ADVICE FROM EXPERIENCE
What did rents do in your market in 2018?
In many markets landlords were able to raise the rent in 2018.
Were you able to do so as well? Click here to read more.
What did rents do in your area? Were you able to increase them, hold steady or did you have to decrease them to find tenants? Please share your personal experience with a comment.
Nearly every property I have purchased required an extensive rehab. Rehabs are complicated and no two are ever the same, making them perhaps the most difficult and costly aspect of this business. Adding value through a rehab, despite the difficulty and cost, makes these properties profitable to us. But, our goal as investors and entrepreneurs is not to just do a rehab for profit; it is to run an efficient business that increases the potential for making a profit. Increasing profit potential through standardization, especially rehabs, is one way to do that.
Standardization helps to reduce the difficulties and the costs of doing a rehab. All businesses should strive to standardize their processes, to streamline and make things as repetitive as possible. Standardized and streamlined processes save valuable time, and time as they say is money. Use time wisely and the reward will be more money in your pocket.
McDonald’s is a perfect example to use. McDonald’s was my first “real” job and before they let me do anything, I had to go through training. I watched videos, read manuals and followed checklists on how a hamburger patty was to be properly grilled. I had to learn the exact amounts of lettuce, pickle, etc. that went on a Big Mac. Everything was spelled out in detail so the process of making a Big Mac could be repeated over and over, not just at the restaurant where I worked, but also in Chicago, Memphis, Paris, Tokyo, wherever. It was this standardization that in part made McDonald’s so successful.
Rehabs are not Big Macs however so they are much more difficult to standardize. This difficulty stems from the facts that every property is different and needs differing amounts and types of repairs. Throw in the turn of the last century construction that is common in my market and rehabs become even more complicated. Despite my best efforts, every time I do a rehab job there is a new issue that gets overlooked because of these differing factors.
One key towards standardization is the use of materials. Just as McDonald’s uses the same pickles over and over, we real estate investors can use the same paint colors, ceramic tile, plumbing hardware or ceiling fans over and over. Doing so will lessen difficulties at the property in the future and left over materials can be used on the next project to reduce waste.
Another key to standardization and thus a more streamlined business is the use of checklists. A checklist assists in ensuring that the same standardized materials and processes are used and repeated. Checklists help guarantee that easily overlooked items are not. They are also valuable tools to keep you on track and within budget.
Without standardization and checklists too much is left up to chance. The chance of you forgetting something is high. The chance that you will spend more on materials than is necessary is also high. Your contractors will miss things as well. There are just too many moving parts in a major rehab.
Standardization and checklists in the real estate business are constantly evolving. The differences in properties will always ensure that, as will the desired outcome of acquiring the property. The rehabs for your buy and hold properties will likely be very different from the rehabs for properties you wish to resell on the retail market. This however does not mean that standardization cannot be done; just that it is an ever changing process. Checklists for example are never set in stone, but are constantly revised as new problems are raised or as new processes and products make things easier.
I’ll talk more about what I do to standardize things in my business and some of the things I have experienced in future posts. For now, if you have not before, take this opportunity at the beginning of the New Year to begin to think about what can be standardized in your real estate business. Start making lists and keeping track of what it is you do. Knowing where you are now is the first step towards moving things forward.
What have you been able to standardize in your real estate business? Was it materials, property inspection procedures or even just how the phone is answered? How has this helped you’re your business more profitable and manageable? Please add to the discussion with your comments.
Happy New Year!
I hope everyone had a great holiday season and is looking forward to 2019. The beginning of a new year provides us with the opportunity to look at where real estate is going. Real estate continued to do well for many of us investors in 2018, but not without some challenges. Will we see the same in 2019? What is on the road ahead for real estate in 2019? Here are some thoughts.
The real estate investing industry is becoming more and more concentrated and centralized. Websites such as Zillow and Roofstock along with turnkey investment companies in many major cities and hedgefunds are redefining the business and bringing new resources to the industry. These factors will make it more difficult and perhaps more expensive for smaller and beginning investors to get into the business. It will be harder to find deals with expanded resources chasing them. Finding and keeping good help will be more difficult as demand for their services grow. It will also be more difficult to “go it alone” as everyone utilizes the new services this competition will bring. These changes will require us smaller “mom and pop” operations to develop new strategies if we wish to remain competitive and grow.
Anti-landlord and anti-investor sentiments will continue to rise and develop. These sentiments could be especially forceful if real estate prices and rents continue to rise. Plus a swing to the left is possible as a reaction to the current state of the country. There will be misguided calls for rent controls, landlord registrations and other acts that will make our lives and the ability to conduct and enter the business more difficult.
Perhaps in part because of these potential challenges and difficulties I describe above, now is the time to sell your real estate if you wish to do so. Buyers have the money to buy and inventory seems to have been declining. In many areas sellers can almost name their price as there are so many buyers chasing whatever becomes available on the market. This situation will not last. In fact, it may start to disappear sometime during 2019. Will there be as hard of a fall as there was in 2008? It is hard to say. But if you do not take this opportunity now you may have to wait another 10 years for a similar opportunity.
Developers in many locations have been scrambling to meet the increased demand for real estate. Higher prices and higher rents have incentivized entrepreneurs to respond. The numbers of new construction projects, especially apartment projects has been astounding. All of this new supply will eventually come online and likely push down prices and rents. Again, the time to sell is now.
Real estate will continue to be a wise choice in 2019. Yes, there might be some pain and readjustment as markets shift and clear or new laws are enacted but the eventual outcome is usually good if you can hold on. Real estate is and will still be a valuable investment. The players may change, the way things are done may change and prices may change, but change is part of the process and change creates opportunity for those who can see it and adjust to it. Despite what the naysayers say, remember that real estate is tangible. It cannot be created by the stroke of a pen or keystroke on a computer. Plus, they are not making any more of it. Barring a major war or catastrophe, good properties will offer good returns.
If you are looking to get started in real estate investing, 2019 may be the year for you to do it. Challenges will be out there but so will opportunities. Know your market and begin to gather information. Sign up to smarterlandlording.com and let’s have a Happy Real Estate New Year!
On this Christmas Eve I want you to think a little about the best present you can give yourself. This present may not be what first popped into your head. It is not cash, or gold or even real estate. It is the control of your time. Your time is by far your most valuable asset. With time you can build wealth and do all those things you dream of doing.
Gaining control of your time should therefore be your first priority. It should be your number one goal. There can be many things utilized to achieve that goal and real estate investing should play a role, but not be the primary goal. While gaining control of your time and becoming a real estate investor may certainly be related, there is a distinction between the two and your time is much more important.
You may dream of taking exotic vacations, of spending more time with your family and friends or just doing whatever it is that you like and want to do. Yes, some of those things will take money and real estate investing can get you that money but just having money is not the answer. Having control of your time can mean so much more and will lead you towards having the money to achieve your other goals.
There are many items in life that compete for our limited amounts time. Sleep of course consumes large portions but there is really no way around this vital function. In fact, I suspect many of us wish we had more time for it. Our waking hours are those that we should strive to gain more control over. Doing that often means finding new streams of income and creating new habits.
Creating new streams of income is how real estate investing can come into play. How? Real estate can provide cashflow and it is that cashflow income stream that gives you your time back. Good cashflowing properties will work for you 24/7. It will not matter if you are sleeping, at the beach or playing with your children, your properties will still be providing you with income.
Yes, getting these properties acquired and running smoothly will take time and lots of effort at first. Nothing worth having ever really comes very easily. This is where changing habits comes into play. If you stay focused on your goal you will gain control of more of your time and thus of your life. It really is the best present you can ever give yourself.
Of course many people out there enjoy the work they currently do. Their time as carpenters or research scientists or whatever provides fulfillment. Thus I am by no means saying that everyone needs to run out and think about how to get out of their job. But if you are in a position like I was many years ago and looking for a bit more out of life, then real estate investing is a way for you to move forward.
Make it a goal next year to gain more control of your own time. It is after all your most valuable asset. Start achieving this goal by using the time that you already have available wisely. Use it to study and learn. Use it to build relationships with people that can help you. It will be difficult at first, but striving to gain control of more of your own time is really the best gift you can give to yourself and those closest to you.
I hope everyone has a Merry Christmas and the happiest of Holidays!
The headlines some days are filled with significant amounts anti-real estate investor rhetoric. Flippers, landlords and developers are at times derided and scorned. There are calls for legislation and regulation. The real estate investor is seen as someone who is merely greedy and even harmful to society.
These views are however misguided. Many people, perhaps even many investors, do not understand the valuable function that we investors have in the real estate market place and in the economy as a whole. They misunderstand and miss what it is exactly that we do.
Honestly, these misunderstandings can be easy to develop as it can be easy to miss the role investors have. This is because the work real estate investors do is perhaps not as visible as the work others do. It can in fact appear that we do not do anything at all. After all, many of us do not swing hammers, cut the grass or research the titles. It can therefore almost seem like all we do is just stand around while everyone else does the work. However, while the efforts we investors put forth may not at first be evident, it does not mean that those efforts are not valuable and necessary. Without the work that we investors do, the hammer swinging, grass cutting and title searching would be harder to come by as well.
Real estate investors use their knowledge and skills to take risks. It is taking those risks that create the need for much of the work that others do. We investors make the deal come together. We put our butts on the line in hopes that we will make a profit. That is risky but taking the risk creates work for others. How? By finding a property we create the need for attorneys and others to seal the deal. By borrowing money we create the need for bankers and lenders. We repair and replace creating the need for carpenters, roofers, plumbers and other skilled trades. We coordinate all of these pieces to create something better, something that we hope society wants and needs. Taking that risk can sometimes lead to ruin. But if we get it right, we get rewarded and have incentive to do it all again.
Risk taking therefore plays an important role in our society and economy that is often misunderstood and undervalued. Imagine if risks were never taken. How would housing be provided? How would that shopping center be developed? Going beyond real estate, how would those phones have gotten in our pockets or how would this blog have even been possible? Without risk takers we all would live in a very different, and I think, much less fascinating and favorable world. Learning how to take risks is the role of the real estate investor. For whatever reason, that role is not fully understood or valued. So spread the word about what you do. Help others understand. Then give yourself a pat on the back. It is hard work to be a risk taker.
One of the fun things I do besides real estate investing is teaching at a local community college. The other day I noticed one of my students sitting in the hallway looking quite distressed. Concerned, I asked if there was a problem. The student noted that they were just overwhelmed and feeling stressed, that they did not know where to turn or what to do. “That is completely natural.” I said. “We have all felt that way at one time or another.” “Did you ask for help?” The response to my question was something I see way too often with students and real estate newbies alike. It was a half-hearted “No.”
I saw this encounter as an opportunity, an opportunity to pass on a lesson that we all have to learn. The lesson is that everyone will need help at some point in their lives and the best way to get the help you need is to ask. Asking for help should be something that comes naturally. To some people it is. But I think for many of us, asking for help can be a difficult thing to do.
Why is asking for help so difficult? There are many reasons.
We do not want to appear stupid.
We do not want to appear fragile.
Our egos must be upheld.
Embarrassment.
We are afraid of being judged by others.
We do not know who to ask.
In sum, we are human.
I used this opportunity to explain to this young student that the smartest and most successful people in the world understand that they have to ask for help. They know that they cannot do everything alone. They know that they would not have achieved success without the help of others. Asking for help is what the best and brightest do.
Robert Kiyosaki, a person whose writings have definitely helped me once said; “One of the biggest defects in life is the inability to ask for help.” And I think he is absolutely right.
We as real estate investors, we as humans, have to get over our inability to ask for help. It can be hard to do however because of fear. Fear of appearing stupid or weak and of being judged. Sure there are some that may feel that way but most people are more than willing to help. In fact, I think people generally appreciate being asked for their help. It makes them feel wanted and important. It makes them feel like they are able to do something positive in this world.
On the other hand, those of us who are more experienced and can perhaps offer help have to demonstrate that we are willing to give it. Be humble and inviting, kind and never degrading. Look past the mistakes and work towards helping people overcome them. Let others know we are available to help. We can do that by just repeating the message “I can help.” over and over again.
Wise people ask for help. Do not be afraid or embarrassed to ask for it. Most people want to help you be successful. Look for and actively seek help. Find someone at your local real estate investors association who has been through what you are going through. You just may be surprised at how helpful others can be.
The other day I was out looking at a property. It was a decent property with plenty of nice features but the value was just not there. If only this property was just a few blocks the other way I thought to myself, values would be very different. I went back to my office and got to wondering why values were so different. Why did a few blocks matter so much? Artificial boundaries seem to be part of the answer.
The property I was looking at was a grand old house built at the turn of the last century. It lies in a neighborhood that is surrounded by other grand old houses, many of them now cut up from single-family to multi-family units. Many of these homes show their age. They look a bit tired and worn.
Less than two blocks away across a major boulevard, sit very similar properties. The street names are the same. The lots are the same. The homes are of the same style. Yet values are much higher.
Why then the big difference in values when so much is the same? With a little investigation, I found two artificially created boundaries. These are zoning district and school district boundaries. These artificial boundaries have had a large impact on these two areas.
The areas I’m talking about were developed at a time before zoning was very common. Back then, neighborhoods tended to develop a bit more organically as opposed to the more rigid “planned” manner they are today. Land uses such as single family homes and four-plex apartments were often mixed together. This mixing of land uses worked to prevent concentrations of apartments or rental properties, making it difficult for any one land use to have a huge effect on values.
After World War II, things changed. Zoning took hold. Zoning by its nature is very rigid. Land uses were separated, with single family being located in one area and multi-family being located in another. The boundary between these two types of land uses was the major boulevard I mentioned. Why there? Who knows? But the effect is evident. By concentrating allowable multi-family uses in one area, the old homes were slowly converted over time. There are a few single-family homes still located in the area but their value has been reduced. After all, why would a homeowner want to live in an area surrounded by apartments when they could go two blocks the other way and not be? These homes were effectively removed from the single family market but the demand never lessened. Thus, prices for those in single family only zones rose.
The school zone is the other boundary I discovered. The major boulevard is also the dividing line between school zones. On one side, the school district is perceived to be much better, not so much one the other. I really do not know about the actual performance of either school, but I do know that perception is often reality. People will pay to be located in what is perceived to be a better school district. They will not pay for what is perceived (rightly or not) to be a lesser quality school district.
These artificial and arbitrary boundaries matter. They matter greatly. As such, they are items that a real estate investor should investigate as they are examining properties. Today, with most information easily available on the internet, it is fairly easy to do so. I would even suggest taking some time and examining the zoning and school district boundaries for your particular market. Get to know them and know how they affect values. Knowledge is power and location, location, location are the three most important words in real estate. Knowing the location of these two artificial boundaries may just give you that extra step you need to keep ahead of your completion or out of a bad deal.
The IRS recently announced new annual contribution amounts for owners of self-directed IRAs. Starting in 2019 individuals will be able to contribute $6,000 annually, up from $5,500.
If you do not have a self-directed IRA, you should learn more about this valuable tax saving tool. You can start here. Then, to learn more you can purchase Mat Sorensen’s book, “The Self Directed IRA Handbook: An Authoritative Guide For Self Directed Retirement Plan Investors and Their Advisors” at the link below.
The last few posts I have written have been about selling your property. If you are thinking about selling, the time is now. The current real estate market is up to levels we may not see again for years. But you might not make as much as you think when you sell. There are expenses involved in selling. Some pretty substantial expenses.
What are these selling expenses? I have come up with five significant expenses that I think most investors will bear when they sell. These are:
In this post, my goal is to introduce these expenses and some of the basics of each. In later posts I hope to go into much more detail. Some of these expenses, especially those involved with Uncle Sam, are just too complicated to be dealt with in this brief post. I therefore feel it is important to just introduce them now and get into the details later.
These expenses are vital for investors to understand. Otherwise, how can we make a proper and informed decision with regards to selling? I think many uniformed investors believe that their profit will be the sales price less whatever they paid. But with investment properties, it is never that simple.
Most want to get top dollar when they sell something. Getting top dollar often means a bit of spit and polish as they say to make something look its best. Real estate is no different and some of these preparation expenses might involve lawn and landscaping work, a bit of paint, or some other repairs. This expense is however completely under your control. You can decide if and how much you want to prepare. You can sell as is or perhaps $1,000 will net you real gains on the sales price or you can sell “as is.” You get to decide what makes sense for you.
Commissions are fees paid (often to Realtors) for bringing a buyer and seller together. How much this expense is will often depend on your local market conditions and customs. It is another expense that is somewhat under your control. Commissions can be steep, running as much as 6% or more of the sales price. Of course you can negotiate commissions or choose not to use a Realtor at all, but then finding a buyer and selling may prove difficult.
Whenever you sell a property, there will always be attorney’s fees, title fees, inspection fees, recording fees, transfer taxes and a whole host of other fees. Again some of this can be controlled by you and some of it will be dictated by local custom or even state laws. No way around it however, there are always fees associated with selling. And the bigger the real estate deal, the bigger the expense of closing costs.
Hopefully, you will sell you property for more than you paid for it. That means a profit for you. Unfortunately, Uncle Sam wants his cut of your profit and his cut is called capital gains taxes. Capital gains taxes can get complicated quickly. There are differing federal rules based on length of ownership, if you have ever lived in the property and how much income you have. These taxes can be deferred but they cannot be avoided in this lifetime. If you want to cash out at some point, you will have to pay.
Capital gains taxes put a crimp in your pocket and recapture taxes will to. These taxes are the dirty little secret of buy and hold real estate investing. The tax breaks you received by depreciating your properties have to be paid back when you sell. There is no way around them. Even if you did not actually take the depreciation deduction the IRS will assume you did. Recapture taxes will be significant and they can be difficult to calculate. These taxes can be deferred, but if you want to cash out in this lifetime, you are going to have to pay them.
The expenses of selling a property add up very quickly and can take a big bite out of potential profits. These expenses are often not properly expected, calculated or understood by many investors and thus poor decisions are made. Should you never sell because of these expenses? No, I do not think so. But failing to understand them will leave you with an unclear picture and wondering where all of your money went. If future posts, I hope to make things a bit clearer.
In my previous post I discussed the current exuberance found in the real estate market and the broader economy. The rising real estate prices, the lack of inventory and the steady stream of buyers have caused many to wonder if they should buy right now. The answer to that question was yes, as long as the numbers make sense. Of course the flip side of that question is should I sell right now? Again the answer is yes. If you have any desire to sell, now is the time.
Real estate prices are up. In many areas they are back to where they were or have exceeded their levels before the Great Recession of 2008. It is definitely a seller’s market. The anecdotal evidence is everywhere. I have been getting at least two or three random calls a week asking me if I have any interest in selling. Other investors I know literally have people bringing them unsolicited offers, very nice offers I might add. These were things I did not see a few years ago. The money in the economy is flowing right now and it is flowing, at least in part, into real estate.
All of that money flow and low interest rates have in part pushed real estate prices higher and higher. Will prices continue to rise? How long will they do so? No one can really tell us. But, the fact remains that if you want to sell, the time to do so is now.
If you wait and ignore the selling opportunity now being presented, it might be ten years or more before another such opportunity comes around again. Think about it. The last time we saw a real estate frenzy like what is happening today was in 2006-2007. It is now over 10 years later and real estate is finally hot again. Do you want to wait another 10 plus years? If the market was to slide again, the prices that are here today may not be back for 10 years or more.
Selling however can be a very tough choice. Should you give up the cash flow that you worked so hard to get? How much can you expect to gain from selling? What are the tax consequences? What will you live on? What will you do next? On the other hand, why not cash out? You will most likely want to retire at some point. Is now the time? If not, do you want to, or can you, wait another ten years? Only you can answer those questions.
This seller’s market will not last. Interest rates and other forces will eventually cause prices to retreat. Those same forces will also quickly dry up all of the money that is now out there flowing into real estate. I remember the same conditions were around in 2007. Back then I could find all of the money I needed, but there was little to buy. Then bam! Almost overnight it dried up. There were real estate deals everywhere, but very little money to be had. The money needed for you to cash out is here now. You may want to take advantage of it.
There is of course no need to sell. If your properties are cash flowing well, and you are not tired of the business than continue to hold. Good cash flowing properties should stand the test of time and there is no need to put them on the market unless you want to. But, if you are looking to retire, or are looking get out of the real estate business, now is a really good time to think about it.
What are you seeing in your real estate market? Are you thinking about selling right now? Wny or why not? Please share with your comments.
