SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Real Estate

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?

How I Got On the Real Estate Path

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When I speak with high school kids about getting a part-time job, I give them all the same advice: find a job waiting tables.

The restaurant industry is like a career boot camp. The skills needed to wait tables are integral to every field and transferable to any dream. Restaurant servers have to be experts at customer service, relationship building, time management, multitasking, delegating, and so much more.

That’s where my story starts.

I was 17 years old waiting tables with a fire in my belly and the motivation to GET OUT. I had built a great client base of recurring customers. One of the best tips that I ever received came in the form of a book—given to me by a married couple who owned their own business. The book was Rich Dad Poor Dad by Robert Kiyosaki.

Let me be honest; I hated that book.

I read it in a day expecting to eventually get past the endless parables, metaphors and imagery. I wanted direction. I wanted a to-do list. I wanted someone to tell me what to do, when to do it and how! So, I threw the book to the side, but the seed had been planted.

A few years later, my mother’s home fell into foreclosure. I couldn’t help but remember Kiyosaki’s lesson of homeownership being a liability not an asset (unless it creates cash flow).

I attempted to buy my first home at 21, knowing that my mortgage would be cheaper than my rent. My income from waiting tables, coupled with fresh student loan debt, didn’t help my chances. The loan fell through right before I was set to close.

So, I waited until I had job that could be directly deposited. I saved, and I studied.

I found a neat little house to rent well within my budget. When I met with my landlord to sign the lease, I took the opportunity to ask him a slew of questions. He was kind enough to answer them and provide a couple of book recommendations.

I started checking books out of the library. I took my landlord out to lunch. I attended Real Estate Investor Association meetings. I went to seminars and deals tours. I found co-workers with rental properties. I signed up for alerts from all of the appropriate websites, and here I am.

All of these experiences, and so many more, coalesced to carve out a path for me in real estate. Don’t get me wrong, I did my share of digging and paving.

But the path is there if you want to find it.

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.

Update – Property Reappraisal Challenges

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This is an update to my previous post, I Thought Real Estate Was In the Dumps.  It is a property reappraisal year where I live and despite the down real estate market the county property assessor seems to think we are in the boom times.  Follow along with me as I go through the process of challenging these appraisals.

I have received more property reappraisal notices over the past week.  So far I am looking at an even greater supposed substantial increase in property value for 2013.

The first step in challenging these appraisals is to find out what basis the property assessor used to determine these values.  The basis is generally comparable sales or “comps.”  I went to the property assessors office and asked to see the comps for my various properties.  This information is generally public record and all you need to do is ask for it.

So now I am armed with the info that the assessor used to value my properties.  I will be analyzing it over the coming weeks and will let you know what I find.

I will also note here that the staff in the assessor’s office were very helpful and I could not have been treated better.  I was in and out of the office in about 15 minutes.  It is always refreshing to get good service.

 

I Thought Real Estate Was In the Dumps?

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I thought real estate was in the dumps.  After all, all we have heard for the last few years is about foreclosures, underwater mortgages, short sales, falling prices, declining values and so on.  I guess my local property assessor has been listening to some other news source.

Let me start at the beginning.  Every four years in Tennessee each county property assessor is required to reappraise all properties within their jurisdiction and adjust them to the “fair market value.”  2013 is a reappraisal year here in (Memphis) Shelby County, TN.  That means that all properties have to be reappraised since their last reappraisal four years ago in 2009.  What do you think has happened to values since 2009?

So far I have received reappraisal notices for about half of my properties and amazingly my values have gone up almost a quarter of a million dollars!

Now, I do consider myself pretty savvy when it comes to determining a property’s value, and I always look for the good deal, but damn I did not know I was that good! (Insert sarcasm here).

So it looks like I will be challenging several of my appraised values again this year.  It is not really difficult to do and I have done it several times before.  I will be blogging about my experience here.  So join the fun and follow along.  It should be interesting to learn how they developed their “fair market values.”

Podcast – Landlording 101

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Check out my latest podcast where myself, Jo Garner and Holly Swogger, President of the Memphis Investors Group, discuss landlording basics such as leases, screening tenants, security deposits and more.  We also discuss how you can increase your cash flow by using some of the many mortgage options available to landlords for their rental properties.  We have never seen rates this low.  If you can refinance now is the time to do it.  Put some more cash in your pocket today! 

 

 

 

 

 

 

 

 

 

Finding and Making the Real Estate Deal

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Check out my latest podcast where Jo Garner, Richard Scarbrough and myself discuss finding and making the real estate deal. Real estate deals do not just fall into our laps, they are found and made.  Listen as we discuss the best sources for finding deals and then some techniques and tips we have to make the deal work.  Originally aired on WREC AM 600 on April 7, 2012.

 

What is a Real Estate Deal?

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Check out my latest podcast where Jo Garner, Richard Scarbrough and myself discuss the components of a real estate deal. We discuss figuring out the value of retail, wholesale and buy and hold real estate deals. We cover how to determine offer price, repair prices, holding costs, maintenance and a whole lot more! Originally aired on WREC AM 600 on March 3rd, 2012.

 

Is That a Good Buy and Hold Deal?

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

 

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

 

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

 

Expenses are more varied.  Let me list those:

 

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

 

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

 

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

 

Let’s outline it.

 

Income (monthly)                                                $1,000

 

Expenses (monthly)

Principal and Interest                                        $387.65

Taxes                                                                    $50

Insurance                                                            $30

Repairs/Maintenance                                        $100

Vacancy Credit                                                    $100

Utilities                                                                 $0

Reserves                                                             $100

Misc.                                                                     $25

 

Total Expenses (monthly)                                 $792.65

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

Is that a Good Real Estate Deal?

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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