SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Finding and Analyzing Properties

The SmarterLandlording Podcast – Buying, Rehabbing and Managing Class D Apartments

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“The real estate is easy, the people are hard.”

Check out the SmarterLandlording Channel on iTunes

Stuff We Mentioned

Memphis Investors Group – The Memphis Investors Group (MIG) is the local REIA club here in Memphis.  If you are here in Memphis, look us up.  If not, check for a club in your area.

Multi-Family Investors Sub-Group – This MIG sub-group meets at noon every third Wednesday at Newby’s on the Highland Strip right here in Memphis, TN.   It’s free to go but lunch is Dutch treat.

Section 8 – Section 8 is a low income rental subsidy program that many investors in class D properties use.  Check out the Smarterlandlording Podcast with the Section 8 Landlord to learn more.

Like the Intro Music?  Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!).  They write and play some awesome, original music from right here in Memphis, TN.

Tall Grass Can Lead To Tall Dollars

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Spring has sprung here in Memphis.  Everything is green again, especially the grass.  After sitting dormant all winter, lawnmowers and weed eaters can be heard everywhere, well almost everywhere.  Some properties became vacant this winter, and now that the grass is green, growing and tall again, we can easily see that.

Why were they left vacant?  Who knows?  Why do I care?  Because I do know that a vacant property can lead to a potential deal and that tall grass is often a sign of a vacant property.  So it makes sense to take note of properties with tall grass, as there could be dollars hiding in those weeds.  Just today I went to look at a property that popped up on the MLS and while driving to and from that property I counted and wrote down the addresses of five others to check out.  All because it is spring and the grass is now growing.

This technique, called driving for dollars, is one of my favorites for finding properties.  Even with all of the technology that exists today (I use that too), physically looking around still gets results.  It’s cheap too!  All it takes is driving around an area you wish to farm and looking for signs that a property is in distress such as tall, uncut grass.  If you see signs of distress, make a note to yourself and check the property ownership details later.  It may be worth sending the owner a letter and that letter may just turn into your next real estate project.

I like to drive around areas close to where I live.  But you do not have too and you do not even have to be specifically driving around for dollars.  For example, I found one property just because I was going back and forth to the grocery store.  I found another because it was down the street from one of my other properties.  And, as I said above, I found five to check out just by going to look at another listed property.

So open your eyes as your run your errands.  Look for the tall grass and other signs of distress.  It may just net you a nice deal.

Found any great properties driving for dollars?  What do you look for when driving around?  Please share with your comments.

9 Out-of-the-Box Questions & Tactics Multi-Family Investors Should Consider Using

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9 Out-of-the-Box Questions and Tactics Multi-Family Investors Should Consider Using

By Richard Montgomery      www.DearMonty.com

Summary: Investing in multi-family housing and apartments requires extra investigation, sometimes called due diligence by attorneys. This extra investigation and these questions are beyond what a real estate investor may do normally for a typical commercial real estate investment. As a real estate investor, once you go beyond multi-family rentals such as duplexes or fourplexes, you enter the commercial real estate area.   Here are 9 out-of-the-box questions you should be asking, or at least consider asking, before you purchase that multi-family or apartment building.

DEAR MONTY: About six months ago, three longtime friends and I decided to make some real estate investments together. Our investment goals are similar; we are each high-income professionals, share similar risk tolerance and see real estate as a long-term investment opportunity. Now, we have identified a 60-unit apartment building we are interested in pursuing. We have the standard list of due diligence items, but wonder if there are some “out-of-the-box” due diligence tactics to make certain we do not make a mistake. Can you help?

Real estate apartment investing is a series of calculated risks

Answer: Buying, owning and selling investment real estate is always a series of calculated risks. “Make certain” are strong words. No matter your methods, you cannot know everything the seller knows. Over and above the standard due diligence list, buyers have ways to discover more about a property that either encourages or discourages them.

It is always difficult to understand the motivation of the seller because many sellers do not share their core beliefs, or some may even mislead or miscommunicate their ideas to create an image of trust. As callous as this statement is, I believe it to be true in many cases. To balance that statement, self-interest is to be expected.

Choose carefully which tactics to employ

Business ethics is a subject that is not black and white. It involves various shades of gray depending on the person with whom you are talking. Choose carefully which tactics to employ with which transaction. Some sellers might not take kindly to a given tactic, while others may well have done something similar, or further out-of-the-box, themselves.

I have never witnessed any one buyer applying all of these tactics on a single property. This is a career compilation of tactics I have seen.

No. 1 – The rent roll is not enough: Where do the tenants work?

Determine where the tenants are employed. This data will be on the rental application, but not on the rent roll.

If 25 of the tenants are with the same company, and a move to Mexico is announced 30 days after the sale closes, your vacancy rate could skyrocket.

No. 2 – Visit with former tenants

Visit with multiple tenants who have moved out of the apartments.

You can determine this by comparing year-to-year rent rolls. Look for patterns in the reason they moved out.

Getting closer to work is one thing. But moving away from drug dealers is a different story.

No. 3 – Look for patterns in the vacancy swing

Get the financials both annually and monthly.

Look for patterns in vacancy swings. If you find one, learn what creates it every year.

When you hear the answer, trust it – but verify.

No. 4 – Visit the apartments in the morning- and in case you don’t see them also “good day, good evening and good night”

The quote from the Truman show applies when you want to find out what is really going on with the apartment building.   Visit the property unescorted on multiple occasions.

Visit in early morning, mid-day, late afternoon and midnight. You will learn something about your potential tenants and how the building functions.

  • Do tenants congregate in appropriate places?
  • Are there vehicles with stale damage?
  • Is the parking lot well lit?
  • Do you feel safe?
  • It can be surprising what you learn going unannounced.

No. 5 – Talk with the local police about the apartments

Check with the local police department.

Tell them you are considering buying the building and ask if you could do anything to help them in the neighborhood. You will learn if the building has a reputation.

The best thing that can happen on that visit is they will have trouble placing the property.

 

Read the rest here.

The Boom Is Here!

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The real estate boom that is.

 

How do I know?

 

The stats tell me. Check out these two.

  1. First time foreclosure starts are at their lowest point since the year 2000. Not 2008 when things crashed, but 2000! Lower than they were during the last boom.
  1. New home sales are at their highest point in 8 ½ years.

Add the following to the above:

  • The stock market continues to climb ever higher.
  • The Federal Reserve is keeping interest rates very low.
  • Adjustable rate mortgages are making a comeback.

Suddenly it begins to appear a lot like the year 2005.

What is more, I am seeing A LOT more interest in real estate these days. Everyone wants to know how to go about getting started. Anecdotal I know, but still eerily similar to 2005.

Things do not seem to be quite as exuberant as they were a decade ago but let this be a warning to smarter landlords and real estate investors. The market is definitely heating up. There are still deals out there but there are more and more people chasing them thus driving the prices up. DO NOT get caught up in the exuberance. Keep your head in the game and listen to the numbers. Remember not to bet on appreciation and do not think you will always be able to refinance out. Instead always remember that cash flow is king. I’ll say it again, cash flow is king!

Enjoy it while it lasts. I do not think we are near a crash, but we should definitely remember that nothing goes up forever. So, If you need or want to sell a property, now is the time. In fact, I seriously considered putting some of mine on the market but decided against it. I like the cash flow.

What’s going on in your market? Seeing a boom there? Let me know with your comments.

Inheriting Tenants? Protect Yourself

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When you buy an investment property, sometimes it will come with tenants already in place. These tenants can be a good thing as your new purchase will be immediately generating income. But, these tenants can also be a bad thing because you really have no idea how they were screened, how they have been as tenants or even what the details of their lease are. You can of course review existing written lease agreements, but there are landlords and tenants out there who have nothing more than a verbal agreement. There is no written lease to review.

So what you might ask.

Well, here is the thing with inherited tenants, you are stuck with them. The existing lease, even if verbal, cannot be changed by you just because you have bought the building. Your purchase does not in any way, shape or form alter the lease agreements the tenants currently have in place. You can’t raise the rent. You can’t just evict them. You can’t add rules. You can ask them to sign a new lease. You can offer to pay them to do so, but they do not have to. As I said, you are stuck with them. Stuck with them until the term of their lease is up.

Not a good place to be, especially if you have no idea what unwritten agreements might be hiding out there.

So how do you, as a landlord who wants to add the property to your portfolio, protect yourself? How do you determine what the current lease terms and conditions are?

One way is to ask to review the current leases. But what if there is no written lease? Or, what if the selling landlord is just making stuff up? It happens!

One of the best ways to protect your interests is to use an estoppel agreement. This agreement, which spells out the existing lease terms, is filled out and signed by both the tenant and the selling landlord. An estoppel agreement is a simple one page form that asks some very basic questions regarding a tenant’s living arrangements. Questions such as:

  • What is the term of your lease?
  • Who is listed on the lease?
  • How much is the monthly rent?
  • Do you pay any utilities?
  • How much is your security deposit?
  • Do you own any appliances in the apartment?
  • Are you current on your rent payments?
  • Are there any repairs that need to be made?
  • Do you have any other arrangements with your current landlord?

By getting this form filled out by the tenants you are about to inherit and the landlord you are buying the property from, you will have a legal piece of paper that will offer you some protection going forward.

How?

If a tenant later claims that his verbal lease was for a year and that you can’t ask him to leave you can point to the estoppel agreement that he signed stating that he was on a month to month term.

Or,

If when the tenant moves he claims that his security deposit was $5,000 and that he owns the appliances, you can again refer back to the estoppel agreement to determine if that is indeed the case (If it is the case when you review the agreement before closing you may want to renegotiate the purchase price.)

The estoppel agreement is a very important piece of paper to get completed when buying any property that has existing tenants. Use it every time and make the completion of this agreement a part of your purchase and sale contract. In fact, I think this document is so important I want to make it easy for you to use. So please follow this link to my Smarter Resources Page to download the estoppel agreement form that I use and protect your future buying interests.

 

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The Lies Holding Us Back

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One of the toughest things for a new investor is just getting started. One of the toughest things for an experienced investor is growing their business and trying new ways of doing things. It can be so hard to pull that trigger and acquire your first deal or go down a new path.

Interesting thing is, our brains may actually be holding us back. It seems that our brains like to tell us little lies to discourage us. It wants to keep us safe and on the tried and true path.

Which of the 14 little lies in this article have you used to prevent you from buying that first deal or from expanding your business?

I know several that have entered my mind from time to time. And because of this it can be very hard to get off the path that you know. But if you want to succeed, at anything, often times you must leave the path you are on.

That is why I think the advice at the end of this article is so important. To be successful, you have to learn to recognize these lies and understand how to deal with them. You have to learn that being scared to get off the path you are on is OK. It is natural, but holding you back.

Is The Real Estate Bubble (Coming) Back?

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Home prices are up and rents are too. Rents increased about 5% in the 4th quarter of 2015 and about 7% for the year. It is going to be interesting to see where this all ends.

Home Prices 2007 to 2015

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The change in home prices 2007 to 2015. How is your neck of the woods doing?  There is a lot of “green” out there.

How Nextdoor.com Can Benefit You

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I’m a millennial. Naturally, I’m registered on at least 6 different social media sites—all for different reasons. Each social media site provides a unique platform. Facebook keeps me connected to family and friends. LinkedIn provides me with professional visibility, and Pinterest keeps track of products that appeal to me.

So, which social media platform is best suited for the real estate investor? Nextdoor.com

Nextdoor is a social media site that connects people within specific neighborhoods. In order to register on Nextdoor, you have to first verify your address to proving your residency in the neighborhood. You must use your real name.

The site allows for neighbors to exchange information about block parties and community clean-ups. Neighbors can buy and sell items between each other, and they can report break-ins and burglaries instantly. Good neighbors make good neighborhoods. I enjoy the camaraderie that this site provides.

While, those are my personal reasons for using Nextdoor, it has benefited me greatly as a new investor as well.

 

Example #1:

I marketed a vacant unit in the area on Nextdoor. Within 24 hours, I had an application submitted based on a neighbor referral. No multiple showings; no craigslist chaos. The applicant is now a wonderful tenant. I would rent to her a million times over.

 

Example #2:

I posted an inquiry about a property, stating that I was a real estate investor. Within minutes, I began receiving messages from other real estate investors in the area. These investors provided me valuable information about the property. Plus, I am now connected to other well established investors who farm in my area. This pool of investors are my competition—as well as potential mentors.

 

Example #3:

I was working in a unit when I discovered that I needed a reciprocating saw. I’m a new investor. I have yet to purchase a ladder, let alone a reciprocating saw. So, I posted on Nextdoor asking if anyone would lend me or rent me their saw. Within 30 minutes, a neighbor was at my doorstep, saw in hand. If that’s not neighborly love, I don’t know what is!

 

Example #4:

Many of my neighbors know of me, even if we haven’t met yet. They know which properties I own, and they appreciate my investment in the area. This neighborhood-wide recognition will undoubtedly add to my credibility as an investor. Recently, the neighborhood association newsletter editor asked me to participate in an interview, which I happily obliged. Companies are told to market their brand. As investors, we have to take advantage of opportunities that allow us to market ourselves!

 

I encourage all new investors to consider unlikely resources, like Nextdoor, when developing your RE portfolio. I also encourage me tenants to register on Nextdoor as well. If my tenants are grounded in the community, surely they won’t want to move. At least, I hope not.

Some Properties Are Taxed Differently

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Are you aware that property tax rates can differ for different properties?  They can.  Here in Tennessee for example, commercial property is taxed at a higher rate than residential property.  Not knowing and understanding how these different rates apply could cause you to make a mistake during your property analysis and crimp your cash flow.

To understand how these two tax rates work we have to first define some terms. 

Let’s look first at what “residential” property is.

Residential property as per Tennessee Code Annotated is a single family dwelling or a duplex where the owner is an owner/occupant and lives in one side of the duplex.  So to be classified as residential property, an owner of a duplex must live in one of the units.  A singly family dwelling is always classified as residential, no matter where the owner lives.

So what is “commercial” property then?

It is just about everything else.

Commercial property includes properties that you would ordinarily describe as commercial, such as strip shopping centers and office buildings.  This category also includes industrial buildings and multi-family buildings.  It includes large apartment complexes and smaller buildings like tri-plexes and quad-plexes, no matter if the owner lives in one of the units or not.  It also includes duplexes if the owner does not reside in one of the units.

So what is the difference between these two property classifications when it comes to property taxes?

It’s 15%.

Residential properties are assessed at 25% of their appraised value for property tax purposes.  Commercial properties are assessed at 40% of their appraised value. 

Let’s look at an example and how it might affect you.

You have found an owner occupied duplex that you wish to purchase.  As you do your research on the property, you look up the current taxes and plug them into your spreadsheet.  The property cashflows well, so you decide to buy it and add it to your portfolio.

To make it easy, let’s say the property’s appraised value is $100,000 and as an investor, you have no plans to live there.  At the closing table, your attorney places your office address on the deed so everyone knows where to send tax bills.  This change in ownership will trigger the local tax assessors’ office to reassess the property to the higher commercial rate of 40%.

Now, instead of paying taxes based on $25,000 of value ($100,000*25%) you will be paying taxes based on $40,000 of value ($100,000*40%).  Here in Memphis and Shelby County, TN that can be a huge difference as this change in assessment amounts to a tax increase of over $1,100 per year.

Ouch!  That’s almost $100 more per month.  Double ouch if you were not expecting it because you based your calculations on the residential rates.

I would bet that it is safe to say that other state do similar things.  Please be aware of these potential tax rate differences and how they might affect you.  Your cashflow depends on it.