sellers are motivated (especially distressed owners and banks)

Quite simply, the law of supply and demand is to the advantage of the buyer in this market. If you have the vision and know how, this is the market for you to make a favorable income as well as help others in the process. This will be the first of a series of entries dedicated to real estate investment. It’s not for the faint of heart, but the reward for those who wisely invest, manage, and maintain properties is great!

The first step in developing your investment game plan is to determine what kind of investor you want to be.  Do you want to be in the commercial or residential sector?  Do you want to be a landlord or hire a property management company?  Do you want to hold properties long term, or do you want to buy low, fix up and sell for profit? 

After you find the property of your choice, how much will it really cost you?  How will you rent or re-sell the property once its ready?  What is the best way to manage your costs and how can you leverage your investments into more properties?

These are just a few of the questions I will address in this series, so stay tuned for more!  Here’s to successful investing in 2011 and beyond!

As we look forward to 2011, it’s important to keep our largest investment in mind — our homes. For many people, including myself, our homes become neglected in the everyday hustle and bustle of things.  Let’s take a minute to plan, organize, and manage one of our most important assets, and the place where we have our most memories!

Happy Holidays and a Blessed New Year’s to you all!

Although home prices have been fluctuating over the past few years, rental prices have been consistent. Rental properties are a great source of income, both current and future. If you are interested in renting out a home that you already own, or if you would like to purchase a rental property, take a look at the following article from October’s Real Estate Advisor (from the Reliance Network) and then contact me to get you started!

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As a landlord, determining how much to charge for rent can be a difficult prospect. Setting a realistic market rent will be crucial to making the most out of your investment, regardless of whether you’re renting out your former primary residence following a move, leasing an investment property or renting out a vacation home on a seasonal/weekly basis. If you set rent too low you may end up leaving money on the table. On the other hand, if you ask too much in rent you risk having the property stay vacant for long stretches or seeing high tenant turnover.

Calculate your cost

Before you begin determining how much you can or want to charge in rent, it’s prudent to first gauge your total cost incurred from owning and renting the home. Your total cost will include mortgage payments, maintenance expenditures, any paid utilities and professional services you may require (such as property management, tax help or legal consultation). Avoid being too conservative when estimating potential maintenance and repair costs.

The cost of owning and renting out may not directly dictate the rent you charge in all cases, but it will serve as a vital baseline value which you can refer to as you get closer to setting a rent price.

Understanding the renters in your market

Before investigating actual rental rates in your market, it’s important to actually understand the nature of the rental market and area renters. The needs of renters differ from those of potential buyers. For example, most renters will not be as interested as buyers in top of the line fixtures or brightly painted interior walls, because most lease agreements will prevent the tenant from changing such elements to meet their own taste. Things that will interest many renters include sturdy carpet that will resist wear and tear, appliances in good working order and plenty of storage space.

In addition, rental markets are often defined on a highly local level – notice how rental classified are often divided by neighborhood or sub neighborhood. The needs and wants of renters in your local area will greatly influence how much rent they are willing to pay for your particular property.

For example, a five-bedroom luxury house with attached three-car garage may have a tough time commanding high rent if located in a neighborhood whose rental demographic is predominantly students, single professionals or young couples. By the same token, a modestly sized studio or cottage will not rent for nearly as much in a suburban area popular with families and pet owners.

Establishing market price

To truly devise a competitive rent price, you will want to thoroughly research the prevailing rents of comparable homes. Start by scanning newspaper ads or online classifieds such as Craigslist to assess the price range for similar units in your area. Make sure to sample listings that are of comparable size and amenities, and which are near enough to your home to fall under the local conditions of your micro-market.

Once you locate some comparable properties, visit them to better compare their amenities, location, condition and level of maintenance with your own home. Rental listings often vary a great deal from what is advertised to what you see in person when looking over the property, and often this discrepancy can help explain drastic differences in advertised rent. Visiting three or four homes in person will give you the best idea of how your home stacks up against the competition.

Long term strategy

Before you settle on a final rental price for your property, take some time to consider what your overall goals are with the rental unit. Are you focused on making a profit from the unit or recouping as much of the ownership cost as possible? If so, you may decide to charge rent on the high end of the market, at the risk of experiencing higher tenant turnover or longer periods of vacancy between occupants.

If instead your goal is to ensure steady rental income from the unit, minimizing periods of vacancy, you will likely want have a pricing strategy more geared towards attracting long term tenants.

If you are facing foreclosure, there are other options. Learn your options and make an educated decision. I’m specially trained to help, so don’t delay any longer and let’s solve this together!