SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Cashflow

Growing the Positive Cashflow Money Tree

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Positive cashflow is the key to becoming a successful, smarter landlord.  Without positive cashflow, your time as a landlord is limited. Smarter landlords are always looking for ways to grow the cashflow money tree.

Here is how you can grow yours.

Reducing Your Expenses – There are all kinds of expenses associated with rental properties including utilities, maintenance, and upkeep.  The trick is to save while not skimping on necessary maintenance.  Some tricks include using the same brands and materials in all of your rentals.  Use the same paint, faucets, tiles, etc.  This should cut down on repair costs and the time to do it (remember your time is important too).  Use energy efficient lighting and install low flow water devices to save on utility costs.

Increasing Your Revenue – Sure you can raise rents every year but that may increase turnover.  There are other ways to raise revenue.  Put in coin laundry.  Put in a soda machine.  Rent out the basement to your contractor for storage.  Build some storage space cages in the attic and rent them out to your tenants.  Include cable or satellite dish service as part of your rental package.  Get creative to get those revenues up.

Managing Your Tenants – Tenant turnover is a cashflow killer.  Tenants move either because of a life change or because they feel they are not getting good service.  For those that have to move, ensure you have policies and procedures in place to get your property back as rent ready as possible.  For those that simply want to move, you may need to look at your customer service skills.  Are you responding to their requests adequately?  Are you fixing things that need to be fixed?  The longer tenants stay, the better it is for your bottom line.

Managing Your Property – You have to actively manage your properties or manage your property manager.  You can’t just collect the rent and forget it.  Otherwise little problems can get swept under the rug or become bigger, more expensive problems in a short matter of time.

Fixing it Right the First Time! – Don’t cheap it out because you will just be fixing it again in no time.  Do you really want to pay to fix the same thing two or three times?  Spend a little more upfront on better materials and quality contractors to do the job.

Positive cashflow is the key to being a successful landlord.  But generating positive cashflow is not just about collecting rents.  Sure, that is the biggest part of it, but there are many other facets as well.  Use these tips to fine tune your business and improve your cashflow.

When Is Cheap Worth It?

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I delved into real estate investing because I thought it would save me from the misery of living paycheck-to-paycheck. I’m 2 months into my rehab and I’ve found that not much has changed yet. I’m rehabbing paycheck-to-paycheck. When I’m shopping for tools and supplies, it’s no surprise that I reach for cheap. I look for deals and I do the work myself.

Not everyone shares my sentiments concerning frugality. I bought a Husky crescent wrench and was advised to buy better tools. My plumber strongly recommended that I install a new, double-basin sink. My partner and I disagreed when I insisted on using a combination of old and new shoe molding. This isn’t how I imagined my investor persona!

I justify my frugality by telling myself that I can replace it all during my next vacancy. I need to get my second unit cash-flowing so that I can better fund repairs. I ask myself if my tenants will know the difference. This is when I turned to Kevin. I emailed him, “when is cheap NOT worth it?” This is his response:

  • When it involves gas.
  • When it involves electric.
  • When it wastes your time. You have to understand the value of your time. You may need to pay a plumber for a service call, but they will get it done right and quick. You may be able to do it, but it will take you four times as long to do it. You will have to make three trips to Home Depot to finish it.
  • Appliances! Just buy a new “used” one rather than trying to replace parts. Unless it is incredibly simple to fix, it is just not worth it. The part will cost almost as much as the replacement appliance. You will most likely order or receive the wrong part. Beware, many parts look the same but have slight differences. Trust me on this.
  • Is it really cheaper for you to do it? Don’t try to save money if it is costing you potential rent. Take a rehab for example: You do it all yourself and it takes two months. You could have had it rented at a rate of $625 per month. A contractor could have had the job done in 2 weeks for $1500. Did you really save any money?

I appreciate Kevin’s emphasis on avoiding repairs with safety implications: gas and electricity. I was considering teaching myself how to repair appliances, but I think I’ve axed the idea. For the time being though, it makes financial sense for me to most of these repairs myself. Sometimes cheap is worth it, and sometimes it’s not.

Save

  • We used the cheapest vinyl tile at Home Depot and the kitchen floor looks great. You don’t even notice the mismatched shoe molding.
  • We shopped for used cabinets. We bought unfinished cabinets and painted them. The cabinets look great.

Spend

  •  We bought the cheapest paint brushes we could find, and it was a horrible decision. The hairs fall out and get stuck in the paint. Don’t do it!
  • We paid full price for a window air conditioning unit. I never will again. I later came across two used ac units, which were three times better for a third of the price.

 

While I advocate for frugality, please don’t cut corners by sacrificing quality installation. Tenants and buyers will notice. I firmly believe going cheap should be our current strategy. We rehabbed the entire kitchen of unit 1 for less than $1,000. It looks so much better than before. I look forward to seeing it look even better than now.

Do you have any advice? When is cheap worth it and when is it not?

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?

 

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.

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.

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.

What Happens Without Positive Cash Flow?

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Positive cash flow is king.  If a property does not produce positive cash flow, then don’t even think about it.  Without positive cash flow, you are doomed to failure.  Eventually, the bills and the expenses will mount up and you will be writing a check every month just to keep the property afloat.  A lot of people cannot do that.  They have or will run out of money.

What happens then?

Repairs stop being made.  At first it is little things.  Apartments are not repainted.  The property begins to look worn out.  Soon it turns in to major problems.  Roof leaks continue to leak, air conditioning fails to cool, the dead refrigerator is not replaced.

Next, good paying tenants start to leave.  How long would you put up with a leaky roof?   No AC in the summer? I am out of here!  Bills continue to mount and now less cash is coming in.

Perhaps then the owner begins to take in a lesser quality tenant.  They may or may not pay.  They definitely will be dirty if not trash the place.  They will drive any remaining good tenants away.  They will likely leave in the middle of the night and stiff you on rent.

At this point it is unlikely that the owner can even get tenants in the property.  It sits vacant or nearly vacant.  It is not long before vandals take notice.  Copper starts to disappear.  First it disappears from the HVAC units then from the plumbing.  Now the property is truly uninhabitable.  The only people living in it are perhaps squatters.

With no money coming in foreclosure is not too far away.  The property has become a distressed property.  Smart investors have been watching this property for a while.  They noticed when the current owner paid too much.  They have watched the property slowly deteriorate.  They know that a potential deal is now available because someone bought without positive cash flow.

Think the above does not happen?  It is how I have bought many of my properties.  Stay tuned in the future as I write about what to watch and look for and how to pick up some of these properties yourself.

Podcast – Why Invest in Real Estate

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Check out my latest podcast where I along with Jo Garner and Richard Scarbrough discuss why you should invest in real estate.  Originally aired on AM 600 WREC on 12/3/2011.

5 Financial Reasons to Invest in Real Estate

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Fourplex apartments can be a great cashflow generator.


You have probably heard that real estate is a good investment.  You may even know some people who are active investors.  You may even be thinking yourself that you should get into real estate investing (you should be).  But have you ever thought about why real estate is such a good investment.  My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday.  Since we were constrained by time, I thought I would share some more detail.  Be sure and read through for a bonus at the end of this post.

 

There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.

  1. Cahsflow is KING in the real estate investing world.  Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.*  For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month. Cashflow is King!  Are you beginning to understand the beauty of real estate?  All of your expenses are paid by your tenants.
  2. Leverage – Leverage simply means having the ability to use other people’s money (OPM).  Think about how you purchase real estate.  You purchase it with a loan or mortgage.  That is using OPM.  You can even purchase real estate with no money out of your pocket, entirely using OPM!  Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years.  What other investments allow you to do this?  What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)?  Would a bank lend you the money to buy gold?  How about stocks or bonds?  The answer in general is no.  You would have to come up with 100% of the purchase price to buy any of those other investments.  Leverage is a huge advantage for real estate investors.
  3. Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month.  Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal.  The portion that goes to principal is just like putting money in the bank.  Every month you owe a little bit less on the property and have little more equity on your balance sheet.  Plus, remember who is paying it down for you, your tenants!
  4. Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.  Real estate investing is one of the few methods that can actually bring your earned income down to zero!  Yes, zero so you pay little or no federal income taxes.  Now, I’m not doing anything illegal and do not suggest you do either.  However I do take every legal deduction available and there are many.  One of the best is something called depreciation, but that’s another post for another day.  Want to learn more about the tax benefits of real estate investing?  I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book.  (Please note that I am not a CPA or professional tax advisor.  Please consult an appropriate expert before completing any investment decision.)
  5. Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust.  But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available.  They are out there.   Find one and get instant equity when you close.  Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.

 

There you have them, the top five financial reasons why you should invest in real estate.  And here is the bonus I promised.  With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits.  Owning real estate gives you all five.  There is no other investment vehicle that gives you all of these benefits.

 

I’ll blog again soon about the non-financial reasons to invest in real estate.  Until then, work smarter, not harder!

 

* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income.  If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.