Step One
You must first decide what you are going to invest in and what you
are looking to purchase. Is it a single-family residence, condominium, or
multi-family rental unit they all have their pros and cons? I have focused
my investing on condominiums’ because of their lower price and yes, the
homeowners association. Although HOA’s can be difficult to deal with, at
times, they are mostly responsible for maintaining all exterior components
of the structure. The only components that remain are the inside of the
unit, which is minimal and easier to maintain.
The major components of the inside of the
condominium include, the drywall, ceilings,
paint, water fixtures, electrical, kitchen &
bathroom cabinets, and heating & Air-
conditioning components.
Determine what your components are and
estimate their useful life expectancy.
Component cycles, Minor-Paint, Medium-
Appliances, Major- Cabinets. As a rule of thumb, I plan on a medium
component replacement cycle every 5-7 years.
Minor Component Cycle – This can include small repairs and paint
touch-up upon a rental change. Less than $500 in total costs.
Medium Component Cycle – There comes a time where you will have
to replace some medium components of your purchase. Stoves,
dishwashers, garbage disposals, carpeting, and painting the entire unit.
This usually costs around $2000-$3000 each time. Remember I do my
own repairs, have someone install inexpensive carpeting and this is what I
usually spend. What is your expertise and if you need to hire someone,
make sure you account for this expense every 3-5 years.
Major Component Cycle – This includes all the above and may
include the replacement of kitchen cabinets, counter-tops, heating & air
conditioning components etc.
If you are not handy with a hammer, you can avoid large expenses
on your purchase by having an extended home warranty policy. When you
purchase your unit make sure that you ask the seller to pay for a one year
extended home warranty policy. This will protect you from having to
replace most of the components of your unit, i.e. garbage disposal, water
leaks, A/C unit, etc. These companies can protect you for less than $50
for a service call and possibly save you thousands of dollars in losses. In
addition, it is nice having the piece of mind of an expert a phone call away.
These policies are also extendable, after the first year, usually for a cost of
around $500.00 or less. Remember, if your not handy this might be a
great way to mitigate some major losses suffered by component failure.
Step Two
O.K. Now, where do you want to invest? I suggest that you stray no
further than 60 miles from your home. It becomes easier to manage your
investment from this distance. To keep costs to a minimum I suggest that
you do your own property management, which is not too difficult to
master. (Advertising, signs, forms, credit checks.)
Find your target area, then refine your search to a specific
neighborhood, and then become an expert in that area. You should know
as much or more than the local “Neighborhood Agent”. The more you
know about your neighborhood, the more successful you will become.
1. How old is your target area?
2. What is the condition of the complex?
a. You should consider age and remember that new properties
tend to appreciate more than older neighborhoods, but that is
not always the case. Do your homework.
a. Amenities
i. Pools
Step-By-Step
3. What is the makeup of the community?
4. What are the local rents?
5. Tenants
ii. Clubhouses
iii. RV storage
b. Homeowners Association
i. Reserve Study (Reserves are the live blood of the
homeowners association. Without reserves, the
Association will ask you, at some point in your
ownership, to come up with a special assessment to
replace or repair a major component.)
ii. Special Assessments (Read the minutes of the
homeowners association for at least one year to
determine if they levied or talked about any special
assessments. Also contact the Property Manager and
determine if there are any anticipated for the future.)
iii. Any restrictions on rental activities? (Although rare, you
must also read the Associations Rules and Regulations
to determine if there are any restrictions or additional
monthly charges for renting out your unit.)
a. Is it an ethnic neighborhood?
i. Do you speak the language and have an opportunity to
b. Is it a restricted neighborhood? (Senior Community)
a. This is extremely important to your success and you must
determine the accuracy of this number through various
sources.
i. Local newspaper rental ads.
ii. Real Estate Agent (MLS Listings)
iii. Drive by the complex and call on for Rent Signs.
iv. Online rental sites.
a. Repairs – Remember that tenants are “hard” on your
components, but you must draw the line on “normal” wear and
rent your unit easier than most?
tear as opposed to willful or negligent “destruction” of your
property.
b. Deposits – You should get at least the amount of the first
months rent. In my areas, I usually obtain less, because of the
renters’ inability to come up with more than that.
c. 3-day letters – The 3-day letter serves as legal notice for your
tenant to pay his/her rent or move out. If you have chronic
problems with tenants paying late, you might use this tool to
get them back in line as well as late charges. I find this hard
to believe, but I have tenant who pay late charges every other
month without question. They just choose to do so to make
ends meet.
d. Eviction – Try to avoid this at all costs, including “cash for
keys” which is, “If you move out by this weekend, I will pay you
$500.00 to get out!” If you have to go through the eviction
process, you can handle this yourself, as well, or hire an
eviction attorney. Go to your local Superior Court website and
look up “unlawful detainer” process. The online forms will
walk you through the process of filing the legal paperwork
necessary and serving the forms on the tenant. A professional
for around $1000-$1500.00 can also do this. It can take
about 30-45 days for the process to complete, if the tenant
does not fight the process. Worst-case scenario, if the tenant
files the process, files for bankruptcy, they can possibly live in
your property rent-free for one year. Best hire an attorney for
advice at this point.
e. Smoke Detectors – Have them in each bedroom, hallway, and
near the kitchen. Make sure your tenants sign that they are in
good working order.
f. Section 8 housing – Within the last few years I knew of, but
just began using Section 8 housing. It is a County service
provided to low to no income individuals who qualify. This is
the new Section 8 and not the old horror stories of the past.
The clients, for example, pay $200 of my $1200 monthly
6. Writing an offer (The Real Estate Contract)
rental payment. The County pays the remainder, every month,
and directly into my checking account. The clients are well
mannered, respectful, and thankful for what they are getting.
The County conducts a formal inspection of your unit to make
sure that everything is working and in good order. The
inspection is semi-formal with a county worker filling out pre-
made forms. The County will also tell you what they will pay
monthly for your rental. Therefore, if you expect and think
you can get more than they are offering, then you can provide
three rental units in the area that are getting more, or not use
their services. I would recommend this approach as a source
of renters.
a. Initial down payment should be between $3-$5K. The more
you offer, the more you have at risk, maybe… If you want to
impress the seller your can offer $10, $15, or $25K.
b. Your financing should be in place. 10-20% down and include
the pre-qualification or approval letter with your offer. The
agent may also ask for your FICO scores and proof of funds.
c. Who pays what? Buyer and seller customarily share escrow
and title equally. The seller should pay all other costs, but
everything is negotiable in a real estate transaction. What I
tell my clients is that everything comes down to the bottom
line. You may offer full price or more for the home, and then
ask for a credit of $5K in the transaction. What is your price
the? Its $5K less than full price to the seller and not a “full
price” offer.
d. Contingency periods are normally 17 days, but again may be
reduced or increased. If you are a buyer, have your agent
mark the box in the financing area to extend the financing
contingency period until just prior to closing of the
transaction to provide you with the most protection.
e. Contingency periods – This is the “Free” period in the
transaction where your initial deposit in NOT at risk. You can
back out of any transaction before the end of this period
without jeopardizing your initial deposit. If you are a buyer,
then you want this period to be the longest, if you are a seller,
then you want this period to be the shortest.
i. Financing – Anything agreed to, but can include all the
way to “loan funding” on the last day of escrow. What
this means to the buyer is that if you cannot get a loan
for whatever reason, you do NOT loose your deposit. If
you were a seller, then you would want this contingency
removed as soon as possible.
ii. Inspection – Again, same as above.
iii. Disclosures – This is the area where the seller will tell
you everything of “material fact” they know about the
property. If the seller tells you that the hillside behind
their home is slipping, run fast. Other disclosures may
include a death in the property, water damage, major
component repairs, etc. This is your notification of
those facts and it is your decision as to whether you
want to complete the transaction of back out.
Now its time to put all the knowledge you obtained to evaluate your
neighborhood to see if it is a good investment area. The one thing you
will find is that its ALL about PRICE, BEDROOMS, & RENTS. With these three
bits of information, you can make a quick determination if this is where
you want to invest.
PRICE: Like purchasing a stock from the stock market, determine
the price history of your neighborhood. I want you to research as far back
as when the unit was built and chart out your results. Real Estate is a
cyclical market with its ups and downs like a stock. The market is
somewhat slower than the AT&T stock you might own, but it goes up and
down just the same.
What is a good price? Real Estate Agents will tell you a “good price”
is what a “willing buyer and seller agree to pay for a home”. As an
investor, a “good price” is what YOU are willing to pay after completing all
your homework and working your numbers. If you are in a “down” market
then you need to “guess” where the bottom of the market is. However,
working your numbers should provide you “piece of mind” that if your
purchase does continue to decline, that you are in a “positive cash flow
position”.
Positive cash flow. How much is enough? A good rule of thumb is a
minimum of one month's rent. For example if your rent is $1200.00 a
month, then your positive cash flow should be $100.00 a month.
However, my rule of thumb is at least $300.00 or more per month right
now.
In a “down” market, you should invest like a “long term” investor.
Knowing that real estate is a cyclical market, buy a home with positive cash
flow and then wait for the market to turn positive. Once the market is
positive then you can worry about continuing to be a landlord, cashing in,
or trading up.
Now its time for an example… Around 1981 I purchased my first
condominium for $54,000. The tenant was in place and the place was
filthy. My new wife called me crazy, but she feels better now that it is paid
for. The point of this example is that the price of this condominium rose
to $112,000, more than double in price and I was on top of the world. I
decided to hold onto the condominium and saw the price plummet back
down to $60,000 before the next increase in the market to $200,000. The
market leveled off for many years before taking off in this last upturn to
approximately $450,000. With this most recent downturn this
condominium is now worth around $200,000 again and dropping.
However, what I can be thankful for in my planning is that the rental
market has done nothing but increase and I have been in a positive cash
flow situation since the beginning. Knowing all along that my renter is
paying for my purchase and creating me income and equity.
BEDROOMS & RENTS: Remember, a one bedroom is rentable, but
can be difficult to sell. When you purchase your home, you should also be
looking at your future ability to sell the investment. Two and three
bedrooms are easier to rent, but you also have to be wary of overcrowding.
The difference in rental prices is currently about $200-$300 per bedroom,
in my market. In my farm area, a one bedroom rents for $1200, a two
bedroom for $1600, and a three bedroom from$1800-1900 per month.
My rental market is extremely “hot” right now and has been for many
years. It takes me less than one week to rent out my unit with just a “For
Rent” sign placed in the window. I have renters calling for weeks after still
asking if it is for rent, after I rent it. I hold firm on my rental asking price
for this reason, because “yes” they do ask for a rent reduction when you
meet them. Why not, all you can tell them is “No.”
Step Three
Let us go look for an investment! Now that you have your team in
place, you can begin your search. Remember, time is on your side so be
patient. Let us go over the different methods.
1.
Working with an agent (MLS Properties)
a. Have the agent send you properties by email in your target
area.
b. Look at as many properties as you can.
c. Work your numbers
d. Place an offer
e. Negotiate, negotiate, and negotiate.
I personally use a Software program that I developed from
information available on the internet. I also recently purchased a software
program that is more investor intensive from the internet for about
$100.00. For the below example I will use the more user-friendly version.
Example:
This is my farm area where I will begin purchasing condominiums
again when the price is right. The price became right the other day when
they hit my target of $140,000.00. However, by the time I called to
inquire about the price, the agent told me that she had five offers and two
were over the asking price.
Remember you are investing on your timeline and acquiring property
at below market prices. I know, and now you as well that the real estate
“buying window” for homeowners is between May – September of each
year. This is when the folks who wish to buy a home are looking and
making their purchases. An investor looks for their buying window to be
September – February and especially holiday periods at the end of the
calendar year. This is where you will find your best buys.
As you can see from the chart below, at a purchase price of
$140,000 with 10% down and the expense information inputted I could
make some money each month. The second chart demonstrates that I can
“cash flow” with over $300.00 per month, while my tenant makes my
payment, reduces my loan balance each month, and provides me with a
positive cash flow situation. If you feel comfortable and can manage your
first purchase like this, then what if you multiply this by ten? Does
$3000.00 a month sound like a good way to make money? However, there
is always a give and take situation and when you get to $3K a month your
really working hard to keep these investments earning money.
What are your numbers? Make sure you know. Mine are bare bones
because I do my own repairs and manage my own investments. Your
numbers may be different.
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