TOP 10 THINGS TO DO When #Renting Your Home…
Across the country, a divide is emerging between cities that are growing outward and remaining affordable and ones that are hemmed in by geography and onerous zoning codes and are becoming more and more expensive.
As a whole, U.S. cities are expanding as rapidly, as they have throughout the last half-century. From the 1950s until the 2000s they have added about 10,000 square miles per decade, or an area roughly the size of Massachusetts, according to research byIssi Romem, chief economist at real-estate site BuildZoom, to be released Monday. But beneath the surface a divide is deepening.
On the one side are cities such as San Francisco, Boston, New York and Miami that have slowed their pace of expansion dramatically since the 1970s, in part as they have added layer upon layer of building regulations. On the other side are cities concentrated in the southeast and Texas, which have grown outward and seen much slower price growth.
The developed residential area in Atlanta, for example, grew by 208% from 1980 to 2010 and real home values grew by 14%. In contrast, in the San Francisco-San Jose area, developed residential land grew by just 30%, while homes values grew by 188%.
The developed residential area in Raleigh, N.C., grew by 219% in the same period, while home values grew by 27%. In Seattle, the developed area grew by 69%, while home values grew by 119%.
Mr. Romem draws the distinction succinctly: expansive cities versus expensive cities.
“If you don’t let the city grow, you’re going to get prices going upward…and see the middle class being pushed out,” Mr. Romem said.
Mr. Romem’s research reads on its face like an argument for suburban sprawl, which has come under fire both for its environmental consequences and tendency to lead to oversupply that can lead home prices to crash.
Mr. Romem said ideally cities would relax regulations and build upward rather than outward. But, he said, promoting development on empty fields is more politically feasible than building apartment towers in single-family neighborhoods, and thus likely to ease affordability pressures more quickly.
Many of the more expensive cities are prevented from growing outward by natural barriers, such as oceans or mountains. Those cities are unlikely to grow significantly upward or outward in the next couple of decades, he said, and thus the price divide is likely to continue to widen.
That could be good news for cities such as Atlanta and Raleigh, N.C., that have long been overshadowed by more economically powerful legacy cities.
“These cities are growing more important because of having more population. They have become more viable places for certain types of firms to locate,” he said.
Investing in rental property has long been a popular option for people who want to diversify their investments beyond stocks and mutual funds. But, unlike those more mainstream investments, rental properties can require significant hands-on work, including dealing with tenants and keeping up with maintenance. You have to be smart to make rental investment pay.
“The idea of investing in real estate being easy money is nonsense,” says Casey Fleming, author of “The Loan Guide: How to Get the Best Possible Mortgage” and a mortgage professional in the San Francisco Bay Area who owns rental properties.
While investing in real estate is often referred to as “passive income,” there is nothing passive about it. You should expect to put in plenty of effort if you hope to bring in a return.
“I think the key question is do you want to be a landlord,” says Tiffany Alexy, a broker with Lucky Penny Realty Team inRaleigh, North Carolina, and the owner of several rental properties. “Yes, it’s passive income, but if you’re managing the property yourself, you’re potentially giving yourself a second job.”
Mutual funds don’t call when the toilet is stopped up, they don’t write on the walls and they don’t refuse to pay rent, all issues you’re likely to face with tenants.
“People need to do some deep soul searching before they walk into this,” says Ray Rodriguez, regional mortgage sales manager for TD Bank. “Being a landlord is hard work”
The other myth you need to dispel before starting out is that you can invest in real estate with no money. “That’s not going to happen,” Rodriguez says. “If you’re struggling just to get by … it’s probably not a good idea right now.”
In most cases, not only will you seed a sizeable down payment, you’ll need to show additional savings and enough income to make payments.
If you invest in a duplex, triplex or quadraplex – and you’re going to live in one of the units – you can get a conventional mortgage with a down payment as low as 5 percent if you show enough income to make the payments.
You can get a conventional loan on properties of four or fewer units with 20 percent down with solid credit. But, says Fleming, lenders will want to see at least three months of reserves, plus proof that you can afford all your current expenses as well as the mortgage on the new property. Investing in properties with more than four units requires commercial financing, which is usually more expensive.
If you don’t have experience as a landlord, demonstrated by a Schedule E filed with your recent tax returns, the lender usually will not let you count income from the rentals toward your mortgage qualification. If you do have experience, the lender will use the appraiser’s estimate of the rent (taking 75 percent of that) and subtract mortgage costs, property tax and insurance to get the net income that will be counted.
Even after you surmount all those financial hurdles, you still need to make sure the specific rental property will provide a positive cash flow once all the expenses are paid. Sellers and real estate agents will often provide figures that show the property is profitable, but it’s up to you to make sure those figures truly reflect all the expenses and take into account maintenance costs, home repairs and vacancies.
“You have to do some very good due diligence,” Rodriguez says. Fleming suggests you ask to see the current owner’s Schedule E from the last few years or make an offer on the property that is subject to review of those documents. “A negative cash flow is not an asset,” he says. “It’s a liability.”
Finding rental property that yields a positive cash flow may take some searching. Fleming recommends looking for a building that’s a little rundown but in a good neighborhood, provided you have the money to improve the property. “If you get a great deal, you could probably find something for 25 percent down that cash flows,” he says.
Here are six things to do before you buy rental property:
Gather as much information as you can. Talk to other investors, mortgage brokers and real estate agents who have worked with income property about what owning a rental property is really like, in addition to reading books and articles on the topic. “It’s all about obtaining knowledge,” Rodriguez says.
Decide if you’re ready to be a landlord. Buying and managing property yourself provides the greatest return but also the greatest headaches. “Do you have the stomach for being a landlord?” Fleming says. “Stuff’s going to happen that just really ticks you off.” Other, less active options include becoming a partner in a limited liability company that owns properties or buying into a real estate investment trust.
Crunch the numbers carefully. A rental property is only a worthwhile investment if it makes money. Yes, the property may rise in value and yield a profit when you sell, but it also may lose value depending on which way the market goes. “If you’re banking on just appreciation, it’s really hit or miss,” Alexy says.
Make sure you have enough cash. Getting rich on real estate with no money down is a great dream, but it’s almost impossible to accomplish. Expect to need a sizeable down payment, reserves to pay for repairs and maintenance and a good income before you start investing.
Consider a live-in property. If you’re buying a home for yourself, buying one with up to three additional units can be a good way to get started with investing. “We see a lot of younger people going this route,” Rodriguez says. “I think it’s a good way for a first-time homeowner to begin homeownership.”
Plan for hands-on management. In the long run, you may decide to pay someone to do the day-to-day management of your property, including dealing with tenants and arranging for repairs. Costs vary, but you should estimate paying about 10 percent of the rents collected for this sort of service. But you will still need to be there at the beginning to make sure the building is in tiptop shape and the tenants are dependable.
Food for thought… A SKILLED Property Manager isn’t cheap, and a CHEAP Property Manager isn’t skilled.
Prior to hiring any 3rd party property management company, you should take time to do your research. The mission will be to find a property management service that is experienced, trustworthy and organized. Tips to help you find the very best fit for your rental properties are highlighted here.
Take time to talk with other property owners and real estate agents that are in your area. Ask about the companies or managers that they currently use or that they have used in the past. Also ask them what they like about these services, and what they dislike. This can provide you with some invaluable asset when you are trying to find a property management company.
Complete a Search Online
It is also a good idea to search for a property management service online. There are a number of services available and you can look on their website in order to see the services they offer and learn more about what they can do for your properties. Prior to wasting our time interviewing a certain company, you should also look at the reviews about the company on sites such as Facebook or Yelp.
Ask about Current Clients
You should look at a number of the property managers existing ads. Do they appear compelling and professional? Are they advertising the properties in a number of different places, or are they simply limited to some free sources, such as community bulletin boards and Craigslist?
Also, take time to look at the properties that are currently being managed. Do the properties appear clean and look maintained? When you speak to the current tenants in these properties you can also gain some helpful insight regarding the way that the property management service operates. Since the role of this service is to ensure happy tenants, you need to be sure that you find out if they are capable of this.
Talk with Several Different Services
Chances are you will screen a number of tenants prior to choosing one, you should also interview a number of property management services prior to finding the right one for your needs. When you interview a number of different services then you can find the one that is best suited for your particular needs and the needs of the various rental properties that you are looking to have managed.
With all of the different companies out there that can help with this type of work, finding the right one will take some time. Making a list of needs beforehand is a great way to narrow the selection down.
Q: Dear Mr. Reno:
In a lot of your responses you mention taking the individuals to small claims court. In my case the leased individual is certain to die in the next couple of days. How do I take the current occupiers to court if I don’t have names, socials, or other identification. I only have license plate numbers of all the cars associated with the people currently residing there.
A: These are John Doe’s. You can evict John Doe’s for nonpayment or a holdover. Sometimes the John Doe’s come into court and give their names, so there’s a chance you’ll get a money judgement. But even then, the Judge may rule that you have no rental agreement with them. The problem is, your legal theory that these particular people owe you money is a little shaky.
The Landlord Protection Agency’s “Ask the Attorney” column is for informational purposes only. The questions answered by Mr. Reno on this site do not constitute an attorney – client relationship and are not to be considered legal advice. Not all questions will be answered and some may appear in the LPA Q&A Forum.
The Landlord Protection Agency recommends that you seek legal advice before using any of the material offered on this web site, and makes no guarantee on the effectiveness, compliance with local laws or success of any of the material offered on this web site. The Landlord Protection Agency is not engaged in rendering legal advice.
So, you want to be a real estate investor? You are probably thinking the way I did when I started as a real estate investor. I thought the most important objective was to buy as many properties as possible. Well, I still had a lot to learn.
As an investor in residential real estate, being able to purchase properties that will allow you to make money is paramount. While there are various methods you can use to make your real estate fortune, the two most common plans are quite simple.
Buy and flip. This is when you purchase a property and sell it for a higher price. Many investors will find “Handyman Specials” or “Fixer Uppers” at a low price to improve and sell at a higher price. Sometimes you are fortunate enough to find an excellent opportunity requiring little or no work, only to resell for a quick and easy profit. Although this is a common way to make money in real estate, many investors choose not to sell their investment property.
Buy and hold. This is when the real estate investor becomes a landlord in order to enable the investment property to generate income. Holding onto the property is also a way to allow the investment to appreciate in value over time. Why? The demand for residential real estate continues to grow and people are willing to pay top dollar for a place to live. What can be better than that? You have an asset appreciating in value plus you also have a tenant to pay your expenses on the property. You may even have a positive cash flow.
So what is “The Secret Career Killer Facing Real Estate Investors”?
Before I answer that question, let me ask you,
Tenant problems are the one of the biggest reasons, if not, the biggest reason most landlords quit investing in real estate and sell their rental properties way before benefiting from one of the best features of owning real estate: appreciation.
It is just as important to learn the secrets of landlord protection and property management as it is to know how to accumulate rental property. Let me say it another way: Without knowledge of landlord protection, you as a landlord, are in big trouble!
Think about how much money people spend on books, seminars and trial and error learning about buying real estate. It’s incredible! I invested so much money learning creative ways to buy property. How about you? How much have you invested learning to be an efficient landlord? Most landlords learn their lessons the hard way like I did. Fortunately, now there are some books and websites on landlord topics that can shed some light on the subject and allow average landlords and “Newbies” to become educated and aware of their legal rights concerning landlord – tenant relationships.
What good is struggling and sacrificing to own a lot of properties only to bail out because of overwhelming tenant problems?
Get educated in the art of “landlord protection”. Learn how to avoid tenant problems so you can keep buying more investment property.
The three most important landlord issues to learn about for your own protection are:
If you have experienced the unpleasant part of being a landlord which includes loss of rent, possible foreclosure, loss of sleep, confrontations with unreasonable tenants, expensive repairs and restoration, vandalism, theft, squatters, evictions, legal fees, you may have had to consider if it’s all worth it or not. Many new new investor / landlords decide quit the landlording business soon after a bad tenant experience.
As a real estate investor who intends to be a landlord and enjoy that excellent long term appreciation, it is absolutely imperative to have some landlording knowledge. I strongly recommend having more landlord tenant knowledge than your tenants do!
Happy investing and landlording!
About the author:
As a Real Estate broker / investor in New York, John Nuzzolese has been involved with rentals and investment property since 1979. Besides owning and operating two real estate businesses, he is president and founder of The Landlord Protection Agency, Inc. , an organization specializing in helping landlords and property managers avoid the hurdles and pitfalls and expensive blunders common when dealing with tenants.
More information on The Landlord Protection Agency is available at www.theLPA.com