If you read the last post , do you now understand why we have such a sour spot for tenants?
Last post, we were talking about real estate as a viable source of monthly cash flow and a good, if not great vehicle for investment. But, as we were discussing last time, you haven't made a move yet. What is your reason for not taking that first step? Is it fear? Is it perhaps no extra money? Maybe it is a current or previous credit problem? How about scepticism? Lack of experience and knowledge? How about friends and family? Are they telling you that real estate will not make you money?
Let's talk about each one of these individually.
FEAR - The dictionary describes it as a distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined; the feeling or condition of being afraid.
If you notice in the above definition, fear is an emotion. Fear is also caused by the unknown. If you would find yourself in a helicopter or airplane, with a parachute strapped to your back for the first time, you would be apprehensive because you never jumped before, and do not know what to expect, and have no experience to keep the butterflies at bay. Your first real estate deal is going to be very similar to this. Since you have no experience to draw from, and limited knowledge of the industry, of course you will be fearful. Now, I am not saying that the fear will go away the more transactions that you do, but it will certainly subside. The same would go for jumping out of a plane with a parachute. There is always the risk factor. But, once you see the benefits of buying an investment, and develop experience and knowledge, you will be less and less fearful as time goes on.
LITTLE OR NO MONEY FOR INVESTMENT - This can be solved in any number of ways which we will touch in another post. But, just for ideas for this post, you could refinance your existing house and pull cash out to invest, contact the bank for a personal loan secured on personal property, talk to sellers of property and arrange a deal. You could borrow money from a relative, friend, credit union, or employer. There really are lots of options for accessing cash to purchase an investment, and we will talk about all of these in the future.
CREDIT PROBLEMS - If you have credit problems like late payments, delinquencies, bankruptcy, or just low credit scores, you first need to find out exactly what the issues are by pulling your own credit report. Thereafter, you will have the knowledge on what you need to repair. I will cover credit issues in a future post also, since there are so many reasons for credit issues. Also, it is important to note that the credit reporting bureaus are getting tougher and their method of calculating credit scores are getting more stringent than they were before. I just talked with a lender that told me that she is seeing more potential customers within the last couple of months with less than 680 credit scores. What she is seeing now, is people with good credit (no late payments, no delinquencies, no bankruptcies, no mortgage lates, etc.) with low credit scores. Since the lenders are using the credit scores as their first criteria for loan approval, they are turning more and more people down.
SKEPTICISM AND INPUT FROM FRIENDS AND RELATIVES - These can go hand and hand, since many times, you will hear from friends and relatives that buying real estate as an investment is just not going to work out for you. They have had friends that have bought properties, and since they only heard the negative aspect of real estate from their friend, and never saw the numbers that have occurred, they only had a very one-sided view, and they are passing that along to you. If you have a mentor for your new business, as we spoke about in a previous post, then you will be hearing both sides of the coin. There are definitely negative sides as well as positive sides to everything that you decide to do. The key is to have the backup from knowledge, experience (mentor), and current market conditions to enable you to overcome the negative, and build on the positive. There are a tremendous amounts of positive in real estate, and I will tell you from experience, that I would do this all over again if I were required to do so!
I just love buying properties, and know of many investors of the same mindset. Every one of these investors would never leave real estate as an investment because they now have the experience and knowledge to make wonderful amounts of money for their retirement and monthly cash flow.
Thursday, May 15, 2008
Monday, May 12, 2008
tenants versus "flipping" continued
If you have read the last post, I would assume that you can see why we have a sour spot right now for renting versus "flipping". But, even though we ate sour grapes earlier, some properties are just asking to be kept. The first question that you ask yourself when you look at a property is: what is my goal for this particular property? Is my goal to keep this property, generating cash flow every month, and not incurring tax liabilities, or am I going to sell this property as soon as I can, making instant profit, but incurring capital gains tax that will have to be paid the following April 15th? Just a word for your perusal, if you decide to keep the property, rent it out, and generate cash flow every month, then you will be eligible to refinance the property, using other people's money (the bank's), have an 80% LTV, still holding 20% equity in the property. When you do decide to sell the property, you will be paying capital gains on the profit only. Because you have a mortgage lien on the property, even though you received cash from the refinance, you will still be paying only on the profit, not the cash that you received from the bank. Let's do an example for ease of comprehension.
Let's say theoretically, that you purchase a 2-unit property for $60K. With closing costs, the total acquisition cost to you would be somewhere around $66K depending on many factors including transfer taxes, real estate taxes, insurance, etc. So, now you just settled on the property, paid the $66K, and are looking to do some cosmetic repairs to the property. If you keep your taste modest (and depending on how much work the property needs) you could get away with less than 20K including labor and carrying costs. Now, you are up to $86K in total costs on the property. Let's assume that the property is now worth $120K completed. In this scenario, if you decided to sell the property, then with realtor fees, transfer taxes, and possibly closing cost assistance of, let's say 3%, plus misc. closing costs to the seller, you will have a total expense of somewhere close to $12K. This will reduce your net to 108K. So, doing the math, at 108K minus the total costs of 86K on the property, then your profit will be $22K. This figure is what you will be paying income taxes on, and not the total sales price.
Now, let's take this same scenario, and turn it into a refinance. You will be getting an 80% LTV when you refinance, and based on the above value of $120K, you will have an $96K loan now on this property. Assuming that you are not living in one of the units, and also assuming that you have good credit, the principal and interest payments at 7% interest will be $638.69. Now, you need to add in your monthly real estate taxes, and your monthly fire and liability insurance. In our area, these would probably total about $200.00 a month. So, assuming a $838.69 payment is what you are going to pay on this property every month, you will need to rent both units out for at least $420. to break even. In my area in Pennsylvania, rents are going for at least $600.00 for 2 bedroom units.
Based on this fictitious scenario, you will have paid yourself back for the $86K that you have spent on the property, received about $4K in cash (don't forget closing costs for the refi), and if you would be in my area, then you will rent these out for $600/per unit, and receive $1200.00 a month to pay the mortgage payment of $839.00 Since the tenants are paying the utilities, you will be receiving $361.00 per month for your troubles. Now, you can wait out the market, and wait until the property appreciates in value, having your monthly payments made for you, and generating a couple hundred dollars in cash flow every month!
Let's think about the property now, in 5 years. Let's assume that appreciation is somewhere around 3% a year (very slow market). The value at that time, will be somewhere around $139K. Your loan balance will be $90,366.00 according to your amortization schedule. So, your taxable profit at that time will be $139,000 minus 90,366. minus closing costs, seller assistance, and marketing fees, which will equal something close to $31K. Or, you could refinance again if you wanted to.
Does any other investment do this well even in a slow market? What is stopping you from making real estate your investment vehicle of choice?
Let's touch on this next time. Talk to you then.
Let's say theoretically, that you purchase a 2-unit property for $60K. With closing costs, the total acquisition cost to you would be somewhere around $66K depending on many factors including transfer taxes, real estate taxes, insurance, etc. So, now you just settled on the property, paid the $66K, and are looking to do some cosmetic repairs to the property. If you keep your taste modest (and depending on how much work the property needs) you could get away with less than 20K including labor and carrying costs. Now, you are up to $86K in total costs on the property. Let's assume that the property is now worth $120K completed. In this scenario, if you decided to sell the property, then with realtor fees, transfer taxes, and possibly closing cost assistance of, let's say 3%, plus misc. closing costs to the seller, you will have a total expense of somewhere close to $12K. This will reduce your net to 108K. So, doing the math, at 108K minus the total costs of 86K on the property, then your profit will be $22K. This figure is what you will be paying income taxes on, and not the total sales price.
Now, let's take this same scenario, and turn it into a refinance. You will be getting an 80% LTV when you refinance, and based on the above value of $120K, you will have an $96K loan now on this property. Assuming that you are not living in one of the units, and also assuming that you have good credit, the principal and interest payments at 7% interest will be $638.69. Now, you need to add in your monthly real estate taxes, and your monthly fire and liability insurance. In our area, these would probably total about $200.00 a month. So, assuming a $838.69 payment is what you are going to pay on this property every month, you will need to rent both units out for at least $420. to break even. In my area in Pennsylvania, rents are going for at least $600.00 for 2 bedroom units.
Based on this fictitious scenario, you will have paid yourself back for the $86K that you have spent on the property, received about $4K in cash (don't forget closing costs for the refi), and if you would be in my area, then you will rent these out for $600/per unit, and receive $1200.00 a month to pay the mortgage payment of $839.00 Since the tenants are paying the utilities, you will be receiving $361.00 per month for your troubles. Now, you can wait out the market, and wait until the property appreciates in value, having your monthly payments made for you, and generating a couple hundred dollars in cash flow every month!
Let's think about the property now, in 5 years. Let's assume that appreciation is somewhere around 3% a year (very slow market). The value at that time, will be somewhere around $139K. Your loan balance will be $90,366.00 according to your amortization schedule. So, your taxable profit at that time will be $139,000 minus 90,366. minus closing costs, seller assistance, and marketing fees, which will equal something close to $31K. Or, you could refinance again if you wanted to.
Does any other investment do this well even in a slow market? What is stopping you from making real estate your investment vehicle of choice?
Let's touch on this next time. Talk to you then.
Friday, May 9, 2008
rentals and tenants
Over the last couple of posts, I have painted a pretty bleak picture of tenants and rentals, that is quite a bit more biased than some. We have had some pretty exasperating tenants over the years. Much of that is due to the fact that we are a little bit too kind-hearted. Does this sound like some of you? The tenant runs into financial difficulty for some reason or another, and cannot (or won't) pay their obligations, and you work with them to try to help them past these "temporary" setbacks. But, are these really "temporary setbacks" or are they situations that the tenant has created for themselves? I will give you an example.
We had a tenant ( a single mother of LOTS of children) who was brought to us by a local religious organization. She was in a very bad situation at the time, and had to move out that day! Now, normally, that sends huge red flags up for us, and we usually do not subject ourselves to this potential future aggravation. However, in this situation, she was brought to us directly by the religious organization, and they vouched for her, telling us that they would provide the rent if she could not. So, we provided her with a vastly reduced monthly rent, and a 6 month lease, so that she had time to get on her feet again. Now, the house that we rented to her, had been our home that we had just moved out of and totally remodeled. Another red flag. She had lots of children. She also did not work outside of the home, waiting for her ex-husband to pay her child support for her huge brood. She also home schooled all of her school age children, which means that ALL of the family was there at all times. This should be a couple of red flags.
See what I mean about being soft-hearted? Or is it soft-headed? On this one, I am not so certain! None of you would do anything like this, or would you? We went against all of our better judgement to help out this poor single mother, with lots of kids and did it help her? Not a bit! She was in the same position at the end of our lease, as she was at the end of the previous lease. By the way, the previous landlord for her was a church.
Well, to make a long story short, she had a flood in the basement of our house, spilled wine on our newly polished hardwood floors, put holes in every single wall in the house, somehow she flung jelly on our 11 foot ceiling in the dining room, had leaky plumbing in every bathroom and the kitchen, put holes in the ceramic tiles in the bathroom shower, and tore out some beautiful rhododendrons that had been there for probably 40 years or more! She did not pay the rent for the last month that she was there, nor the fuel oil, nor the water bill (which was $950.00) for one quarter, and we had to send her an eviction notice to get her out of our house.
Where was the church in this whole fiasco? Hiding! They originally told us that she would receive budget counseling to help her get past these situations, and we were told that she participated in these. These were a requirement of the church for them to help her with her bills. But when we called the church to let them know what was occurring, the representative that we talked with, told us that they are not going to pay any more for her, and the representative started talking about how much of a tax break this would be for us! Great! From now on, we will put all sorts of unverified people in our properties, so that we can incur huge expenses to evict them, pay their bills for them, and fix up all of the wonderful repairs that they created at the property, so that we can get more tax deductions! Anyway, we fixed that house back up, put it on the market and sold it. But more on that later.
This is just the larger of the reasons that we are a little biased on tenants. We let our hearts get in the way, not allowing our reason to make decent, financially viable decisions based on credit, job stability, etc. Keep in mind, that if you are buying properties for investment, the choice of tenants can never be according to your heart. You bought these properties for business purposes, and that is exactly the kind of mindset that you need to have when you install tenants in your residential properties.
If you owned a commercial property, you would rent out that property based on the stability of the prospective business tenant. These are almost always long-term tenants who are building a business in your particular property. Almost 100% of the time, both you and the prospective tenant will be making the decision to rent or not to rent based on past numbers, a financial plan, and back-up capital. Not whether they are going through health problems, job layoffs, divorce, or any other life situation that can cause a residential tenant to fall short of their obligations. Since this is a business for you, then you must make your decisions based on the tenants' credit, income stability, amount of income, past landlord verifications, criminal history report, etc. Don't let your heart think for you. There are lots of very wonderful people in this world that have good credit, good job stability, and want to have a lovely house, but do not want to buy at this time. These are the people that you are looking for to install as tenants in your properties. Don't settle for less than this. Even if you have to pay a month or two of payments! You deserve good tenants in this beautiful property that you purchased.
We had a tenant ( a single mother of LOTS of children) who was brought to us by a local religious organization. She was in a very bad situation at the time, and had to move out that day! Now, normally, that sends huge red flags up for us, and we usually do not subject ourselves to this potential future aggravation. However, in this situation, she was brought to us directly by the religious organization, and they vouched for her, telling us that they would provide the rent if she could not. So, we provided her with a vastly reduced monthly rent, and a 6 month lease, so that she had time to get on her feet again. Now, the house that we rented to her, had been our home that we had just moved out of and totally remodeled. Another red flag. She had lots of children. She also did not work outside of the home, waiting for her ex-husband to pay her child support for her huge brood. She also home schooled all of her school age children, which means that ALL of the family was there at all times. This should be a couple of red flags.
See what I mean about being soft-hearted? Or is it soft-headed? On this one, I am not so certain! None of you would do anything like this, or would you? We went against all of our better judgement to help out this poor single mother, with lots of kids and did it help her? Not a bit! She was in the same position at the end of our lease, as she was at the end of the previous lease. By the way, the previous landlord for her was a church.
Well, to make a long story short, she had a flood in the basement of our house, spilled wine on our newly polished hardwood floors, put holes in every single wall in the house, somehow she flung jelly on our 11 foot ceiling in the dining room, had leaky plumbing in every bathroom and the kitchen, put holes in the ceramic tiles in the bathroom shower, and tore out some beautiful rhododendrons that had been there for probably 40 years or more! She did not pay the rent for the last month that she was there, nor the fuel oil, nor the water bill (which was $950.00) for one quarter, and we had to send her an eviction notice to get her out of our house.
Where was the church in this whole fiasco? Hiding! They originally told us that she would receive budget counseling to help her get past these situations, and we were told that she participated in these. These were a requirement of the church for them to help her with her bills. But when we called the church to let them know what was occurring, the representative that we talked with, told us that they are not going to pay any more for her, and the representative started talking about how much of a tax break this would be for us! Great! From now on, we will put all sorts of unverified people in our properties, so that we can incur huge expenses to evict them, pay their bills for them, and fix up all of the wonderful repairs that they created at the property, so that we can get more tax deductions! Anyway, we fixed that house back up, put it on the market and sold it. But more on that later.
This is just the larger of the reasons that we are a little biased on tenants. We let our hearts get in the way, not allowing our reason to make decent, financially viable decisions based on credit, job stability, etc. Keep in mind, that if you are buying properties for investment, the choice of tenants can never be according to your heart. You bought these properties for business purposes, and that is exactly the kind of mindset that you need to have when you install tenants in your residential properties.
If you owned a commercial property, you would rent out that property based on the stability of the prospective business tenant. These are almost always long-term tenants who are building a business in your particular property. Almost 100% of the time, both you and the prospective tenant will be making the decision to rent or not to rent based on past numbers, a financial plan, and back-up capital. Not whether they are going through health problems, job layoffs, divorce, or any other life situation that can cause a residential tenant to fall short of their obligations. Since this is a business for you, then you must make your decisions based on the tenants' credit, income stability, amount of income, past landlord verifications, criminal history report, etc. Don't let your heart think for you. There are lots of very wonderful people in this world that have good credit, good job stability, and want to have a lovely house, but do not want to buy at this time. These are the people that you are looking for to install as tenants in your properties. Don't settle for less than this. Even if you have to pay a month or two of payments! You deserve good tenants in this beautiful property that you purchased.
Thursday, May 8, 2008
the pros of renting instead of "flipping"
Last time, we discussed the downside of renting, and the pros of selling. Today, let's talk about the pros of renting, and the downside of selling.
Whenever you purchase a house for investment, you immediately assume all of the financial responsibility for that particular property. As we discussed last time, this includes the utilities, repair costs, taxes, insurances, ongoing maintenance expenses, municipal & inspection expenses, etc. This sounds like a lot of expenses for little amount of financial gain and lots of liability, doesn't it? But, there is a definite upside to renting versus selling that most people do not know about. Let's go through the following fictitious example first for clarification.
Let's say that we purchase a single family home for investment. Let's say that we acquired the property for $40K , and that it needs a lot of work. Looking at the comparable properties that have sold in the area, let's assume that the 3 bedroom, 1-1/2 bath home with 1300 sq. ft. will sell or appraise for $95K . Let's also assume that the total cost to repair will be $12K. Now, we have $52K in the property, and are looking at our options. What is the market like? Is it appreciating, stagnant, or depreciating? Assuming that the market is depreciating (as it is in our area currently), then what could you make off of the property if you sold it? Will you make $10-20K after expenses? How long will it be on the market? Will you have considerable carrying costs which will decrease your profits? How about a lower sales price? Will this help to sell it? Maybe adding some perks for the buyer might help. Keep in mind that perks for the buyer are out of your pocket. Perks could include closing cost assistance, purchase of appliances, change of cosmetics, or any other multiple help that you, the buyer, or the agent could think of.
Now, if you would wait for another year to sell, will the market be any better? Will you have more profit if you were to sell it? How about 2-5 years? Then would you be in a better position? But, you ask, what am I going to do about money in the meantime? Perhaps all of your working capital has been sunk into this house, and you need to make money on this house to pay off bills, free up cash, or buy another property. Here's one of best benefits of renting out your property... you can keep the property and sell it when the market is at it's peak by refinancing now, and pulling out cash (tax free), and rent out the property, generating free cash at no monthly expense to you! WOW!!! Did you catch this incredible opportunity? Think about it... you can pull out tax-free cash at no monthly expense to you, and wait out the market conditions, providing a much-needed service to the community, all in one fell swoop!
But, you say, tenants are not good for me. I just don't feel comfortable with meeting a prospective tenant, and taking the chance of having to fix up my property a second time. Well, you could always pay for a property manager to manage the property for you. They would be responsible for screening the tenant(s), pulling credit, conducting background checks, checking job stability and personal references, finding contractors to repair the small maintenance issues that arise from time to time, and everything else required to make your landlord experience a good one. Of course, you are going to pay for this service, reducing your monthly cash flow.
How about selling the property on a lease purchase deal, with a sizable down-payment? You can make the buyer responsible for the maintenance, and the tenant/buyer will have a vested interest in keeping the property in good shape. You would screen these people before you sign the contract, reducing your risk. If they run into financial difficulty, and cannot make their monthly obligation to you, then you would still have the down payment, plus you will still have the property to sell. You could either put your property on the market and have a settlement, or you could sell on a lease purchase again.
Sometimes, it is much better to rent out your property than sell it. You decide. It definitely depends on the property that you are looking to purchase, the location, the numbers, and the market.
Remember that mentor that we spoke about before? Now, is definitely the time to talk to them, and review your options.
If you have any questions, feel free to comment, or send me an email. I will be happy to answer them.
Talk to you later.
Whenever you purchase a house for investment, you immediately assume all of the financial responsibility for that particular property. As we discussed last time, this includes the utilities, repair costs, taxes, insurances, ongoing maintenance expenses, municipal & inspection expenses, etc. This sounds like a lot of expenses for little amount of financial gain and lots of liability, doesn't it? But, there is a definite upside to renting versus selling that most people do not know about. Let's go through the following fictitious example first for clarification.
Let's say that we purchase a single family home for investment. Let's say that we acquired the property for $40K , and that it needs a lot of work. Looking at the comparable properties that have sold in the area, let's assume that the 3 bedroom, 1-1/2 bath home with 1300 sq. ft. will sell or appraise for $95K . Let's also assume that the total cost to repair will be $12K. Now, we have $52K in the property, and are looking at our options. What is the market like? Is it appreciating, stagnant, or depreciating? Assuming that the market is depreciating (as it is in our area currently), then what could you make off of the property if you sold it? Will you make $10-20K after expenses? How long will it be on the market? Will you have considerable carrying costs which will decrease your profits? How about a lower sales price? Will this help to sell it? Maybe adding some perks for the buyer might help. Keep in mind that perks for the buyer are out of your pocket. Perks could include closing cost assistance, purchase of appliances, change of cosmetics, or any other multiple help that you, the buyer, or the agent could think of.
Now, if you would wait for another year to sell, will the market be any better? Will you have more profit if you were to sell it? How about 2-5 years? Then would you be in a better position? But, you ask, what am I going to do about money in the meantime? Perhaps all of your working capital has been sunk into this house, and you need to make money on this house to pay off bills, free up cash, or buy another property. Here's one of best benefits of renting out your property... you can keep the property and sell it when the market is at it's peak by refinancing now, and pulling out cash (tax free), and rent out the property, generating free cash at no monthly expense to you! WOW!!! Did you catch this incredible opportunity? Think about it... you can pull out tax-free cash at no monthly expense to you, and wait out the market conditions, providing a much-needed service to the community, all in one fell swoop!
But, you say, tenants are not good for me. I just don't feel comfortable with meeting a prospective tenant, and taking the chance of having to fix up my property a second time. Well, you could always pay for a property manager to manage the property for you. They would be responsible for screening the tenant(s), pulling credit, conducting background checks, checking job stability and personal references, finding contractors to repair the small maintenance issues that arise from time to time, and everything else required to make your landlord experience a good one. Of course, you are going to pay for this service, reducing your monthly cash flow.
How about selling the property on a lease purchase deal, with a sizable down-payment? You can make the buyer responsible for the maintenance, and the tenant/buyer will have a vested interest in keeping the property in good shape. You would screen these people before you sign the contract, reducing your risk. If they run into financial difficulty, and cannot make their monthly obligation to you, then you would still have the down payment, plus you will still have the property to sell. You could either put your property on the market and have a settlement, or you could sell on a lease purchase again.
Sometimes, it is much better to rent out your property than sell it. You decide. It definitely depends on the property that you are looking to purchase, the location, the numbers, and the market.
Remember that mentor that we spoke about before? Now, is definitely the time to talk to them, and review your options.
If you have any questions, feel free to comment, or send me an email. I will be happy to answer them.
Talk to you later.
Wednesday, May 7, 2008
tenants
Today, let's talk about buying, repairing, and flipping; versus buying, repairing, and renting. What is the benefits to both? What are your goals for buying houses at all? Is it because you want to become independently wealthy, owning lots of property, helping provide affordable housing to disadvantaged people, or is it perhaps a sense of pride in fixing up an undesirable house, and turning it into an example of exceptional workmanship?
One advantage to buying houses to "flip" is that you wouldn't have tenants if you sell right away. You wouldn't have tenants to destroy your newly remodeled house. Now, none of this is applicable if you purchase a commercial unit, so for the sake of discussion, let's talk only about residential applications. You wouldn't have to come back in and fix up any of the necessary repairs required after they leave your house. Even if they are immaculate tenants, they still would leave a few issues behind them that the security deposit should cover. All of this, is more time and money, and since time is money, it all equivalates to lots of money! We went through lots of these issues, and have found a solution that works for us. I will let you know later in a subsequent post. For today, we need to find out what the advantages are for selling versus renting.
Let's talk about the advantages of selling for right now. As we noted earlier, the first advantage for some people is not having tenants. Another advantage is making money quickly, without waiting so that you have capital to be able to buy another property to make money on. Another advantage might be so that you can terminate a relationship with a partner, and move on solo. And how about those wonderful monthly expenses that you will occur when you buy a property of any kind? You know, you don't hear about the downside with many of the real estate gurus out there. And yet, there are quite a few downsides, just as there are in any investment. These could include utilities, taxes, repair bills, insurance, incidentals (phone, fuel ,meals) etc. You also would not have to pay to have the mowing done, the snow removed, and any other outside maintenance done. How about those hidden defects that you didn't find while fixing up the property? These could include roofing, structural defects, plumbing, electrical, and/or HVAC. Many times, it is Murphy's law, that if the roof will develop a crack in it, or the heater decides to malfunction, it is right after you fix the property up! Depending on the location of the property, you also would not have the liability for the property after the sale occurs. We currently have a property in a local city, where about once every year and a half, someone drives by and takes off the front porch which we either have to fix it ourselves, or report it to the insurance company, and then put the porch back up. It is a definite downside for that property!
Let's talk about the pros of renting next post.
Don't forget to email any questions that you might have!
One advantage to buying houses to "flip" is that you wouldn't have tenants if you sell right away. You wouldn't have tenants to destroy your newly remodeled house. Now, none of this is applicable if you purchase a commercial unit, so for the sake of discussion, let's talk only about residential applications. You wouldn't have to come back in and fix up any of the necessary repairs required after they leave your house. Even if they are immaculate tenants, they still would leave a few issues behind them that the security deposit should cover. All of this, is more time and money, and since time is money, it all equivalates to lots of money! We went through lots of these issues, and have found a solution that works for us. I will let you know later in a subsequent post. For today, we need to find out what the advantages are for selling versus renting.
Let's talk about the advantages of selling for right now. As we noted earlier, the first advantage for some people is not having tenants. Another advantage is making money quickly, without waiting so that you have capital to be able to buy another property to make money on. Another advantage might be so that you can terminate a relationship with a partner, and move on solo. And how about those wonderful monthly expenses that you will occur when you buy a property of any kind? You know, you don't hear about the downside with many of the real estate gurus out there. And yet, there are quite a few downsides, just as there are in any investment. These could include utilities, taxes, repair bills, insurance, incidentals (phone, fuel ,meals) etc. You also would not have to pay to have the mowing done, the snow removed, and any other outside maintenance done. How about those hidden defects that you didn't find while fixing up the property? These could include roofing, structural defects, plumbing, electrical, and/or HVAC. Many times, it is Murphy's law, that if the roof will develop a crack in it, or the heater decides to malfunction, it is right after you fix the property up! Depending on the location of the property, you also would not have the liability for the property after the sale occurs. We currently have a property in a local city, where about once every year and a half, someone drives by and takes off the front porch which we either have to fix it ourselves, or report it to the insurance company, and then put the porch back up. It is a definite downside for that property!
Let's talk about the pros of renting next post.
Don't forget to email any questions that you might have!
Friday, May 2, 2008
Our story continued...
Our story gets more and more interesting as we go along. The last house that I wrote about, was the house that we bought in 2003. We still own that house, and are in the process of fixing it up a 3rd time, so that we can sell it. More on that in a subsequent post.
Now, back to the story. When we bought the house, we purchased the home in our name, applied for an 80% loan, and the partner paid for the repair costs, the 20% down payment, and closing costs. Our total monthly payment, at the time, was $450 for this house. We rented the house out to some people who I personally screened for credit, previous landlord experience, and also visited their home before signing the lease. Everything checked out o.k.
The credit was nominal (medical bills, and some utility bills), however there were no evictions on the credit report, and no indication that they were going to have a problem with anything. I even visited their home before signing the lease, just to make doubly certain that they were going to take care of the house.
After they moved into the house, they stopped "singing the tune" . They paid none of the rent, allowed their children to skateboard in the house, pulling up the intricately designed hardwood floors in the living room, tearing holes in the dining room linoleum, and breaking spindles out on the front porch railing, and the staircase going up the steps to the bedrooms. They also ended up with an almost $500.00 water and sewer bill, which is a leinable municipal item for the owner. Whenever you went to talk with them, they claimed hardship, cried the tears, and begged for understanding. One of their infant children had a tracheotomy, the property had issues that they could not live with, etc. The city sent an inspector out to the property at the tenants' request to look at "issues" that the house was uninhabitable, and needed repairs. The inspector called me, and told me that I needed to install 2 smoke detectors, and fix a leak in the bathtub. We repaired those immediately, and spoke with the inspector for reinspection, and he told us that we had a nice house with less than reputable tenants. He told me that they "sang the blues" for him too, and at first, he believed them.
We ended up evicting these people, paying over $1000.00 in attorneys' fees, and found out that if we would have inquired about them at the district justice level, we would have seen many cases of previous evictions in their name, which never went on the credit report!
The interesting part of this whole story is: that these people have done this same thing to numerous other people in their lifetime, and had the experience to pull it off many times. They knew the process so well, that after they lost the eviction in district justice level, they waited for the very last day of the appeal process, went into the prothonotary's office to appeal the decision of the district judge, paid NO money for back rent or otherwise, crossed out words on the appeal and changed them, and went their merry way. The prothonotary, sent the paperwork over to the business judge at the end of the day, and he took a cursory look at it, signed it, and they were now living in the property free of charge with their appeal filed!
I spoke with their new landlord (who was a realtor also), after they moved out of our house. She told me that these people just could not be the kind of people that I was describing! I told her to do her research in the district justice offices, and let me know what she found out.
This was certainly a learning experience for all of us, including our attorney, who just could not believe that someone could appeal a decision of the district court, without paying the amount of rent and costs awarded at that level, to the prothonotary! Fortunately for us, our attorney is a landlord, works with real estate, wrote a book about landlord/tenant laws, and is the solicitor for the sheriffs' department in the county. So, he had the experience to handle this oddball case as well. To say that we could have done this by ourselves, would be lying!
This brings us to another point for all of you investors and almost-investors: build your team wisely! Your team should include an accountant, an attorney, a contractor, and a realtor at the very minimum. You need access to many different people to help you achieve your goals of making money in real estate. Don't be afraid to pay them either. They deserve to make money on these transactions also. Remember, they are doing a service to you. Without them, you could not achieve your goals of investing. Besides, when you see the money that can be made from real estate, you won't ever go back to the mundane 9-5 mentality that is so prevalent in our society today.
Don't forget to email me any questions. I will gladly answer them for you. Talk to you soon.
Now, back to the story. When we bought the house, we purchased the home in our name, applied for an 80% loan, and the partner paid for the repair costs, the 20% down payment, and closing costs. Our total monthly payment, at the time, was $450 for this house. We rented the house out to some people who I personally screened for credit, previous landlord experience, and also visited their home before signing the lease. Everything checked out o.k.
The credit was nominal (medical bills, and some utility bills), however there were no evictions on the credit report, and no indication that they were going to have a problem with anything. I even visited their home before signing the lease, just to make doubly certain that they were going to take care of the house.
After they moved into the house, they stopped "singing the tune" . They paid none of the rent, allowed their children to skateboard in the house, pulling up the intricately designed hardwood floors in the living room, tearing holes in the dining room linoleum, and breaking spindles out on the front porch railing, and the staircase going up the steps to the bedrooms. They also ended up with an almost $500.00 water and sewer bill, which is a leinable municipal item for the owner. Whenever you went to talk with them, they claimed hardship, cried the tears, and begged for understanding. One of their infant children had a tracheotomy, the property had issues that they could not live with, etc. The city sent an inspector out to the property at the tenants' request to look at "issues" that the house was uninhabitable, and needed repairs. The inspector called me, and told me that I needed to install 2 smoke detectors, and fix a leak in the bathtub. We repaired those immediately, and spoke with the inspector for reinspection, and he told us that we had a nice house with less than reputable tenants. He told me that they "sang the blues" for him too, and at first, he believed them.
We ended up evicting these people, paying over $1000.00 in attorneys' fees, and found out that if we would have inquired about them at the district justice level, we would have seen many cases of previous evictions in their name, which never went on the credit report!
The interesting part of this whole story is: that these people have done this same thing to numerous other people in their lifetime, and had the experience to pull it off many times. They knew the process so well, that after they lost the eviction in district justice level, they waited for the very last day of the appeal process, went into the prothonotary's office to appeal the decision of the district judge, paid NO money for back rent or otherwise, crossed out words on the appeal and changed them, and went their merry way. The prothonotary, sent the paperwork over to the business judge at the end of the day, and he took a cursory look at it, signed it, and they were now living in the property free of charge with their appeal filed!
I spoke with their new landlord (who was a realtor also), after they moved out of our house. She told me that these people just could not be the kind of people that I was describing! I told her to do her research in the district justice offices, and let me know what she found out.
This was certainly a learning experience for all of us, including our attorney, who just could not believe that someone could appeal a decision of the district court, without paying the amount of rent and costs awarded at that level, to the prothonotary! Fortunately for us, our attorney is a landlord, works with real estate, wrote a book about landlord/tenant laws, and is the solicitor for the sheriffs' department in the county. So, he had the experience to handle this oddball case as well. To say that we could have done this by ourselves, would be lying!
This brings us to another point for all of you investors and almost-investors: build your team wisely! Your team should include an accountant, an attorney, a contractor, and a realtor at the very minimum. You need access to many different people to help you achieve your goals of making money in real estate. Don't be afraid to pay them either. They deserve to make money on these transactions also. Remember, they are doing a service to you. Without them, you could not achieve your goals of investing. Besides, when you see the money that can be made from real estate, you won't ever go back to the mundane 9-5 mentality that is so prevalent in our society today.
Don't forget to email me any questions. I will gladly answer them for you. Talk to you soon.
Wednesday, April 30, 2008
Our story continued...
The last time we spoke about our experiences, we stopped at a house that we purchased in 2002. We still have that home and rent it for a couple hundred dollars cash flow per month.
We then decided to purchase another house with the same partner in the same city. A couple months went by, and we found a VA foreclosure with 5 bedrooms, bath and a half, off street parking, and in a great area for only $36K. Again, we put too much money into the home (we sent the same investor out again to repair the house(!?!), and rented the house out. We spent huge amounts of money finishing the hardwood floors in the living room, installing carpet in the bedrooms and the hallway, laying linoleum in the dining room and installing laminate in the kitchen. The whole house needed spackle and paint (there was paneling on all of the walls downstairs), all new lights and ceiling fans, remodeled kitchen and bathrooms, and then the outside needed work as well.
Would we do that again? No way! As in any endeavor that we as humans take on, we make mistakes. The key is: not to make the same mistakes twice! We made many mistakes on this particular home. First and foremost, is the partnership situation. Whenever you decide to run a business of any sort, you need to make certain that if you are going to have a partner, then both you and the partner needs to be compatible. You need to have the same goals, principles, and techniques. It is every investors' goal to make money on their investment. It is their method of achieving this goal sometimes that can be the deterrent for initiating a partnership with them . This was our situation. We, my husband and I, were very different from our partner. His ideas and experiences, we did not share. It is also very important to map out your expectations of one another from the very beginning. We did not do that.
Another mistake that we made, is buying a huge house that needed lots of work. Granted, most of it was cosmetic, but it was still lots of time and money. Some of the repairs were mechanical, and they had to come out of our pocket. Also, large houses have more liabilities from many view points. First and foremost, the larger it is, the more money that you spend. Secondly, if you rent out the house, it will be to large families. That means more wear and tear on your walls and flooring. Thirdly, if you sell the house, most people are looking for a three to four bedroom home, not a five or more bedroom. Because of the size and amenities, you will be listing the home for more money. This will throw those people who are looking for lesser payments, out of your market.
Speaking of repairs, this would be a third mistake. Always interview many contractors, get estimates, and do not hire them by the hour, unless they are trustworthy, and you have known them for a long period of time. Try to visit the project frequently, and keep them on track. Keep in mind that time is money! The more time they put into the project, the more money that you spend. That was the gist of our third mistake. The contractor who worked on that project, was constantly shopping at the big box stores (for the house), constantly taking breaks, smoking cigarettes, and finding someone to talk to.
We have built new criteria for houses that we look at in the future, based on the mistakes that we have learned from in the past. We now have a crew of contractors that we feel comfortable with, and we buy the materials needed for the house, not the contractor. We now buy houses by ourselves, without a partner. That is not to say that we would not have a partner, if the right situation arose. The numbers have to work for these houses before we buy them, and we never buy row homes.
Let's talk more about this again. See you later.
We then decided to purchase another house with the same partner in the same city. A couple months went by, and we found a VA foreclosure with 5 bedrooms, bath and a half, off street parking, and in a great area for only $36K. Again, we put too much money into the home (we sent the same investor out again to repair the house(!?!), and rented the house out. We spent huge amounts of money finishing the hardwood floors in the living room, installing carpet in the bedrooms and the hallway, laying linoleum in the dining room and installing laminate in the kitchen. The whole house needed spackle and paint (there was paneling on all of the walls downstairs), all new lights and ceiling fans, remodeled kitchen and bathrooms, and then the outside needed work as well.
Would we do that again? No way! As in any endeavor that we as humans take on, we make mistakes. The key is: not to make the same mistakes twice! We made many mistakes on this particular home. First and foremost, is the partnership situation. Whenever you decide to run a business of any sort, you need to make certain that if you are going to have a partner, then both you and the partner needs to be compatible. You need to have the same goals, principles, and techniques. It is every investors' goal to make money on their investment. It is their method of achieving this goal sometimes that can be the deterrent for initiating a partnership with them . This was our situation. We, my husband and I, were very different from our partner. His ideas and experiences, we did not share. It is also very important to map out your expectations of one another from the very beginning. We did not do that.
Another mistake that we made, is buying a huge house that needed lots of work. Granted, most of it was cosmetic, but it was still lots of time and money. Some of the repairs were mechanical, and they had to come out of our pocket. Also, large houses have more liabilities from many view points. First and foremost, the larger it is, the more money that you spend. Secondly, if you rent out the house, it will be to large families. That means more wear and tear on your walls and flooring. Thirdly, if you sell the house, most people are looking for a three to four bedroom home, not a five or more bedroom. Because of the size and amenities, you will be listing the home for more money. This will throw those people who are looking for lesser payments, out of your market.
Speaking of repairs, this would be a third mistake. Always interview many contractors, get estimates, and do not hire them by the hour, unless they are trustworthy, and you have known them for a long period of time. Try to visit the project frequently, and keep them on track. Keep in mind that time is money! The more time they put into the project, the more money that you spend. That was the gist of our third mistake. The contractor who worked on that project, was constantly shopping at the big box stores (for the house), constantly taking breaks, smoking cigarettes, and finding someone to talk to.
We have built new criteria for houses that we look at in the future, based on the mistakes that we have learned from in the past. We now have a crew of contractors that we feel comfortable with, and we buy the materials needed for the house, not the contractor. We now buy houses by ourselves, without a partner. That is not to say that we would not have a partner, if the right situation arose. The numbers have to work for these houses before we buy them, and we never buy row homes.
Let's talk more about this again. See you later.
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