Landlord Inspections: The Do’s and Don’ts of Apartment Inspections

Maybe you’re suspicious one of your tenants is breaking the lease’s pet policy. Maybe you just haven’t checked in with them for a while.

If so, you may ask yourself: can a landlord do random inspections? Well, the answer isn’t an easy yes or no.

As a landlord, you can drive by, walk by, or bicycle by your property anytime. But you cannot walk into the property unannounced. We’re here to walk you through the do’s and don’ts of landlord inspections.

Legal Reasons to Inspect an Apartment

Apartment inspections need to be performed for a variety of reasons. Let’s take a look at those situations in which you can legally enter and inspect an apartment.

Maintenance and Repairs

Your tenant might ask you to service or repair something. Typically, landlords are only permitted to enter the premises during “reasonable hours.” That varies from state-to-state.

Any time between 9 a.m. and 5 p.m. is usually considered reasonable. Those hours are within normal business operating hours.

However, when a repair is specifically requested by the tenant, you can enter and perform the necessary service at any hour that is mutually agreed upon.

In a scenario where the tenant has not requested maintenance or repair, but you still need to perform it, give them 24-48 (dependent on state and local law) hours’ notice of your arrival. Additionally, make sure to come at a time that falls within the scope of “reasonable hours.”

Decorations, Alterations, or Improvements

Can landlords do random inspections to address the aesthetic? As a landlord, you have the right to make aesthetic changes as you see fit. This is different from maintenance or repairs. That’s because it’s not something that you need to do to maintain the unit’s habitability.

For example, you might want to repaint the front porch or install new light fixtures. In these cases, stick to the “reasonable hours” rule. Make sure to give your tenant proper notice.

Showings

You have the right to show the unit to prospective tenants. Again, be sure to notify your tenants in advance. This gives them the opportunity to ensure that they’re out of the apartment during showings or give the unit a good once-over, if necessary.

Keep in mind, with millions of Americans working from home due to COVID-19, it may be difficult to schedule a showing during the workday. If that’s the case, you’ll need to work with your tenants to schedule a time that works for them without disturbing their work. You could also “show” prospective tenants your available units via 3D apartment tours.

Lease Violations

Though you may have done your due diligence, there’s always the chance that you may have a tenant that is egregiously committing lease violations. Whether you suspect there’s an illegal subletter on the premises or that your tenant has willfully ignored your no-pet policy, you have a right to check it out.

As it goes for all instances in which you may want to enter the unit, give notice. If you find that your tenant is committing lease violations, you may need to serve a notice to quit.

Move-in/Move-Out

It’s essential for landlords to conduct move-out inspections to assess the damage, if any, that the last tenant is responsible for. Your findings will dictate how much of a tenant’s security deposit you’ll refund back to them.

Upon move-in, inspections enable landlords to confirm the condition of their unit. Then, they can make any necessary repairs before their new tenant officially moves in.

Extenuating Circumstances

While the previous reasons to perform an apartment inspection were very clear, there are also extenuating circumstances in which an inspection can be legally performed. These include:

Court Orders: If you’ve obtained a legal order granting you permission to inspect one of your units, then you can legally perform the inspection. Typically, the order may stipulate a specific date and time that you can perform the inspection.

Tenant Abandonment: Keep in mind that the requirements to be considered “abandonment of a property” are different state by state. If a unit has been abandoned, you’ll need to remove any remaining possessions. Be sure to document the abandonment.

Tenant Violation of Health/Safety Codes: Not only does this put the tenant and others at risk, but it can also lead to significant damage to your property in the form of a pest infestation.

In Case of an Emergency: For example, a fire, gas leak, water leak, burst pipes, or an extreme weather event that may threaten the safety of your tenant gives you license to make necessary repairs as quickly as possible.

Do’s of Landlord Inspections:

Give Proper Notice of Any and All Inspections (24-48 hours)

Also keep in mind that, even after giving notice, you can only enter a tenant’s unit during “reasonable hours.” Typically, though this varies by state, a time between 9 a.m. and 5 p.m. is considered to be within the scope of “reasonable hours.”

It’s even better to give even earlier notice than the recommended time frame. That’s the case especially in cases of routine inspections that you’ve scheduled in advance.

There are real legal consequences for failing to give notice. Those include arrest, fines, and legal action being taken against you.

Avoid this by giving written notice, leaving a note on the door or in the mailbox, or sending notice via email. Those methods are sufficient and serve as proof that you adhered to the law.

Schedule Property Inspections a Few Times Throughout the Lease Term

There’s no magic number for this. It’ll depend on the length of the lease (we recommend no more than quarterly for a year lease).

What’s the rationale behind scheduled, incremental inspections throughout the duration of a lease? Well, it ensures that maintenance and safety standards are up to date without being excessive.

Remember: Purpose, Professionalism, and Tenant Privacy

If you must enter a tenant’s home to perform an inspection, consider purpose, professionalism, and tenant privacy. State your purpose upon your arrival, give proper notice as a professional courtesy, and respect your tenant’s privacy by ensuring that you don’t overstep.

Document All Routine Inspections in the Lease Agreement

If you have a policy that allows for inspections over a set interval of time, then you need to document that in the lease agreement.

It’s imperative to discuss these provisions when you’re face-to-face with the tenant at signing. This way, everyone knows what to expect ahead of time. It’s much better than having tenants, who haven’t read through the lease, be caught off guard by your routine inspections.

Be Smart and Reasonable

Just because the law is on your side, doesn’t mean you should completely disregard the importance of a good tenant-landlord relationship. If you’re continuously notifying your tenant that you’ll be stopping by, it’s likely to frustrate your tenant over time. If you’d like to increase your rate of renewed leases, limit your inspections.

Don’ts of Landlord Inspections

Breach a Tenant’s Right to Quiet Enjoyment

The right to quiet enjoyment is legally protected. For tenants, this means that they can peacefully enjoy their homes, bar entry from landlords, and that the landlord is responsible for the maintenance and upkeep of the property. Entering the apartment without permission or not giving notice would breach this right.

Show Up Unexpectedly

Outside of an emergency or extenuating circumstance, you need to give tenants proper notice. If your state has a statute that describes a specific notice period that you must give to tenants before entering their homes, then you must always adhere to it.

Remember that a tenant may refuse entry to a landlord that has not given appropriate notification. Additionally, avoid requesting inspections outside of reasonable hours: typically, 9-5.

Ignore State and Local Law

Laws regarding apartment inspections vary in different states, so it’s imperative to be up-to-date with your knowledge of current inspection law. For example, Alabama requires a two-day notice. Connecticut requires reasonable notice. New York has no statue on a state level.

Give a Vague Notice

When you are letting your tenant know you’ll be coming by, stipulate a date and time. Don’t leave the “when” up in the air. Be sure to state your purpose for entering.

Are you coming by for a showing? Are you repairing something? Or is it a regular inspection? Fill your tenant in on the details for your upcoming visit.

Final Thoughts

As a landlord, you’re ultimately responsible for the upkeep and condition of your property, even when you’re renting it out. Though you’ve gone through the process of thoroughly screening all tenants, there’s always a chance that your tenants may not keep their apartment in top-notch condition. That’s where landlord inspections come in.

Whether your tenants don’t report a leak which ends up causing extensive damage or you simply want to perform a routine check-in, you have a legal right to inspect your property.

However, you must comply with the law when you do. Typically, this means giving proper notice and not entering a unit without permission from your current tenants, except in emergency circumstances.

Can landlords do random inspections? The answer is yes if you follow the above advice and adhere to local laws, your lease, and best practices.

Understanding Prepayment Penalties

Mortgage loans are expensive to originate.  It is not uncommon for consumer mortgages to cost upwards of $9,000.  Lenders typically recoup those costs through a combination of upfront fees and interest revenue over the life of the loan. 

If a borrower pays off a loan shortly after origination, the lender is at risk of losing money on the loan. Enter prepayment penalties.  A prepayment penalty is a contractual clause that states the borrower is going to pay the lender an additional fee if the borrower pays the loan off early.  This really isn’t a penalty at all.  It is a way for the lender to make sure they don’t lose money on a loan.

For example a standard prepayment penalties with a 5 year structure of 5/4/3/2/1 structure. This means that if the borrower pays off the loan in year one, they have a 5% prepayment penalty, in year two, a 4% prepayment penalty, in year three, a 3% prepayment penalty, and so forth. So, you might be wondering how this affects the borrower, and the answer is, it depends on your investment strategy. Let’s dive in.

The rental investors looking to grow a legacy of rental properties and hold on to them long term (we call these properties “permanent rentals”) are not really affected by the prepayment penalty.  Since their investment strategy focuses on the lifetime of the loan, paying off the loan in the first five years is a moot point.

On the other hand, investors looking to purchase rental properties with flexibility to sell in the foreseeable future (we call these properties “transitional rentals”) are very concerned about the prepayment penalty. These investors are interested in market conditions and want to be able to sell the property at the right time without worrying about paying a penalty fee.

Cash for Keys – Could it Work for You?

Cash for keys may soon be on the rise. It’s an idea that might appeal to many landlords who want to incentivize tenants to leave their rentals and avoid a drawn out eviction process.

Cash for keys, in concept, is a simple, straightforward process, legal in all 50 states. It’s exactly what it sounds like: an agreement, entered into voluntarily by a landlord and tenant, in which cash or other value is provided to the tenant as an incentive for them to hand over the keys and move out of the rental.

Some landlords are already engaged in cash-for-keys contracts. It’s perfectly legal to do so even while state and federal eviction moratoriums are in place, as long as it is done in a non-threatening, voluntary and non-coercive manner on the part of the landlord. To be safe, consultation with an attorney, or the MassLandlords Helpline, is recommended before initiating or entertaining any cash-for-keys proposals.

A renter may also suggest cash for keys independently, without any prompting from the landlord, which can result in a move-out agreement.

Cash-for-Keys Mortgage Foreclosures vs. Rental Evictions

Cash for keys gained popularity during the housing crisis in 2008. Real estate owners, who represented banks, offered cash to underwater and nonpaying homeowners by the millions in heavy hit communities, in Florida, Southern California and other regions. Offering the strapped homeowners cash to vacate their homes saved banks from going through the costly and time-consuming process of foreclosure.

Over the years, landlords have also begun using cash for keys as a way to entice nonpaying renters, for example, to leave their residences instead of filing eviction notices, spending months in housing courts, sitting on empty rentals and paying court and other costs. Some landlords have also used cash for keys to encourage paying tenants to leave a unit that they want to renovate or sell, or vacate for other reasons.

For the purposes of this article, we refer to cash for keys between landlords and tenants.

Now or Later

It’s important to note: cash for keys, while it may be the answer for some landlords, is not a panacea for those with problem tenants, for example, nor an arrangement to be entered into lightly.

Landlords embarking on cash-for-keys agreements now, while eviction moratoriums are in place and courts are not hearing most housing cases, will have no recourse in the event tenants don’t comply with the agreement. Make certain both parties are entering the contract in good faith, are well-informed of their rights, and of the contract’s stipulations.

In some cases, it might be in the interest of landlords to hire a mediator to work with both parties – landlord and tenant – to negotiate an amenable agreement that all will adhere to throughout the process. If you opt not to hire a mediator, make certain that tenants know their rights in a cash-for-keys agreement, to avoid them from backing out of a deal later when they’ve received advice from others.

Eviction Pileup

Potentially looming at the other end of the state and federal eviction moratoriums now in place is a significant number of evictions. This situation could be avoided if the state government were to take legislative action, such as that proposed by MassLandlords, to guarantee housing for the long term. But short of further legislation, the eviction backlog could become substantial.

Conditions may also be affected by pending bills, such as HD.4878, a bill in the state legislature, sponsored by Reps. Kevin Honan and Mike Connolly, that could effectively lead to rent cancellation for a large percentage of landlords.

Easy Math

Evictions are almost always expensive. The total bill for an eviction in Massachusetts can tally more than $5,000, considering lost rent, attorney, court and constable fees, repairs and cleaning costs. In the next couple years, that amount will likely increase as courts become backlogged and may delay summary hearings for months (i.e., more lost rent).

The math is simple in a lot of situations:

A) Wait months or more than a year for your eviction case to be litigated while a nonpaying tenant occupies your rental (and possibly degrades its condition), then forfeit thousands of dollars in court costs, lost rent and attorney fees?

Or B) Offer your tenant a few thousand dollars to move out peacefully and quickly? The savings between cash for keys and an eviction can range from the low thousands to five figures in some outlying cases, even considering attorney consulting fees.

Meanwhile, you could have your rental reoccupied with a paying tenant within a month or two. Not to mention all the headaches you could avoid.

A Tough Pill to Swallow

 For some landlords, paying cash to a nonpaying tenant who owes thousands of dollars in back rent and may have damaged your property is anathema. Like rubbing salt in a wound.

But providing housing is a business, first and foremost. And while it may be emotionally difficult to hand over a pile of cash to a tenant who has given you headaches since the day they moved in, it may be the wisest business decision.

Some landlords also question the ethics of a cash-for-keys agreement. They argue that the practice could have the long-term effect of increasing squatting and rent delinquency by encouraging bad players to force landlords to hand them cash just in order to get them out of their property and avoid legal fees and headaches.

That scenario is possible in a few situations. But in the wake of coronavirus, the overwhelming percentage of delinquent renters will be the result of the pandemic response and economic downturn. There has always existed a fraction of squatters and intentional nonpayers gaming the system. It’s impossible to say how much that fraction could increase because word spread that cash for keys is a way to extort some cash from landlords.

Creative Solutions

In the wake of the coronavirus pandemic and response, once eviction moratoriums have been lifted, many landlords will be positioned to serve eviction notices as soon as they can to their delinquent tenants. In many cases – especially for tenants who have not suffered a loss of income but instead have taken advantage of the eviction moratorium to get free housing – eviction might be the logical course.

But for many other tenants – such as those who stopped paying rent because they lost jobs and income during coronavirus and response – landlords might consider alternatives to eviction, especially for good tenants who have regained employment and resumed rent payment.

Alternatives might include working with tenants to come to a compromise that will extend the tenancy for the long term while forfeiting some back rent. You could renegotiate back rent payments, for example, or restructure payments with some owed funds added in. Partial rent forgiveness might also be a prudent solution if it saves the arduous process of eviction.

But if you decide as a landlord that the relationship with your tenant is untenable, then cash for keys may be the better alternative.

How to Offer Cash for Keys

The process can be simple, but it depends on a few specifics. At its simplest, cash for keys is a transaction directly between landlord and tenant. No courts, constables or intermediaries needed.

(When court-enforced evictions are possible, however, cash-for-keys agreements may be entered into the court record. This action would give you a back-up plan in case your tenant doesn’t comply with the agreement.)

As stated above, hiring an attorney or mediator, or consulting the MassLandlords Helpline, might be a prudent step, at least to avoid any misunderstandings or surprises, and to provide additional assistance in case the court becomes involved.

As much as possible, try to keep emotion out of your cash-for-keys communications. It’s a business transaction, and in most cases will be a win-win solution (i.e., the least bad outcome) for landlord and tenant. Focus on the benefits.

Step 1: Draft a plan

Jot some parameters on paper, or use the MassLandlords Agreement to End Tenancy form to outline a proposal. Include a proposed amount to offer your tenant to incentivize a quick move-out. Decide on an amount to offer beforehand (see below).

This step offers an opportunity to be creative and flexible within the agreement. For example, you could offer, as part of the payment, to cover moving costs for your renter. Or maybe your cash-for-keys offer doesn’t involve actual payment at all, rather you could offer to forgive all the back rent owed in exchange for a voluntary move-out.

You might consider two or three offers that correspond with faster move-out schedules. If you want your tenant to move out sooner than later, you’ll likely need to offer a higher amount of cash.

This is an abstract that could be shared with an attorney for those who work with one, as recommended.

Step 2: Initiate a conversation with your tenant, either in person or via phone

Present your case and proposal evenly and clearly, as you would with a business proposition. There is no need to mention eviction during this conversation, especially if your intent is just to empty the rental for renovation or sale.

Outline the cash-for-keys concept, emphasizing the benefits to your tenant (i.e., cash in hand, no eviction record to hamper future efforts to find rental housing, etc.).

Your tenant might try to negotiate or counter-offer. Keep negotiation to a minimum. If an extortionist tenant suspects that you are vulnerable or willing to pay more to get rid of them they may take you to the cleaners. Choose a fair amount to open with and try to stick close to that figure.

Assuming your tenant agrees to a cash-for-keys settlement, spell out the agreement with your tenant, or share the MassLandlords Agreement to End Tenancy, a brief and convenient form that provides fields for the essential information and signatures.

Include the amount (or services) you will pay renters to move out. Include the date and time they agree to be vacated from the apartment – meaning all possessions are removed from the unit and any common areas, keys have been delivered to the landlord or agent, and the unit has been left “broom clean.”

Both you and your tenant must sign two copies in duplicate so you each have a signed record of the contract.

Step 2a: Escrow the money

 Whether or not you hire an attorney or mediator to assist with your cash-for-keys process, we recommend that you set aside the agreed cash amount for payment upon contract completion. To keep it simple, landlords could place the cash amount in a separate account and pay it out to complete the contract. You could also have your attorney or mediator escrow the cash and oversee the payment at your direction.

This is a step that removes emotion from the payment process, which can be a difficult step for some landlords. It also assures that tenants, who have voluntarily moved out as part of the cash-for-keys agreement, won’t have to wait for payment or chase the landlord to receive the cash owed them.

Step 3: Complete the contract

The cash-for-keys contract is completed when the rental is vacated at or before the agreed upon time and date, satisfactorily cleaned, and keys are in your hand.

Do not hand over any payment or order release of escrowed funds until those conditions are met. If your tenant has not met those conditions by the designated time (i.e., they are still moving out or cleaning beyond the time you both agreed), you have the option of considering the contract void.

Once you have the keys, the unit is in your possession, you have inspected the apartment to your satisfaction and paid your tenant the amount you agreed to, the contract is completed.

How Much to Pay?

First, as a comparative exercise, calculate how much you project an eviction would cost you. You will need to build in more months than usual of lost rent because of the backlog of cases after the eviction moratorium is lifted. For example, if your eviction is delayed six months or more due to the backlog of cases, your costs will increase substantially.

Also think about how much an eviction would cost in normal times, with little or no court backlog. One rule of thumb is to halve that amount as a cash-for-keys offer.

Consider rents and move-in costs for similar apartments in your community. Would $2,700 cover first and last month’s rents plus security deposit? If so, that may be your starting figure, and could present a strong incentive for your renter to leave.

In early conversations, ascertain your renters’ needs. Could they be out in a week, or will they need longer? Would a higher cash offer incentivize an earlier departure?

You could consider a tiered offer with one amount for a 60-day move-out, another offer for a 30-day move-out, or a higher amount to move out in a couple weeks or less. Keep the conversation going over several days or weeks to allow both parties time to consider and address underlying concerns.

Contract Complete

On move-out day, once you’ve been handed the keys to the apartment and inspected it, have your tenant sign a final clause saying they have received the cash payment. If the payment was escrowed and distributed by the bank, be sure to get a record of that payment.

Before handing over or releasing the cash payment, be very sure to conduct that final inspection.

As a last step, it is recommended that you immediately change the locks, as usual with an apartment transition. Having the keys handed to you from the tenant doesn’t mean they didn’t at some point have copies made.

Thousands Saved

Cash for keys isn’t for everyone in every situation. It needs to be approached thoughtfully and thoroughly with all bases covered from a legal standpoint.

If you find yourself lamenting the pile of cash you just handed over to an undeserving tenant in exchange for keys to your property, consider revisiting your calculated eviction costs.

Focus on the potential thousands of dollars you just saved, and your freedom to now locate a better tenant.

6 Tips for Setting Rents, Winston Rowe and Associates

If your rent is set too high, the property can sit on the market and you will miss out on monthly rental income.  And if the rent is set lower than the competition, simply put, you will leave money on the table.

Whether you own or manage one rental property or hundreds of rentals across the country, you need to be able to set fair market rents confidently.

As we know, rents vary greatly from market to market, but can even differ from one street to the next within a single neighborhood.  Obviously, numerous variables impact the rent you can charge for your rental unit, including location, type of building (duplex, apartment building, etc.), size/square feet, age of unit, number of beds/baths, and amenities (i.e. parking, AC, pool, roof deck, and so on.)

Don’t be fooled that any one rent comp, property manager, or local real estate agent can tell you the perfect fair market rent for your property.  We recommend that you tap into a handful of resources to help you set rents confidently.

1. Find some rent comps to give you a starting point

Check local apartment listings using the local newspaper, online apartment guides, or websites like Craigslist and Rentometer to get a feel for the “going rents.”  Rentometer can give you historical rent trends for the area and a good starting-point rent.  You can further refine the rent from there by using some of the suggestions listed below.

2. Stay up to date on the economic and business activity in the local market

Is it thriving? Are stores closing down?  Economic activity is one of the key drivers of rental housing demand and it can affect the rental market in unique ways. For example the current economy in Boston, Mass., is hot! Rental housing is in high demand, leading many renters to forgo amenities and perks in favor of securing a lease. This means that landlords can afford to make fewer concessions when negotiating.

3. Check occupancy rates for your area

Are the occupancy rates trending upward? Good! The stronger the desirability of a rental, or neighborhood, typically the higher the occupancy rate – and higher market rent. It’s a question of supply and demand.  Factors that can affect occupancy rates include local millennial population, employment trends, housing supply, and new construction growth, rent prices, and the location and  condition of the rental property.

4. Chat with a local real-estate professional

Talk with an industry professional about their take on the market or a specific neighborhood. Local experts (property managers, brokers, agents, appraisers, and lenders) are especially good at identifying the drivers of housing supply and demand unique to your market – jobs, local ordinances, building permits, zoning for a new apartment building, etc.

5. Use “rent per square foot”

Whenever possible use square footage as a benchmark for searching rent comps. This allows you to encapsulate into a single number all the subjective variables of rent, and provides you with a basis for comparison across different units, locations, amenities, and so forth.

6. Check your local apartment or rental-housing association

These are great resources for research. They may provide information about local rent levels – past, present, and future. This is especially important for real-estate investors and developers.

Making sure your property is renting at (or close to) fair market rent is as much of an art as it is a science.  However, with the 6 tips for setting rents along with good current and historical rental data and a thorough understanding of the local market and market conditions, you can set rents with confidence!

How to Write a Real Estate Business Plan

Winston Rowe and Associates No Upfront Fee Commercial Real Estate Lending

Success in the real estate investing industry won’t happen overnight, and it definitely won’t happen without proper planning or implementation. For entrepreneurs, a real estate investing business plan can serve as a road map to all of your business operations. Simply put, a real estate business plan will serve an essential role in the formation of your investing career.

Investors will need to strategize several key elements to create a successful business plan. These include future goals, company values, financing strategies and more. Once complete, a business plan can create the foundation for smooth operations and outline a future with unlimited potential for your investing career. Keep reading to learn how to create a real estate investment business plan today.

What Is A Real Estate Investing Business Plan?

A real estate business plan is a living document that provides the framework for business operations and goals. A business plan will include future goals for the company and organized steps to get there. While business plans can vary from investor to investor, they will typically include planning for one to five years at a time.

Drafting a business plan for real estate investing purposes is, without a doubt, one of the single most important steps a new investor can take. An REI business plan will help you avoid potential obstacles while simultaneously placing you in a position to succeed. It is a blueprint to follow when things are going according to plan, and even when they veer off course. If for nothing else, a real estate company business plan will see to it that investors know which steps to follow to achieve their goals. In many ways nothing is more valuable to today’s investors. It is the plan, after all, to follow the most direct path to success.

8 Must-Haves in A Real Estate Business Plan

As a whole, a real estate business plan should address a company’s short and long-term goals. Though in order to accurately portray a company’s vision, the right business plan will require more information than a future vision. A strong real estate business plan will provide a detailed look at the ins and outs of a company. This can include the organizational structure, financial information, marketing outline and more.  When done right it will serve as a comprehensive overview anyone who interacts with your business, whether internally or externally.

That said, creating an REI business plan will require a persistent attention to detail. For new investors drafting a real estate company business plan may seem like a daunting task, and quite honestly it is. The secret is knowing which ingredients must be added (and when). Below are seven must-haves for a well-executed business plan:

Outline the company values and mission statement.

Break down future goals into short and long term.

Strategize the strengths and weaknesses of the company.

Formulate the best investment strategy for each property and your respective goals.

Include potential marketing and branding efforts.

State how the company will be financed (and by whom).

Explain who is working for the business.

Answer any “what ifs” with backup plans and exit strategies.

These components are what matter the most, and a quality real estate business plan will delve into each category to ensure maximum optimization.

Vision

A company vision statement is essentially your mission statement and values. While these may not be the first step in planning your company, a vision will be crucial to the success of your business. Company values will not only guide you through investment decisions, but will also inspire others to work with your business time and time again. They should align potential employees, lenders and possible tenants with the motivations behind your company.

Before writing your company vision, think through examples you like both in and out of the real estate industry. Is there a company whose values you identify with? Or, are there mission statements you dislike? Use other companies as a starting point when creating your own set of values. Feel free to reach out to your mentor or other network connections for feedback as you plan. Most importantly, think about the qualities you personally value and how those can fit into your business plan.

Goals

Goals are one of the most important elements in a successful business plan. This is because not only do goals provide an end goal for your company, but they also outline the steps required to get there. It can be helpful to think about goals in two categories: short term and long term. Long term goals will typically outline your future plans for the company. These can include ideal investment types, profit numbers and company size. Short term goals are the smaller, actionable steps required to get there.

For example, one long term business goal could be to land four wholesale deals by the end of the year. Short term goals will make this more achievable by breaking it into smaller steps. A few short-term goals that might help you land those four wholesale deals could be to create a direct mail campaign for your market area, establish a buyers list with 50 contacts, and secure your first property under contract. Breaking down long term goals is a great way to hold yourself accountable, create deadlines and accomplish what you set out to.

SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities, and threats. A SWOT analysis involves thinking through each of these areas as you evaluate your company and potential competitors. This framework allows business owners to better understand what is working for the company and identify potential areas for improvement. SWOT analyses are used across industries as a way to create more actionable solutions to potential issues.

To think through a SWOT analysis for your real estate business plan, first identify your company’s potential strengths and weaknesses. Do you have high quality tenants? Are you struggling to raise capital? Be honest with yourself as you write out each category. Then, take a step back and look at your market area and any competitors to identify threats and opportunities. A potential threat could be whether or not your rental prices are in line with comparable properties. On the other hand, a potential opportunity could be to boost the amenities offered at your property to be more competitive in the area.

Investment Strategy

Any good real estate investment business plan requires the ability to implement a sound investment strategy. If for nothing else, there are several exit strategies a business may execute to secure profits: rehabbing, wholesaling and renting — just to name a few. This is where investors will want to analyze their market and determine which strategy will best suit their goals. Those with long-term retirement goals may want to consider leaning heavily into rental properties. However, those without the funds to build a rental portfolio may want to consider getting started by wholesaling. Whatever the case may be, now is the time to figure out what you want to do with each property you come across. It is important to note, however, that this strategy will change from property to property. Therefore, investors need to be able to determine their exit strategy based on the asset and their current goals. The reason this section needs to be added to a real estate investment business plan is because it will come in handy once a prospective deal is found.

Marketing Plan

While marketing may seem like the cherry on top of a sound business plan, marketing efforts will actually play an integral role in the foundation of your business. A marketing plan should include your business logo, website, social media outlets and any advertising efforts. Together these elements can build a solid brand for your business, which will help you build a strong business reputation and ultimately build trust with investors, clients and more.

To plan your marketing, first think about the ways your brand can illustrate the company values and mission statement you have created. Consider the ways you can incorporate your vision into your logo or website. Remember, in addition to attracting new clients, marketing efforts can also help maintain relationships with existing connections. For a step by step guide to drafting a real estate marketing plan, be sure to read this guide.

Financing Plan

Writing the financial portion of a business plan can be tricky, especially if you are just starting your business. As a general rule, a financial plan will include the income statement, cash flow, and balance sheet for a business. A financial plan should also include short- and long-term goals regarding the profits and losses of a company. Together, this information will help when making business decisions, raising capital and reporting on business performance.

Perhaps the most important factor when creating a financial plan is accuracy. While many investors want to report on high profits or low losses, manipulating data will not boost your business performance in any way. Come up with a system of organization that works for you and always ensure your financial statements are authentic. As a whole, a financial plan should help you identify what is and isn’t working for your business.

Teams & Small Business Systems

No successful business plan is complete without an outline of the operations and management. Think: how your business is being run and by whom. This information will include the organizational structure, office management (if any), and an outline of any ongoing projects or properties. Investors can even include future goals for team growth and operational changes when planning this information.

Even if you are just starting out, or have yet to launch your business, it is still necessary to plan your business structure. Start by planning what tasks you will be responsible for, and look for areas you will need help with. If you have a business partner, think through each of your strengths and weaknesses and look for areas you can best complement each other. For additional guidance, set up a meeting with your real estate mentor. They can provide valuable insights to their own business structure, which can serve as a jumping off point for your planning.

Exit Strategies & Back Up Plans

Believe it or not, every successful company out there has a backup plan. Businesses fail every day, but by creating a backup plan investor can position themselves to survive even the worst-case scenario. That’s why it’s crucial to strategize alternative exit strategies and back up plans for your investment business. These will not only help you create a plan of action if something does go wrong, but will also help you address any potential problems before they happen.

This section of a business plan should answer all of the “what if” questions a potential lender, employee, or client might have. What is a property remains on the market for longer than expected? What if a seller backs out before closing? What if a property has a higher than average vacancy rate? These questions (and many more) are worth thinking through as you create your business plan.

The impact of a truly great real estate business plan can last for the duration of your entire career, whereas a poor plan can get in the way of your future goals. The truth is: a real estate business plan is of the utmost importance, and as a new investor it deserves your undivided attention. Again, writing a business plan for real estate investing is no simple task, but it can be done correctly. Follow our real estate investment business plan template to ensure you get it right the first time around:

Write an executive summary that provides a bird’s eye view of the company.

Include a description of company goals and how you plan to achieve them.

Demonstrate your expertise with a thorough market analysis.

Specify who is working at your company and their qualifications.

Summarize what products and services your business has to offer.

Outline the intended marketing strategy for each aspect of your business.

Executive Summary

The first step is to define your mission and vision. In a nutshell, your executive summary is a snapshot of your business as a whole, and it will generally include a mission statement, company description, growth data, products and services, financial strategy, and future aspirations. This is the “why” of your business plan, and it should be clearly defined.

Company Description

The next step is to examine your business and provide a high-level review on the various elements, including goals and how you intend to achieve them. Investors should describe the nature of their business, as well as their targeted marketplace. Explain how services or products will meet said needs, address specific customers, organizations or businesses the company will serve, and explain the competitive advantage the business offers.

Market Analysis

This section will identify and illustrate your knowledge of the industry. It will generally consist of information about your target market, including distinguishing characteristics, size, market shares, and pricing and gross margin targets. A thorough market outline will also include your SWOT analysis.

Organization & Management

This is where you explain who does what in your business. This section should include your company’s organizational structure, with details the ownership, profiles on the management team and their qualifications. While this may seem unnecessary as a real estate investor, the people reading your business plan may want to know who’s in charge. Make sure you leave no stone unturned.

Services or Products

What are you selling? How will it benefit your customers? This is the part of your real estate business plan where you provide information on your product or service, including benefits it has over competitors. In essence, it will offer a description of your product/service, details on its life cycle, information on intellectual property, as well as research and development activities, which could include future R&D activities and efforts. Since real estate investment is more of a service, it’s critical for beginner investors to identify why their service is better than others in the industry. It could include experience.

Marketing Strategy

Generally speaking, a marketing strategy will encompass how a business owner intends to market or sell their product and service. This includes a market penetration strategy, plan for future growth, channels of distribution, and a comprehensive communication strategy. When creating a marketing strategy for a real estate business plan, investors should think about how they plan to identify and contact new leads. They should then think about the various options for communication: social media, direct mail, a company website, etc. The marketing portion of your business plan should essentially cover the practical steps operating and growing your business.

Winston Rowe and Associates is a national consulting firm you can review them on line at www.winstonrowe.com

Free Business And Real Estate Investing eBooks

Contact Winston Rowe and Associates

Welcome to Winston Rowe and Associates knowledge blog, scroll down to the right for posts about commercial real estate.

This is a list of free books about real estate investing, commercial real estate financing and business strategy.

We’re always on the lookout for great free books so bookmark this blog and check back for monthly updates.

These links are not affiliate marketing links, just publications that we feel may add value to people and businesses.

Commercial Real Estate Finance

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

Real Estate Investing Articles

This is a link to 1226 real estate investing articles written by industry veteran’s.

25 Productivity Tips for Successful Business Owners

Productivity is critical to your success at work. Business owners, managers and executives all want to get the most from their employees. If you’re not performing as efficiently or effectively as others, your long-term job prospects could be in trouble.

Real Estate Investing: How to Find Cash Buyers and Motivated Sellers

“Real Estate Investing: How to Find Cash Buyers and Motivated Sellers” teaches real estate investors and those interested in learning to invest in real estate how to define and target ideal cash buyers and motivated sellers. The book covers absentee owners, rehab investors, Section 8 landlords, and other buyer types. Some of the marketing topics include mailing lists, postcards, both online and offline marketing strategies along with examples. Anyone who wants to wholesale a house or is curious about flipping houses should pick this book to get educated on cash buyers and motivated sellers for their real estate investing.

Real Estate – Breaking Bad How to Flip Decaying Real Estate Properties for Profit

Tired of working 9 to 5? You should think of making money with real estate! Yes, the effort is well worth it! You just have to ditch the misconceptions and embark with all the passion you have in store for this amazing trip of rehabbing old houses and giving them a new look and a new owner.  Your reward? A nice profit!

Real Estate Forms Portfolio

A FREE and ready-for-download eBook consisting of a comprehensive collection of real estate-related forms for real estate investors.

Real Estate Secrets Exposed

This FREE e-Book sheds some light on the often mysterious and sometimes daunting world of real estate.

Use 1031 Real Estate Exchanges to Create Multiple Streams of Income

Discover how to use 1031 tax-free exchanges, tenants in common interests, and zero cash flow properties to create new sources of income. Learn how to offer bundled services and attract new clients. This FREE, ready for download eBook is perfect for anyone involved in real estate, taxes, mortgages, insurance, or law.  Download it now!

Make Money Through Real Estate Renovations

Download this FREE eBook and learn how a successful investor makes thousands of dollars from real estate renovations. Download it now!

Discover the Secrets of How to Fund Your Real Estate Deals with Private Lenders

Download this FREE e-Book, and discover the new secrets of funding real estate deals in the post-bubble real estate market, where traditional lending sources are getting very difficult to obtain. Download it today!

Real Estate Investing Strategy for Rehabs

This eBook is about residential rehabbing and the multiple strategies that can be used to maximize profits in this current economic climate. My goal has always been to share knowledge with folks that are truly interested in rehabbing and view it as not only for monetary gain but also see is as an “art and science” like I do. Happy Rehabbing!!

How to Be A Super Property Investor

A FREE, step-by-step guide that will help you become a super real estate property investor. Learn all the basic and some advanced investing techniques that have generated millions for property investors. Ready for download now!

Financial Terms Dictionary – 100 Most Popular Financial Terms Explained

This practical financial dictionary helps you understand and comprehend more than 100 common financial terms. It was written with an emphasis to quickly grasp the context without using jargon. Every terms is explained in detail with 600 words or more and includes also examples. It is based on common usage as practiced by financial professionals.

The Prince by Niccolò Machiavelli

Niccolò di Bernardo dei Machiavelli was an Italian diplomat, politician, historian, philosopher, writer, playwright and poet of the Renaissance period. He has often been called the father of modern political philosophy and political science.

The Science of Getting Rich by W. D. Wattles

This book is pragmatical, not philosophical; a practical manual, not a treatise upon theories. It is intended for the men and women whose most pressing need is for money; who wish to get rich first, and philosophize afterward. It is for those who have, so far, found neither the time, the means, nor the opportunity to go deeply into the study of metaphysics, but who want results and who are willing to take the conclusions of science as a basis for action, without going into all the processes by which those conclusions were reached.

Sun Tzu Art of War

Written in the fifth century B.C., Suntzu and Wutzu still remain the most celebrated works on war in the literature of China. While the chariot has gone, and weapons have changed, these ancient masters have held their own, since they deal chiefly with the fundamental principles of war, with the influence of politics and human nature on military operations; and they show in a most striking way how unchanging these principles are.

Make Extra Money Flipping Houses While On Vacation by Jason Medley

Reveals his simple and proven systems to automate, delegate and outsource nearly every function of his business except cashing his checks. He shows the exact steps that has allowed him to go on multiple vacations with his family throughout the year while having his system continue to flip houses for him.

Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business

Have you ever thought about making money with real estate? In Achieving Wealth Through Real Estate: A Definitive Guide to Controlling Your Own Financial Destiny Through a Successful Real Estate Business, author and entrepreneur Kirill Bensonoff takes you through the process of starting your own real estate business step-by-step, featuring his expert tips and tricks.

Business Loans Uncovered

Knowing if you qualify is one of the most important things to know when applying  for a loan of any type. Blindly applying for a loan and being declined increases the chances of you being declined again and again because you not only lower your credit score each time you apply, multiple inquires also serves a red flag to other lenders and as a result lenders put you in a high risk category and charge higher interest rates in the event of an approval Includes: ​Traditional Lenders, Government Sources, The 7(a) loan guarantee program, SBA Low Doc loan program, SBA Express loan program, Factoring, Venture Capitalists, Angel Investors.

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Real Estate Finance and Investment

This course is an introduction to the most fundamental concepts, principles, analytical methods and tools useful for making investment and finance decisions regarding commercial real estate assets. As the first of a two-course sequence, this course will focus on the basic building blocks and the “micro” level, which pertains to individual properties and deals.

Introduction to the Law of Property, Estate Planning and Insurance

Introduction to the Law of Property, Estate Planning and Insurance is an up-to-date textbook that covers legal issues that students must understand relating to real estate (an especially important business asset), as well as estate planning and insurance.

The text is organized to permit instructors to tailor the materials to their particular approach. The authors take special care to engage students by relating law to everyday events with their clear, concise and readable style.

Defensive Real Estate Investing: 10 Principles for Succeeding Whether Your Market is Up or Down

As the real estate market changes after years of aggressive growth, investors everywhere are faced with uncertainty, wanting to know how to prepare for a potential real estate bust and make sure they don’t lose money.   In his authoritative new work, Defensive Real Estate Investing, bestselling author and real estate expert William Bronchick provides guiding principles to safe investments for beginning to intermediate real estate investors.

Private Real Estate Investment: Data Analysis and Decision Making

Fiduciary responsibilities and related court-imposed liabilities have forced investors to assess market conditions beyond gut level, resulting in the development of sophisticated decision-making tools. Roger Brown’s use of historical real estate data enables him to develop tools for gauging the impact of circumstances on relative risk. His application of higher level statistical modeling to various aspects of real estate makes this book an essential partner in real estate research. Offering tools to enhance decision-making for consumers and researchers in market economies of any country interested in land use and real estate investment, his book will improve real estate market efficiency. With property the world’s biggest asset class, timely data on housing prices just got easier to find and use

Construction Funding: The Process of Real Estate Development, Appraisal, and Finance

Construction firms operate on narrow profit margins and the success of construction projects is hinged upon proper financing. Construction Funding is the only single volume, concise text on the financial aspects of building and developing.

The book acquaints the reader with a set of procedures specifically designed to solve the unique financial challenges facing the construction industry. It guides the reader step-by-step through each phase of financing a development project, from simple one-family residences to large multi-unit complexes. Construction Funding also addresses raising capital, selecting markets, rating sites, insurance, joint ventures, loan options, and cash flow management. Separate sections are devoted to the conduct of profitability studies and to finding after-tax rates of return. Construction Funding, Fourth Edition, has been updated to provide current costs and funding methods and additional learning features such as key terms, review questions, and learning objectives.

How to Make Money With Real Estate Options: Low-Cost, Low-Risk, High-Profit Strategies for Controlling Undervalued Property….Without the Burdens of Ownership!

I have dabbled with real estate for years usually making good money and sometimes being hammered (like with the last crash in the RE market). But overall RE has been good to me. Be that as it may, I have lost enough to know that I wanted to minimize my risk while still having plenty of upside potential. Real estate options are a vehicle to accomplish this goal. Thus, I started educating myself on the subject and found this most excellent book. Mr. Lucier is thorough and detailed and relates the reality of what it takes to profit (not like some of these dream weaver real estate gurus who like to sell you on how “easy” it is).

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Marketing Strategies for Real Estate Photography

One of the biggest problems that real estate photographers have once they have set up their business as a legal entity, obtained all the right equipment and perfected their technique is obtaining new clients.

Clients and customers are the lifeblood of any business, but how do you obtain new clients after starting your business?

By developing and executing a strategic marketing plan tailored to your business.

This short guide has been written to help real estate photographers develop their marketing plan and assist with winning new business.

It includes a series of digital and direct marketing strategies along with useful tips and lessons the author has learned from his own experiences that can save you time and money when growing your business.

A marketing action plan template has been included to help photographers execute the strategies learned in this guide book.

Books by Dr William Edward Deming

William Edwards Deming (October 14, 1900 – December 20, 1993) was an American engineer, statistician, professor, author, lecturer, and management consultant.

Educated initially as an electrical engineer and later specializing in mathematical physics, he helped develop the sampling techniques still used by the U.S. Department of the Census and the Bureau of Labor Statistics.

In his book The New Economics for Industry, Government, and Education Deming championed the work of Walter Shewhart, including statistical process control, operational definitions, and what Deming called the “Shewhart Cycle, which had evolved into Plan-Do-Study-Act (PDSA). That was in response to the growing popularity of PDCA, which Deming viewed as tampering with the meaning of Shewhart’s original work.

Deming is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry. That work began in July and August 1950, in Tokyo and at the Hakone Convention Center, when Deming delivered speeches on what he called “Statistical Product Quality Administration”.

Many in Japan credit Deming as one of the inspirations for what has become known as the Japanese post-war economic miracle of 1950 to 1960, when Japan rose from the ashes of war on the road to becoming the second-largest economy in the world through processes partially influenced by the ideas Deming taught

 

Squatters’ Rights: Guide to State Law and How-To Evict

Squatters’ Rights Explained

Property owners around the globe have been paying close attention to squatting— a topic that boomed in recent years thanks to the establishment of organized groups like Take Back the Land.

Squatter inhabiting property

Many residential and commercial property owners are now apprehensive about leaving their buildings unoccupied— concerned that onlookers may view their realty as a squatting opportunity.

Even landlords seeking tenants must be exceptionally vigilant when it comes to screening potential renters, as some may pay their rent for a short period of time before deciding to occupy the space unlawfully.

But what, exactly, are the legalities surrounding squatting? And how should landlords who are being affected by this phenomenon go about addressing it?

These are the questions we’ll be answering in today’s post.

But first, let’s cover the basics.

What is a squatter?

A squatter is any individual who decides to inhabit a piece of land or a building in which they have no legal right to occupy. The squatter lives in the building or on the property they select without paying rent and without lawful documentation stating they own the property, are a law-abiding tenant, or that they have permission to use or access the area.

What are squatters’ rights?

Squatters rights refers to laws which allow a squatter to use or inhabit another person’s property in the event that the lawful owner does not evict or take action against the squatter.

Typically, squatters rights laws only apply if an individual has been illegitimately occupying a space for a specific period of time. In New York, for example, a squatter can be awarded “adverse possession” under state law if they have been living in a property for 10 years or more.’

It’s important to note, however, that each state has their own laws surrounding this topic. Thus, how squatting is approached and dealt with varies greatly depending on where it occurs.

Which states have squatters rights?

Squatters rights, also known as “adverse possession” laws, exist in all 50 states. However, how these laws are enforced, and when they are enforced, differ greatly from state-to-state.

The below states have a squatters law which requires the individual to have lived on the property in question for 20 years or more:

  • Delaware
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Louisiana (30 years)
  • Maine
  • Maryland
  • Massachusetts
  • New Jersey (30 years)
  • North Carolina
  • North Dakota
  • Ohio (21 years)
  • Pennsylvania (21 years)
  • South Dakota
  • Wisconsin

The below states have a squatters law which requires the individual to have lived on the property in question for 19 years or less:

  • Alabama (10 years)
  • Alaska (10 years)
  • Arizona (10 years)
  • Arkansas (7 years)
  • California (5 years)
  • Colorado (18 years)
  • Connecticut (15 years)
  • Florida (7 years)
  • Indiana (10 years)
  • Iowa (10 years)
  • Kansas (15 years)
  • Kentucky (15 years)
  • Michigan (15 years)
  • Minnesota (15 years)
  • Mississippi (10 years)
  • Missouri (10 years)
  • Montana (5 years)
  • Nebraska (10 years)
  • Nevada (15 years)
  • New Mexico (10 years)
  • New York (10 years)
  • Oklahoma (15 years)
  • Oregan (10 years)
  • Rhode Island (10 years)
  • South Carolina (10 years)
  • Tennessee (7 years)
  • Texas (10 years)
  • Utah (7 years)
  • Vermont (15 years)
  • Virginia (15 years)
  • Washington (10 years)
  • West Virginia (10 years)
  • Wyoming (10 years)

Note: Some of the states listed above require the squatter to possess a deed, or to have paid taxes during their occupancy, while others do not. In some states, if the squatter can produce the required documentation, the number of years may be reduced.

How to evict a squatter

With the squatting movement gaining traction, more and more landlords are looking to arm themselves with information about how to get rid of squatters.

This is an excellent step to take, since successfully defending a property against individuals who intend to take advantage of squatters rights will rely heavily on the landlords understanding of the law and their ability to respond promptly.

Below are the permissible steps we recommend taking when evicting squatters:

  1. Call the Police

The more quickly you contact your local law enforcement, the better. They will be able to file an official police report, which you can use in the future if you end up having to pursue an eviction via the court system.

The more evidence and documentation you have to demonstrate your efforts to remove the individual(s) from your premises, the stronger your case will be.

Remember, you can not legally try to intimidate the squatter or forcibly remove them from your property. If you must engage with the individuals who are illegally inhabiting your property, it’s best to have a police officer present.

  1. Provide a Formal Eviction Notice

After you have notified the authorities that there is an illegal tenant on your property, you’ll need to file an Unlawful Detainer action. The process of filing such an action can vary from state to state, so it’s important to speak with a lawyer or your local court office to ensure you understand all of the required steps.

  1. Litigation

If the squatter refuses to leave after being ordered to do so, you can take further action by filing a lawsuit. After doing so, a hearing date will be set and both parties will be required to attend.

If the courts rule in your favor (which is most likely), the judge will order the police to escort the squatter from the premises. At this point, you will be allowed to change the locks to the property.

  1. Remove Any Possessions Left Behind

As frustrated as you may be at this point, it’s important to remember that you can’t always just discard any possessions a squatter leaves behind. Some states require landlords to provide written notice to the squatter stating a deadline by which they must collect their belongings.

Because squatters are often difficult to contact, you can protect yourself by having this letter prepared and bringing it to your court hearing. In this same notice, you can disclose what you intended to do should the belongings not be collected by the specified date. Either way, be sure to speak to a lawyer or your local judicial office to ensure you are following the proper procedures.

Reasons to Reject a Tenant Application

Reasons to Reject a Tenant Application

Many landlords believe that they cannot reject a tenant application for any reason, that they have to accept the first one to come along with the money or risk the grief of a lawsuit.

Not so.

There are numerous legitimate, businesslike reasons to reject a prospective tenant’s application.

Unsatisfactory references from landlords, employers and/or personal references.

These could include reports of repeated disturbance of their neighbors’ peaceful enjoyment of their homes; reports of gambling, prostitution, drug dealing or drug manufacturing; damage to the property beyond normal wear and tear; reports of violence or threats to landlords or neighbors; allowing people not listed on the lease or rental agreement to live in the property; failure to give proper notice when vacating the property; or a landlord who would not rent to them again.

Evictions.

Frequent moves. You have to decide what constitutes frequent moves and apply the same criteria to every applicant.

Bad credit report.

If a report shows they are not current with any bill, have been turned over to a collection agency, have been sued for a debt, or have a judgment for a debt, that is grounds to reject. These do not have to be debts connected in any way with housing.

Too short a time on the job.

As with frequent moves, you have to decide what too short a time is and apply the same criteria to every applicant.

Too new to the area.

There is nothing to say you have to rent to people who have just moved to town. Be careful, though, many times these would be excellent tenants and the time and long distance call expense of checking them out could pay big dividends.

Smokers.

Some newspapers mistakenly believe that smokers are a protected “handicapped” class. They will never be. The tobacco companies would not allow it. Do do so would be to admit that tobacco and nicotine are addicting. Industry lobbyists would be sure to fight that idea tooth and nail. So you can safely discriminate against people who smoke. Newspapers will not accept ads that say “no smokers,” but they will accept ads that say “no smoking.”

Too many vehicles.

Lots of cars can be a real source of irritation to neighbors and make the entire neighborhood or apartment complex look bad. Chances are, if they have more than one vehicle for every adult they spend a lot of time broken and being fixed. That means they could be in pieces in the front yard or parking lot.

Too many people for the property.

Be extremely careful with this. Before the familial status protection clause of the Fair Housing Act, you could discriminate on this basis without fear of any problems. Not any more. Now the same criteria must be applied without regard to the age of the inhabitant. Be sure it is applied equally to all applicants. Check your state’s Landlord-Tenant Law.

Drug users.

They must be current drug users. If they are in a drug treatment program and no longer use drugs, the Federal Government considers them handicapped and protected by the Fair Housing Act.

Any evidence of illegal activity.

You must be able to come up with some kind of satisfactory evidence. I don’t know what that would be, every case would be different. Certainly a letter from the police department warning a previous landlord of their illegal activity and threatening to close the property is considered sufficient evidence.

Insufficient income.

You must set up objective criteria applied equally to each applicant. Insufficient income could reasonably be if the scheduled rent exceeded 35% of their gross monthly income.

For example, if the rent is $600, their gross monthly income must be at least $1714.29. The formula is: Acceptable income= scheduled rent divided by income ratio. You can require proof of all income.

Be careful, though, if you are willing to accept only one member of a married couple to supply the total dollar income, you must be willing to accept the same of unmarried, co-tenants that share the housing. Under Fair Housing law you cannot require that unmarried people meet different income requirements than married people.

Too many debts.

Even if their gross income is sufficient, they may have so many other debts that they would be hard pressed to make all the payments.

A rule of thumb might be that all contracted debts, including rent, cannot exceed 50% of their gross income. Contracted debts would be such things as credit card payments, car payments, loans, etc. Those would not be cable TV, water and garbage, telephone, or other utilities.

Conviction of a crime which was a threat to property in the past five years.

Included in this could be drunk driving convictions, burglary convictions, robbery convictions, and other such misbehaviors.

Conviction for the manufacture or distribution of a controlled substance in the past five years.

The best way to proceed is to post a list of the acceptable rental criteria and hand it to each applicant.

You can use the list above, but under no circumstances is it intended to be legal advice. Check with an attorney who is familiar with the Landlord-Tenant Law before posting or handing out anything like a list of acceptable criteria for applicants. Laws change constantly, and what you don’t know can and will hurt you.

 

10 Tips for Buying Your First Rental Property

10 Tips for Buying Your First Rental Property

Real estate has produced many of the world’s wealthiest people, so there are plenty of reasons to think that property is a sound investment.

However, as with any investment, it’s better to be well-versed before diving in with hundreds of thousands of dollars. Arm yourself with the information below before starting a new career as a real estate tycoon.

Make Sure It’s for You

Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? Sure, you could call somebody to do it for you, but that will eat into your profits.

Property owners who have one or two homes often do their own repairs to save money. If you’re not the handy type and don’t have lots of spare cash, being a landlord may not be right for you.

Pay Down Debt First

Savvy investors might carry debt as part of their investment portfolio, but the average person should avoid it. If you have student loans, unpaid medical bills or children who will soon attend college, purchasing a rental property may not be the right move.

Get the Down Payment

Investment properties generally require a larger down payment than owner-occupied properties, so they have more-stringent approval requirements. The 3% you may have put down on the home you currently live in isn’t going to work for an investment property.

You will need at least 20 percent, given that mortgage insurance isn’t available on rental properties.

Beware of High-Interest Rates

The cost of borrowing money might be relatively cheap right now, but the interest rate on an investment property will be higher than traditional mortgage interest rates.

Remember, you need a low mortgage payment that won’t eat into your monthly profits too significantly.

Calculate Your Margins

Wall Street firms that buy distressed properties aim for returns of 5% to 7% because they have to pay staff. Individuals should set a goal of 10%.

Estimate maintenance costs at 1% of the property value annually. Other costs include insurance, possible homeowners’ association fees, property taxes and monthly expenses such as pest control and landscaping. And then there’s landlord insurance.

Avoid a Fixer-Upper

It’s tempting to look for the house that you can get at a bargain and flip into a rental property. However, if this is your first property, that’s probably a bad idea.

Unless you have a contractor, who does quality work on the cheap—or you’re skilled at large-scale home improvements—you’re likely to pay too much to renovate. Instead, look to buy a home that is priced below the market and needs only minor repairs.

Determine Your Return

For every dollar that you invest, what is your return on that dollar? Stocks may offer a 7.5% cash-on-cash return, while bonds may pay 4.5%.

A 6% return in your first year as a landlord is considered healthy, especially given that number should rise over time.

Get a Low-Cost Home

The more expensive the home, the higher your ongoing expenses will be. Some experts recommend starting with a $150,000 home.

Find the Right Location

When choosing a profitable rental property, look for low property taxes, a decent school district, a neighborhood with low crime rates and an area with a growing job market and plenty of amenities, such as parks, malls, restaurants and movie theaters.

Risk vs. Reward

Every financial decision is about weighing the rewards, determining payoff against potential risk. Does investing in real estate make sense for you?

Rewards:

  • Your income is passive. Aside from the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job.
  • Your income should grow. You don’t just earn rental income; as real estate values increase; your investment rises in value.
  • You can put real estate into a self-directed IRA.
  • Rental income isn’t included as part of your income subject to Social Security tax.
  • The interest you pay on an investment property loan is tax deductible.
  • Short of another crisis, real estate values are more stable than the stock market.
  • Real estate is a physical asset. Investing in stocks or Wall Street products isn’t anything you can see or touch.

Risks:

  • Although rental income is passive, tenants can be a pain to deal with unless you use a property management company.
  • If your adjusted gross income is above $200,000 (single) or $250,000 (married filing jointly), you may be subject to a 3.8-percent surtax on net investment income, including rental income.
  • Rental income may not cover the total mortgage payment.
  • Unlike stocks, you can’t instantly sell real estate if the markets go sour.
  • Unlike stocks, in most cases, you can’t sell a portion of your real estate. It’s all or nothing.
  • Entry and exit costs are high.
  • If you don’t have a tenant, you have to pay for all the expenses.

The Bottom Line

Keep your expectations realistic. As with any investment, rental property isn’t going to produce a large monthly paycheck for a while and picking the wrong property could be a catastrophic mistake.

Consider working with an experienced partner on your first property or rent out your own home to test your landlord abilities.

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A Real Estate Investing Guide

A Real Estate Investing Guide

When you think about buying real estate, the first thing that probably comes to mind is your home. But physical property can play a part in a portfolio too, especially as a hedge against the stock market.

However, while real estate has become a popular investment vehicle over the last 50 years, buying and owning brick and mortar is a lot more complicated than investing in equities and bonds. In this article, we’ll examine the leading options for individual investors, listed in approximate order of how direct a real estate investment they are, and reasons to invest.

Basic Rental Properties

This is an investment as old as the practice of land ownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes, and maintenance of the property.

Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit.

Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate in this country has consistently increased in value from 1940 to 2006.

While there was a dip during the subprime mortgage meltdown of 2008 to 2010, it has now rebounded and has been increasing overall.

An investor must know the market in which he is searching for property or hire an expert to help. For investors seeking an income stream from rental properties, the most important aspects to consider are property location and market rental rates.

As for location, many successful rentals are located in close proximity to major schools. For example, if you buy a property near a state university, students are likely to want to rent it year after year.

There are also many other features of a profitable rental property, and some take time to learn.

There are, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, ends up having no tenant at all. This leaves you with negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments.

There is also the matter of finding the right property. You will want to pick an area where vacancy rates are low and choose a place that people will want to rent.

Once you’ve found an ideal property in an area where people want to rent, use a mortgage calculator to determine the total cost of the property with interest. It’s also worth researching different mortgage types in order to secure a favorable interest rate for your rental.

Perhaps the biggest difference between a rental property and other investments is the amount of time and work you have to devote to caring for it.

If you don’t want to, you can hire a professional property manager. But his or her salary then becomes an expense that impact’s your investment’s profitability.

The Flip Side: Real Estate Trading

This is the wild side of real estate investment. Like the day traders who are leagues away from a buy-and-hold investor, the real estate traders are an entirely different breed from the buy-and-rent landlords.

Real estate traders buy properties with the intention of holding them for a short period, often no more than three to four months, whereupon they hope to sell them for a profit. This technique is also called flipping and is based on buying properties that are either significantly undervalued or are in a very hot area.

Pure property flippers will not put any money into a property for improvements; the investment has to have the intrinsic value to turn a profit without alteration, or they won’t consider it.

Flipping in this manner is a short-term cash investment.

If a property flipper gets caught in a situation where he or she can’t unload a property, it can be devastating because these investors generally don’t keep enough ready cash to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market.

The second class of property flipper also exists. These investors make their money by buying cheap or reasonably priced properties and adding value by renovating them. They then sell the property after renovations for a higher price.

This can be a longer-term investment, depending on the extent of the improvements. The limiting feature of this investment is that it is time-intensive and often only allows investors to take on one property at a time.

Real Estate Investment Groups

Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but don’t want the hassle of being a landlord, a real estate investment group may be the solution for you.

A company will buy or build a set of buildings, often apartments, and then allow investors to buy them through the company, thus joining the group.

A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent.

There are several versions of investment groups, but in the standard version, the lease is in the investor’s name, and all of the units pool a portion of the rent to guard against occasional vacancies, meaning that you will receive enough to pay the mortgage even if your unit is empty.

The quality of an investment group depends entirely on the company offering it. In theory, it is a safe way to get into real estate investment, but groups are vulnerable to the same fees that haunt the mutual fund industry. Once again, research is the key.

Real Estate Limited Partnerships

A real estate limited partnership (RELP) is similar to a real estate investment group: It is an entity formed to purchase and hold a portfolio of properties, or sometimes just one property – only it is in existence for a finite number of years.

An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners.

They may receive periodic distributions from income generated by the RELP’s properties, but the real payoff comes when the properties are sold – hopefully, at a sizeable profit – and the RELP dissolves down the road.

REITs

Real estate has been around since our cave-dwelling ancestors started chasing strangers out of their space, so it’s not surprising that Wall Street has found a way to securitize it, turning real estate into a publicly-traded instrument.

A real estate investment trust (REIT) is created when a corporation (or trust) is formed to use investors’ money to purchase, operate and sell income-producing properties. REITs are bought and sold on the major exchanges, just like any other stock.

To keep its status as a REIT, this entity must pay out 90% of its taxable profits in the form of dividends. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits, thus eating into the returns it could distribute to its shareholders.

Much like regular dividend-paying stocks, REITs are appropriate for stock market investors who want regular income, though they offer the opportunity for appreciation too. REITs allow investors into non-residential properties such as malls (about a quarter of all REITs specialize in these), health-care facilities, mortgages or office buildings. In comparison to the aforementioned types of real estate investment, REITs also are highly liquid.

Real Estate Mutual Funds

Real estate mutual funds invest primarily in REITs and real estate operating companies. They provide the ability to gain diversified exposure to real estate with a relatively small amount of capital. Depending on their strategy and diversification goals, they provide investors with much broader asset selection than can be achieved in buying individual REIT stocks, along with the possibility of fewer transaction costs and commissions.

Like REITs, these funds are pretty liquid. Another significant advantage to retail investors is the analytical and research information provided by the fund on acquired assets and management’s perspective on the viability and performance of specific real estate investments and as an asset class.

More speculative investors can invest in a family of real estate mutual funds, tactically over weighting certain property types or regions to maximize return.

Why Invest in Real Estate?

Real estate can enhance the risk and return profile of an investor’s portfolio, offering competitive risk-adjusted returns. Even factoring in the subprime mortgage crisis, private market commercial real estate returned an average of 8.4% over the 10-year period from 2000 to 2010, based on data from the National Council of Real Estate Investment Fiduciaries (NCREIF). And usually, the real estate market is one of low volatility especially compared to equities and bonds.

Real estate is also attractive when compared with more traditional sources of income return.

This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low.

Diversification and Protection

Another benefit of investing in real estate is its diversification potential. Real estate has a low, and in some cases, negative, correlation with other major asset classes – meaning, when stocks are down, real estate is often up. In fact, in 14 of the 15 previous bear markets, going back to 1956, residential real estate prices rose, according to data from Yale University’s Robert Shiller, the co-creator of the Case-Shiller Home-Price Index. Of course, there are exceptions: real estate tanked along with equities during the Great Recession (though this was an anomaly, Schiller argues, reflecting the role of subprime mortgages in kicking off the crisis).

This means the addition of real estate to a portfolio can lower its volatility and provide a higher return per unit of risk. The more direct the real estate investment, the better the hedge: More indirect, publicly traded, vehicles, like REITs, are obviously going to reflect the overall stock market’s performance (and some analysts think the two will become ever more correlated, now that REIT stocks are represented on the S&P 500). Interestingly, though, this also has been changing of late. The correlation between listed REITs and the broad stock market hit a 12-year low in 2015, according to research by the National Association of Real Estate Investment Trusts (NAREIT), “suggesting that whatever factors happen to drive the non-REIT part of the market will not necessarily spill over to affect the REIT market,” an article on Reit.com, the association’s website, concluded.

Because it is backed by brick and mortar, real estate also carries less principal-agent conflict or the extent to which the interest of the investor is dependent on the integrity and competence of managers and debtors. Even the more indirect forms of investment carry some protection: REITs for example, mandate a minimum percentage of profits be paid out as dividends.

Inflation Hedging

The inflation-hedging capability of real estate stems from the positive relationship between GDP growth and demand for real estate. As economies expand, the demand for real estate drives rents higher and this, in turn, translates into higher capital values. Therefore, real estate tends to maintain the purchasing power of capital, bypassing some of the inflationary pressure on to tenants and by incorporating some of the inflationary pressure, in the form of capital appreciation.

The Power of Leverage

With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order – unless you are buying on margin. And even then, the percentage you can borrow is still much less than with real estate, thanks to that magical financing method, the mortgage.

Most conventional mortgages require a 20% down payment. However, depending on where you live, you might find a mortgage that requires as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, the size of your mortgage affects the amount of ownership you actually have in the property, but you control it the minute the papers are signed.

This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.

The Drawback of Real Estate Investing: Illiquidity

The main drawback of investing in real estate is illiquidity or the relative difficulty in converting an asset into cash and cash into an asset. Unlike a stock or bond transaction, which can be completed in seconds, a real estate transaction can take months to close. Even with the help of a broker, simply finding the right counterparty can be a few weeks of work. REITs and real estate mutual funds offer better liquidity and market pricing, but come at the price of higher volatility and lower diversification benefits, since they have a much higher correlation to the overall stock market than direct real estate investments.

What You Need to Know About Emergency Plumbing Services

The plumbing system in your house is significant however relatively few individuals understand this until an issue has sprung up.

Preventing it is in every case superior to searching for an answer where there is as already an issue in the home plumbing systems which is the reason it is ideal to put in estimates that keeps your system fit as a fiddle.

By being cautious with what goes down your drain channels and routinely checking plumbing equipment and guaranteeing everything is in the right working order, you can avoid so many issues that the homeowner suffers from.

But, when the plumbing problem is already visible, there are emergency plumbing services to deal with the situation and get things back to normal. Contingent upon the issue you are confronting, you could have routine plumbing service done or you may think that it is important to get emergency services.

The two are somewhat different and there are facts that you need to know about emergency plumbing services.

They are essential for things you cannot deal with

The important fact is that there are plumbing issues that are minor and you can without much effort to deal with or monitor until you get an expert to help it out. Prior to call the emergency plumber, make sure that it is genuinely an emergency of an issue that is beyond you.

The emergency service covers various issues

Knowing when to call the plumbing services very crucial. Some of the problems that truly require the assistance of an emergency plumber include gas spills, pipes burst, running toilets or sewage issues.

This service is for issues that truly cannot hold up for a longer period because of the possible damage delay in rectifying the situation that may prompt.

In the event that your problem is presenting harm to your property and valuable or is posing a health risk, at that point it goes for an emergency.

Additionally, sometimes warranties act an important part here. If you claim for the Home warranty plan, it covers the plumbing issues too.

They are offered whenever quickly

The emergency services are often called emergency because of the fact that the plumbers are adaptable enough to deal with them when as soon as it occurs.

So, whether it is on an end of the week or an occasion or the wee hours of the night, the emergency plumbers will come to help you.

This is why it is important to ensure that you call in just when it is a genuine and important issue that essentially cannot wait.

They will, in general, be increasingly costly than general services

Plumbers essentially drop everything else to take care of emergency calls and will come to where you are at any given time and day.

For this, the emergency plumbers will cost you more than the standard general administrations that can hold up somewhat longer to be dealt with.

This is one more reason regarding why you ought to guarantee that your pipes issues are extremely an emergency before proceeding to call in the experts.

Benefits of hiring an emergency plumbing service

  • A plumber will find a permanent solution
  • When any plumbing emergency happens, people always get panic. But, instead, hiring professional plumber will assess the situation and get a permanent solution out of it.
  • Hiring an emergency plumber will save you money
  • It is a onetime investment. It can be expensive for the first time but it is reliable and can save you for the long haul.
  • An emergency plumber has professional training in handling various emergencies

As mention “professional”, they are the hero in plumbing services. They are well trained and can work with proper fixing.

Getting a professional plumbing contractor can keep you safe from issues

Carrying out plumbing tasks at your home, especially in the emergency period can be risky. As a professional plumber are well trained with safety equipment, they can keep you safe from dangerous situations

The plumbers are constantly prepared to offer help and ensure your plumbing system turns back to its functionality.

Emergency administrations will spare you the stresses and efforts and in turn very valuable and quite beneficial.

It is essential to keep contacts of dependable and trustworthy plumbing contractors offering emergency and professional plumbing services so you can get instant help when the situation is terrible.

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How to Retire Early Through Real Estate Investing

How to Retire Early Through Real Estate Investing

Real estate investment can be a tricky business, but when it’s done right, it can be rewarding for you and your retirement account.

Whether you are thinking of investing in real estate or you already have a few properties under your belt, with the right steps, it is possible for you to build a successful early retirement fund. Of course, this sort of goal doesn’t happen overnight.

This takes a great deal of prep work, planning and careful choices. But if you are smart about your real estate selection, stay actively involved with your property and keep an eye on your finances, early retirement could be in your future.

When done well, you can build a comfortable nest egg much sooner than you think. If you are curious about real estate investment and the idea of early retirement, here are seven tips that can help you get that fat savings account.

Establish financial independence.

It can be difficult to retire early if you still have the burden of debt. The first step toward early retirement is making sure you are debt-free or have as little debt as possible.

It can be difficult to retire early if you need to make credit card payments or pay off a loan.

Take steps to manage your expenses, such as limiting high-dollar purchases and avoiding charging items or taking out loans for projects or items you may not need. It’s hard to retire if your distributions are going to someone else.

By paying off your debt, you can ensure that all money coming in will go to your living expenses.

With lower debt, you can also take steps to buy more rental properties. Stay in control with these purchases.

Careful debt management can help you retire early.

Mind your income.

Retiring early requires monitoring your income. Having a successful portfolio isn’t enough to warrant pulling out of the job market early.

There are additional steps you need to take. Once you’ve cleared out your debt, it’s time to look at your current income and expenses.

How much money do you need to generate to cover your expenses? How much should you set aside for emergencies? Know how much you need to live comfortably before you rely on your real estate information.

Know your rental property numbers.

Another step toward early retirement is planning your investment. If you already own rental properties, how many do you have? Keep track of how much each property generates and set a goal for the amount you need to achieve.

Factor in the money required to keep your properties in favorable condition and to care for any upgrades. Be prepared for emergency repairs, as well.

You never know when an issue could happen with your property.

Find the right number.

After paying off any debt, getting a grasp of your income and checking out your assets, it’s time to think up your game plan. How many properties do you need to maintain your expenses?

Consider everything you need to care for your personal life:

  • Health.
  • Daily care.
  • Bills.
  • Livelihood.
  • Spouse and family.

To retire early, you must be able to master your current finances and be prepared for anything that might come up.

The last thing you want is to be blindsided by an expense you can’t afford. Of course, you can always have assets ready to sell in case of an emergency.

In addition to your personal costs, consider what needs to be cared for through your investments:

  • Upkeep.
  • Repairs.
  • Upgrades.
  • Taxes.

With these numbers in mind, what is the right number to keep all those expenses in balance?

Decide on a number that is achievable and comfortable for your retirement.

Reinvest in your properties.

If your plan is to retire using real estate investment, keeping your properties pristine is imperative for your livelihood. If you aren’t maintaining your properties, your investment pool will not last.

To retire early, you must put money into your investment to make money long-term. The key is to build up net worth on your properties. You can’t retire on rentals that aren’t able to bring in money.

Choose your real estate wisely.

In addition to investing in your property, it’s important to choose your real estate wisely. You will not retire early by flipping houses.

The risk of purchasing, fixing and selling will likely not bring in consistent long-term wealth. Select property somewhere people are moving to, not away from.

Choose an area with decent schools, a good neighborhood and good property value. Also, make sure it’s in a spot that you can sell easily if need be.

Vet your tenants.

The final step toward early retirement is selecting reliable tenants and setting up your rent requirements.

When choosing how much rent to charge, it’s important to make it fair; otherwise, you may miss out on decent tenants.

Tenants can make or break your investment. Don’t pick just anyone to rent your home. As the landlord, you really need to vet your tenants and pick the best one.

If your tenant is costing you money by not paying rent, take steps to remove them (keeping in mind any legal notification requirements). Real estate depends on long-term, steady income.

Building a foundation takes patience.

Real estate investment is not for everyone. It takes time and patience, and it can be costly. However, if you are willing to put in the effort, it is possible to build a successful retirement fund and even retire early.

Defining Normal Wear and Tear for Apartment Owners

Simply living in a rental place will eventually lead to scuffs, scrapes, and stains. The longer a tenant lives in a property, the more potential there is for accidents and everyday deterioration.

In America, the onus is on landlords to understand that a certain level of wear and tear is unavoidable and an expected aspect of renting out their unit or home. Despite this, many landlords are sticklers and it is not uncommon for property owners to try and withhold a security deposit for minor concerns, leaving their tenants in a financial predicament.

To combat these cases, many states have implemented legislation that safeguards tenants from this type of unfair treatment— making landlords potentially liable if they do not adhere to the applicable regulations.

When approached correctly, disputes can often be avoided, and if they do occur, can be resolved more easily and quickly, making the rental experience more enjoyable for both tenants and owners.

What is Normal Wear and Tear?

In a nutshell, normal wear and tear refers to any damage that takes place as the result of aging and/or regular usage.

It’s important to note, however, that each case is unique. This means that if a landlord and tenant dispute is handled in court, it will be up to the judge’s discretion to determine if an inappropriate amount of damage has occurred.

It’s also important to remember that laws differ from state to state, so rulings relating to these types of issues can vary significantly.

For the purposes of this explanation, though, we’ll be sharing an example that is more definitive.

EXAMPLE:

Small nail holes and minor scrapes in wall paint would be considered usual wear and tear, while large, gaping holes in gyprock would be considered excessive damage.

Understanding Normal Wear and Tear VS Excessive Damage

It isn’t always easy for a landlord to determine when an issue qualifies as excessive damage, or when the responsibility should fall on the tenant to repair a particular concern.

Below are some guidelines that can assist with differentiating between ordinary wear and tear and unreasonable damage:

Wear and tear does NOT include damages that occur as a result of a tenant’s negligence, abuse, or accidental destruction.

Wear and tear does NOT include damages that occur as a result of negligence, abuse, or accidental destruction by a tenant’s guests or pets.

Excessive damage does NOT include the cost of regular maintenance and repairs that must be completed after a tenant moves out and prior to another tenant occupying the space.

Examples of Normal Wear and Tear

To further clarify the normal wear and tear definition, below are some common issues that landlords would NOT be justified in deducting from a tenant’s security deposit:

  • Carpet deterioration caused by foot traffic, normal use, etc.
  • Broken cords on blinds or curtains
  • Fading on carpets or flooring caused by sun exposure
  • Non-functional light bulbs, wiring issues, etc.
  • Loose door handles, hinges, cabinetry, etc.
  • Leaky toilets
  • Broken light switch plates

Examples of Excessive Damage

Below are damages that would NOT qualify as normal wear and tear rental concerns:

  • Excessive amounts of pet urine on carpets
  • Smoke or burn marks from cigarettes on flooring, walls, etc.
  • Broken or missing cabinet doors
  • Unauthorized renovations
  • Gaping holes in walls, doors, etc.
  • Smashed mirrors, broken window glass, etc.
  • Clogged toilets as a result of improper use

Examples of Regular Maintenance

It is unlawful to claim regular maintenance as security deposit wear and tear, since landlords assume responsibility for a certain level of property upkeep when they make the decision to rent their space.

Below are some examples of projects or activities that would be considered regular maintenance:

  • Rodent or insect exterminations
  • Repairing of water damage or leaks
  • Installation of functioning fire and carbon monoxide detectors
  • Gutter cleanings
  • Sprinkler system repairs
  • Safety inspections
  • Replacing fire extinguishers
  • Updating or replacement of kitchen appliances

If you aren’t sure whether or not an issue qualified as reasonable wear and tear rental concern, it’s always advisable to seek a second opinion.

Too often, landlords bring their case to court, only to realize their definition of wear and tear rental property issues differs from the definition set forth by the law.

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Tips for Buying A Commercial Investment Property

Tips for Buying A Commercial Investment Property

Buying a property is always a great way to invest. However, there are several things to keep in mind before buying an investment property.

How well you manage the proceedings will go on to determine whether your financial goals will be realized.

You don’t have to be wealthy to buy an investment property. Yet it is extremely important to make wise decisions whether you have bought three investment properties or this will be your first.

Since the property market is one of the most volatile ones, understanding the correct dynamics can be pretty difficult, especially if you are not familiar with the market.

Hence, it would be prudent to make a purchase only with much forethought. The following tips can be helpful.

Choose the right property and the right price

Investing in a property is only sensible if the given property is going to increase in value in the upcoming years. In addition to this, it is also equally important to understand the correct market price so that you make a fair deal.

Since the market prices of real estate are not highly transparent, it can be difficult to understand the actual price.

Therefore, it would count to do some background research. This is also where using a qualified local realtor can really pay off.

Prepare a long-term financial plan

If done in the right way, property investment can be one of the most profitable sources of income generation, giving you very quick returns.

However, it is important that you have a clear financial plan. For example, you can use a loan or a mortgage when buying the property and then later rent out the property. This way, the rental income itself can be used for paying the mortgage.

However, the rental income will also be affected by the system of taxation followed in the area. Therefore, make sure that you learn about the cost of all insurances and taxes before making a move. Many areas charge a bed tax which can be between 10% – 15% on top of normal taxes.

Hire a property manager

Buying a property involves a massive financial investment. If you are not familiar with the market, it can be hard to understand the actual value of different properties. Along with this, the process also involves a number of other things such as taxes, legal process, rental laws and much more.

Property managers, being professionals in the field, can easily help you through all of these issues. You may have to shell out some amount as a fee for the property managers. However, they will definitely help you secure a constant flow of renters in your home as well as make sure maintenance is kept up.

Understand the area

When you are buying a property, it is important to understand the area. It is not possible to learn everything on the internet. Hence, it would be advisable to talk to knowledgeable local real estate agents. This is important because your local realtor will know which neighborhoods have the best chance or history of increasing or decreasing property values.

Go for a massive down payment

FHA and VA mortgages are generally not available when you are buying an investment property. However, you can always opt for conventional financing, which will require you to make a down payment of 20%.

You can also opt for a higher down payment so as to bring down the rates and monthly payments. It should be noted that the mortgage rates for investment property tend to be higher than those of primary residences. Hence, it is important that you plan on this when adding up your potential profits on homes you’re looking at.

Additional costs for repairs

If you are buying an old property, you may have to make a number of repairs before renting them out or making a resale. Not doing so can affect its market value. Hence, it is important that you include the cost of upkeep and repair to the total cost of the property.

Do not put off making repairs to save money. It will cost you much bigger in the end.

While investing in property, it can be tempting to go for large-scale investments with the expectation of getting an equally large profit line. However, this can be very risky unless you have grown very familiar with the market and can afford to play around with the investments.

If you are new to the area, it would be more advisable to start small and then gradually move on to larger properties when you are prepared enough to handle them. This will give you an idea of how things work out in the market while also giving you a continuous profit on the side.

 

Why Tech Will Not Replace The Role Of A Real Estate Agent

Why Tech Will Not Replace The Role Of A Real Estate Agent

One of the biggest value-adds of utilizing technology is that it can automate mundane tasks — and that’s especially true for real estate professionals.

For example, property managers can leverage automated workflows to help them do everything from collect rent to see through maintenance work orders, and investors can use online tools and analytics to access cash and grow their portfolios.

Meanwhile, when it comes to real estate agents, historically, there have been fewer technology solutions available.

However, there are some incredible ones available that help agents do their jobs better. At first glance, these technologies do, in fact, automate some of the core responsibilities of the modern-day agent, but, ultimately, they serve to change the nature of the real estate agent role.

Bringing Simplicity to Unit Showings

One of the biggest (and perhaps more tedious) responsibilities of a real estate agent today is unit showings. Apart from the back-and-forth with prospective tenants when trying to schedule unit showings, agents also deal with a lot of cancellations, late appointments and no-shows, all of which waste agents’ valuable time. When prospective renters do show up for viewing appointments, agents then have to spend time, of course, showing them the unit or home.

This can be a time waste, too, especially with prospects who are not seriously considering moving or signing a lease just yet — often, people want to check out available units simply to gain perspective into the rental market. Yet regardless of a prospective renter’s intentions, real estate agents have to make time for these showings, many of which have no business impact.

Newer technologies have slowly started to alleviate some of these frustrations with the unit-showing process, allowing for self-service by the prospective renters. The value-add here is not so much that it eliminates a time-consuming part of an agent’s day, but that it allows agents to fill their days with more important activities, like marketing the units, identifying the best prospects, being better advisers to those clients and closing deals faster.

Transforming the Screening Process

Once prospects have viewed a property and want to move forward in the leasing process, real estate agents then need to screen them to determine if they’re the right fit (have good credit, never been evicted, etc.). This is easier said than done. Doing background checks on prospective tenants can be challenging and very time-consuming.

Most importantly, even once agents have all the proper information on hand, they still need to pick the best tenant based on that information. A bad renter can cause many headaches, so properly screening prospects is vital for long-term success, and its why tenant screening is one of the cornerstones of our business.

Technology advancements expedite the screening process, making it easier for agents to make these kinds of determinations based on criteria and data, all while aiding in compliance with Fair Housing Laws.

Even the concept of “closing the deal” can beget more success through tech solutions that enable immediate lease completion, helping agents secure renters quickly.

Revitalizing the Agent’s Role

Self-service showings and the streamlined screening process ultimately give time back to agents to do what they do best: close deals and spend time with prospects who are serious about renting. Agents can devote more of their time to answering prospects’ questions, addressing concerns and ultimately persuading them to move forward with signing a lease.

It also gives agents time back to strategize on areas of their business that could use a revamp, like average success rates or turnover rates, for example, and gives them a chance to better assess how they can improve those areas. The modern agents of today can be more successful and more effective than ever before, because they finally have time to be. Tech eradicates the tedious tasks, but not real estate agents’ roles.

The technology only serves to enhance their roles, giving them more time to act as strategic advisers to their clients and prospects. Real estate is a people business, so humans will always be a critical part to that.

So where do agents start on this journey? The most important step is to do some research into different technologies to find the most user-friendly tools.

Deciding to embark on a digital revamp in one’s profession doesn’t mean that it has to be a tedious overhaul with a significant learning curve. That’s the beauty of so much modern technology: its ease of use. Approaching research in this way will, inevitably, limit the number of unforeseen challenges with tech implementation.

Another important part of this process is identifying the specific challenges in the business and what is most important to solve for first. Agents, to be successful, must focus on solving for a specific business pain point to gain true benefits.

Just throwing technology at all aspects of a business won’t necessarily help solve for the most pressing issues and may, frankly, create more work than necessary. That’s why identifying a specific business case to apply technology to is critical before any implementation.

For agents who may be reticent to adopt technology when they are so used to doing every part of their job manually, it’s a good idea to look closely at ways in which competitors are using technology.

Where there’s technology, there’s more power, so if an agent is adamant about doing things the way he or she has always done them, that person will never have the upper hand against a competitor who sided with tech.

What’s more, nurturing client relationships is real estate agents’ bread and butter, and agents should always be on the lookout for ways to improve upon those relationships by making all processes as seamless as possible.

To Make A Property Stand Out, Landlords Must Master The Basics First

To Make A Property Stand Out, Landlords Must Master The Basics First

In a market that’s growing by the minute, landlords need to make the most of their properties to stand out from the crowd. True property optimization — minimizing costs while improving performance and increasing ROI — is still the name of the game for landlords across the U.S.

As both a landlord and a broker, I’ve learned a great deal about making the most out of what you’ve got, and have found that the best property optimization tactics for landlords require a true understanding of your tenants, properties and the current market.

Optimizing properties is about more than installing new appliances and a fresh coat of paint. Here’s a step-by-step playbook to help landlords target niche demographics and optimize their properties to maximize value:

  1. Understand your tenants.

Connecting with tenants begins with an understanding of your own key objectives with the property in question. Naturally, each landlord needs strategies that are unique to each property, rental market and client they’re trying to pursue.

Always be transparent with clients and let them know how the value you present meets their needs, with an emphasis on accommodating their budget. Trustworthy landlords not only empower tenants to confidently buy or rent from them, but may also ultimately improve their own bottom line with higher sales. When both you and the tenant understand the meaning behind what you’re charging, both sides can feel confident that they’re getting the most out of the transaction.

  1. Understand your property.

Just like people, buildings age and require maintenance. Understanding the values and faults of your property helps fix problems as they happen, not as they spiral out of control. The last thing you want to sell is a flawed piece of property.

Some things to consider include:

Location:

Connect with the property’s neighborhood to understand of what you’re presenting to clients. Knowing about amenities, transportation and demographics only scratch the surface — if you’re serious about investing in a particular neighborhood, consider opening local offices to show future tenants that you’re serious about the area they’re considering living in. Other important factors include major attractions, how easy it is to get around and the quality of local schools.

Renovations:

Regular property inspections allow landlords to find problems with the unit’s structure right away. Renovations and updated finishes can increase your asking price. Based on property type, consider what kind of renovations will pop up in the future. As always, use your best judgment when fixing up these properties.

You’ll want to be careful not to over-improve a unit above market rate, as this can do serious damage to your ROI. At one property, we optimized the layouts and upgraded amenities of each apartment, adding an extra bathroom, installing central air and washer/dryers and renovating outdoor space. This increased the price per square foot we were able to achieve by 50% over a similar product on the same block.

Floor plans:

Steep price per square foot means landlords need to put their best foot forward, starting with a floor plan that will show luxury tenants that they’re getting what they pay for. Floor plans and layouts of the space are getting more efficient by the day. They help you understand a property’s character and allow you to market it to the right renters.

  1. Develop a unique strategy based on that understanding.

Powerful and unique marketing strategies separate the best landlords from the rest. Strategies materialize from a deep understanding of your properties and the tenants you want to attract. A solid leasing strategy — the goal to achieve the best rental rates across multiple tenants — will be the second crucial component of your game plan. Throughout the process, presenting your strengths will remain your goal.

Here’s how.

Brand story:

Each building has one. With the insights, you gain during inspections and renovations, assess the history and design that makes your property stand out. Partnering with a real estate firm can help you determine the market, historical data, and analytics, ideal pricing, proper building unit mix, renovation analysis and ideas for future development so you can brand, promote and market to the right people who want to live in your properties.

Data-driven leasing:

Over the years, I’ve seen the more renters have lease terms that appeal to them, they are more likely to stay at a property. Today’s best leasing solutions use data and predictive analytics to assess patterns in consumer behavior so that landlords can attract and generate more qualified leads. Data allows landlords and brokers to work together to reach the right audience.

Once tenants move in, landlords can use data to improve their properties’ retention rates. Zillow reports that customer service and satisfaction are decisive factors in a tenant’s decision to leave a building.

Retention will save landlords time and money — and nothing is better than when a building is at full capacity.

Timing:

Consider the timing and execution of your construction schedule. Marketing units during peak seasons can attract the highest rents and keep leases in the right cycle. These concerns demand collaboration between landlords, brokers, and contractors to deliver high-quality luxury units when the market needs them most.

Real estate isn’t easy, and success requires more than drive. It calls for a deep understanding of the fundamental appeal of a great property, and without a solid underpinning, you’re selling facades rather than strong foundations.

You’ve got to meet expectations before you can exceed them. Once you do that, clients will know who to turn to when they need a new place.

5 Habits You Didn’t Know Were Essential for Landlording

There’s no such thing as landlord school.

Most landlords just do a little reading online and dive right in. Which is fine – but it also means many new landlords are ill-prepared for the work of being a successful landlord.

Far too many landlords fail to bring a level of professionalism to their landlording side gigs. Sure, this can lead to some irked tenants, but the person who suffers the most is the landlord — in the form of shoddy returns.

Here are five habits that landlords need to develop if they want maximum profits and minimum headaches!

  1. The Unflinching Enforcer Mindset

A few months back I analyzed whether you should keep your home as a rental or sell it when you move. The first thing I talked about? Whether you have the disposition and discipline needed to be a landlord.

Tenants will push against your boundaries. Your job as a landlord is to firmly and professionally defend those boundaries.

That means enforcing your lease agreement — to the letter.

Rent doesn’t come in on the first? Send an unofficial late-rent reminder. Rent doesn’t come in before the legally-mandated grace period ends? Send an official eviction-warning notice.

They still don’t pay after the required waiting period? File in court for eviction.

You’ll get sob stories, often with literal sobbing. Many people bend and give their tenants leeway — and then they give some more leeway.

If you do this, you train your tenants to believe that the rent is not their most urgent bill. So why would they ever pay it on time when they have other bills they need to pay in which excuses are not an option?

Enforce your lease agreement and your tenants will know that they can’t get away with whatever they want. They’ll know the rent is their highest priority because you will enforce the late fee and evictions.

If you can’t do that, you will lose all credibility with your tenants. You’re better off investing your money in a REIT.

  1. The Discipline to do Recurring, Scheduled Work (Even When it Doesn’t “Feel” Necessary)

Landlords have monthly, semi-annual, and annual work they should be doing.

As we discussed above, every month you need to stay on top of your tenants about rent. Set reminders on your calendar if need be. Every six months, you need to inspect your rental units. Semi-annual inspections should be written right into your lease agreement.

It doesn’t feel urgent. It’s not a frantic midnight phone call about a burst pipe. So, most landlords don’t do it.

But again, it comes down to setting expectations with your tenants. Send a loud, clear message that you care about the property, you care about the lease terms, and (if you do it right) you care about the tenants.

Check that they don’t have unauthorized people or pets living there. Make sure they’re keeping the property clean. Confirm that they’ve changed the air filters.

And use that face time to build more of a relationship with your tenants: Ask about their jobs, their kids, their lives.

Then, every year, you need to raise the rent. Many landlords wring their hands and fret about it, but the alternative is allowing rents to fall below market value — then hitting your tenants with a too-drastic rent hike all at once.

  1. Budget Like a Business (Because You Are One)

As a landlord, you’re a small business owner, whether you think of yourself that way or not.

The expenses involved in owning a rental property are largely hidden because they’re irregular (but big when they happen). Expenses like turnovers, repairs, vacancies.

Here’s what rental property cash flow looks like visually – smooth periods, interrupted by huge spikes in expenses.

What does that all mean for you as a landlord? It means you don’t want to be that chump standing there with his jaw hanging open asking: “How am I supposed to pay for this $5,000 roof bill?!”

Here’s how: by setting aside money every month for these potential expenses. In a word, by budgeting.

And while we’re at it, if you ever want to retire with your rental income, budget your personal finances too. What’s the point of all the hard work building (and managing) your rental portfolio if you’re just going to turn around and spend it all on new shoes and dinners out?

If you want to get ahead, both as a landlord and as a person, get comfortable (and disciplined!) with your budgeting.

  1. Think Long-Term to Vanquish Vacancies

Turnovers are where most of the work and costs involved in being a landlord lie.

You’ll have to repaint the unit. Maybe re-carpet it. You’ll have to go through and fix all the little things that the outgoing tenants either messed up or just lived with. Then there’s the lost rent, even as you continue carrying the costs of owning the property.

In other words, you have to spend money that you wouldn’t have had to if the tenants had stayed.

Then there’s the stress and headaches and work of advertising for new tenants, coordinating with contractors, screening tenants, signing a lease agreement, doing move-in and move-out inspections, etc. It’s labor. If you have a property manager, they’ll charge you dearly for that labor.

Speaking of tenant screening, your goal is not to fill the unit as quickly as possible with an acceptable tenant. Shift your thinking to the long term, and instead make it a priority to fill the unit with a high-ROI, low-maintenance, long-term tenant.

You want someone who will be low-impact and treat your property with kid gloves. Someone who will pay the rent on time every month so you don’t have to chase them. Someone who will stick around for the long haul so you don’t have to worry about all the costs and headaches involved in a turnover.

  1. The Meticulous Mindset: Records, Documentation & Attention to Detail

I’m just going to say it: If you’re not the anal-retentive type, hire someone to manage your rentals who is.

You need to be exacting in your record keeping, your documentation, and your attention to detail. For example, did you walk through the unit before your renters moved in to document the condition with them? Did you both sign the condition statement? Did you take photos with timestamps of every room from every angle?

Then what did you do with the photos and documentation? Is it stored securely on your computer or in your file folder where you can access it at a moment’s notice?

I’ll stop beating this horse; you get the idea. Active landlording is not a good fit for the laid-back and leisurely. There’s nothing wrong with hiring a property manager if you don’t have this meticulous personality type – the important thing is the self-awareness to acknowledge the bad fit and outsource your property management.

You’re in Business — Be Professional

Effective landlords have effective habits, that revolve around thinking long-term and embracing minor headaches today to avoid massive headaches tomorrow.

Keep a friendly but professional distance from your tenants; they’re your clients. Set a budget for expenses like you’re a professional because you are. Set recurring reminders on your professional calendar, and then follow through actually execute them!

Catching a theme here? The landlords who succeed are the ones who bring professionalism to their rental management.

Mistakes Landlords Make With Investment Properties

Mistakes Landlords Make With Investment Properties

As a landlord, you have a big responsibility to the property as well as the tenants. One small misstep could end up costing you valuable time, energy, and money.

Choosing the Wrong Tenants

This is one of the biggest mistakes you can make as a landlord. If you are renting your property out to a stranger, you must take the extra steps needed to make sure you get the best possible tenants in your property.

If you do not know them very well, there are certain precautions you can take. Have them prepare the following:

Application Form:

Have prospective tenants complete a written application form. This will include standard renter’s information such as names, numbers, employer, previous residences, income, etc. Each adult who will be living in the property would need to fill one of these forms out and minors can be added as well. They would sign that all the information they provide is accurate to the best of their knowledge.

Credit and Background Checks:

Tenant screening is a great way to see how financially stable your prospective renter is. Credit reports often show if someone has been late on payments and the amount of debt they already have. A background check is very important, not just for your peace of mind, but also in consideration of the neighborhood.

Referrals:

Asking for referrals from past landlords and current employer is a great way to go the extra mile in finding the perfect tenant.

Failing to Create a Thorough Lease Agreement

Creating a good lease agreement is where part of your research will come in handy. Many landlords will print the first form they see on the internet. Unfortunately, this form could be outdated and only relevant for a certain location. Use an attorney to draft a lease agreement for you.

Lack of Communication

If you make yourself unavailable to your tenants, you are doing them and yourself a disservice. Your office should always be open and you should always be available by phone. Sometimes, home emergencies will come up and your tenants will need your ‘okay’ or your help to get the issues resolved.

Setting the Rental Rate Too Low or Too High

Make sure you are setting the rental rate within the correct range for the property’s age and location. There is such a thing as setting the price too high and too low. If the rent is too high for the area or for how old the property is, no one will want to live there.

Delaying Eviction Process

If you do find yourself in the position of having to evict a tenant, try to get the process started as soon as possible. You can expect it to take about 30 days from start to finish, but many times, it is delayed because tenants will come up with excuses.

Being a landlord is a tough role! If you avoid these common mistakes that most people make with their investment properties, you should have an easier go at it. The main thing to remember is that the more research and preparation you put into renting out your property, the more return you will see on your investment.

How to Find Off Market Apartment Buildings

One of the most elusive and desirable real estate opportunities is the off-market property.

Investors and specialty real estate companies covet an apartment building where they are the first to contact the seller.

How can you find off market apartment building for sale?

The following are some of the people that can lead you to find off-market properties:

Estate, Probate and Divorce Attorneys

Relocation Companies

Local Builders

Other Investors

Commercial Brokers

Public Records, for bankruptcies and Sherriff sales.

But why not look for properties that aren’t yet for sale?  This is a great way to bypass the “middle man” and go “direct to seller.”  Here are a few ideas that can help you discover those “hidden gems” – those great off-market apartment deals.

Driving Around

If you live in the same area you want to buy in, you can always start by driving the local neighborhoods.  Find out, if you don’t already know, where the “B” class neighborhoods are with the better schools, in neighborhoods consisting primarily of single-family homes and in close proximity to the better restaurants, shopping facilities and services.

Look for a class “C” looking building in a “B” class neighborhood and you could potentially find a great “value add” opportunity.  When you see those properties, join down the address and look up the properties either online or through the county assessor’s office to get the owner’s name, address and telephone number.  Draft a strong letter or, if possible, call and see if you can find motivated owners.

Google Mapping

If you are an out-of-area or out-of-state investor, you can also cruise neighborhoods, but instead of driving, cruise the neighborhoods online through Google maps.  After doing your research by talking to brokers, agents and others from the area of interest, identify the “B “class neighborhoods, look for apartments that look like “C” class apartments and jot down the address off the building or apartment sign.  And do the same as above.

Placing an Ad

An ad placed on Craigslist or through social media stating what you’re looking for can also attract motivated sellers.

Buying an Apartment Building That’s Not for Sale

Buying apartment buildings that aren’t for sale starts with a three-step search process.  You first decide what you’re looking for and in what market.  Do you want duplexes and four-plexes, or larger apartment buildings?  The second step is to start looking for properties that fit your criteria.  And finally, you contact the owners.

Don’t limit yourself to “fixer-uppers” or other “problem” properties that seem more likely to have owners willing to sell.  Probably, most owners of rental properties have thought of selling at one time or another, so you can start with almost any building.  How can you tell when or why a landlord is ready to call it quits?  By asking.

Of course, tact is necessary.  When you call the owner, tell him you’re an investor, not a broker.  Tell the owner you like what you see, and you can have an offer ready in a week if he the owner is interested.  What if the owner is not interested?  Thank the person politely and hang up, but send your card or a follow-up letter.  Investors often buy from owners that change their minds.

If the owner is interested, explain that you are an investor, so your offer will have to be based on your return-on-investment.  That means you’ll need to see the books, specifically the rent roll (listing the units and what they rent for plus current occupancy), a financial history of his income and expenses for the last 2 or 3 years, and finally, do some research on the neighborhood and greater market.

Have a confidentiality agreement ready before you call, and let the owner know you’ll sign it and deliver it before you see the books.  It’s possible he doesn’t want the tenants to know he’s thinking of selling.  If so, inspecting the units may have to wait until you make an offer.  Just make an acceptable inspection a contingency in the offer.

Why should you buy income properties this way? Because having no competition and no sales commission can mean a much better price.  Instead of waiting for that perfect property to be listed for sale, you just find it now.  Look for it, find it, and make an offer.

EBIT and EBITDA – Shortcut to Cash Flow

EBIT and EBITDA – Shortcut to Cash Flow

While there are several factors that go into qualifying for a variety of business loans, there is one metric upon which banks heavily rely, but is unfamiliar to most applicants.

It is the Fixed Charge Coverage ratio (slightly modified for pass-through entity accounting), and it measures your projected ability to pay back the loan with interest better than any other calculation or ratio.

EBIT and EBITDA – Shortcut to Cash Flow

The bank wants to know how many times your cash flow can cover your loan payments. The way they determine cash flow is EBIT, or calculating your earnings before interest and taxes.

Your may have heard of EBITDA, which adds Depreciation and Amortization back to EBIT, and I have always contended that this is the lazy man’s formula to derive free cash flow.

The investment and banking community have established this standard.

Pass-Through Entity Hides Cash Flow

But the problem with EBIT, or even EBITDA, is that it leaves out a significant decrease in cash flow inherent to S-corps and most LLCs — owner draws or dividends.

Due to tax and other reasons, owners of and partners in S-corps, and most LLCs, often receive a large portion of their income as draws or distributions, for which EBIT and EBITDA do not account.

A bank, therefore, is possibly seeing a prospective borrower too favorably without accounting for this form of owner compensation.

Modified Fixed Charge Coverage Ratio

Banks have gotten smart. They have taken the Fixed Charge Coverage ratio, which was derived to more accurately determine a company’s wherewithal to make its loan payments than the Interest Coverage ratio, and added the owner draws/distributions to the formula.

It is focused on assessing all of the company’s fixed financing commitment, in which fixed distributions to owners should be included. Here is how it works:

[EBIT + Lease Expense + Owner Draws]

[Interest Expense + Lease Expense + Owner draws]

Don’t feel overwhelmed by all of the inputs into the formula; it’s not that hard to pull together.

What’s good?

A ratio of exactly one means the business is running on tight cash flow but it will be able to make all of its obligations.

A ratio greater than 1.2 is a comfortable place for a bank to lend, and a ratio over 3 means the company may not be using leverage to its maximum potential.

Here’s an example:

Saul’s Deli generates EBIT of $80,000 annually. Saul has fixed leases in place of $20,000 and takes another $60,000 out of his company every year as a dividend (he is an S-corp). He pays $15,000 per year in interest. Here is his Fixed Charge Coverage ratio:

[80,000 + 20,000 + 60,000]

[15,000 + 20,000 + 60,000]

[160,000]

[95,000]

Fixed Charge Coverage ratio = 1.68

This means that Saul’s Deli can cover his existing debt and obligations by 1.68 times.

A bank would likely feel comfortable with this ratio if he meets the other loan underwriting criteria and the new loan does not decrease this ratio too much. Interestingly, the interest coverage ratio would have come back over 5, not nearly as realistic as the fixed charge coverage ratio in determining Saul’s ability to service his existing and potential new debt.

Conclusion

Applying for a loan can be intimidating. You should know your ratios, including your fixed charge coverage ratio, before you even start the application.

Not only will the EBIT and EBITDA coverage ratio, along with the modified fixed charge coverage ratio help you think like a banker, but it will also help you determine if asking for a loan will help or hurt your business.

When Should You Hire A Property Manager For Your Rental Properties

When Should You Hire A Property Manager

Keeping on top of rental maintenance is vitally important for any landlord. But for most, it’s not exactly something they enjoy. After all, being on call 24/7 for any repairs and maintenance issues that arise can get tiring after a while, even for the most resilient landlord.

Then there’s the issue of time. While in the beginning, doing cleaning, painting and small plumbing jobs might be fine, once you’ve got a few rentals under your belt you’ll quickly find that management can escalate into a full-time job.

If you’re on the fence, here are a few questions that can help you determine whether a property manager is the best option for you.

Do I have time to manage my property?

If you’ve reached a stage where you dread answering the phone because you don’t want to deal with yet another tenant maintenance request, it may be time to outsource.

It happens all the time: landlords running themselves ragged, trying to do it all. They have a few properties, but instead of creating passive income streams for themselves, they’ve simply acquired another job — a full-time one at that.

Don’t let your dream of owning rental properties become stifled because you can’t afford to put any more hours in at your properties. Instead, consider outsourcing to a reputable rental management professional who will be able to oversee the properties in your stead.

Do I want to expand my rental property portfolio?

If your goal is to own five, 10 or more rental properties, outsourcing is the fastest way to get there. This is especially true if you’re finding that maintenance and repairs are starting to keep you from high-level tasks like finding and assessing new investment opportunities and properly overseeing your property portfolio.

Will I invest in markets outside of my local area?

While many landlords start out with properties in their own hometown, if you’d like to grow your portfolio, you may wish to take advantage of up-and-coming markets or opportunities that are better than what’s available in your own backyard. However, being a long-distance landlord can bring its own set of unique challenges, even for experienced landlords.

If you’re thinking of investing in an out-of-town property, hiring a professional property manager who will be your eyes and ears on the ground can free you up from the stress that’s often associated with long-distance landlording.

Will a property manager help me be more profitable?

Finally, is hiring a property manager a financially smart decision? If you have one or two local properties, it might make more sense to oversee them yourself. But often, professional landlords find that hiring a property manager to oversee their rentals enables them to invest in more properties than they’d be able to otherwise, helping to maximize returns.

Finding A Reputable Property Manager

Much of your rental property’s success is contingent on how well it’s managed. For landlords who are thinking of outsourcing management or maintenance, finding a reputable and qualified professional is crucial.

Be sure to do your research upfront. Read online reviews. Ask for referrals. And, much like conducting an interview, ask your prospective property managers qualifying questions to ensure you end up with a great match. Here are a few questions you should ask:

1. How much experience do you have?

First, you’ll want to ensure that you find a professional who’s experienced and knowledgeable — one with a proven track record of success. Consider asking how many rental units they are currently responsible for. A low number could indicate that they’re new to the game, or perhaps struggling.

2. How do you structure your fees?

Concerns about cost is one of the main factors that keeps people from outsourcing. And naturally, this should be one of the first questions that you ask.

Generally, monthly fees are either fixed or a percentage of the rental yield, often 8-12% of the monthly revenue. Optional packages and additional services could impact the cost, though, so make sure you’re aware of their fees before you commit.

3. Are there any fees when the property is vacant?

If you find a company that charges you while the property sits vacant, be careful. Property managers should have an incentive to keep your rental occupied, and if they’re being paid regardless, then that incentive goes away.

4. How do you screen tenants?

Any property manager worth their salt will not only screen tenants thoroughly, but also have airtight policies and procedures in place to ensure that they do so in a way that’s in compliance with the Fair Housing Act.

5. What’s your average vacancy rate?

Reducing vacancy times is key to maximizing your returns. A reputable property manager should know their average vacancy rates, and will be more than happy to inform you of them. Anything within the two- to three-week window is outstanding.

At the end of the day, the decision to outsource comes down to your personal preferences and investment goals.

Many landlords find that it’s a pivotal turning point in their investment career — the decision that’s responsible for allowing them to reclaim their time and focus on growing their investments.

Does Rental Income Qualify For The New 20% Section 199 [A] IRS Deduction

Does Rental Income Qualify For The New 20% Section 199 A IRS Deduction

Section 199 A was added to the Internal Revenue Code under the Tax Cuts and Jobs Act of 2017 to provide taxpayers with a 20% deduction from income attributable to qualifying trades or businesses.

One immediate question under the new law was whether the definition of a “trade or business” would include a landlord who is in the business of collecting rent and performing only incidental duties under a Lease Agreement.

This will make a big difference for landlords who have a net profit because rent income exceeds depreciation, interest and operating deductions.

New Proposed Regulations were issued on August 8th which provide some degree of guidance, but also confusion.

The new Proposed Regulations indicate that if a taxpayer has an active business, like a factory or an engineering firm, and directly or indirectly leases property to the firm, then the net income from the leasing arrangement will be considered to be an active trade or business for Section 199A purposes.

On the other hand, where the tenant under an arrangement is not an active business that is affiliated by at least 50% ownership with the landlord, then by the terms of the Proposed Regulations a definition of “trade or business” which comes from Internal Revenue Code Section 162 will be used.  Section 162 dates back to 1926, and controls when a taxpayer can take deductions for expenses incurred in an “active trade or business.”

The court cases interpreting Section 162 have not always been kind to landlords.  In particular, there needs to be something more than a long-term triple net lease where a landlord just collects rent and does very little else in order to qualify as being a trade or business.

A landlord that provides active management relating to a particular building, or at least administers common area expenses, should probably be able to take the Section 199A deduction, but someone who simply bought a building that is triple net leased to a large company where the large company does everything and simply sends a check to the property owner will probably not qualify, although this is not clear.

One example in the Proposed Regulations provides that an individual who manages and leases vacant property to an airport is able to take the deduction.

The primary focus of this example was not whether this landowner was in a “trade or business,” but it seems like the only reason the IRS would have had to mention that the landlord manages the airport property would be to show that it must be an active trade or business.

A second example in the Proposed Regulations provides the same language for a parking garage rental.

Based upon these examples, it appears that taxpayers who have passive triple net leases and are not otherwise active in the leasing business will not qualify for this 20% deduction, although landlords under triple net lease arrangements might be engaged in continuous due diligence, negotiating, and buying and selling properties that are triple net leased and therefore be considered to be in an active trade or business for the purposes of this deduction.

Proposed Regulations constitute the thinking of the IRS, and these particular Proposed Regulations are only binding on taxpayers to the extent that taxpayers would choose to rely upon them.  In other words, they cannot be used by the IRS against the taxpayer.

Hopefully, the real estate lobby will be able to convince the IRS and the Treasury Department that final Regulations should be more tolerant.

In the meantime, individuals and entities taxed as sole proprietors, S corporations, or partnerships that have triple net lease situations like those described above should consider making the arrangement more active by providing management to the tenant, or engaging in activities that would make the business of being a triple net lease landlord more active than what might otherwise be the case.

This article does not constitute a full and complete discussion of everything that someone would need to know about Section 199A and real estate leasing.  The Section 199A rules have a number of requirements that may need to be met.

For example, high earner taxpayers who wish to take a 199A deduction attributable to rental income will need to satisfy a wage and/or Qualified Property test that may require that they pay a minimum amount of wages and/or have a minimum amount of depreciable property based upon the original cost of depreciable components.

3 Reasons Why Investing in Real Estate Is Easier Than Ever

3 Reasons Why Investing in Real Estate Is Easier Than Ever

More millionaires today have invested in real estate than any other asset class. While real estate investing may seem intimidating or out of reach, new technology is changing the game by increasing access and decreasing investment minimums.

The following three tips for getting ahead in real estate:

  1. Start conservatively.

The first and most important aspect to remember when investing is preserving money.

Make sure your investments will perform well in both an up and down economy.”

  1. Don’t worry about diversification — just start.

A lot of people are so worried about investing intelligently and maintaining diversification that they never begin investing.

If you are fairly conservative with your early investments, you can earn while you learn.”

  1. Technology is changing the game and inviting new players.

Before the passage of the JOBS Act in 2012, it was illegal for unaccredited investors to invest in non-traded REIT offerings. The only options were the stock market and possibly a fixer upper if you were willing to endure the hassle of being a landlord.

Information, technology and transparency are removing the intimidating shroud that has historically covered the real estate investment market — making that leap from saver to investor that much easier for the future generations of millionaires.

Guidance for Utilizing Sections 121 & 1031 in Combination

Guidance for Utilizing Sections 121 & 1031 in Combination

Virtually all CPAs, tax attorneys and other tax professionals will bring the Principal Residence Exclusion under Section 121 of the IRC to the attention of their clients at some point in their careers. Likewise, there is an equal probability that tax professionals will suggest that at least one of their clients conduct a tax-deferred exchange under Section 1031.

Both of these sections are among the most financially beneficial provisions of the tax code. Just by themselves, each of these sections has the potential to save taxpayers hundreds of thousands – and even millions, if Section 121 be used repeatedly – of dollars in taxes.

Section 121 refers specifically to personal residences, while Section 1031 refers to real property held for investment or business purposes. Previously, Section 1031 could be applied to personal property held for business or investment, but this application was recently removed with the Tax Cuts & Jobs Act. While these sections are undoubtedly powerful when used separately, when used together in combination they can be even more useful for taxpayers.

Converting Property Before the Sale

Section 121 allows individual taxpayers to eliminate up to $250,000, and married taxpayers (filing jointly) to eliminate up to $500,000, of gain from the sale of a “principal residence” (or “primary residence”). To qualify as a principal residence, taxpayers must own and reside in the property for at least 2 years out of the most recent 5-year period. These 2 years do not have to run consecutively, and so it’s possible for a taxpayer to reside in a property for 1 year, live elsewhere for 3 years, go back and reside in the property for another year and then sell the property using the benefits of Section 121.

If you want to combine these sections prior to the sale, you will have to establish the property as your personal residence and then convert the property into an investment vehicle. This means that you will need to satisfy the time requirement of Section 121 and the holding requirement of Section 1031.

Section 1031 is only eligible for real property “held for” productive use in trade or business or for investment. Unlike with Section 121, this holding requirement is not strictly a time requirement, but is based on the intent of the taxpayer, and intent is established by considering all relevant facts and circumstances surrounding the taxpayer’s ownership of the property.

Here’s how a transaction involving both 121 and 1031 before the sale might proceed:

you acquire a property, move in and reside for 2 years, and then exits and converts the property into a rental

you then hold the property for investment for 18 months, being very careful to treat it just as you would treat any other piece of investment property

you sell the rental property and are able to utilize the exclusion provided by Section 121 and also the tax deferral benefits provided by Section 1031

Utilizing 121 & 1031 in an Allocation

Sections 121 and 1031 may also be combined in cases involving partial personal use of an investment property. You may currently reside in only a portion of your investment property. For instance, you may own a multi-unit rental complex – say a complex with 4 units – and resides in 1 of the units and rents out the remaining 3 to unrelated renters. In this scenario, you would be able to utilize both sections, just as in the example given above, but you would need to “allocate” the portion used as a personal residence when conducting a 1031 exchange.

Suppose that your 4-unit complex has a sales price of $1 million. In this case, the taxpayer would allocate the personal residence portion and invoke Section 121 to eliminate the gain associated with that portion rather than the entire complex. In other words, only the gain realized from the personal residence portion would be eligible for exclusion under Section 121, whereas the remaining proceeds from the other 3 units would need to go toward replacement property under Section 1031.

Converting Property After the Sale

The rules for using these sections in combination after the completion of a Section 1031 exchange are a bit more involved and so you will need counsel. After completing an exchange, taxpayers may convert their replacement property into a personal residence and then take advantage of Section 121 to eliminate some (or all, depending on the situation) of the gain.

However, in this scenario, taxpayers must own the replacement property for a minimum of 5 years following the exchange transaction; this is true even though taxpayers still only need to use the property as a personal residence for 2 years to satisfy the use requirement of Section 121. After owning the property for at least 5 years, and using it for at least 2 years during this time period, taxpayers may sell the property used in the exchange and utilize Section 121.

But, in the case of a post-exchange conversion, the time that the taxpayer uses the property as a personal residence figures what amount of the gain is eligible for exclusion. The rule works like this: the amount of time during which the property is used for investment purposes is considered “non-qualifying use” for Section 121, and so that amount of time cannot be used toward the exclusion; taxpayers will put the amount of non-qualifying use in a fraction as the numerator, and the total number of years that the property is owned will be put as the denominator.

The fraction which shows up represents the portion of the realized gain which is not excludable under Section 121. Here’s an example:

you finish a like-kind exchange and then own the property for a total of 8 years after the transaction

you rent out the property for just 2 years following the exchange, and then move in and establish the property as your personal residence for the next 6 years.

You then decide to sell the property and wants to use Section 121.

In this scenario, 2/8 of the gain (or ¼) would be considered not excludable under the principal residence exclusion because that would represent the non-qualifying use period during which the property was used for investment.

It’s important to remember that the holding requirement still applies on this post-sale side of the transaction, and so practitioners should be sure to counsel their clients about the risks associated with converting their property into a personal residence prematurely. If taxpayers do not satisfy the holding requirement on the post-sale side, they run the risk of having the underlying 1031 exchange transaction nullified by the IRS.

 

Using Social Media to Market Your Rental Homes

Using Social Media to Market Your Rental Homes

There is a big difference between a rental real estate mogul and someone who manages a handful of properties they rent to local residents — especially when it comes to marketing. Real estate corporations and investors with dozens of homes in their portfolios are marketing all the time. They have invested in fancy websites and constant social media campaigns because there is always another unit to fill and another tenant moving out in the near future. For local landlords and property managers, however, you could go months or even years between times when a home is empty and in need of marketing.

What this ultimately means is that you need efficient, unique and fast-acting advertisement strategies that get your message out to locals when homes are available, and not when they aren’t. In addition to the popular home-listing sites, social media is perfect for this approach. It gives you fast, widespread access to locals who may be looking for new homes and helps you make use of any online networking you’ve already done. Let’s explore a few social media techniques that can draw attention to an available home in a friendly and welcoming way.

Change Your Page Banner

For many social media platforms, you can set a personal page or channel banner image that shows a large picture on your profile. As an individual, you may have used this for pictures of family, travel photos, pets or a hobby you’re involved in. But when you’re tenant-hunting, try a different approach.

Replace your page banner with a picture of the home from the perspective of your “for rent” sign. Try to get an attractive shot that makes it absolutely clear that the home featured is available for a new renter. There will be no confusion that anyone interested in renting should contact you through your social media account.

Pin A Gallery Of Photos

Several platforms allow you to “pin” a favorite recent post and essentially stick it to the top of your feed or profile page to share with everyone who comes along. When turning over a rental property is the perfect time to update your active pin to showcase more pictures of the home. Start with a picturesque outdoor or living room shot, and include a few of your best interior photos — as many as the platform will allow.

Include a small, simple caption that says the home is currently available for rent and how to contact you. Making use of your current personal social media account is a great way to get the word out to friends, family, contacts and tertiary contacts who may be interested.

The Right Tags And Hashtags

Tagging is how people on social media find new content from people they haven’t met and connected with before. Someone who wants to see discussions on their favorite TV show will look up the corresponding tag. Likewise, people looking for a rental home will check the tags and hashtags associated with renting and their region.

Depending on your platform, the best way to use tagging can be to create a connection with venues and local landmarks you want to reference when marketing your home. Tagging the community parks, local restaurants and neighborhood schools is a great way to get attention from people who are already involved and interested in your community.

Share Vacancies

While it might be obvious why connecting with potential renters is valuable, there’s also a strong advantage to joining a few landlord and/or property manager social media groups. These online communities often share each other’s listings. Landlords and property managers can work together to expand your group’s total networking reach by liking and sharing the listings other members post to the group. This can ensure that your properties are seen by a wider range of people and can give you an insight on the total rental market in your region.

Combine Online And Real-World Networking

Don’t forget that connecting with locals online is the path to real-world connections. Use social media to meet people in person. Invite local renters to join you for open houses or private showings. You might consider asking a few of your real estate industry professional contacts out to lunch. This can significantly strengthen your connection and give you a good idea of how much you can rely on each relationship.

People who really want to meet you in person are more likely to be eager and ready to take action, but be considerate of introverts who can be decisive but not social. You may also consider becoming a part of community events, both sharing information online and attending the event to casually meet more locals.

Respond To Messages

Finally, remember to check and answer every message you get on every channel. Watch your phone, email and private messaging system on every social media platform. There may even be messages on your property listing websites. Interested potential tenants can come from any direction, and you need to be responsive to win their confidence in the home itself. Don’t delay by more than 16 hours or a reasonable weekend to respond.

Try to give a polite answer to every message you get, and have a quick way to send them a copy of your application — ideally via text or email, as online applications can greatly streamline the process. Be ready to answer questions, provide links to photo galleries and send next steps to people as smoothly as possible, no matter how they contact you. And most importantly, be responsive and friendly. Remember that you’re also interviewing to be their new landlord or property manager.

Social media marketing for your rental properties needs to be a careful balance between a big splash and a polite invitation. By featuring your property on your page, reaching out to the community and meeting connections in person, you should be able to cast a wide net and find a tenant efficiently.

 

Five Steps to Smart Multifamily Investments

Multifamily Investing 

The signs all point to an excellent opportunity for investment in multifamily rental properties. But while the overall outlook may be favorable.

A growing market. Who are the renters? Working-class individuals have traditionally been a mainstay of apartment living, but we now have to consider the millennial generation, consisting of 85 million U.S. citizens born between 1977 and 1996. Whether due to student debt or the delay in starting a family, this large segment of the population is a big factor in the increasing demand for apartments nationwide.

Investing in a new complex. In response to the growing number of people who prefer to rent rather than buy a home, new, shiny apartment communities are being built in cities across the nation.

Increased demand for class-B and -C apartments. With minimal investment in upgrades and amenities, the older class-B and -C complexes can attract a wide demographic, including working-class individuals and millennials. For one thing, they are generally located in established middle-income neighborhoods. In addition, these apartment complexes are essentially recession-proof, which is important for tenant retention when the economy heads south.

Lower initial costs lead to greater long-term returns. Older complexes are often undervalued or overlooked by institutional buyers due to the significant investment in time and resources required to reposition the property. A smart investor will see the opportunity here, since by investing in the right kinds of upgrades and addressing maintenance and safety issues, these buildings can yield greater returns, significant NOI growth and overall capital appreciation.

The importance of professional management. Many of these older units suffer from absentee ownership, misalignment between owner and property manager or unsophisticated owners/operators who lack professionalism and an institutional approach. Simply upgrading the units is not enough to improve value; professional property management is essential to protecting your investment. These days, that means more than simply keeping the property clean and attractive, although those things are important; it also means working to make your tenants feel like part of a community. That takes an experienced, professional management team.

Coupling an institutional investment approach with active, hands-on property management is what makes for a successful multifamily investment. Ultimately, if people feel safe and comfortable in their apartment community, they will want to stay—and that benefits everyone.

 

CMBS Loans

CMBS Loans

Anyone advocating for a commercial real estate borrower — especially mortgage brokers and lenders who influence the front end of a loan scenario — should be aware of some common misconceptions about cash management for loans underpinned by commercial mortgage-backed securities (CMBS).

About 70 percent of all CMBS loans originated-ed today have some sort of cash-management system, or lockbox, that allows a lender to capture a property’s cash flow. Understanding “springing” lockboxes, which are especially common, can help borrowers avoid deals that start well but wind up going bad.

There are three types of cash-management systems for CMBS loans. They include hard lockboxes, which do not allow the borrower to have control over the property’s cash flow; soft lockboxes, which allow some control of cash flow; and springing lockboxes, which are triggered when certain situations occur.

The general premise of springing cash management is that it gives lenders the power to capture cash flow in the event of declining property performance. Mortgage brokers and borrowers may agree with this premise and understand its intent when they sign a deal with springing cash-management provisions, but it’s important to remember the devil is in the details.

Income restrictions

Some borrowers think they won’t need to worry about cash management springing on their loan if the property is performing well and the debt-service coverage ratio (DSCR) is above the threshold spelled out in the loan agreement.

Typical CMBS loan agreements, however, include many definitions within definitions that give the servicer the right to calculate DSCR, and the servicer’s calculation is “final absent a manifest error.” These words actually appear in many loan agreements and the definitions are very important as they state what should be included in both the income and expense components of the DSCR calculation. With interest-only loans, the debt service used in the DSCR calculation often assumes the loan is of the 30-year amortizing variety, making the monthly payments in the formula much higher than interest-only payments.

Mortgage brokers and their clients should know about income that may be excluded from the DSCR calculation in the typical CMBS loan agreement.

The bottom line is there are many well-performing properties today with DSCRs of 1.5 and higher that are being placed into cash-management plans. This is because the servicer has performed its own calculation based on the specific details of the loan agreement and is excluding certain income line items, adding other expenses and using an amortizing payment plan (even for interest-only loans). The servicer’s DSCR is often much lower than the actual ratio. Again, however, the servicer’s numbers are final, absent an obvious error. Just because the actual DSCR is above the documented threshold for springing cash management, it doesn’t mean the servicer’s calculation won’t be below the threshold.

Occupancy and rental rates

A second misconception is that a borrower won’t need to worry about cash management when his or her property is outperforming market expectations because of higher occupancy rates or higher rental rates.

“Underwritten operating income” is a term often included in the details of the servicer’s DSCR calculations. This stipulation allows the servicer to adjust rental rates, occupancy rates and other factors to the lower of (a) actual, (b) market, or (c) underwritten rates. So, in cases where the borrower has negotiated higher-than-market rental rates or has an occupancy rate above the market average, they will not get credit for that when the servicer calculates their DSCR as it relates to cash management.

This can really sting a borrower, for example, if the loan was originated with an underwritten occupancy rate of 80 percent, but the current occupancy is 90 percent. If the loan agreement defines the occupancy rate as the lower of actual, market or underwritten rates, then the income will always be calculated assuming 80 percent occupancy — or lower, if market-rate occupancy is below that — regardless of the actual occupancy rate of 90 percent.

Once again, just because the actual DSCR is above the documented threshold for springing cash management, it doesn’t mean the servicer’s DSCR calculation won’t be below the threshold and cause the lockbox to be sprung. Income will be adjusted downward to the lowest allowable number in the loan documents.

Loan assumptions

Many buyers entering into an assumption of an existing loan believe they will receive the same terms as the previous borrower. This is partially true — but not entirely — and this one issue causes many lawsuits between buyers and sellers when the conditions for approval contain what the buyer believes are deal changes.

Without a modification, there are loan-assumption terms that cannot change, such as the interest rate and maturity date. There are other requirements that are wide open to change, however.

Reserves. Servicers can add reserve requirements that aren’t in the current loan documents, and they can increase the amount of reserves as much as they feel warranted. Often, any caps in place on the reserves are removed at the time of assumption.

Additional collateral. This can be in the form of a cash reserve, a letter of credit or a personal guarantee. The point is that the servicer can request additional collateral from the assuming borrower for any number of reasons — or no perceived reason at all.

Cash management. If the loan includes springing cash management, you can bet that it will be sprung at the time of assumption, regardless of the property’s performance. In today’s marketplace, this is a common condition for loan-assumption approvals.

Don’t be fooled into thinking a buyer can request changes to the loan documents at the time of assumption. A servicer is unlikely to entertain changes requested by the borrower. When buying a property with existing CMBS debt, mortgage brokers and their clients should be prepared for higher reserve amounts, cash management and other conditions. Don’t expect to be able to change the loan documents.

Purchase-price adjustments

When a buyer assumes an existing CMBS loan, they may believe the purchase price of the property doesn’t matter since the loan is already in place. This used to be the case. From 2009 to 2014, loan-to-value (LTV) ratios at the time of assumption didn’t matter.

But times have changed. Some special servicers now require a buyer to establish a reserve at the time of assumption in order to make the LTV equal to the original loan-to-purchase (LTP) ratio. This is best understood with an example.

Let’s say a CMBS loan was originated on a property with an appraised value of $25 million and the borrower got a 65 percent LTV loan — $16.25 million — at that time. Fast forward a few years and the property is being sold to a new buyer for $22 million. The original loan is interest-only, so the total balance is still $16.25 million.

On a property valued at $22 million, a 65 percent LTV loan would equal $14.3 million. Since the current loan is for $16.25 million, however, the difference between $16.25 million and $14.3 million ($1.95 million) would be required in the form of a collateral reserve at the closing of the loan assumption.

To make matters worse from a borrower’s perspective, the $1.95 million cannot be used to pay down the loan because CMBS loans have prepayment prohibitions or penalties. So, the $1.95 million sits in a reserve account and cannot be used by the buyer for the life of the loan. This one item can impact a buyer’s internal rate of return so severely that many back out of deals when they learn of this requirement.

What does all this mean for commercial mortgage brokers and their clients? Don’t enter into new CMBS loan documents without a thorough understanding of the specific terms, definitions and servicer processes. Don’t assume cash management will not be sprung based on actual DSCR calculations. This decision is based on the servicer’s DSCR calculation, which is binding unless there is an obvious error.

Be prepared for additional cash requirements when a buyer is assuming an existing CMBS loan, including the possibility of an LTV reserve. And, most of all, know that every word in the loan documents matters in regard to springing cash-management and DSCR calculations.

 

How Commercial Construction Loans Work

How Commercial Construction Loans Work

Securing a commercial construction loan for various types of commercial real estate can be a difficult process to navigate. This post will shed some light on commercial construction loans and demystify the lending process.

Commercial Construction Loans and Lenders

The construction loan process begins when a developer submits a loan request with a lender. Construction or development lenders are almost always local community and regional banks.

Historically this was due to bank regulation that restricted trade areas for lending. More recently, life insurance companies, national banks, and other specialty finance companies have also started making construction loans.

However, community and regional banks still provide the majority of construction financing, since they have a much better understanding of local market conditions and the reputation of real estate developers than larger out of area banks.

There are two normally two loans required to finance a real estate development project, although sometimes these two loans will also be combined into one:

Short term financing. This stage of financing funds the construction and lease up phase of the project.

Long term permanent financing. After a project achieves “stabilization” and leases up to the market level of occupancy, the construction loan is “taken out” by longer term financing.

When a bank combines these two loans into one it’s usually in the form of a construction and mini-perm loan. The mini-perm is financing that takes out the construction loan, but is shorter in duration than traditional permanent financing.

The purpose of the mini-perm is to pay off the construction loan and provide the project with an operating history prior to refinancing in the perm market.

Commercial Construction Loan Underwriting

After the initial loan request is submitted, the bank typically goes through a quick internal go/no-go decision process.

If the project is given the go-ahead by the bank’s senior lender, the lender will sometimes issue a term sheet which outlines the terms and conditions of the proposed loan, provided all of the information presented is accurate and reasonable.

Once the non-binding term sheet has been reviewed, negotiated, and accepted, the lender will move forward with a full underwriting and approval of the proposed loan.

During the underwriting process the lender will evaluate the proposed project’s proforma, the details of the construction budget, the local market conditions, the development team and financial capacity of the guarantors, and in general address any other risks inherent in the loan request.

Typical documents required in the underwriting process include borrower/guarantor tax returns, financial statements, a schedule of real estate owned and contingent liabilities for the guarantor(s), the proposed project’s proforma, construction loan sources and uses, cost estimates, full project plans, engineering specifications, and in general, any other documents that can support the loan request.

From an underwriting standpoint, one of the most notable differences between a commercial construction loan and an investment real estate loan is that with a construction loan there is no operating history to underwrite.

The economics of the project, and thus the valuation of the property, is based solely on the real estate proforma.

The credit approval process is similar to other commercial loans, but because of the additional risks inherent in construction loans, further consideration is given to the development team and general contractor, as well as the prevailing market conditions.

Once the commercial construction loan is approved, the bank will issue a binding commitment letter to the borrower.

The commitment letter is similar to the term sheet, but contains much more detail about the terms of the loan.

Additionally, the commitment letter is a legally-binding contract whereas the term sheet is non-binding.

Commercial Construction Loan Closing and Beyond

Upon completion of the loan underwriting and approval, a loan then moves into the closing process, which can take on a life of its own.

Commercial construction loan closings are complex and involve an overwhelming quantity of documentation and procedural nuances. Typically, the closing is handled by the lender’s attorney, the borrower, and the borrower’s attorney.

A loan closing checklist is also normally issued to the developer along with the commitment letter, which outlines in detail what needs to be completed before the loan can close and funding can begin.

After a loan closes, the loan mechanics are primarily the responsibility of the loan administration department within a bank.

The loan administers (sometimes just called the loan admin), will fund the loan according to the internal policies and procedures of the bank.

Commercial construction loans are typically funded partially at closing to cover previously paid soft and hard costs.

After the initial partial funding, loan proceeds are disbursed monthly based on draw requests for costs incurred. These costs are submitted by the developer and verified by the lender.

Commercial construction loans can quickly become complex and difficult to secure. But understanding how construction loans work and how commercial developments are evaluated by lenders can help demystify the funding process.

In future posts we’ll dive into various parts of this process in detail. In the meantime, if you have any specific questions about commercial construction loans, please let us know in the comments below.

Property Management Issues For Portfolio Managers

Property Management Issues For Portfolio Managers

One of the biggest issue’s managers of large property holdings encounter is the lack of a clear line-of-sight into the assets within their property portfolio. This lack of clarity can affect anyone from individual investors with a handful of properties in their portfolio, all the way up to institutional owners such as Fannie Mae and Ameritrust.

Owners of portfolios of properties often do not have an up-to-date status of the equipment on their properties, and this makes it difficult to plan and prioritize for their upkeep and repair.

In turn, poorly planned repair and replacement jobs on “behind-the-wall” assets such as HVAC systems, electrical systems, and plumbing can lead to bloated maintenance expenses. However, these can be pared down with asset tracking and planned replacements. Performing planned replacements during the lower-cost offseason, rather than performing expensive emergency repairs during the peak heating or cooling seasons, can make all the difference.

Asset tagging or tracking—the logging of age, model, and warranty status of services—helps owners know what systems are most likely to fail and then plan their budgets accordingly.

An asset-tagging project typically involves a contractor or technician going into a property and labeling existing behind-the-wall assets with a unique identifier, which can then be scanned and logged by the technician via a mobile application.

To use HVAC as an example, once asset data is gathered on all properties of a portfolio, a 360 profile is built showing the brands of the equipment, efficiency/SEER ratings, tonnage, the types of refrigerant used, and the condition of the equipment. Once the data is collected, a report is generated that shows the overall health of a given property and the portfolio as a whole.

Additionally, the technology can be merged with home automation solutions such as smart thermostats to provide additional benefits such as remote monitoring of an entire portfolio of properties, managing heating, and cooling efficiency.

With this asset report in hand, the property owner or investor then is able to optimize their capital expenditure with planned replacements, avoiding both fluctuations in HVAC equipment prices and labor costs.

Managing Out Of State Rentals

Owning a rental property can be a lucrative business. There’s a lot of potential for landlords to generate passive income by renting out homes. Real estate isn’t all passive, though.

Property owners should be checking in on their rental properties on a regular basis to ensure tenants are taking care of the home and that everything is in good working order.

It’s not a hopeless situation, though. Here are five simple tips the pros use to keep tabs on long-distance properties:

Use online landlord software to streamline management.

You know the saying: “There’s an app for that.” Online landlord software allows you to handle the process of screening tenants and accepting payments electronically and remotely, all from one central location. We could all use a little streamlining in our life and business, and property management software is a great example of this type of technology.

Install smart locks to boost security.

Smart locks allow for keyless entry, eliminating the hassle associated with creating or replacing lost keys. Better yet, the keys can’t be reproduced or transferred without your permission. You can even control who has access to the home from your smartphone, so when a tenant moves out, it’s easy to deactivate their access and grant it to the new tenant. This saves both time and money when having locks replaced.

Stay involved with neighborhood home owners associations.

Establish regular communication with the board and check in with them often to make sure your property meets any HOA requirements. They’ll be more than happy to let you know if something looks amiss so that you can address it quickly.

Plan occasional trips for inspections and showings.

You’ll still have to make physical trips to see your property every so often. In these instances, try to coordinate with your tenants so that you can hit all your area properties in one trip.

Keeping up with your rental properties is critical to success in real estate, but it doesn’t have to be a daunting task. Armed with these tips, you’ll be off to a great start with turning your out-of-state property into a source of consistent income.

Real Estate Finance and Investment

Real Estate Finance and Investment

That’s what people like about real estate: it moves slowly and is not that affected by the daily swings in the markets. Long-term trends can—and will—affect real estate positively or negatively, but despite raucous political and economic news, real estate just continues to offer a safe harbor for clients.

Real estate investment products can offer superior risk-adjusted returns. Lower volatility is another advantage. Given generally low, or even negative, correlations with stocks and bonds, real estate also can also provide diversification.

Market conditions for real estate are positive from a supply-and-demand standpoint; the fundamentals remain positive; and in many ways markets keep improving.

Growth in the U.S. economy is strong, slow and steady, putting up solid quarterly GDP numbers. Unemployment is at historic lows and consumer spending continues to rise. Those factors are very positive for real estate overall, specifically for industrial, multifamily and office.

Supply-and-demand metrics remain key. New supply is historically low, yet people who aren’t in the industry may look around many cities and say, “There are a ton of construction cranes on the skyline and people are building all over the place.” The fact remains that deliveries of new properties are way below historical averages, in all property types. Demand far outpaces supply.

The U.S. Federal Reserve has already increased interest rates four times. Real estate has been largely unaffected. The industry is more impacted by labor and building materials’ costs. Those have ticked up but not necessarily because of inflation, and building continues.

New property development profitability projections remain in the mid-20s. If that ever falls below 20 or 15 percent, it could turn off development. Nothing near that level looms, even a few years out.

However, if inflation does continue to creep up (in conjunction with growing GDP, which is happening now), it could bode well for real estate: rents often rise as demand for space persists. With inflation hedges built in, real estate also can provide steady income potential, in different market climates.

Tenants—in apartments, industrial, offices or retail—are absorbing what new supply is being delivered. In retail, little new supply is being delivered by nature of what is happening, namely the e-commerce revolution; but in the industrial sector, properties cannot be built fast enough to meet mounting demand.

Apartment Building Loans No Upfront Fees Winston Rowe & Associates

Apartment Building Loans No Upfront Fees Winston Rowe & Associates

Real Estate Investing

Winston Rowe & Associates a national no upfront fee apartment loan and financing firm. With direct access to the most aggressive investor sources in the world, they can structure a customized financing solution for clients, with the best terms possible.

Winston Rowe & Associates Capital Deployment Objectives:

No upfront or advance fees
Loan amounts starting from $1,000,000 to $500,000,000
Private or hard money funds available for a quick close
Debt coverage ratios (DSCR) from 1.20 and up
All property types considered
Construction, Bridge, or Permanent Financing
Adjustable Loans, Fixed Loans, or Interest Only Loans
Loan to cost increased with mezzanine financing
Loan to value increased with mezzanine financing

At Winston Rowe & Associates, their primary objective is to provide the most reliable and efficient means of sourcing both debt and equity for your commercial real estate loans. Recognizing that people and relationships drive this business, they are staffed with some of the industry’s most committed professionals.

How To Purchase An Apartment Complex

How To Purchase An Apartment Complex

Buying an apartment complex is a long, sometimes complicated, process. It’s important for you to gather as much information as you can before you make the decision to buy. Applying for a mortgage to finance an apartment complex is not at all similar to applying for a home mortgage. Apartment complexes with four or more units are commercial properties, and loans for them have different underwriting rules.

Types of Properties:

Decide if you want to purchase a residential apartment complex of a mixed-use building. A mixed-use building has a combination of office and residential units, but at least 80% of the space has to be residential. The complex has to have a grade of C+ or higher. This means you can’t rent the units daily or weekly, and the units can’t be single-occupancy, as in a rooming house or motel.

Gather information about the building you would like to buy. You may not be able to get a loan if the building will require excessive maintenance, or if the complex has not had 90% occupancy for the three months immediately preceding your loan application.

Background:

Talk to local real estate agents. Get their advice about the location you have in mind. Inquire about the possibilities of future zoning changes or any public works projects that may impact an income producing property. If there are plans for a regional airport to be built a few miles away in the next few years, for example, you might find it difficult to rent out your residential units. Don’t assume that everything will remain static; look at the past history of the location and try to imagine any major changes that could be likely to take place in the future.

Professional Expertise:

Have the building inspected by a professional who has experience inspecting commercial buildings. Make sure the inspection covers every aspect; don’t settle for a standard inspection, which may not include trouble spots, such as a wet basement. Pay extra money if you have to for a thorough inspection that goes above and beyond what is required by mortgage lenders. If the inspection reveals serious flaws, don’t make an offer, or reduce your offer amount by the amount it would cost to make the necessary repairs.

Supporting Documentation:

Assemble the documents you will need for the loan application. Your real estate agent will be able to assist you in this. Most lenders require the following documents, but your lending institution may require more:

The ensuing is a list of supporting documents that are required to process and underwrite (due diligence) your commercial loan request. Additional documents will be required.

Financial Supporting Documents:

The last three (3) years corporate tax returns

The last three (3) years business tax returns

Name and address of corporate bank

Business Profit & Loss 3 Years, For Seller or Buyer

Most recent copy of business bank statement

Personal financial statement for all guarantors

Use of Proceeds In An Excel Format For Cash Out Refinance

Property Supporting Documents:

Schedule of tenants leases

Copies of Tenant Leases

Schedule of Units with Square Foot Per Unit

Schedule of improvements to be made with cost breakdown to subject property

Exterior Photos of Subject Property Photos of Parking Lot, Street view

Interior Photos of Subject Property

Most Recent Appraisal

Copy of the First Page of the Insurance Binder for Refinance

List of All Litigation Past and Present

Guarantor Supporting Documents:

4506 T executed

Tri merge credit report

Government issued photo ID copy – front and back

Personal Financial Statement

Articles of Incorporation

Commercial Real Estate Investing Loans

Commercial Real Estate Investing Loans

Becoming a real estate investor is a smart way to generate a steady passive income stream. Nonetheless, it does take a certain amount of cash to get started in real estate investing. Real estate investing can be a hedge against market volatility when stocks take a tumble, and there are many other perks associated with owning an income property. When you don’t have a huge bankroll, taking out loans for investment properties may be the only way to seal the deal.

Loans for investment properties can take several forms. Choosing the wrong type of loan can impact the success of your real estate investment, so it’s crucial that a real estate investor understands how the various alternatives work before approaching a lender.

In this article, we break down the 6 most common types of loans for investment properties to help you, the real estate investor, determine which option works best for your investment.

Conventional Mortgage Loans for Investment Properties

In real estate investing, taking a conventional mortgage loan is the most common investment property financing option among property investors. If you already own a home that is your primary residence, then you’re probably familiar with conventional mortgage loans. A conventional mortgage is simply a loan that private entities like banks or mortgage brokers offer for real estate investment purposes. It conforms to guidelines set by Fannie Mae or Freddie Mac and it’s not backed by the federal government.

The process of obtaining conventional mortgage loans for investment properties varies from one state to another, but there are some standard requirements for the real estate investor to qualify. For example, property investors should expect lenders to require 20% of the income property’s purchase price as down payment. This large down payment means property investors are less likely to default and tend to have a more secure financial standing.

Furthermore, your personal credit score and credit history will determine your approval for conventional mortgage loans for investment properties and what kind of interest rate applies to the mortgage. 620 is typically the minimum credit score to obtain a conventional mortgage loan, and 740 is the minimum score for a good interest rate. Another obligation is that property investors must be able to afford their existing mortgage (if they have one) and the monthly loan payments on the income property. Therefore, most lenders of conventional mortgage loans for investment properties expect the real estate investor to have at least six months of cash set aside to cover these payments.

As we said, these requirements differ from state to state. So, make sure to check other requirements for obtaining conventional mortgage loans for investment properties in your local real estate market.

Hard Money Loans for Investment Properties

You can obtain hard money loans from professional individuals or companies that lend money specifically for real estate investing purposes. The best thing about these types of loans for investment properties is that they are faster to secure than conventional mortgage loans. Moreover, hard money lenders don’t look at the real estate investor’s credit score – instead, they evaluate the value of the income property you’re planning on buying to decide whether or not to grant you the loan.

Although this is one of the common types of loans for investment properties in real estate, it does come with a list of formalities, documentation, and guarantees. Another thing to keep in mind before approaching hard money lenders is that these are short-term (up to only 36 months!) and they come with higher interest rates (up to 10% higher than conventional mortgages).

As a result, these loans for investment properties are not suitable for any type of income property. Hard money loans are a good financing option for property investors who aim to buy cheap investment properties, renovate them, and quickly sell them for a profit and pay off the loan in due time (the fix-and-flip strategy). On the other hand, you won’t possibly be able to pay off a hard money loan on a long-term residential investment property in only 3 years.

Savvy property investors evaluate the profitability and after repair value (ARV) of the targeted income property before considering these types of loans for investment properties to ensure they don’t end up in a financial bind.

Private Money Loans for Investment Properties

Private money lenders are not professionals like hard money lenders. Instead, they are individuals who have extra money and want a good return on investment for their money. Private money lenders can be within your personal network (family, friends, neighbors, co-workers, etc.) or even other property investors and people you’ve met through your real estate investing career.

These loans for investment properties are great for property investors who were turned down by banks. They come with fewer formalities thanks to the close relationship between the real estate investor and the lender. Moreover, they don’t involve strict conditions, interest rates are typically lower, and the length of the loan is flexible and negotiable.

Before approaching private money lenders, a real estate investor should keep in mind that these loans for investment properties are secured by a promissory note or the existing mortgage on the income property. Thus, if property investors don’t pay off the loan in due time, private money lenders can foreclose the investment property.

Fix-and-Flip Loans for Investment Properties

While investing in long-term investment properties has its perks, it also comes with certain headaches. Thus, some property investors find flipping a more attractive alternative because it allows them to receive profits in a lump sum after selling the investment property rather than collecting rent checks each month. If this is your preferred investment strategy, a fix-and-flip loan is a more appropriate financing option.

These loans for investment properties are short-term loans that allow a real estate investor to renovate the investment property and put it back on the market as quickly as possible. Basically, fix-and-flip loans are hard money loans – thus, they’re secured by the investment property. Hard money lenders specialize in these types of loans for investment properties, but certain real estate crowdfunding platforms offer them as well.

Just like hard money loans, the upside of this financing option is that they’re easier to qualify for and obtain compared to conventional mortgage loans. While lenders still consider things like credit score and income, the primary focus is on the income property’s profitability. Thus, the ARV also determines if property investors can apply for fix-and-flip loans for investment properties.

On the other hand, the downside of using fix-and-flip loans is that it won’t come cheap. Depending on the lender, interest rates for these kinds of loans for investment properties can go as high as 18% and your timeframe for paying it back may be short – it’s not uncommon to have terms lasting less than a year! Closing costs may also be higher compared to the conventional financing option.

Home Equity Loans for Investment Properties

Drawing on your home equity is a great financing option for a long-term income property or a flip. Home equity loans for investment properties are a type of debt that allows homeowners to borrow against the equity of their home to use towards buying a second home or an income property. The loan is based on the difference between the homeowner’s equity and the property’s current market value. In most cases, it’s possible for a real estate investor to borrow up to 80% of the home’s equity value!

Using home equity loans for investment properties has its pros and cons, depending on the type of loan you choose. The lender will run a credit check and appraisal on your home to determine your creditworthiness. This financing option provides an easy source of cash and obtaining the loan is quite simple. Moreover, interest paid on home equity loans is tax deductible.

Home equity loans for investment properties are essentially a second mortgage, but they have higher interest rates than the first mortgage. As with any mortgage, if the real estate investor doesn’t pay off the loan, the lender gets to repossess the investment property and sell it to satisfy the remaining debt. Plus, if property investors default, lenders get to keep all the money earned on the initial mortgage and the home-equity loan.

Thus, home equity loans for investment properties are a good choice for responsible property investors. If you know exactly how much you need to borrow and have a steady, reliable source of income to repay the loan, this financing option is a sensible alternative.

Commercial Investment Property Loans

If you’re into commercial real estate investing, then the above-mentioned types of loans for investment properties are not suitable for you as they are residential investment property loans. You need another financing option – a commercial investment property loan!

The main difference is that to obtain these loans for investment properties, property investors need to have a solid business plan coupled with a good credit score. Lenders are concerned with the benefits and necessary work needed to improve the investment property in order to see cash flow.

There are different types of commercial investment property loans, each with specific terms and qualifications that make them suitable for certain types of commercial properties. For example, commercial hard money loans are short-term loans to purchase and renovate an owner-occupied commercial property. When going for these types of loans for investment properties, a commercial real estate investor should expect to cover a down payment of around 15% – 35% of the purchase price. This financing option typically lasts for 1 – 3 years with 8% – 13% interest rates.

Bottom Line

Finding the money to enjoy the perks of real estate investing doesn’t have to be an obstacle if you know where to look. As you’re comparing the different loans for investment properties, keep in mind that the best option depends on your personal financial standing, the type of income property you want to buy, and your goals as a real estate investor.

Investing In Single Family Rental Homes

Investing In Single Family Rental Homes 

If you’re a newcomer to single-family rental investing, one way to think about it is like an inflation-adjusting bond with an equity kicker.

The rental income fewer operating expenses generates current distributions — like the coupon on a bond — and rents can be adjusted annually, providing inflation protection.

Finally, the equity “kicker” comes in the form of building wealth as your tenant pays down your mortgage for you while the property can grow in value over time. It’s entirely possible to get a nice double-digit overall return on your equity over an extended holding period.

Purchasing and owning a single-family rental home is simpler than you might imagine.

Here are five tips to get you started:

1. Know your investing criteria first

With any investment, be it stocks, bonds or real estate, you need to know what your objectives are.

If you’re focused on safety and security, consider exploring low-risk investment homes that generate steady, reliable yield.

An example of this may be a more expensive investment property in a good school district.

You’re going to get a lower yield, but you may see better downside protection and less volatility. If you have a longer-term horizon or you’re seeking higher returns, you may want to take on a little more risk.

Often, lower-priced homes will be riskier, but you may get higher yields and potentially higher long-term returns.

2. Don’t limit your investment property search to where you live

Consider this: If you lived in Atlanta, you wouldn’t buy Coca-Cola stock simply be
cause its headquarters are local.

The same principle applies to real estate investing. If your primary residence, income property, and job are all located in the same area, you have a lot of concentrated risk and are more vulnerable to the swings of the local economy.

Diversification is just one reason to expand your investment property search. Another is access: If you live in an expensive urban or coastal area with relatively high home prices — the San Francisco Bay Area, for instance — finding an income property that’s cash-flow positive is going to be challenging, to say the least.

You won’t be able to find a great income property for $100,000 in Seattle, Denver, or Oakland, Calif., but you can if you focus on the Midwest, South, and Southeast.

3. Separate investing from operations

One of the appeals of investing in single-family rental homes is you can hire strong local property management firms to handle day-to-day management tasks of rent collection, repairs and maintenance, and leasing.

Over the past several years, property managers have adopted new technologies and business processes to manage homes more effectively for owners.

While some people do choose to self-manage, hiring a property manager can save you a lot of time and potentially money in the long run.

While property management companies typically charge between 7% and 8% of the rent, they manage properties for a living and can work to ensure the property is leased, in good condition, and the tenants are happy.

Additionally, using a local property manager effectively allows you to buy properties outside of where you live, as self-managing is difficult if the property is not nearby.

4. Real estate investing is a marathon, not a sprint

You might be familiar with the house-flipping reality TV shows in which a person buys a home, fixes it up, and sells quickly for a profit.

While that can be an effective way to make a one-time profit, it’s the exact opposite of how you should approach single-family rental home investing, which is about building long-term wealth. Instead, treat it like a nest egg.

In addition, don’t be overly influenced or reactive to short-term fluctuations in your rental property portfolio.

You may own a home for a few months and have to deal with a tenant moving out unexpectedly, but the next tenant might reside there for several years before you have another vacancy.

Look at this investment over a multi-year horizon and consider your overall outlays and inflows over that long time span.

If you buy a decent house in a decent area, the returns tend to be quite attractive over time and can add a nice counterbalance to other types of investments.

5. Take advantage of the tools and resources available to you

The single-family rental home industry currently totals $3 trillion, with 1 million homes trading hands among investors every year.

The investment opportunities are ripe, and never has it been less complicated for investors to buy and own homes outside their geographic location.

US Growth Kicks Into High Gear For 2018

Real Estate Investing 2018

In the face of persistent fears that the world could be facing a trade war and a synchronized slowdown, the U.S. economy enters June with a good deal of momentum.

Friday’s data provided convincing evidence that domestic growth remains intact even if other developed economies are slowing. A better-than-expected nonfarm payrolls report coupled with a convincing uptick in manufacturing and construction activity showed that the second half approaches with a tail wind blowing.

“The fundamentals all look very solid right now,” said Gus Faucher, chief economist at PNC. “You’ve got job growth and wage gains that are supporting consumer spending, and tax cuts as well. There’s a little bit of a drag from higher energy prices, but the positives far outweigh that. Business incentives are in good shape.”

The day started off with the payrolls report showing a gain of 223,000 in May, well above market expectations of 188,000, and the unemployment rate hitting an 18-year low of 3.8 percent.

Then, the ISM manufacturing index registered a 58.7 reading — representing the percentage of businesses that report expanding conditions — that also topped Wall Street estimates. Finally, the construction spending report showed a monthly gain of 1.8 percent, a full point higher than expectations.

Put together, the data helped fuel expectations that first-quarter growth of 2.2 percent will be the low-water point of 2018.

“May’s rebound in jobs together with yesterday’s report of solid income growth and the rise in consumer confidence points to the economy functioning very well,” the National Retail Federation’s chief economist, Jack Kleinhenz, said in a statement. “Solid fundamentals in the job market are encouraging for retail spending, as employment gains generate additional income for consumers and consequently increase spending.”

The most recent slate of widely followed barometers could see economists ratchet up growth expectations.

Already, the Atlanta Fed’s GDPNow tracker sees the second quarter rising by 4.8 percent. While the measure also was strongly optimistic on the first quarter as well, at one point estimating 5.4 percent growth, other gauges are positive as well.

Andrew Hunter, U.S. economist at Capital Economics, said the ISM number alone is consistent with GDP growth of better than 4 percent, though he thinks the second quarter will be in the 3 percent to 3.5 percent range.

“With global growth set to hold up fairly well in the near term, this suggests that manufacturing activity should continue to expand at a solid pace,” Hunter said in a note. “That said, if the Trump administration continues to pursue protectionist policies and provoke retaliation from other countries, the export-focused manufacturing sector would be most exposed.”

Indeed, there are a spate of headwinds still out there, and trade continues to top the list.

The White House’s decision this week to forge ahead with steel and aluminum tariffs stoked fears that the administration could be its own worst enemy on the road to 3 percent-plus growth. While the tariffs themselves are expected to have minimal economic impact on their own, fears remain that they could spark retaliatory measures and, ultimately, an all-out trade war.

Exports make up just 12.4 percent of the U.S. economy, but S&P 500 companies generate about 43 percent of their sales internationally. That’s why markets tend to recoil every time the administration saber rattles about tariffs.

Still, manufacturers remain largely upbeat.

Respondents to the ISM survey released Friday relayed mostly positive sentiments. One typical statement, from an unidentified transportation equipment firm, said, “We are currently overselling our forecast and don’t see an end to the upswing in business,” while noting that “we are very concerned” about the tariff situation and “are focusing on alternatives to Chinese sourcing.”

Others noted price pressures, while an index that tracks order backlogs hit its highest level since April 2004. The pricing index also registered its highest since April 2011, as firms noted that inflationary pressures are building heading into the second half.

That’s consistent with news out of the trucking industry, which is reporting a shortage of drivers amid huge demand for delivery vehicles.

While inflation could prompt more aggressive action in the form of Federal Reserve interest rate hikes, PNC’s Faucher sees an economy resilient enough to withstand that and other headwinds.

“The tight labor market is going to lead businesses to invest in capital that makes their workers more productive. Then you’ve got stronger government spending with the increase in discretionary spending caps,” he said. “I think we’ll see growth better than 3 percent in the final three quarters of the year.”

The United States economy is growing at a record pace not seen since the 1950’s

Real Estate Investing

The U.S. economy is expanding at a 4.8 percent annualized rate in the second quarter, the Federal Reserve’s GDPNow forecast model showed on Friday.

The forecast has been climbing higher following the release of a series of good economic data. On May 25, the measure foresaw four percent GDP growth.

This rose to 4.7 percent Thursday and ticked even higher on Friday following the better than expected jobs report for May.

The Fed forecasts a big boost in private sector fixed investment, which includes capital investment in machinery, land, buildings, vehicles, and technology.

Earlier, the Fed saw this growing at 4.6 percent. But following the release Friday of a construction spending report from the U.S. Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management, this was upgraded to 5.4 percent growth.

Consumer spending is expected to grow at a 4.6 percent rate, up from 3.4 percent prior to the Friday data releases.

5 Key Factors To Qualify For A Commercial Loan

Real Estate Investing

Financing is the lifeblood of small business, and the more you know about what lenders are looking for from borrowers, the better your chances of securing financing when you need it.

Let’s consider five factors that can have considerable impact on your chances of getting the right financing at the right time.

1. Credit Scores

You credit score is often the most important factor when it comes to qualifying for a small business loan.

Borrowers with good credit scores have a wider range of choices, with terms more favorable to long-term success.

To qualify for the best financing for your business, strong personal credit scores are generally a must, but did you know that your small business has a business credit score as well? Building up your business credit score will help legitimize your business in the eyes of banks and lenders, simplify your taxes, and open doors to trusting relationships with vendors and suppliers.

2. Cash Flow

Cash flow is defined as the total amount of money coming into and going out of your business. Lenders are not only interested in how much money you’re making, they also want to see (a) how you reinvest it back into your business, and (b) if you’re able to maintain cash reserves for a rainy day, versus spending it as soon as it comes in.

When applying for a commercial loan, banks usually want to see documentation for at least three months’ worth of your operating expenses. These should include any and all loan payments. If you’re new to business, prepare to show all of the statements you have available, because the more information you can share, the better the likelihood of getting a loan.

3. Time in Business

Traditional lenders keep a close eye on these numbers, and place a high value on the length of time your business has been up and running. It differs according to lender, but the minimum sweet spot for both traditional and alternative lending is usually around a year. Some alternative lenders require as little as six months, but less stringent requirements usually come at a cost—you’ll want to make sure you’re able to repay the loan quickly, otherwise the higher interest rates may hurt your business’ cash flow.

4. Collateral

Collateral can include deposits on a merchant processing or business bank account (a good option for new business owners), home equity, and business-owned equipment. Collateral is a strong motivator for paying your bills on time, but think long and hard before considering it an option. If you can’t repay the loan, the bank will take your assets to make up for its loss.

5. Social Media

Social media can be an excellent tool for reaching customers and establishing a brand, but the role it can play in obtaining financing isn’t always as obvious.

Although many banks have yet to consider social media a factor for the financial success of your business, a number of credit unions and alternative lenders like Kabbage and LendUp are looking to social media to see how favorably a business is viewed online, whether it’s trusted by its customers, and the extent to which it’s considered an authority by both customers and peers.

Gross Rent Multiplier

Gross Rent Multiplier

Suppose you want to buy an apartment building or obtain a commercial loan on a multifamily property.  You can quickly compute the value of any multifamily property, if you know that property’s Gross Scheduled Rent and the correct Gross Rent Multiplier for that area.  The Gross Rent Multiplier is a number, usually between 3 and 11, by which  you multiply the Gross (Annual Scheduled) Rents to obtain a rough estimate of the value of an apartment building.  Expressed algebraically:

Value of an Apartment Building = Gross (Annual Scheduled) Rents x Gross Rent Multiplier

Example #1:

You’re in a car with your commercial broker, and the two of you are driving around a good rental area in your city, looking for an apartment building to buy.  You come to a decent looking building that is for sale.  Your commercial broker looks up the Gross (Annual Scheduled) Rents and tells you that they are $263,000 per year.  “What’s the going Gross Rent Multiplier for this area?” you ask him.  Around seven,” he replies.  You multiply $263,000 by 7 to compute a market value of $1,841,000.  “What’s the seller asking?” you ask your broker.  He replies, “$2,670,000.”  “Ha-ha,” you laugh.  The seller is on drugs if he thinks that he is going to get that much.”  You find another nice building.  “What are the Gross Rents of this property?” you ask.  “$301,000,” replies your commercial broker.   You multiply $301,000 times 7 to arrive at a market value of $2,107,000.  ‘What’s the seller asking?”  “$1,995,000.”  “This looks like a decent value.  Let’s get out and walk around,” you reply with interest.

Example #2:

You’re a commercial mortgage broker.  A borrower calls you looking for a $3 million multifamily loan.  He owes $2,850,000 on the property, and the loan is ballooning.  “What’s the building worth?” you ask the borrower.  “$4.25 million,” he replies defensively.  Instinctually your radar flashes a warning.  “He’s lying,” you think to yourself.  “What are the gross rents on the building?” you ask the borrower.  “$473,000,” he replies guardedly.  You’ve lived in Las Vegas your entire life, and there’s a ton of vacant land surrounding the outskirts of the city.  The Gross Rent Multiplier in Las Vegas has never exceed 5.5.  Five point five times $473,000 equals just $2,600,000.  Just $2.6 million?  Heck, the borrower owes $2.85 million.  This deal is a loser.  “Who has turned you down on this deal already?” you ask.  “Boston Nation, Pebble Stream Capital, and San Diego Apartment Express.” he replies, naming the three most aggressive multifamily lenders in the market.  “Can you bring a load of cash to the closing table?” you ask.  “No,” he admits.  “Do you own some other property that we can refinance?” “No, just my house, and its has an 80% LTV loan on it.”   “I’m sorry, Mr. Borrower, but I can’t help you.  You need to do a short sale.”  By understanding and knowing the Gross Rent Multiplier, you just saved yourself six weeks of wasted work.

 

Key Investment Guidelines For Rental SFR Properties

Real Estate Investing

Whether you’re looking for a conduit, traditional or hard money funding solutions. Winston Rowe and Associates can meet both your individual and professional investment objectives. They have some of the most creative capitalization plans in the market that are designed meet the unique set of financial circumstances of each  transaction.

Choose the right property and you’ll reap the rewards; the wrong one will end up costing you dearly. You can minimize the potential for losses if you remember these four things to look for when evaluating a commercial property.

Property Location. The most important aspect of real estate investing is the location of the property. Properties in prime locations provide investors options such as resale, or rental. Those in poorly performing areas are limited and resale or rental may be difficult. The only way to really know what the area is like is to drive through during the day, at night and on weekends. Take note of activity that may discourage future buyers or renters.

Property Condition.  The condition of the roof, foundation, windows and mechanical components are big ticket items that will greatly affect your budget.  Make sure you have hard cost numbers from your contractor before you take the deal. Don’t be overly concerned by cosmetic issues that are easily fixed. Fresh paint, updated carpet, and flooring are relatively inexpensive.

Asking Price. The determining factor will be what the potential future value of the property is. The listing price is an important part of the equation. You don’t want to invest more than the property is worth, especially if you need to do a large amount of rehab. Look at other comparable properties, same number of bedrooms, square footage, etc., and determine the amount you’re willing to invest. Don’t be surprised, sometimes your offer will be more than the listing price.

After Rehab Value.  When it comes to investing, look at the location, condition, sales price and after rehab value. When all of these things are in line, you’ll be on your way to a profitable deal. The combined total of the asking price, plus rehab costs will bring you to your total expenses. Determine the percentage of profit, or dollar amount, you want to make and evaluate whether your investment will fulfill your needs. If not, you will be wise to move on to the next deal. Evaluating the after rehab value of a property will help you determine whether the deal is one you want to take, or if it’s time to move on. However, this isn’t necessarily the value of the home. Once completed, it’s possible your investment will be worth far more.

When speed and experience are important and crucial to your SFR and multifamily investing success, a principal at Winston Rowe & Associates is always available to speak with prospective clients.

They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com

Commercial Mortgage Ratios Explained For Business Loan Underwriting

Real Estate Investing

Underwriting commercial real estate loans, there are three main ratios to us to analyze the quality of a financing request.

Loan-To-Value (LTV) Ratio

Debt Ratio

Debt Service Coverage Ratio (DSCR)

The first ratio is the Loan-To-Value Ratio:

The (LTV) equals the amount of the commercial mortgage divided by the market value of the property as determined by a commercial appraisal.

The Loan-To-Value Ratios for commercial real estate loans are capped at 75% or 80%.

The Debt Ratio:

Is the amount of personal monthly debt a borrower has divided by personal monthly income. In commercial lending, rarely does a commercial lender analyze the borrowers personal debt-to-income ratio, rather the underwriter focuses more on the property’s income and expenses.

Debt Service Coverage Ratio (DSCR):

The final ratio used in underwriting a commercial mortgage loan request is the Debt Service Coverage Ratio (DSCR). The DSCR equals annual net operating income divided by annual debt service. Net operating income is the gross rental income minus expenses. Most commercial lenders require a minimum DSCR of 1.25x.

Winston Rowe & Associates is a commercial real estate consulting and advisory firm providing financing solutions nationwide through their strategic relationships.

You can contact them at 248-246-2243 or visit them online at http://www.winstonrowe.com

How To Value Commercial Property Using Gross Rent Multiplier (GRM) Formula

Real Estate Investing

The Gross Rent Multiplier (GRM) is a capitalization method used for calculating the approximate value of an income producing commercial property based on the property’s gross rental income.

To calculate the value of a commercial property using the Gross Rent Multiplier approach for valuation, simply multiply the Gross Rent Multiplier (GRM) by the gross rents of the property.

How to calculate the Gross Rent Multiplier (GRM):

In this example, the GRM for a property with a listing price of $640,000 and $80,000 in gross rental income is 8. Next, simply average the respective gross rent multipliers together and you will have a good indication of the local market GRM for your property type.

To calculate the Gross Rent Multiplier, divide the selling price or value of a property by the subject’s property’s gross rents.

The GRM calculation of value

Property Value = Annual Gross Rents X Gross Rent Multiplier (GRM)

$640,000 = $80,000 X 8 (GRM)

In this example – using a GRM of 8 – a property that generates $80,000 a year in gross rental income has a value of $640,000.

Calculate a GRM

To calculate a GRM, take the listed selling price and the annual gross rental income and divide one into the other, the equation looks like this:

GRM = Sales Price / Annual Gross Rents

8 = $640,000 / $80,000

The major difference in valuation between the income approach to valuation via the appraisal and the GRM approach to valuation is the former uses net income in the calculation of valuation while the latter uses gross income.

Winston Rowe & Associates has a core business focus providing expert knowledge, while leveraging their strategic capital source relationships, providing clients with the most competitive rates and terms in the commercial real estate markets.

They can be contacted at 248-246-2243 or visit them on line at http://www.winstonrowe.com

Business Financials For Due Diligence Explained

Real Estate Investing

All business professionals need a good working knowledge of financial statements to include how they are created and how they can be used to make key business decisions.

Business transactions are transformed into financial statements through a due diligence and accounting process.

Three required statements are produced:

Income Statement

Balance Sheet

Cash Flow Statement

The statements provide results of business activity, not the reasons. To understand the reasons, we must look at relevant ratios.

These ratios are standard indications of business reasons and serve as the basis for key business decisions.

They are derived from a combination of calculations of components of the financial statements to indicate a unique and universally accepted metric or measurement.

We can glean relevant indications of the company’s success from these metrics. They become the “language” through which we understand business activity and we use them to help understand and analyze financial statements and also compare one company to another or one financial period to another.

Winston Rowe & Associates utilizes an initial due diligence review that provides an in depth understanding of business and financial activity as it pertains to the financing commercial real estate transactions.

With a core focus on flexibility, Winston Rowe & Associates really wants to be able to find a way to help everyone who comes to them find a funding solution that meets their needs.

The best funding solutions occur when they combine data with consultation and common sense.

They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com

Best Markets to Buy and Hold Real Estate

Real estate investors whose strategy is to buy and hold rental properties are facing higher initial purchase prices, a much tighter inventory of properties to choose from and a resurgence of interest from large institutional investors.

Here are the top 10 counties for best annual gross rental yield and lowest investment property vacancy rate during the first seven months of 2016.

Monroe County, Pennsylvania: 16 percent rental yield, 0.4 percent vacancy rate

Hernando County, Florida: 14.3 percent rental yield, 2.1 percent vacancy rate

Lackawanna County, Pennsylvania: 12.1 percent rental yield, 2.1 percent vacancy rate

Westmoreland County, Pennsylvania: 11.8 percent rental yield, 2.8 percent vacancy rate

Davidson County, North Carolina: 11.8 percent rental yield, 2.6 percent vacancy rate

Marion County, Florida: 11.7 percent rental yield, 1.9 percent vacancy rate

Wicomico County, Maryland: 11.7 rental yield, 2.1 percent vacancy rate

Randolph County, North Carolina: 11.1 percent rental yield, 2.7 percent vacancy rate

Ulster County, New York: 11 percent rental yield, 2.1 percent vacancy rate

El Paso County, Texas: 11 percent rental yield, 1.9 percent vacancy rate.

 

COMMERCIAL REAL ESTATE BRIDGE FINANCING

Real Estate Investing

Winston Rowe & Associates is pleased to announce their new major market commercial real estate bridge financing program.

This is one of the most aggressive commercial real estate bridge financing programs in the industry.

No Upfront or Advance Fees

$1MM – $25MM+

6-36 mo terms

9–11%, 2–4 points

Development/construction deals, major rehab,
cash out and even land deals considered

2-3 week closing

Winston Rowe & Associates is a unique type of commercial real estate finance firm, they do not charge any upfront fees like their competitors to review or perform due diligence for your transaction, because of this savvy investors have been turning to them for their financing needs.

 

Hard Money Commercial Real Estate Property Funding No Upfront Fee

Commercial Hard Money Lenders

Winston Rowe and Associates is a premier source for hard money commercial loans, we understand even the most complex commercial hard money loan scenarios.

Underwriting a commercial hard money loan takes a knowledgeable team that has the experience to understand all aspects of the hard money loan request.  We have the proven track record as a premier hard money commercial capital source to help.

Commercial Loans for Borrower’s With Bad Credit

Commercial Loans for Borrower’s With Bad Credit

Winston Rowe and Associates capital sources provides commercial loans for borrowers with bad credit under our equity-based programs. Borrowers with bankruptcy, foreclosure, short sale, tax liens and other derogatory credit items may be eligible for our traditional commercial loan and apartment loan programs after a sufficient amount of time has passed, strong mitigating factors, credit has been reestablished and there is adequate financial capacity.