Once you’ve determined what target location where you want to invest in real estate and done all the research on the neighborhood, what properties sell and rent for, along with all the idiosyncrasies of the neighborhood, it's time to start looking for your first property.
When looking at properties to figure out what's a good deal or not, we need to work backwards. There are five things that you need to think about when determining whether this deal is a good one for you.
1. When you're looking at a prospective property, don't start with want the property is listed or it what the asking price is. If your plan is to renovate the property and resell it, start with what you think you can sell it for. If you're looking at 3 bedroom, 1 and a half bathroom house, the first thing you need to think about is what all if the newly renovated houses that size have sold for in the past 6 months. Don't just think about the one or two that sold the highest or the one or two that sold the lowest. Think of them all. Since you've been doing your homework on the neighborhood, you should know why some sold for more or some sold for less. With this in mind, you should be able to come up with a reliable after repaired value or "ARV".
2. The next thing you have to think about is how much the renovations will cost. If you don't feel comfortable figuring this out in your own, ask a reliable & trustworthy contractor to come with you. If you convince him that he'll get the work when you but the property, he should be willing to give you some estimates on the renovation. There are a couple things to keep in mind here.
1. Make sure your contractor is trustworthy. You don't want to buy a property thinking the repairs will cost you X, only to find out later that the contractor was under bidding you just to get the job.
2. Make sure that the renovations that you're planning will put the property in the same condition as the comparable sales that you're relying upon for value. If you're looking at a comparable sale where the bathrooms were all renovated and you're not considering fixing up the bathrooms in this property, you're provable nit gong to get the same price.
3. Factor in the unknown. In any project, things can take an unexpected twist. You may think that the heater has another 10 years of life in it, only to discover that you need to buy a new I've. You need to count on sobering not going right when you do your numbers.
3. The third thing that you need to think about is your carrying cost. Between the time you buy the property and the time you sell it, there’s going to be real estate taxes, insurance, gas, electric & water bills. Determine how long you think that you’ll own the property and how much these bills should be on a monthly basis and you’ll have the number. As I said above, things have the potential to take longer then expected. You may think the renovations could take two months, but it could stretch to three. The same thing holds true for marketing time. Make sure you have conservative estimate of how long you’re planning on owning the property and what they carrying costs should be.
4. The next thing to consider is closing costs. When you buy and sell the property, you’re going to have to pay transfer tax, title insurance, fees to record the mortgage, realtor costs and mortgage closing costs if you finance the property. Make sure that you have a good handle on these costs for both when you buy and sell the property. Between your realtor and your mortgage company, you should be able to get a good estimate of what these costs are.
5. The last thing you need to think about… and the best thing to think about is your PROFIT! How much do you want to make in this deal? It all depends on how hard or easy the deal is going to be and how much you value your own time. He higher you set this figure, the harder it will be to find an investment that works, but it will be more rewarding when you do it.
Let’s go through a practical example…
You see a three bedroom, one and a half bathroom house that needs work. It’s listed for $62,000.
You’re very familiar with the area and you know that similar homes have sold between $90,000 and $105,000 once renovated.
There are no adverse conditions to the property and it’s close to a popular church, so you determine it should sell for $100,000 once complete if you do a nice renovation job. You’ve seen the house that sold for $105,000 and it was beautiful… nicer then you’re planning on renovating this house.
You’ve spoke to your contractor and he assures you that you should be able to renovate it to the level that you feel comfortable with for $18,000. You check is references and feel comfortable that he stands by his prices. When doing your numbers, you want to budget another $1,500 for unforeseen problems bringing the total to $19,500.
You believe that the property should be sold within 9 months of having bought it and the carrying cost should be roughly $2,500.
You’ve spoke to a realtor and a hard money lender and determined that your closing costs and interest should be $16,000.
Since this is one of your first projects and it doesn’t seem that hard, you want to set a profit goal of $10,000.
$100,000 Sales price
Subtract:
$19,500 Renovations
$2,500 Carrying Cost
$16,000 Closing Cost
$10,000 Profit Goal
$52,000 Maximum Amount you can pay
From a strategy standpoint, you can choose to offer lower and negotiate, but if you’re numbers tell you $52,000, stick with hat number. One of the biggest mistakes that I’ve seen people make over the years is they get emotionally caught up in the negotiations. They’ll offer less, but when the seller wont go below $59,500, they’ll go back to their original assumptions and delude themselves into thinking that they’ll sell it for more than they originally thought or the renovations will cost less. This is a huge mistake. If your assumptions are correct, don’t change them to make the deal make doable. If the numbers don’t work, move on to the next property. If you looked at 100 properties so far and the numbers don’t work on any of them, keep looking. Remember… the goal is not to be a real estate investor… the goal is to make money by investing in real estate.
Thursday, January 5, 2012
Tuesday, December 13, 2011
When do I know enough about my target market area to make my first investment?
Now that you’ve defined your target market area, when do you know enough about it to accurately predict what any given property will sell or rent for? I’ve come up with a 5 step process to help you get to know and to tell you when you sufficiently know your market area.
1. Sales & Rentals: You should be going to every open house and inspect as many rental and sale listings as you can in your target area. While you’re there take note of the size, layout, condition, precise location and price of the property along with anything else that jumps out at you that will make this property either desirable or undesirable. Keep in mind that it’s not enough to know what the property is listed for, but you should also get to know what the property sells or rents for. This is a much better indication of value. You should also try to find out if there was any special financing in the sale. A seller might have got a higher price, but if he had to hold back financing on a buyer who doesn’t qualify for traditional financing, it needs to be factored in when you determine what your future investment properties may sell or rent for.
2. Time Changes: I’ve seen properties that look perfectly fine during the day, but when the sun goes down, it brings in a whole new crowd… and that new crowd may not be good for your value. There are also some properties that are close to a loud bar or a home that tends to have a lot of late night parties. There are certain corners where the neighborhood teenagers hang out at night. All of these can hurt your value. Also, pay attention to bus stops. If there are 10 people sitting on a certain house’s front steps waiting for the bus every evening or early morning, it’s not going to help your value. The opposite can also be true. Certain properties may be on parade routes that make them particularly desirable for those times of the year. Make early morning, late night and weekend drives and walks around your target area part of your new routine. Make sure you know how the neighborhood changes on nights, weekends & different times of the year and it will help you avoid trouble or find an opportunity.
3. Know Your Neighbors: From my experience, I’ve found that most of my neighbors have been very nice. However, that’s not a guarantee. There are halfway houses, adult bars, methadone clinics, properties where sex offenders live, properties that seem to have frequent police visitations for whatever reason, blocks with religious buildings, community leaders or elected officials. All of these can tremendously hurt or help your value. The first property that I ever bought happen to be right next to halfway house. I didn’t know the neighborhood well enough to know this and the realtor & seller never volunteered the information. Thankfully, the people there were very nice and we got along very well, but I’m sure that it hurt my value to some degree. If a famous person ever lived there or there was ever a horrific crime there, you need to know all of the above before you start investing and how it will affect that value and desirability for your potential property. Many years ago, I was with a friend of a friend and they told me that they were moving to a neighborhood that I knew very well. They told me that they had just bought a house and where it was. Without even thinking I said, I know that property. 10 years ago Joe Smith (not his real name) murdered his wife and stuck the body behind the wall of the basement there. It was big news. You can only imagine the look on her face. She didn’t know her target areas well enough and ended up buying a property with a bad reputation.
4. No Clue: There are also properties that for no discernable reason stink. I can think of a particular corner in downtown Philadelphia where every business that ever went there failed and failed quickly. I watched every one of them and even with my years of experience, I can’t figure out a reason. Maybe it’s cursed. Who knows? It doesn’t really matter the particular reason. What does matter is that this property isn’t worth anything near a similar property that’s a block away and you need to know the difference before you buy it.
5. No Shortcuts: There are no shortcuts to knowing a neighborhood. This is why I strongly recommend spending as much time there as possible. This is where you should go out to eat, do your shopping, get your drycleaning done, walk your dog, etc. All of this will help ensure that you know your target area intimately and give you the greatest chance of success.
1. Sales & Rentals: You should be going to every open house and inspect as many rental and sale listings as you can in your target area. While you’re there take note of the size, layout, condition, precise location and price of the property along with anything else that jumps out at you that will make this property either desirable or undesirable. Keep in mind that it’s not enough to know what the property is listed for, but you should also get to know what the property sells or rents for. This is a much better indication of value. You should also try to find out if there was any special financing in the sale. A seller might have got a higher price, but if he had to hold back financing on a buyer who doesn’t qualify for traditional financing, it needs to be factored in when you determine what your future investment properties may sell or rent for.
2. Time Changes: I’ve seen properties that look perfectly fine during the day, but when the sun goes down, it brings in a whole new crowd… and that new crowd may not be good for your value. There are also some properties that are close to a loud bar or a home that tends to have a lot of late night parties. There are certain corners where the neighborhood teenagers hang out at night. All of these can hurt your value. Also, pay attention to bus stops. If there are 10 people sitting on a certain house’s front steps waiting for the bus every evening or early morning, it’s not going to help your value. The opposite can also be true. Certain properties may be on parade routes that make them particularly desirable for those times of the year. Make early morning, late night and weekend drives and walks around your target area part of your new routine. Make sure you know how the neighborhood changes on nights, weekends & different times of the year and it will help you avoid trouble or find an opportunity.
3. Know Your Neighbors: From my experience, I’ve found that most of my neighbors have been very nice. However, that’s not a guarantee. There are halfway houses, adult bars, methadone clinics, properties where sex offenders live, properties that seem to have frequent police visitations for whatever reason, blocks with religious buildings, community leaders or elected officials. All of these can tremendously hurt or help your value. The first property that I ever bought happen to be right next to halfway house. I didn’t know the neighborhood well enough to know this and the realtor & seller never volunteered the information. Thankfully, the people there were very nice and we got along very well, but I’m sure that it hurt my value to some degree. If a famous person ever lived there or there was ever a horrific crime there, you need to know all of the above before you start investing and how it will affect that value and desirability for your potential property. Many years ago, I was with a friend of a friend and they told me that they were moving to a neighborhood that I knew very well. They told me that they had just bought a house and where it was. Without even thinking I said, I know that property. 10 years ago Joe Smith (not his real name) murdered his wife and stuck the body behind the wall of the basement there. It was big news. You can only imagine the look on her face. She didn’t know her target areas well enough and ended up buying a property with a bad reputation.
4. No Clue: There are also properties that for no discernable reason stink. I can think of a particular corner in downtown Philadelphia where every business that ever went there failed and failed quickly. I watched every one of them and even with my years of experience, I can’t figure out a reason. Maybe it’s cursed. Who knows? It doesn’t really matter the particular reason. What does matter is that this property isn’t worth anything near a similar property that’s a block away and you need to know the difference before you buy it.
5. No Shortcuts: There are no shortcuts to knowing a neighborhood. This is why I strongly recommend spending as much time there as possible. This is where you should go out to eat, do your shopping, get your drycleaning done, walk your dog, etc. All of this will help ensure that you know your target area intimately and give you the greatest chance of success.
Thursday, December 8, 2011
How do you prevent putting in bad tenants?
Every landlords fear is that they fix a property up so well that it looks great and then they put bad tenants in who don't pay and destroy the unit on the way out. This is a real concern for real estate investors and there are no guarantees, but there are things to do to help shift away from bad tenants as much as possible.
Before I go any further, I need to add one condition. Different places have different anti discrimination laws. Find out what they are and base your tenant approval process around those laws. Please do not use anything that I write to justify breaking a local law or discriminating against good people for any reason. For the purpose of this article, I'll be focusing on residential tenants. I'll try to write something else for commercial tenants.
Once you understand the laws in your area, write a tenant approval policy. This should dictate the criteria where tenants will be approved or denied occupancy in your property. You should address credit history, previous rental history, income versus expenses & length of employment.
You may want to put something like:
1. Excellent overall credit
2. No rental lateness’s over 15 days in the past 2 years
3. Total monthly payments on debts are not greater than 36% of the potential tenant’s gross monthly income
4. Rental payment is not greater than 28% of the potential tenant’s gross monthly income
5. Minimum job history 2 years
You can adjust these categories according to your own discretion, but be careful not to make them too loose. You're better off making an exception to your policy to someone who doesn't qualify in a certain area then to reject someone for a reason other than that stated in your policy. That type of rejection is an invitation to a discrimination action.
You may be thinking... What do I do if I can't find someone who fits in every category??? Where do I make an exception? The first place I would make the exception is credit history... and the place I would never make the exception on is debit to income ratio. Someone might have been sick in the past or they might have taken out bills that they couldn’t afford in the first place. There are a lot of reasons that someone might have bad credit and they still can be good tenants. If someone doesn't make enough money to afford the rent, you're asking for problems. What if they have excellent credit and they say they can afford the rent even if it doesn’t look that way? Forget it. Do both of you a favor and recommend an apartment that they can afford.
As far as job history and income goes, use your judgment. If someone has always worked, even if at different jobs, and made similar amounts, chances are that will continue, even if they lose this job.
It's better to wait an extra month to find a good tenant, then to put someone bad in. What if it takes more then a month? Wait and don’t get discouraged. There are plenty of good, honest people out there.
Before I go any further, I need to add one condition. Different places have different anti discrimination laws. Find out what they are and base your tenant approval process around those laws. Please do not use anything that I write to justify breaking a local law or discriminating against good people for any reason. For the purpose of this article, I'll be focusing on residential tenants. I'll try to write something else for commercial tenants.
Once you understand the laws in your area, write a tenant approval policy. This should dictate the criteria where tenants will be approved or denied occupancy in your property. You should address credit history, previous rental history, income versus expenses & length of employment.
You may want to put something like:
1. Excellent overall credit
2. No rental lateness’s over 15 days in the past 2 years
3. Total monthly payments on debts are not greater than 36% of the potential tenant’s gross monthly income
4. Rental payment is not greater than 28% of the potential tenant’s gross monthly income
5. Minimum job history 2 years
You can adjust these categories according to your own discretion, but be careful not to make them too loose. You're better off making an exception to your policy to someone who doesn't qualify in a certain area then to reject someone for a reason other than that stated in your policy. That type of rejection is an invitation to a discrimination action.
You may be thinking... What do I do if I can't find someone who fits in every category??? Where do I make an exception? The first place I would make the exception is credit history... and the place I would never make the exception on is debit to income ratio. Someone might have been sick in the past or they might have taken out bills that they couldn’t afford in the first place. There are a lot of reasons that someone might have bad credit and they still can be good tenants. If someone doesn't make enough money to afford the rent, you're asking for problems. What if they have excellent credit and they say they can afford the rent even if it doesn’t look that way? Forget it. Do both of you a favor and recommend an apartment that they can afford.
As far as job history and income goes, use your judgment. If someone has always worked, even if at different jobs, and made similar amounts, chances are that will continue, even if they lose this job.
It's better to wait an extra month to find a good tenant, then to put someone bad in. What if it takes more then a month? Wait and don’t get discouraged. There are plenty of good, honest people out there.
How does one deal with contractors?
Contractors (carpenters, electricians, plumbers, etc.) are some of the toughest groups of people to work with. Most are very hard working and honest. However, there are some others who are crooked and will think nothing of trying to pass off shoddy work, trying to jack up the price half way through the job, not doing all of the required work, walking off of the job completely or all of the above. If you’ve ever done a rehab or even owned your own home, you know what I’m talking about. If you’ve been taken advantage of, don’t feel bad. You’re not alone. I’m right there with you. The only reason I know any of this is because it’s all happened to me… more than once.
Here is a list that I compiled of some keys to dealing with the 2nd group of contractors (that also helps a lot with the first group)
Get absolutely everything in writing. This includes the following:
Total Cost (usually broken down into 2, 3 or 4 installments as the work progresses, depending ion the size of the job.) This means that you know and the contractor know exactly what work needs to be done for you to give them their next check.
The installments section should break down what work has to be done to get each installment. MAKE SURE THE BULK OF THE MONEY IS GIVEN TO THEM WHEN THE JOB IS FINISHED.... Not at the beginning. That's probably the most important thing I could tell you. You have to look at installments as “just in case the contractor stops returning your phone calls, you can pay someone else the rest of the money you have set aside to finish the job.” If you can't, you're paying the contractor too much up front for each installment
The quality of materials used. You don’t want to verbally talk about marble countertops and have them show up with formica.
Breakdown between labor & materials. Any contractor is entitled to make a fair wage. I also believe that I’m entitled to know what that fair wage is.
Timeframe with financial consequences if they don't finish in the allotted time. This is very important. Every day that your property goes unfinished is a day that you have to pay interest, taxes, insurance, utilities, etc. Plus the risk that the market will turn for the worse, seasons change, pipes freeze, etc.
Once you get more comfortable with what work needs to be done, I highly recommend that you come up with your own list and have them bid on your list. That way they don’t leave something off their list and charge you more for it later…. Or the famous “That’s not my responsibility.”
Make sure they are licensed & properly insured - if a problem happens because of their faulty work, you want to have recourse.
Ask for recent references & call them. I know that you're busy, but it only takes a few minutes. If the most recent satisfied customer they give you is 3 years ago, there may be a problem. If the contractor burns you half way through the job, you’ll wish you had done more due diligence in the beginning.
Inspect, inspect, and inspect. Be prepared to inspect the property a lot to make sure that the work is progressing. The other day a friend of mind was complaining that the contractors were moving at a snails pace. I asked him how often he inspects the property. He told me ever couple weeks. Big shock that they’re not pushing forward quick enough. I recommend daily or every other day depending on the job. If the property is too far for you to inspect that much, shame on you for buying a property too far to manage. If you’re too busy with other stuff, make time. This is your money we’re talking about.
Last, but certainly not the least. There will come a point with almost every contractor when they will ask for the next payment (or part of it) before they finish the task. I’ve had this happen a million times. Often with contractors I used before. They always have a story. Everyone does. Sometimes I cave in and give it to them. Sometimes, I remain strong. Here’s what I can tell you. Almost every time I caved in and gave them an advance before the work was done, I regretted it. All of sudden when they had my cash, I became last priority on their list. Stick to your guns and say, No.
This is a tough business for smart and touch people. Know your rules and stick to them and you'll be way ahead of the pack.
Here is a list that I compiled of some keys to dealing with the 2nd group of contractors (that also helps a lot with the first group)
Get absolutely everything in writing. This includes the following:
Total Cost (usually broken down into 2, 3 or 4 installments as the work progresses, depending ion the size of the job.) This means that you know and the contractor know exactly what work needs to be done for you to give them their next check.
The installments section should break down what work has to be done to get each installment. MAKE SURE THE BULK OF THE MONEY IS GIVEN TO THEM WHEN THE JOB IS FINISHED.... Not at the beginning. That's probably the most important thing I could tell you. You have to look at installments as “just in case the contractor stops returning your phone calls, you can pay someone else the rest of the money you have set aside to finish the job.” If you can't, you're paying the contractor too much up front for each installment
The quality of materials used. You don’t want to verbally talk about marble countertops and have them show up with formica.
Breakdown between labor & materials. Any contractor is entitled to make a fair wage. I also believe that I’m entitled to know what that fair wage is.
Timeframe with financial consequences if they don't finish in the allotted time. This is very important. Every day that your property goes unfinished is a day that you have to pay interest, taxes, insurance, utilities, etc. Plus the risk that the market will turn for the worse, seasons change, pipes freeze, etc.
Once you get more comfortable with what work needs to be done, I highly recommend that you come up with your own list and have them bid on your list. That way they don’t leave something off their list and charge you more for it later…. Or the famous “That’s not my responsibility.”
Make sure they are licensed & properly insured - if a problem happens because of their faulty work, you want to have recourse.
Ask for recent references & call them. I know that you're busy, but it only takes a few minutes. If the most recent satisfied customer they give you is 3 years ago, there may be a problem. If the contractor burns you half way through the job, you’ll wish you had done more due diligence in the beginning.
Inspect, inspect, and inspect. Be prepared to inspect the property a lot to make sure that the work is progressing. The other day a friend of mind was complaining that the contractors were moving at a snails pace. I asked him how often he inspects the property. He told me ever couple weeks. Big shock that they’re not pushing forward quick enough. I recommend daily or every other day depending on the job. If the property is too far for you to inspect that much, shame on you for buying a property too far to manage. If you’re too busy with other stuff, make time. This is your money we’re talking about.
Last, but certainly not the least. There will come a point with almost every contractor when they will ask for the next payment (or part of it) before they finish the task. I’ve had this happen a million times. Often with contractors I used before. They always have a story. Everyone does. Sometimes I cave in and give it to them. Sometimes, I remain strong. Here’s what I can tell you. Almost every time I caved in and gave them an advance before the work was done, I regretted it. All of sudden when they had my cash, I became last priority on their list. Stick to your guns and say, No.
This is a tough business for smart and touch people. Know your rules and stick to them and you'll be way ahead of the pack.
How to get started in real estate investing?
The number one question that thousands if new investors gave asked me is: How do I get started?
The first thing that any new investor has to do is to pick a target area. This should a town it neighborhood that you know and are the mist active in. It should be the same neighborhood where you get your dry cleaning done, where you go to the supermarket, where you go out to lunch, where you walk your dog, where you do just about everything. Someone might be thinking that they've identified an area that they want to invest in, but it's too far to go to do all these things. If it's too far to go to, then it's too far to invest in.
There are two reasons that you need to be in your target area all the time. The first is that you need to know your target area intimately. You need to know every house on every block. Why? We all know that there are some blocks it properties that are better then others for no obvious reason. We all know of certain locations that every business that goes there seems to fail. Nobody knows the reason. Maybe its cursed, but if you it your best friend was opening up a business, There’s no way you would put it there. We all know of certain corners where kids tend to hang out late at night. The house on that corner isn't as desirable as one a block away.
The flip side is also true. I know a guy was investing in off campus housing in a particular city. He told me that he was paying a certain price for a property several blocks off campus. The price he told ne sounded high compared to other properties that I knew of on different blocks. I knew the area pretty well, but not intimately. I told him exactly what I thought that this was a bad deal. He knew the neighborhood much better than I and he told ne that he was getting a great deal off if an out if town investor who didn't know what he had and that it was the safest block in the city. I was a little confused and asked him why it was safer then any other Street a few blocks away from Campus. He smiled and told me that no other block as 24 hour undercover police protection. Now I was really confused. Seeing that I still didn’t get it, he smiled even boarder and told me that the Mayor of the city lives next door.
There's no way an outsider would know any of these things. If you invest in an area that you dint know intimately, you run big risks.
The first thing that any new investor has to do is to pick a target area. This should a town it neighborhood that you know and are the mist active in. It should be the same neighborhood where you get your dry cleaning done, where you go to the supermarket, where you go out to lunch, where you walk your dog, where you do just about everything. Someone might be thinking that they've identified an area that they want to invest in, but it's too far to go to do all these things. If it's too far to go to, then it's too far to invest in.
There are two reasons that you need to be in your target area all the time. The first is that you need to know your target area intimately. You need to know every house on every block. Why? We all know that there are some blocks it properties that are better then others for no obvious reason. We all know of certain locations that every business that goes there seems to fail. Nobody knows the reason. Maybe its cursed, but if you it your best friend was opening up a business, There’s no way you would put it there. We all know of certain corners where kids tend to hang out late at night. The house on that corner isn't as desirable as one a block away.
The flip side is also true. I know a guy was investing in off campus housing in a particular city. He told me that he was paying a certain price for a property several blocks off campus. The price he told ne sounded high compared to other properties that I knew of on different blocks. I knew the area pretty well, but not intimately. I told him exactly what I thought that this was a bad deal. He knew the neighborhood much better than I and he told ne that he was getting a great deal off if an out if town investor who didn't know what he had and that it was the safest block in the city. I was a little confused and asked him why it was safer then any other Street a few blocks away from Campus. He smiled and told me that no other block as 24 hour undercover police protection. Now I was really confused. Seeing that I still didn’t get it, he smiled even boarder and told me that the Mayor of the city lives next door.
There's no way an outsider would know any of these things. If you invest in an area that you dint know intimately, you run big risks.
Subscribe to:
Posts (Atom)