SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Kevin

There Is No “Right Way” In Real Estate

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My last post was about analyzing a good buy and hold deal.  In it I went through many of the criteria that I look at in evaluating if a potential deal is a good one or not.

A fellow investor and friend of mine read the post and we then had an e-mail discussion on a couple of the points.  He pointed out some of the criteria he uses and the logic behind his methods, which were very sound.  I did the same.

He is quite successful and good at what he does and it got me thinking that there just is no “right way” to do this business.  And that is one of the things that make the real estate investing business great.  As an investor, you can mold the business to fit you, or your customer’s needs based upon expectations or experiences.

However, you have to start somewhere.  You can go it alone if you want to, but I don’t recommend it.  If you are just starting out or fairly new to real estate investing here is what I suggest:

  • Read all you can on real estate investing, business and entrepreneurship.  Even if the subject is not real estate, you need to get your mindset to that of a real estate investor and an entrepreneur.
  • Join a local reia to network with other local investors.  The price of admission will be rewarded back to you many times over.
  • Buy a few of the more respected “Guru” courses.  As I said you do not have to go it alone and you should not.  Some of these gurus have already invented the wheel and will provide you a sound base to get started that again will reward you many times over what you initially invest.  Some of the gurus I have invested in include:
      • Mike Butler
      • Alan Cowgill
      • Robyn Thompson
  • Once you do the above get out there and get a few deals under your belt!  You have read the books, bought the courses and attended the reia meetings.  Now do it!  There is no better teacher than experience.
  • Once you get a few deals done, then you can begin to modify and refine the techniques you have learned to fit your particular niche.  You may want to focus on a particular area, or a particular form of real estate for example.
  • As you become more and more experienced, you can begin to write your own business systems for your particular circumstances and who knows, maybe you become the guru.

Whatever you do, remember there is no “Right” or “One” way to do real estate investing.  There are so many different deals in so many different areas with so many different customers that the sky is literally the limit.

Until next time work smarter not harder!

Is That a Good Buy and Hold Deal?

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Buy and hold deals are my favorite kind of real estate deals.  They provide you with monthly income and generate long-term wealth.

 

With buy and hold deals, cash flow is the name of the game.  The deal must generate positive cash flow.  A property is not a deal if it just breaks even.  It is not a deal if you have to write a check to cover expenses every month.  You want to collect checks, not write them!   Do not bet on price appreciation.  Appreciation is a nice benefit to get, but it is almost completely out of your control.

 

So how do you determine if a property will generate positive cash flow?  First, you need to determine how much potential income a property will generate.  Most of the time income equals rent, but there could be other sources of income such as utility and vending income.  For now, let’s keep it simple with rental income.

 

Expenses are more varied.  Let me list those:

 

  • Most of us need to borrow money to acquire the deal (if you do not, good for you!).  So your first expense is your principal and interest payment or the cost to borrow other people’s money.  This is the one major expense that we as investors have control over on the front end.  This control comes in the form of the price we can offer for the property.  Too high a price will skew the principal and interest costs up turning a potential deal into no deal.  Remember you make money in real estate when you buy.  So buy them right on the front end.
  • The second expense is property taxes.  Be sure you include everyone who can add a little piece to your bill.  Where I am today I just pay city and county taxes.  I recall living in Fort Lauderdale, Florida where there were no less than six or seven different taxing authorities.
  • Property insurance is third on the list.  The cost of this expense will vary depending on your location.  These first three make up the major expenses and are sometimes collectively referred to as PITI (Principal, Interest, Taxes and Insurance).
  • Repairs and maintenance are next.  Something always needs to be fixed and there is routine maintenance such as keeping the yard cut, raking leaves, cleaning gutters, painting, etc.  Budget approximately 10% of your gross rents in this category.  In other words, if monthly rental income is $1,000, budget about $100 per month for repairs and maintenance.   It will not always be exactly $100 per month.  Some months will be higher and some will be lower but over the course of time 10% is surprisingly accurate.
  • Vacancy is another expense you will have.  Your rental unit will never be 100% occupied 100% of the time.  If it is not occupied, it is not generating any income and you still have to pay the bills.  So a good rule of thumb is again to budget about 10% of your gross rental income towards a vacancy credit.  Depending on your location and market, this number can be higher or lower.  Use your own experience and expertise and adjust accordingly.
  • Utilities should also be figured into the deal.  There may be house electric meters or it may be common for the landlord to pay for water in your market.  Market conditions will vary, as will rates.  Some properties for example will be charged residential (lower) rates while others will be charged commercial (higher) rates.  Make sure you know your market and your rates.
  • Reserves are an expense that more and more bankers are asking about these days.  Reserves are funds that you set aside for those big future expenses such as roof replacements.  A lot of banks got burned in the real estate bust because landlords did not budget for this (among other things) and left the bank holding a ruined property.  If you are going to borrow bank funds, show them that you are going to set aside 10% of gross rents for future major repairs.  Plus it is nice to have that money there when something major happens (notice I said when not if).
  • Other expenses could include trash removal, homeowner association fees, advertising, professional fees (for lawyers and accountants), license fees and other various taxes.  These types of expenses will all vary depending on your local laws and market conditions.  Sometimes I just throw in a miscellaneous category of about 2.5% gross rents just to be safe.

 

Once you have determined your potential income and expenses for a particular deal, you can then list them to determine the potential cash flow.  Let’s say I am looking at a single family house that will rent for $1,000 per month.  The owner is asking for $50,000.  Is that a deal?

 

I always look for at least $150 per month positive cash flow after all expenses outlined above are paid.  I will also have to pay 7% interest with a 20 year amortization to borrow $50,000.  Those terms make my principal and interest payment $387.65 per month.

 

Let’s outline it.

 

Income (monthly)                                                $1,000

 

Expenses (monthly)

Principal and Interest                                        $387.65

Taxes                                                                    $50

Insurance                                                            $30

Repairs/Maintenance                                        $100

Vacancy Credit                                                    $100

Utilities                                                                 $0

Reserves                                                             $100

Misc.                                                                     $25

 

Total Expenses (monthly)                                 $792.65

So is this property a deal?  You bet it is.  Using the numbers above this property should generate a positive cash flow of just over $200 per month.  Not to bad.  If you buy 10 of these type properties they would generate $24,000 per year in positive cash flow.  What could you do with that extra money?  This positive cash flow is why buy and hold deals are my favorite deals.

Chruch Foreclosures Soar And Other Real Estate News

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More than a 1/3 of all home sales are now foreclosure sales.

Even churches are now not immune from the real estate crisis.

 

 

 

 

 

Investors are buying up all of those foreclosures, because the prices have dropped by half since 2006.

Here is a very smart 14 year old.  Where would I be today if I had started investing that early!

 

Is that a Good Real Estate Deal?

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Yesterday on the radio with Richard and Jo on AM 600 WREC we talked about what makes a real estate deal.  How do you, as a real estate investor, determine what your asking price for a property should be to ensure that you get a good deal?   In case you missed the show or were not able to listen, I wanted to jot down some our thoughts for you here.

 

First, let me start off by saying that any real estate deal is made when you buy, not when you sell.  Selling is simply a part of your real estate investing strategy.  There are three basic strategies to real estate investing.  One strategy is to get a property to retail to a retail buyer.  The second is to wholesale to another investor.  The third strategy and my favorite is to buy and hold in your landlord portfolio.

 

The numbers for all there strategies have to be backed into.  In other words, there are several other pieces of information you need to know before you know if you have a deal.  Let’s look at a retail deal first, then wholesale deals and next time I will write about buy and hold deals.

 

A retail deal’s most important number is the current market value for the property.  What would the property sell for to a retail buyer in today’s market?  To determine this number you need to examine the most recent sales comparables, or comps, of other similar properties that have sold in the last three months.  Look for the average sales price for square foot and then do the math to determine a retail sales price for the property you are interested in.

 

If for example after examining the comps you find that a property’s retail value is $200,000 you can then begin backing in to your price.  First subtract the amount needed for any repairs or upgrades.  Was the property last renovated in 1985?  Does it have the dual bathroom sink everyone wants now days?  Is the kitchen clean, modern and functional?  Was it beat up during the foreclosure process?  Is the property neatly landscaped?  The answers to these types of questions will of course determine the repairs needed.  For the sake of our example here let’s say the property needs $20,000 worth of work.

 

Next, you need to subtract your holding costs.  Once you acquire a property, only in exceptionally rare circumstances will you be able to immediately turn the property over to a retail buyer.  So there will be holding costs such as paying for the utilities while renovations are completed, keeping the grass cut, paying the property taxes and insurance.  You will also likely have to pay real estate commissions and some closing costs.  A quick rule of thumb to use here is to figure on about 10% of your sales price going to these holding costs.  So deduct another $20,000 from our example.

 

Finally, and this is the good part, you need to deduct your profit.  You are not doing this for free are you?  I did not think so.  In any deal you should make at least $10,000 or 10% of the retail sales price, whichever is higher.  There is risk in taking on a retail project.  All sorts of thing can happen from the property not selling to vandalism.  You need to make sure you are compensated.  And the bigger the deal, the bigger the compensation should be.  So for our example let’s take 10% or $20,000.

 

So what is the deal in our example here?  That $200,000 retail property is a deal if purchased for no more than $140,000.  Hopefully it is easy to see how I got to that number now by taking the retail sales price of $200,000 and subtracting $20,000 worth of repairs, $20,000 of holding costs and $20,000 profit.

 

A wholesale deal is similar except you are planning to quickly resell the property to another real estate investor.  The difference being the investor may want to retail the property or buy and hold the property.  So you need to know what your investor’s strategy is to be able to provide them with a good deal and make a profit for yourself.

 

Here again you need to figure out the after repaired value (ARV) or retail value using the latest comps available.  If your investor buyer plans to retail the property the most you can pay for it is 60% of the ARV, less any repairs needed and less your profit which should be $5,000 to $10,000.  You can take less profit here than in the retail deal above because you are in and out of the deal quickly and there is therefore less risk.

 

So if you find a property with an ARV of $100,000 that needs repairs of $10,000 the most you can pay for the property is $40,000 to $45,000.  That is 60% of $100,000 or $60,000 less $10,000 for repairs less $5,000 to $10,000 profit.

 

If your investor buyer is looking for properties to buy and hold, a quick method to determine your base price is to multiply the gross monthly rent and then divide by two.  So if a property generates $800 per month in gross rents. The base price works out to $800 multiplied by 100 or $80,000 which is then divided by 2 for a base price of $40,000.  Then you can subtract your profit for your offer price.

 

Why you may ask would anyone take such deep discounts for their properties?  Well there are many reasons.  People go through various stages in life, they get married, have kids, move, get divorced, pass away, etc.  These stages create opportunity because people may need to unload properties quick, not want to do necessary renovations or repairs, or just want to walk away.  So don’t think that you are stealing anything, many times you are providing a valuable service and the seller is more than happy to have your offer in hand.

 

Next time, I’ll go over how to determine a good buy and hold deal.  Until then, work smarter not harder.

Landlords Are Sitting Pretty and Other News Items

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If you have an extra billion or so lying around, you can pick up some really good deals from Uncle Sam.

Even if you do not have that much to invest you may want to get in the game since home prices have not been this low since 2002/2003.

Landlords are beginning to figure it out and may of them are sitting pretty!

Renting is Better 100% of the Time & Other News Stories

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As a landlord I have to like it when Yahoo reports that renting is better than owning 100% of the time!

 

 

 

 

It is also fun to watch the spin for a housing market recovery.

Home Sales Jump!  The housing market is recovering!

Well, maybe we spoke too soon.

The housing market is really comatose.   No, it’s more zombie like.

 

Meanwhile there are plans to downsize Freddie and Fannie.  And there are plans for more bailouts, this time by the USDA.

 

The bottom line is properties are cheap, money is cheap and renting is good.  Now is the time to buy.

 

 

 

Pick A Place To Farm

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No, I’m not talking about for growing corn, but for growing your real estate investments.  If you want to be a successful and smarter real estate investor, you should find a particular area and farm it for real estate deals.  It just makes good real estate investing sense.  Just as you would not try to scatter your corn crop all over the country or your particular city, you should not scatter your real estate investments all over the country or even all over your particular city (at least not at first when you are starting out).

Farming means selecting an area and then getting to know that area like the back of your hand.  You need know all the streets, the house types, average retail sales price, price trends, rental rates and rental trends.  By having all of this information on hand for quick reference, you can act quickly if a deal presents itself.  (In hot markets, quickly may mean as little as a couple of hours!)

Farming a particular city or neighborhood provides the real estate investor with many advantages.

  • You can easily get to know the area and quickly develop a “mental map” in your head.
  • It is much easier to keep up with comparable sales and rents on a farm as opposed to an entire city, region or country.
  •  A farm allows you to focus by limiting the amount of info (noise) coming at you.  This focus can really help you when you are just starting out.
  •  A farm will provide confidence as you get to know your farm more and more.
  •  A farm will save you time, money and hassle.  This fact alone is worth it!

Where should you farm?  I recommend you look for an area that is maintaining property values and where people have and hold jobs.  It does not have to be the nicest neighborhood or even the lowliest.  Although both of these types and everything in between will have deals in them for you to farm and grow.

I also suggest, at least when you are beginning your real estate investing journey, that you pick an area close to your home or work.  This strategy will provide you will several more advantages.

  • Your farm will be located in an area you are already going to, so no extra drive time.
  •  You will most likely already be familiar with the area.
  •  You can keep things close.  I really like this one since I manage my own properties.  This one really saves you time when there is an emergency in the middle of the night during an ice storm (ask me how I know this).

How big should your farm be?  The answer will depend on many factors, but here are a few guidelines.

  • It needs to be big enough so that you can find enough deals to invest in.  Farming only in your 30 lot subdivision will not give you much to eat.
  • It should not be so large that you are driving 30 minutes or more to get from property to property.  All of mine for example are about 10 minutes driving distance from my home.
  • The size will depend on your strategy.  If you are landlording it can be smaller, if you are wholesaling it will most likely need to be larger in size to find both sellers and buyers.
  • Size will also depend on where you are located.  If you live in a big city you may be able to focus on one or two neighborhoods.  If you live in a small town you may need to focus on the entire town.  If you live in a rural area you may need to think larger and focus on the entire county.

Farming is a great real estate investing strategy, especially for the beginning investor.  So get your maps out, grab a highlighter and pick your place to farm for your real estate deals.

Podcast – Choosing Your Real Estate Investment Strategy

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Real estate investing is a great way to build wealth, but which strategy is right for you? Should you wholesale, retail or buy and hold? All three offer great opportunities. Listen as Richard Scarbrough, Jo Garner and myself talk about the pros and cons of each strategy.  Originally aired on AM 600 WREC on 2/4/2011.

Real Estate News – February 17

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It appears upon closer inspection that the robo-settlement is just another tax payer bailout of the big banks.  See here and here.  I can’t wait for the spin on this one.

With their latest bailout under their belts, banks are beginning to foreclose again.

Housing starts were up!  That sounds good if you only count the past couple of years.

Think we got problems?  Check out this ghost town in Spain created by their own housing bubble bust.

Real Estate News This Week

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Here is a round up of real estate related news stories I found interesting this week.

  • Home sales in Memphis, TN were either up by 8% or 12% for the month of January depending on who you talked to.  Either way they were up!
  • The foreclosure crisis has decreased home ownership rates across the US.  Less homeowners means more renters.  The market is waking up to this fact.  Keep your eyes open for a possible multi-family price bubble in the future.
  • Banks may have finally figured out that short sales are a good way to dispose of some inventory.  Perhaps now investors will actually be able to complete short sales!
  • Commercial real estate is overbuilt.  The times are changing and businesses like Amazon.com are leading the way.
  • A quick take on the robo-signing deal.   A good deal?
  • Now that the robo-signing deal is done, people may not get to live for free anymore and will actually have to pay their mortgages or rents.  That may suck as much as $50 billion out of the retail economy.
  • Big money is looking to start buying up all those foreclosed single family homes and rent them out.

“The new loan program would likely be only available for deals of $100 million or more.”

 

 

 

Anything else catch your eye this week?  Send me a message and let me know.