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How to properly evaluate a potential investment property

Life is full of sayings that seem contradictory at first.  Expressions like “a chain is only as strong as its weakest link” and a “team is only as good as its worst player” seem to make no sense until they have been analyzed and understood.  In flipping homes, you make your money when you buy.  Quite simply, if you buy a home at the proper discount then you have a much better chance of selling at a profit.  Here is a general outline to help you evaluate a potential home for investment.

First, Take a Casual Drive

It is a good idea to only consider homes that you can actually inspect.  Being able to drive by the home gives you a firsthand perspective. On your way to the home pay attention to the little details such as

• condition of the roads; are there large potholes, pavement patches, adequate street signs?
• local area; are there any schools, shopping, offices, or factories nearby?
• Appearance of the actual street; how do the other homes on the block look?
• The prospective home; what is your first impression when you see the place?

Second, take a Casual Stroll

Now that you have had the time to look at the home and surrounding area from the road, it is time to actually look at the property up close.  When you are in the home ignore things like carpeting and paint.  Take time to look over the roof, the foundation, the electrical box, the HVAC unit and any plumbing pipe that is easy to access.   Walk outside and see if the septic tank or well has any problem.  These are the areas that can cost major money to fix.  If there are any noticeable problems with these primary parts of the home you can use that to negotiate with the seller.

Third, crunch some numbers

Now that you have looked over the home and determined that it is a possible investment, it is time to do the math.  You need to have an idea of what the total repairs will cost along with how much the home should be worth after the repairs are completed.  Once you have these numbers you can make an offer to the seller.

When putting together your repair estimates it is always better to over price.  Trying to cut corners and dream that the kitchen can be remodeled for $2,000, or some other wishful hope, will cause you tremendous grief later on.

After you have looked at a few homes and talked with the same contractor a number of times you can start to get a feel for how much repairs will cost.  This one skill takes some time to master for those that are new to real estate investment.   Once you are comfortable estimating repair costs you will be much better at spotting a deal when it pops up.

Search for: Madison, WI Foreclosures for Sale

How to Pick Profitable Rental Properties

(Investment Properties: Part 4 of 5)

From looking at various homes to actually making a profit, investing in rental properties takes many steps. A person that is new to the process may feel a bit overwhelmed. In order to reduce risk and increase your chances of making positive cash flow with real estate, here are some tips on picking a home.

Good School Zone

A good school zone will always attract families. Many families will be able to purchase homes in the area but some will have to rent a while in order to get their finances in order. These are the types of people who will stay in a home for 2 or 3 years and be potential good tenants. Focus on schools that have high standardized test scores and achieve well in the areas of math and science.

Avoid High Crime Areas

This may seem obvious, but it needs to be pointed out. Homes in areas that are subject to more than average rates of crime will be tough to rent out. Furthermore, the crime rate will drop the rental rate. This can cause a breakeven or even net loss on the monthly cash flow.

Demographic of Neighborhood

Each neighborhood will have its own miniature set of demographics. A community next to a college or university will likely be made up of homes rented almost exclusively to students. An older neighborhood with higher priced homes will likely have couples that are middle aged and higher. Study the neighborhood carefully to make sure there is an available market of tenants that fit the demographic.

Employment Opportunities

Another factor that can heavily influence the profitability of a rental property is the number of available jobs in the nearby area. A new factory, expanding hospital or growing university are places that will add on more people and need them for full time work. Many times people will obtain a job first and then start looking for nearby homes to rent. Sometimes these people can be short term renters but it is possible to find someone that locks in a home for 2 or 3 years.

Check for Vacancies and Homes for Sale

For a new subdivision that is under construction it is common to see multiple signs indicating new homes for sale. However, for an established neighborhood, a high number of for sale signs is a kiss of death. This typically indicates that the area is on the decline. An even worse condition is the presence of several vacant homes. These are homes that have been abandoned for various reasons. Steer clear of these areas in your own best interest.

Be on the Lookout for Problems from Mother Nature

Some areas are more prone to natural problems than others. Issues like flooding, mud slides and tornadoes seem to be attracted to certain areas. The insurance for properties in these areas can be quite high and chip away at the monthly cash flow for the property.

Finding a good property based on these guidelines does not automatically mean that your home will be a cash cow. However, it should increase your chance for success in a very lucrative type of investment.

Investment/Rental Properties (5 Part Series)

• Preparing to Purchase that First Rental Home (Part 1 of 5)
• Adding the Title of Landlord Behind your Name (Part 2 0f 5)
• Rental Property is Still a Safe Investment (Part 3 of 5)
• How to Pick Profitable Rental Properties (Part 4 of 5)
• Success Plan for Investing in Rental Property (Part 5 of 5)

It Takes a Good Plan to be Successful in Rental Property

(Investment Properties: Part 5 of 5)

For people considering a purchase of a rental home this is truly an opportune time. The tremendously low mortgage rates coupled with attractive home prices makes this a buyer’s market.

However, numerous reports indicate that home prices are rising consistently, although modestly. If you are considering buying a home it is time to take action. Here are a few guidelines to help you plan out your first purchase.

Look to Experts

If you are looking at your first investment property purchase it would be wise to work with a real estate agent that is experienced in these kinds of deals. An agent that intends to work with an investor over the long term will be meticulous about the property recommendations to insure the investor meets their financial goals and comes back to the agent for more homes.

It is also a good idea to speak with other investors. They can provide you some guidance about what to look for in homes, what areas to avoid and other general information that is generally not found in a textbook.

What Type of Investment Do You Wish to Pursue?

Some first investors choose to buy a home at a great price and rent it out on their own. Others use the service of a management firm. And then there are the individuals that buy a home, spend some money on repairs and put the home back on the market at a price to make a profit.

It is important to consider your options and tolerance for risk. Buying a home that you can easily afford while looking for a tenant may be a good opportunity to get your feet wet.

Develop Your Team before the Purchase

If you plan to manage the property on your own, there will be a few individuals you need to contact prior to purchase. First, you will need a lender that can handle investment loans. Second, you should consult with an accountant and attorney to make sure you are covered legally and that you minimize your tax liability. Third, you should speak to an insurance agent about the proper policies to cover your investment. Finally, you will need to talk to a general handyman or one each of plumbers, electricians, roofers, painters and HVAC repairmen. Having these people lined up and ready to work for you will make much of the process go by smoothly.

Choosing the Right Area

It is important to pick a home in an area that is accustomed to rental property. Places with a high population close to schools and shopping districts are usually safe bets. Rural areas can be difficult simply because the number of available applicants is typically small. Keep in mind that you may want to sell the property in a few years. If you buy the smallest, or the largest, home in a neighborhood it can be tough to unload later.

Buying an investment home should be approached as a strictly business transaction. Decide how much you can comfortably invest and how much you hope to make as a return and let those types of items help you with the decision.

Investment/Rental Properties (5 Part Series)

• Preparing to Purchase that First Rental Home (Part 1 of 5)
• Adding the Title of Landlord Behind your Name (Part 2 0f 5)
• Rental Property is Still a Safe Investment (Part 3 of 5)
• How to Pick Profitable Rental Properties (Part 4 of 5)
• Success Plan for Investing in Rental Property (Part 5 of 5)

Financial Gurus Still Believe Rental Property Is a Safe Investment

(Investment Properties: Part 3 of 5)

The record low interest rates for mortgages have helped the real estate market to slowly improve month by month for the last several quarters. Thanks to these low rates real estate has continued to be a sound investment for people who wish to diversify their portfolio. For those people that are considering buying their first investment property here are some considerations to keep in mind.

Neighborhood History

It is wise to pick areas that are accustomed to rental homes. One of the most obvious choices would be neighborhoods close to a major university or college. If there are no colleges or universities in your area then look for certain neighborhoods close to quality schools. Schools often attract stable, hardworking tenants that will likely pay on time.

Understanding the Role of Landlord

There are two major ways to prosper from owning rental property. The first is to buy the home at a significant discount and then sell the place at a profit after the home has appreciated. The second way is to have positive cash flow. The second method takes considerable planning. Just because the tenant is willing to pay more per month than the actual mortgage payment, it does not mean that the home is profitable. There are other items to consider such as regular maintenance and repairs.

Determining What to Charge in Rent

Appraisers and real estate agents can provide information about rental rates for a certain area. This gives the investor some idea of what can be charged per month. The monthly mortgage amount and allotted figures for maintenance should be subtracted from the rent. There should be at least 15% left over after subtracting the payments and expenses. Otherwise, you run the risk of losing money.

Choosing Tenants

Once you have some interested parties and they seem capable of paying the rent it is time to begin the screening process. Experienced landlords hold fast to the rule of checking out prior landlord references as well as the tenant’s credit file and even a criminal check. The criminal check could spare you from inadvertently leasing to a felon and finding major damage to your home due to a police raid.

Research the Possibility of Using a Rental Management Firm

Some companies specialize in managing properties for investors. These firms will review applications from potential tenants, handle collecting rent payments and, most importantly, take care of the maintenance issues that pop up at the most inopportune times.

For instance, if you get a call in the middle of the day that a toilet is leaking, can you leave work and fix it? If you get a call at 2 am on Saturday morning notifying you of a sudden hole in the roof, are you capable of fixing that problem? Some people have the skills and time to manage these issues, but most people do not. In these instances it is a good idea to use the service of a reputable management firm.

Investment/Rental Properties (5 Part Series)

• Preparing to Purchase that First Rental Home (Part 1 of 5)
• Adding the Title of Landlord Behind your Name (Part 2 0f 5)
• Rental Property is Still a Safe Investment (Part 3 of 5)
• How to Pick Profitable Rental Properties (Part 4 of 5)
• Success Plan for Investing in Rental Property (Part 5 of 5)

Advice About Purchasing Your First Rental Home/Property
(Investment Properties: Part 1 of 5)

Before buying that first piece of rental property it is important that you answer a single question. This question has nothing to do with your credit score, your experience with real estate or how much money you can gather for the purchase. The question is quite simple: WHY are you buying an investment home?

The answer to this question will guide you towards the right kind of property and the right type of financing. Let’s look at some examples to get a better idea of reasons people use to start investing in homes.

Saving for College Tuition

This type of goal usually involves a term over a few years. Couples with young children will buy a home in an area that has shown signs of appreciating. A year or two before the child enters college the family will sell the home and use the profit to pay for tuition, books and other expenses.

In this particular scenario the couple is not concerned with making a large profit each month on the rent. They simply want to break even while keeping the home in tip-top shape to maximize the potential appreciation.

Using Cash Flow to Increase Monthly Income

Some individuals invest in rental homes because they want to earn a profit each month from the rent. In these cases it is extremely important to buy a home either for all cash or at a deep discount from the market price. Foreclosures and vacant homes are common for this example. Buying the home for cash or at a deep discount allows the landlord to charge a fair rent based on the current market conditions and pocket most of the money each month as profit.

Speculation about Future Values

Sometimes people simply buy a property at a slightly discounted price in hopes that the property value will escalate quickly due to a future event. For instance, a new shopping mall, new school or a new factory can greatly improve the value of homes in the immediate area. Buying a home in such a location and holding on to it for a few months to a year can yield a high profit.

Career Change

Some people want to begin their property investment as a means to escape their current full time job and start a new career. It is possible for people to invest in real estate as their main source of income. However, it is not a get rich quick scheme.

The most successful investors have clear goals and follow a proven formula. They buy homes in particular areas that exhibit desirable qualities. They only buy when the price is discounted heavily and they have favorable financing for the transaction. They also understand the rental rates for the area in comparison to the financing costs.

Buying a rental home can be lucrative and lead to good fortune. However, it must be approached with diligence and hard work, not pie-in-the-sky dreams.

Investment/Rental Properties (5 Part Series)

• Preparing to Purchase that First Rental Home (Part 1 of 5)
• Adding the Title of Landlord Behind your Name (Part 2 0f 5)
• Rental Property is Still a Safe Investment (Part 3 of 5)
• How to Pick Profitable Rental Properties (Part 4 of 5)
• Success Plan for Investing in Rental Property (Part 5 of 5)

By now you are probably telling yourself, having an investment property is not as easy as you thought. To make matters worse, your property is now underwater and it shifted from an Asset to a Liability. It is a liability because you may be dealing with negative cash flow, accruing repair costs, vacancy, and most importantly, it is underwater meaning you owe more on the home than it is worth. Let’s explore some options.

No Credit Ding Options

• Option #1 – Ride It Out

If you have sufficient income to support your investment property, you can ride the market out in hopes of selling it at a higher price point.

• Option #2 – Improve The Property

You can improve the property by getting a fresh coat of paint or getting landscaping work done. However, this is very risky and rarely works in these types of situations.

• Option #3 – Lease Option Sale

This is an option where you can negotiate a lease option with your tenant/buyer. This way, the tenant can improve their credit, increase their savings, and eventually purchase the property.

• Option #4 – Pay The Difference

You can sell the property and pay the difference in the amount owed and the amount you can sell it for. Some ways you can pay this difference are, out of pocket or if you have other investment properties, you can borrow the difference amount against your other rental property.

Credit Ding Options

• Option #5 – Foreclosure

If your bank does not accept your hardship letter and short sale request, you can default on your payments and allow the bank to repossess your home. This last resort option will hurt your bank(s) and yourself. This option can leave you vulnerable to a deficiency judgment(s) depending on whether your state is a recourse or non-recourse state. For more information, read my previous article here.

In this situation, your credit score will receive an 85-160 (varies upon situation) point reduction and you will have a foreclosure stamped on your credit report. With a foreclosure, you will not be able to obtain another mortgage for at least a few years or typically, a 7 year period.

• Option #6 – Short Sale

This has been the most popular option for investors. If you can show legitimate hardship or foreseeable hardship, your bank may allow you to short sale where you can sell your property for less than what is owed, avoid foreclosure and walk away from the property with little to no remaining debt. The key is to find a pro negotiator in your area who is well connected with banks and can negotiate the deficient amount despite having other assets.

This is preferable by banks and the short sale is translated on your credit report as “paid for less than original amount.” You will be able to obtain another mortgage in some cases immediately or on average, 24 months.

Tax implications

One of the most important factors when walking away from your investment property whether it is via short sale or foreclosure, are the subsequent tax implications. The IRS deems the forgiven amount (deficiency) as “taxable income” unless it is your primary residence in which you would be able to exclude the income through the mortgage forgiveness debt relief act.

If however you are able to show insolvency where your total liabilities exceed your total assets or if the debt was discharged in a Title 11 bankruptcy, you can exclude the forgiven amount regardless of it being a second home.

Short selling your rental property with little liability is difficult to do if you do not have an experienced agent who is well connected with banks. Our agents have been VERY successful in getting our investors out of their bad investment situations. If you are in Washington State, connect with our experts today to discuss your best option for your situation.

Hope this helps

Peter

There is another conflict brewing between investors and first time home-buyers, and this time the home buyers may win. In the more affordable areas of the Silicon Valley distressed properties, ie short sales and reos have been popular with investors and first time buyers. Many would be owner occupiers lose out on great opportunities to investors who have all cash.  Since condos are the least expensive properties, have the fewest maintenance issue,  and tend to bring in more rent per dollar spent they are popular with investors. Coupled with the more restrictive lending practices on condos, many bay area developments are now in a position where the number of owner occupied units has fallen to a critical level. Owners of these properties are having trouble refinancing and buyers trying to get loans are being rejected by the lenders.  As a result, many complexes are starting to pass new HOA regulations limiting the number of rentals allowed in the condo development.

These restrictions can be a double edged sword.  If they occur in a building where the delinquency rate on the HOA dues is too high then a buyer will not be able to get a loan anyway and it will effectively cut off all sales.  In the future when the market has settled down the rental restriction could put a damper on future sales.  However, if they are not instituted it may become impossible for anyone but investors to purchase in some condo complexes, which in itself will lower values not to mention make things harder for the first time home buyer. It will also make it impossible for current homeowners to ever refinance in some of these buildings.

I do not have the answer here as to what is right or wrong here. I can only give some advise on what to do if you want to purchase or sell a condo and want to get the information about potential rental restrictions.

1. Ask your agent to find out if the HOA docs are available yet.  If it is an reo they most likely will not be and a

short sale very likely not

2. If the docs are not available before you make an offer ask your agent to ask the listing agent for the number of the HOA management company

3. Call the management company and ask about any current or contemplated rental restrictions

It is not that hard to find out and can save a lot of time and possibly money.

If you have any questions about short sales in San Mateo or Santa Clara Counties please feel free to contact me.

Marcy Moyer

Keller Williams Realty

www.marcymoyer.com

marcy@marcymoyer.com

650-619-9285

D.R.E.  01191194