SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

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Herding Cats

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Previously, I wrote about having your offer accepted.  In that article, I touched on some of the major items that you will need to keep up with, such as inspections and appraisals.  There are however a whole host of other things that you need to keep up with as well.  In fact getting to the closing table can sometimes be like trying to herd cats.

Real estate transactions involve several players.   Each player has their own role to play in you having a successful closing.  There is your attorney, the seller’s attorney, each attorney’s assistant, the lender, the lender’s assistant, the appraiser, the title searcher, the insurance agent, the bank inspector, the termite inspector, etc., etc.

Keeping up with all of this can be a challenge.  But, if you want to close on your deal by the date defined in your contract, it is in your best interest to make sure all of these players work together.  In other words, get used to herding cats.

Many of these players are swamped with other projects and real estate deals.  Yours can easily get lost in the shuffle.  I have not seen a real estate attorney’s office yet that was not stacked floor to ceiling with files.  So you have to protect your interest in getting the deal done.  No one else will care like you will.

What you as the smarter investor need to do is start a simple file as soon as you offer is accepted.  Yes, get an old fashioned legal sized file folder, write the address of the property on the tab, and put a copy of your signed contract in the file.  Then attach this Closing Information Sheet on the front cover.

This Closing Information Sheet is the one we use to keep up with our closings.  It lists all the players, gives dates when things like appraisals are due and provides a checklist to make sure we do not miss anything.  Feel free to download a copy of it here.  You will be thankful you did.  Because when herding cats, you need all the help you can get.

How to Save Money for Future Investing

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Training yourself to build a consistent savings will eliminate so much stress and uncertainty in life. You will be adequately prepared to deal with unpredictable expenses and you will be positioned to make serious real estate investments in your future.

So, why do we make excuses?

I’ve copied down a few of the tactics and tricks that helped me develop consistent savings. Savings coupled with reducing your expenses are the keys to financial flexibility.  I’ll discuss reducing expenses next time.

1. Increase the Inconvenience
Using the same bank for your checking and savings accounts is too convenient! It makes it too easy to borrow from your savings. That’s why I tell everyone to open their savings account at a different institution than their checking account. To INCREASE the inconvenience, I opened my savings account at a credit union whose hours of operation mirrored my own office hours. What are the chances of you leaving work just to borrow a few dollars from your savings? I don’t think so. You don’t need to buy those shoes anyway.

2. Payroll Deduction
If you have the option, have your savings come directly out of your paycheck and into your savings account. If you don’t ever see it, you won’t ever miss it. This worked so well for me that I continued to increase my payroll deduction every time I got a pay increase.

3. Know Where Your Money Goes
This may sound like a no-brainer, but seriously, know where you spend your money. Make a budget of necessary spending as well as monthly luxuries. After analyzing my spending, I realized I was eating out way too much. If you earn $10 an hour, and those shoes cost $70, think about it. Are those shoes worth a full day’s work?

4. Spend it all on Pay Day
Pay all of your bills the day you get paid. If you aren’t afforded the option of payroll deduction for your savings, then pay into your savings like it’s a bill. After all of your bills are paid, portion out what is needed for groceries, gas and reasonable “rewards” for budgeting responsibly. If there is a larger than expected balance remaining, then put most of it in your savings. If you wait to pay your bills, you will nickel and dime your savings away before you ever see it.

There will be surprises; there will be set backs. Don’t get discouraged. Everyone is different, and you should develop your own savings strategies based on how well you know yourself. For instance, I never allowed myself a “reward” for responsible spending. I saved it all. If I had just experienced a sizable set back to my savings though, I would find justification for treating myself. Yes, it made an even bigger dent to my pot of savings, but it kept me on track.

Which is more important?

Why I Became A Real Estate Investor

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I have always rented: rooms, apartments, town houses, single family homes—the works.   My parents have always rented too.   They worked hard to provide for me, but I wish they had worked smarter.

Working smart is having assets that work for you.

Unless you have revenue generating assets, your income will always depend on the hours you punch on a time clock.   Building wealth and financial stability is about diversifying your revenue streams.   Diversification will provide you with an additional level of stability in the event that you’re laid off or suffer from a severe medical condition.

I’m young but I’m all about preparation.   There are many reasons why investing in real estate can be advantageous.   Here are 5 reasons why I became a real estate investor.

1. It is not rocket science.
Properties appreciate alongside inflation.   The longer you own an investment, the more it is worth.   As a notoriously indecisive person, I enjoy the options that appreciation provides.   I can sell it for a profit down the road, or I can refinance and leverage the equity to continue investing.

2. I learn valuable skills.
Unlike undergraduate school where I spent thousands of dollars to learn things like existentialism, the skills I have learned during my time in real estate are functional.   As long as people live in houses, there will always be a demand for carpenters, plumbers, painters, etc.   If all else fails, I could make a living as a handy man—not to mention the money I save by doing repairs on my own.

3. I can increase the value of my investment.
Unlike stocks or bonds, a real estate investment is something that you can directly and immediately affect.Sweat equity can go a long way, increasing the property’s value and increasing its rent revenue potential.   I enjoy the work too; so, it’s a win/win!

4. Cash flow is king.
The revenues generated from my rentals cover my mortgage—in addition to padding my pockets.   Someone else is paying for my retirement!   I’m able to save at a higher level than before too, which affords me some of life’s luxuries, as well as the ability to continue investing.

5. I can be proud.
The most rewarding part of being a real estate investor is the difference that you make in the community.   It’s incredibly satisfying to see an abandoned property return to its former glory. I want to be a catalyst for systemic change, and real estate can afford me the opportunity.   I also enjoy being a fair landlord to deserving tenants. Too many companies take advantage of tenants through crafty lease language—or by neglecting their duty to maintain the property.   I know because I have been there.

I’m proud to be an investor.

So what are your reasons?

 

Announcing Our Newest Blogger!

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I am proud to announce that Jenna Stonecipher will be joining SmarterLandlording as a blogger.

Jenna is what some of us more experienced folks would call a “newbie” who has just purchased her first investment property.  She took the leap and bought a vacant tri-plex in need of rehab.

Jenna will be writing about her experiences as a new real estate investor and sharing her thoughts on learning about real estate investing, searching for properties and getting the money to buy them.  Plus it should be fun and interesting to watch as she goes through the rehab process, finds tenants and then searches for her next deal.  All with a little help from yours truly thrown in every once in a while as well.

So welcome aboard Jenna, we look forward to your posts!

 

My Offer Was Accepted, Now What?

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You have gotten to know your market.  You have a pretty good idea of what a good buy and hold deal is. You just negotiated an offer.   It got accepted.  It is your first deal!  Now what?

That depends on what is in your purchase contract and how you are planning to purchase the property.  No two contracts are the same but most have several standard parts.  These can include:

  1. Buying the property “as is.”
  2. A property inspection period.
  3. A review of leases and financials.
  4. The need for some type of financing to close the deal, likely from a bank.
  5. A way out or escape clause.

So let’s go through each one.

  1. Many investors buy investment properties as is.  Buying a property “as is” means exactly that.  You are buying the property as it is where it is and the seller will not make any repairs.  It is incumbent upon you to know what you are getting into and what, if any, repairs and upgrades are needed and what they will cost.  To find all this out you need an inspection period.
  2. Just because you are buying a property “as is” does not mean you should not inspect it.  In fact you should!  During initial negotiations you may only have seen portions of the property.  Now is the time to see it all.  Your inspection should include all rental units, attics, basements, crawl spaces, roofs, etc.  Anyplace you can get into.  If you are new to this, you may want to hire a property inspector or at least take a trusted contractor with you.  During this inspection period you should be doing two things, making a list of repairs needed and looking for major damage and/or problems you were not aware of.  If you find major damage or problems, it may be time to go back to the negotiating table.  If the seller will not renegotiate, use your escape clause and back away from the deal.
  3. Get copies of all leases and at least two years of past income and expense reports.  Read these over carefully.  You will be inheriting the tenants and they come with certain rights.  You can’t just kick them out because you are the new owner, you will have to live with them for a while.  Be sure you are aware of what you are getting into.  Make sure utility payments jive with what you were told for example.  Do the tenants really pay them, or are they listed as expenses on the expense report?  Depending on what you find, you may need to renegotiate.  Again, if the seller is unwilling to do so, you may need to back away from the deal.
  4. Finally, if you are getting bank financing, there will be an appraisal.  Always, always, always go to the appraisal and meet the appraiser.  This person can make or break your deal depending on how they value the property.  Be helpful to the appraiser.  Take them some comps if you can.  Hold their measuring tape for them.  Explain to them, or better yet provide a list of the repairs and upgrades you plan to make.  Do all you can to ensure the appraisal goes well.
  5. This is pretty self explanatory.  If something goes wrong, such as unexpected and costly repairs, you need a way out as we see in 2 and 3 above.  But only use it if you absolutely have to.  If you make an offer, you should have every intention to close.

Assuming all is in order and has gone well, your next job is to secure insurance for the property.  Find a good insurance agent who understands your market and understands investment property.  Trust me, not all of them do.  You can often find one at your local REIA.

Finally, develop a checklist to make sure all of these various pieces get placed in their proper slots.  Do not just assume that the appraiser has the proper address to send the appraisal.  Do not just assume that your insurance agent has sent the proper forms to the right places.

It is your job to follow up with all of these people and make sure that everything gets to the right place in time to close.  E-mail the bank to make sure they have the appraisal scheduled and that they receive the appraisal when completed for example.  Nobody else cares about this deal as much as you do and often times you need to expend some energy to get all the pieces together.

Only then, once it all has been fitted together, then maybe, you will close on your first deal.  Congratulations!  Now the real fun begins.

Tax Appeal Deadline July 31

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The deadline to file an appeal with the Shelby County, TN Board of Equalization  is rapidly approaching.  If you want to challenge your recent property appraisal by the Shelby County Assessor’s Office, you have until July 31st to file.  I will be filing appeals for several properties.

You can download the forms you need and file online here.

A word of caution though, if you file online you will not get a receipt.  There will be no record that you have filed.  I would recommend printing out your forms from the link above and actually taking them in person to the office to get a receipt.  You do not want to “get lost in the mail” so to speak.

Tenants Are Your Eyes and Ears

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You can’t be at your properties 24/7, but things can certainly go wrong 24/7.  Your tenants are your first set of eyes and ears that can alert you to something gone wrong.  Your job as landlord is to determine when something requires your immediate attention.

A smarter landlord listens closely to what their tenants are saying.  Tenants are not property experts.  Something that seems like a huge problem to the tenant may not be a huge problem.  But, something that seems small to the tenant may in fact be a huge problem.  Here is what I am getting at.

The other night a tenant called after business hours.  We ask tenants not to call after hours unless it is a true emergency, but the definition of true emergency can get muddled.  Anyway, the tenant says that half of the building’s power is out.  Some things are on, others are not.  And, it is not just in his unit, everyone is reporting the same issue.

The thing here is that his report was odd.  If all power is out, it is likely a utility problem.  If only some power in one unit is out, it is likely that a breaker is tripped.  But here not all power is out in all units.  This is odd and odd things should get your attention.  So I went over.  Turns out a tree branch had broken a power line and knocked out one phase of the power.  This explains why some power was on and some was out.  However when I was there I could hear the AC condensers trying to kick on, but not having enough power to do so they were burning themselves up.  If I had let this go overnight, they would have burned up and cost me thousands in repairs.

Another time a tenant complained about lights flickering.  No big deal I thought.  But she also mentioned her phone charger plug had melted in the outlet.  That is odd.  Something is wrong.  Power is surging somewhere.  Long story short, when I got there the meter was literally smoking hot.  I was minutes away from a major fire.  That tenant saved the building and who knows, maybe a life.

Another time a tenant called and complained of a musty smell.  Now you might not think a musty smell is such a bad thing but what causes a musty smell?  The answer is water.  Water is collecting somewhere, likely somewhere hidden.  It could be between walls or under the house because of a broken pipe.  It is something you need to check out before the walls, floors and everything else becomes mildew infested and rot.

So learn to use your tenant’s eyes and ears.  You don’t have to respond to every request right away.  But you must learn when you should.  If they are telling you about something out of the ordinary, you might want to check it out.

What to Watch to Know Your Market

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Last time I wrote about the importance of knowing your market.  You never want to go out and just buy an investment property for the sake of buying a property.  Rather, you want to make a calculated investment decision.  And in order to do that, you need to know your market. 

But what exactly does that mean “know your market?”  What should you be watching?

Here are four items that I watch almost every day.

  1. What is the Rent? – What are properties in your market renting for?  You simply have to know what type of income you can expect before you can make any purchase decision.  How do you watch them?  You scan Craig’s List, read the classified ads, call for rent signs pretending to be a potential tenant and talk to other landlords at your local REIA club.
  2. Where is the Rent Going? – Are rents in your market steady, going up or going down?  This factor obviously can drive many an investment decision.  If you see rents going up, perhaps it is time to ratchet up your buying, if they are going down, perhaps you should consider another market.
  3. What are Properties Selling For? – As buy and hold investors, we are generally concerned with one thing, positive cash flow, hence our focus on numbers one and two above.  Price is also a very important factor in that cash flow calculation.  You need to be keenly aware of property values and prices in your market, because when a deal comes on the market you have to spot it and act quickly sometimes to beat others to it.  You can’t do that unless you know your market.  My Sunday paper prints listings of sales every week.  Working with a realtor from your local REIA group can also be very handy here.
  4. Know Who is Buying In Your Market – No I do not mean by name, but what the buyers’ goals are.  Are they owner occupants or are they investors or both.  Knowing this information may help you determine your next move.  If there are many owner occupants they may be driving prices too high for a reasonable cash flow return and it may be time to find a new market.  If there are a lot of investor types, you may have found a good rental market, but the competition may be stiff to get properties.  I like to watch the daily property transfers here.  Your location may have a similar publication or website.

If you watch this information continuously, you will soon develop a very good feel for your market.   You will become a much smarter real estate investor.

Know Your Market

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As a Smarter Landlord, you should be very in tune with the market where you invest.  Remember, you are a real estate investor buying investment properties and the value of an investment property is based solely upon the income it can generate.

To a landlord that means you really only need to know one thing when looking to buy a property, what will the property generate in rent.  Once you are reasonably certain about the rental income, everything else will fall into place.

I have seen way too many “investors” go at buying properties from the wrong direction.  They start, not by looking at the income, but by looking at the expenses.  They note that their mortgage, tax, insurance and expenses payments will be X dollars.  Therefore they reason, they will need Y dollars to cover those costs and make a little profit.

Sounds great, but here is the problem.   You do not get to set the rental amount at Y dollars.   The market, hundreds if not thousands of other landlords and tenants, will determine what the rent will be for you property.  It may not be Y, it may very well be Z.  The market does not care that you need Y dollars and were not in tune with what it was trying to tell you, it will simply ignore you

This is why knowing your market is so important.  Knowing what your market can generate in rents will set the price for the properties you are looking to invest in.  Knowing your potential rent first and then subtracting expenses will lead you down the path towards becoming a successful investor.  You will also be able to see when a deal is truly a deal.

Remember, the numbers do not lie.  If the numbers do not make sense, then do not buy.   And never, ever bet on appreciation.  Betting on appreciation is speculation, not investing. Look where that got folks in the last few years.

So learn your rental market and what it closely, by doing so you may just spot your next deal.  I’ll write more about that in future posts.

Update #4 – Property Reappraisal Challenges

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I have reviewed all of my property reappraisal notices.  To see what I have done previously in this process see here, here and here.  Some I can agree with and can see the logic behind the valuation while others I simply cannot explain.  Some of my properties’ values more than doubled in just one year for example.  With others, the value significantly increased while surrounding properties’ values were lowered.

Sometimes the Property Assessor did not even use comparable sales to value my properties.  They used “replacement cost,” meaning they added up the cost of the “bricks and mortar” needed to replace the property.  Using replacement cost really makes no sense.  For example, think of a run down section of your town or city, imagine building a house there using $1 million worth of materials (marble, quartz, gold fixtures, you name it!).  Is the home you built worth $1 million, or does location, location, location come into play?

Anyway, I asked for and received an “informal review” of several of my properties’ valuations.  This is a process whereby the staff of the Assessor’s office takes a look at the new values.  The results of this process were mixed.  Some properties were reduced to the old values (yeah!), some were reduced a little bit but not all the way (hmmmm?) and others were left where they were, too high (nope!).

So now we go on and upward with a formal appeal to the Board of Equalization.  At the very least, the informal review process reduced the number of formal appeals I need to make, so it is valuable to do.  I also must say that the staff of the Assessor’s office was at all times helpful and professional.  They returned phone calls (many times), listened to my reasoning and were as helpful as they could be.

If you live in Shelby County, TN the deadline to file is July 31, so be sure and get your paperwork in if you plan on appealing.  I plan on appealing several and I will be writing about that here in the future.