We’re not talking here about whether you should be a landlord or not.  It’s more a planning issue, so that you can select properties and invest appropriately in order to accomplish your investment goals in a way that suits your personality and abilities.  An objective assessment of your attitudes and capabilities at the beginning of the real estate investment process is important.

·         Do you like working with people?

·         When complaints are made, can you handle anger or volatility?

·         Have you been stable in other long term endeavors?

·         Can you enforce rules and stand up for your rights?

·         Do you get along better with certain people types or income strata?

·         Can you handle surprises or uncertainty?

It isn’t necessary that you have all these qualities or abilities.  It is necessary that you understand where you excel and where you may need help.  Whether it is you, your spouse, or an employed manager, there are activities that simply cannot be avoided in managing rental properties.

·         Interviewing and selecting of tenants – including turning them down if they aren’t up to your requirements

·         Enforcing your rental and behavior rules

·         Collecting rents when they aren’t on time

·         Fielding complaints from tenants – whether they are valid or not

·         Responding to emergency repair issues – perhaps late at night

·         Doing all of this and more over a period of years

Many of us just seem to gravitate to a certain income strata.  You may do well with higher income tenants renting in more exclusive areas.  Or, on the flip side, you may get highly annoyed by a rich college student making demands on your time.  It could be that blue collar workers with families are just your cup of tea.  It doesn’t really matter.  What does matter is that, if you do lean in one direction or the other, you recognize that fact and invest in areas and properties that will bring you the tenants you’ll enjoy serving.

If some or all of the more people-interactive tasks are not your thing, it doesn’t mean you can’t own rental properties.  You may just need to make purchases that will return on your investment, even if you must hire help on a part or full time basis.  Or you may be able to let your spouse handle some of the tasks.

Learn what you like and do well, and find other solutions for the other requirements. 

Supply – What is the supply situation…how many comparable rental units are available in the immediate area?  Pretend you’re a renter and look through the newspaper ads, drive around and look for signs, and don’t ignore the individual owner-landlord properties.  They are all your competition.

Demand – What factors are out there that may influence demand for your rental(s)?  Is the area growing, with new jobs and industry?  Or, not so good, are people moving away?  Do you know of new commercial ventures coming to the area, or community developments that will make the neighborhood more desirable soon?  Demand is the other side of supply.

Competition and Features – Supply and demand are important, but property characteristics, features and benefits can have an impact as well.  Recent surveys of renters indicate that a large percentage will decline to rent an otherwise suitable property if it lacks their most desired feature.  What might that be?

·         Washer and dryer

·         Security features

·         Modern or gourmet kitchen

·         Large area for entertaining

·         Close to work

·         Close to green areas

With the price of vehicle fuel always climbing, location is more of a concern for many renters.  Proximity to jobs, shopping and outdoor recreation can add value to your property, allowing you to ask more in rent than comparable properties farther away.

Have you done renovations that include the latest in kitchen or bath features found in single family homes?  Whether it’s cable TV, high speed internet access, or some other hot new feature, if your unit(s) offer amenities that are in demand and not found in many of your competitor’s units, then you can charge more for rents.

Your Desires – It isn’t all about the market.  What are your desires or abilities?  If you hate interviewing and selecting tenants, you might want to reduce rents to entice them to stay for longer lease periods.  Lower rents also increase the pool of tenant prospects, making interviewing and selection easier.

Weigh all of these factors and research the competition.  Watch your market area, and make adjustments when conditions or your desires change.

What is break-even ratio?  Simply, it’s the point at which a rental property goes from negative to positive cash flow, or the point at which we break-even on cash flow to operate the property.  This is one calculation used by lenders to determine the feasibility of lending on a real estate rental property.  Too high a break-even ratio, and you’ll have trouble getting a loan.  So, the lower the ratio, the better.

It is expressed as a percentage, and isn’t a difficult calculation.  In your financial analysis and valuation of a potential purchase, you’ll have all of the numbers in front of you to determine the break-even ratio.  We will be using Gross Operating Income or GOI, Debt Service Cost, and Gross Operating Expense. 

1. Our GOI, or Gross Operating Income, is the amount of money we have to spend after we’ve subtracted vacancy and credit losses (or estimates) from our gross rental income.
2. The gross operating expenses are the costs to operate and manage the property.  This would be all direct costs of operation, including management salaries, repairs, maintenance, taxes, insurance, office and supplies expenses.
3. The debt service is the total of all principal, interest or loan charges paid on the mortgage for the year. 
4. The Break-even Ratio is arrived at by adding the Debt Service to the Gross Operating Expenses, and dividing the result by the GOI.  Or Debt Service + Expenses / Gross Operating Income.  Basically, you’re just taking the total of all the cash you’re putting in for the year and dividing it by the cash you’re getting back.

Let’s do a quick calculation for an example four unit property that you’re purchasing with a $195,000 loan at 7.0% interest.  Rents average $900/month each unit, and vacancy/credit loss is 7%.  You manage them yourself, so no management salaries are involved, making your annual operating expenses approximately $16,000.

·         The loan is $1297/month with no other charges, for a total annual Debt Service of $15,564.

·         Operating expenses are $16,000 per year.

·         Gross Operating Income is $900 X 12 X 4 = $43,200 minus 7% = $40,176.

·         ($15,564 + $16,000) / $40,176 = .785, or 78.5% Break-even

Generally, lenders are OK with 80% or better for this result, but you’ll need to check the market and lender criteria at the time of your evaluation of a property.

Assuming the seller has great records, what has been their historic vacancy rate?  Let’s say that records show a rate of 6% for vacancy.  If this were a six unit property, that would only be about 4.32 months of vacancy out of the 72 month rental year.  However, if the average rent is $900 per month, this is $3888 in lost revenue.  And the vacancy rate could be higher. 

Whatever it is, don’t just take the last year as an indicator.  Look several years back and see if there is a trend in either direction.  If vacancy has risen over the last couple of years, factor in an increase for the next year for your valuation research.  Don’t’ stop there either, as you should try to find figures for comparable properties in the area.  This is more difficult, as landlords don’t advertise these numbers.  A search on the Internet for “apartment vacancy rates” yields a great deal of data, some of it specific to urban areas.

If the property you are considering has a vacancy rate significantly lower or higher than others in the area, determine the probable reason(s).  If higher, is there something you can correct or change economically that will bring it more into line with others, as well as increase profitability.  If lower, you might want to tack a little on to the number you’re using for the valuation to provide a “worst-case” scenario.

When examining the non-payment of rent, or credit losses, it isn’t just numbers.  You might even have to ask the seller some questions about how they go about rent collection, particularly when a tenant becomes delinquent.  If the seller is a bit laid-back in their style and collection practices, you can possibly look forward to better results with a strict policy that’s enforced with speed.  Of course, a firm grasp of your legal rights and responsibilities as a landlord will go a long way in this regard.

The important thing is to make the vacancy and credit loss numbers a part of your due diligence and financial evaluation of any rental property.  It could save you from a financial mistake or it could show you hidden opportunity in a property.

The first, and most obvious, thing to check is the duration of the current leases.  Are most of them rolling over in the next six months or less?  What is the anticipation of renewals by the current tenants?  If they are at market levels, you’ll really want to get new leases without having to get new tenants.  If the lease terms are out a year or more, examine them to make sure that they don’t have loopholes or easy escape clauses.  There’s no fun in having a number of tenants bale on you unexpectedly a couple of months after you buy the property.

Are the rents at current market levels?  If they are below market, you really want to see shorter terms before expiration, giving you the ability to raise rents sooner.  If they are at market level, are they really paying what it says in the lease.  This is one area in which buyers have been very upset after purchase.  Just because a lease says that Tenant Smith pays $900 per month, it doesn’t mean that the really do.  Check lease rental terms against actual rental deposits.  You don’t want to buy and then find out that several tenants are trading out services for rent.

Dean Graziosi, in instructing his real estate investment clients, is very clear with tips about getting the real information behind leases.  Do the tenants have options to renew?  Do these options allow rent increases, or can they renew at their current rate?  This could be a very important factor in your purchase decision.  Are there automatic rent increase escalator clauses?  With long leases, you want to be sure that the increases negotiated will cover inflation.

When you think you’ve found that perfect multi-family investment, pay extra attention to the leases currently in place.

Second, the fact that buyers are present, together and in competition, can mean competitive pressures will result in a better price for the property.  Another thing sellers like about auctions is the fact that there is a fast track to closing.  The typical home auction will move a property without follow-up inspections, repair negotiations or other time consuming back-and-forth from contract to closing.  Generally, the buyers are market-savvy, and they will do their due diligence and property evaluation before the auction.  The price that takes the property is the price that goes forward to closing.

Buyers, of course, like auctions because they perceive an opportunity to buy at bargain prices.  Whether it’s a foreclosure, tax sale, or just a motivated seller, buyers come to an auction to buy at below-market prices.  If you are considering buying at real estate auctions, Dean Graziosi, in his book Be A Real Estate Millionaire, suggests doing your homework carefully, and going in with a plan for bidding, including a top number for each property.  Stick with the plan, and you’ll either walk away with a bargain, or you’ll leave empty handed but not trapped in a losing deal.

There are three major categories of auctions, and they can result in very different outcomes.

·           The Absolute or No Reserve Auction - With no minimum bid, and a requirement that the seller sell to the lowest bidder, this isn’t an auction type used a lot in real estate.  The buyers love it, as it guarantees the highest bidder will get the property, but sellers fear the high bid will not be even close to what they were expecting.

·           The Minimum Bid Auction - In this auction, the high bidder is also guaranteed to get the property.  The difference is that the seller sets a minimum bid that they are willing to accept.  This is a popular auction style for real estate, but sellers need to be sure to set their minimum at a price they’re willing to accept.  There is a tendency for buyers to arrive wanting to pay only the minimum, thus the property might only get one bid.

·           The Reserve Real Estate Auction - Because the seller reserves the right to sell the property at the high bid or not, buyers aren’t fond of this type of auction.  They could do a lot of research work, come in with the right plan, be the highest bidder, and still not get the property.

Shrubbery, flowerbeds, or other forms of landscaping around the foundation of a home are attractive, but when they get too close they may contribute to serious and expensive problems. Maintain a healthy buffer between growth and the foundation and keep an eye out for encroachments into this important zone. When you look at potential investments or send your building contractor or landscaper to work on your own home or your rental property, for example, make sure that foundation issues are adequately addressed.

Here are some guidelines to help you maintain an adequately clear foundation:

·         Keep about 18 inches next to your foundation clear, and make sure that soil drains away – not toward – the home. Take a watering hose and run water in that space next to the foundation. If it runs downhill away from the home, you’re in good shape. You don’t need a jogging path, mind you, so there is no need to go overboard. But an average sized person – or a child, for example – should be able to walk unimpeded around the entire structure with one shoulder hugging the outside wall.

·         Clear away any unwanted growth, accumulated dirt, or leaves and other debris left over from winter.  If growth is touching the wall of the foundation, it is too close. Have rotten wood, deteriorating brickwork, or termites tracks – that look like veins made of thin paths of mud – checked more thoroughly by a qualified contractor.

·         Drainage needs to slope away from the home, not toward it; otherwise water may pool at the base of your home and cause trouble. Or it could leak into the home if there is a severe rainstorm or if someone accidentally forget to turn off an outside faucet that is connected to the wall of your home. If the turf is piled up or sloped like a snowdrift against the foundation, that is also a problem. The landscape should grade gradually downhill, starting at the base of the foundation and extending outward.

If the gutters are clear, there is space around the outside walls of your home, and drainage is in the right direction, the foundation will stay uncluttered and dry and won’t be a suitable home for unwanted pests. Plus, one of the first places a home inspector or appraiser looks is around the outside perimeter of the house. If the foundation is not correctly maintained it can kill an otherwise smooth transaction or cost you a ton of repair fees to rectify the situation and appease a buyer or their mortgage company.

Make it a habit to conduct routine homeowner maintenance tasks such as this monitoring of your foundation. They don’t necessarily require a big budget or lots of weekend hours, but they can help to preserve the value of your property, improve the way it looks, enhance the enjoyment of your home, and boost your valuable equity.

#1

Lay the Groundwork

The first step to creating beautiful flowerbeds around your property – whether it is a home, an office building, or a cluster of condos – is to define or outline the beds. Curves add interest and are visually more natural and organic than straight lines, so keep that in mind as you plan your landscape. Once you have your idea envisioned, use a flat-ended shovel to cut into the turf and mark the outline of the flowerbed. You don’t have to dig a ditch, just cut into the earth to make a slight trench about an inch or two wide and 4-6 inches deep.

Once that is done use flexible rubber border material found at any home improvement store to create a boundary between the lawn and your flowerbed. If you need to add topsoil to the bed to ensure healthy plants, do that next. Then use a good quality weed block fabric to cover the area. This can also be found in rolls that look kind of like wrapping paper at home improvement stores. Staking it down controls the weeds so that you don’t have to spend your free weekends on your knees pulling weeds out from around your plants. But it also allows enough water to reach your plants so that they can grow up strong and healthy despite the fabric.

#2

Add Colorful Flowers and a Cheerful Border

With the help of someone working at a nursery – unless you happen to have a green thumb – select plants and flowers that not only look good but also are appropriate for the location, climate, and amount of attention you can reasonably afford to give them over the long haul.

Cut little X’s into your weed blocking fabric – which now covers the flowerbed dirt like a wall to wall carpet – and dig out holes just large enough to plant your flowers. Pat them into the ground with some dirt or potting soil, give them some water, and pat yourself on the back for a great job that is almost done.

#3

Mulch is Magical

Finally, use a thin layer of dirt to hide the weed block fabric. On top of that disguise the fabric completely with a liberal amount of mulch Hardwood mulch generally holds its color the best, while also helping to retain moisture during warm months and provide warmth to your plants in winter. The visual benefit of mulch is stunning if it is applied carefully and neatly. The contrast in color between the rich dark mulch and your colorful palette of flowers gives the flowerbed a thoroughly professional appearance and can dress up even the drabbest of landscapes. 

Home improvement stores also sell inexpensive fencing that is about two feet tall. Some is wooden, some plastic, and some metal. If you want to really dress up your flowerbeds, add some around the edges.

Using the exact same methods outlined above – on a budget of about $5-$10 per square foot or less – you should be able to jazz up flowerbeds, the sides of your walkways, and other prominent features of your yard.

If you haven’t a had a chance to watch this videos, you need to watch them now. It is in it’s 2nd month, so there are now two real estate investing videos posted, with plenty more to come.

Deal of the Month Real Estate Investing Video 1
Deal of the Month Video 2

Dean Graziosi’s Video Blog

To those who may not be familiar with the term “curb appeal”, it is real estate jargon used to describe the allure of a home when it is viewed by passersby from the street. Curb appeal works like a magnet on browsers who are out crawling the curbs search of homes, either in cars or during a leisurely after-dinner stroll. But it is important to remember that every magnet has two opposite poles. Your curb appeal magnet will either draw potential buyers in for a closer view of your home, or it will repel them and they won’t even slow down for a second glance.

The Importance of Curb Appeal

For example, gutters stuffed with leaves and a burned out porch light or broken doorbell are minor issues that do not detract from the actual value of a home. But to a buyer who pays close attention to subtle clues and telltale details, unkempt gutters could indicate a poor track record of home maintenance. A broken doorbell can be an embarrassment for a Realtor coming to tour your home with clients, and it can make them skeptical of your entire home wiring system.

The missing porch light is no big deal – unless buyers are touring neighborhoods at night, a time that is popular for people who are busy at work during daylight hours. They might not spot your house or house number because of the lack of light, and even if they do they might get the impression that it lacks that warm, inviting quality that many buyers shop for in a home.

On the other hand, if your walkway is flattered by attractive ambient lighting, the entryway sports a beautiful door with a stained glass panel, and the flowerbeds are manicured and pretty, it can help close a sale. Most sales of homes are powerfully influenced by the buyer’s emotions. Appealing to those emotions in a positive and uplifting way is an important part of real estate marketing.

How to Evaluate and Critique Curb Appeal

Before you improve your curb appeal, you will first need to evaluate it and come up with a game plan. Begin by driving through the most attractive neighborhood you can find to check out what others have done to increase their curb appeal. Even if your property is modest and your goal is to do an inexpensive project, you can still get valuable ideas from those who splurged on their own projects.

·         For instance, what colors did they choose for the shutters and trim, what kind of entry door and hardware looks best, and how are the house numbers displayed? Sometimes a handsome brass doorknocker can be a knockout, and a cheap white picket border around the walkway can add upscale charm and character.

·         Next, observe your own house from the curb and compare and contrast it with those you found most attractive. Look for conspicuous blemishes like bald patches in the lawn, dead leaves clinging to the shrubbery, shabby lawn furniture, unkempt garden hoses and trashcans, roof shingles that are curling, and peeling, faded paint.

·         Focus on the front door and entryway because those are the center of attention in terms of curb appeal. Replace broken windowpanes, torn screens, and purchase a new door if necessary – or give it a good coat of varnish or paint. The entryway is the focal point for your house.

Add Perceived Equity on a Shoestring Budget

While most home equity projects involve not just labor but also a significant investment of cash, improved curb appeal can usually be accomplished on a shoestring budget. The sky’s the limit, of course, and the more you have to spend on improving the exterior look of your property, the better. But if you are trying to preserve your profits by conserving your funds, look to an inexpensive curb appeal makeover as the path of least resistance and biggest immediate rewards.

·         Trim the grass and shrubbery and put down fresh, rich-looking mulch or pine bark.

·         Ask your local nursery to help you select flowers that are inexpensive yet colorful and low maintenance. $200 worth of new flowers, pine straw, and mulch can make a drab yard look like a million bucks.

·         Clean out the gutters because it looks good, helps prevent water damage to your home or yard, and conveys the impression that the entire property is probably looked after with pride of ownership.

·         Wash the windows to make them sparkle. Use newspaper to dry them instead of a cloth, because newspaper does not leave streaks.

·         Add some inexpensive walkway lighting or just leave the porch light on at night to accentuate the beauty you worked so hard to create.

Get Creative in an Emergency

If your lawn needs help, you might have to call in a landscaper to re-seed it. But in a pinch you can cover those bald or brown patches with potted plants or attractive lawn furniture. If you can’t afford to repaint your entire exterior, focus on the trim. Making the window frames, doorways, and shutters look sharp can help give the home a facelift, and may draw attention away from areas where the siding could use a fresh coat.

Remember to Give Browsers a Sales Sheet

To make sure that you connect with buyers, consider putting sell sheets or flyers near the curb for them to take. Home improvement stores sell plastic tubes on metal stakes that are specially designed for keeping MLS sheets conveniently accessible but protected from the elements. If a buyer likes your house and walks away with marketing information in hand, there is a much greater likelihood that they will contact you or pass the information on to someone else who is house hunting.

Curb appeal is not necessarily difficult or costly to accomplish, but it can give you a distinct advantage over the competition, and that is especially valuable during challenging market cycles. Invest a little time and energy to achieve and preserve the aesthetic appeal of your property, and it may turn out to be one of the most rewarding investments you make. Good first impressions are important for business, and that idea is especially true when it comes to selling real estate.