Walking Through The House Of Mirrors

May 23, 2013 By Leave a Comment

Be very wary…

Just like a fanciful walk through the twisting, colorful and dizzying amusement park attraction, the House of Mirrors, that bend your shape and leave you rubbing your property investment adviceeyes for better perception, so too is the effect on real estate investors trying to read the current state of the U.S. housing market.  My singular property investment advice:  be wary of what you see in the current housing recovery.

All factors and new data suggest a rapidly improving housing arena.  But, like the House of Mirrors, everything’s bent totally out of proportion and  recognition.  And, we’re left with the main issue I’ve preached in two previous articles here this year:  all investor’s eyes need to remain squarely fixed on the unemployment rate – not how the housing market is doing.  For it is that unemployment rate that should dictate how you invest in these current economic times. 

Here’s what others are saying…

In an article from this week’s Time magazine (“The Housing Mirage,” by Ranaproperty investment advice Foroohar, Time, May 20, 2013), she notes that in regards to the present housing market conditions,  “prices are up, but the market is far from healthy.  We’re missing key elements of a true recovery.”  She goes on to ask, “if housing is back, why is the percentage of people who own homes lower now than it was over a decade ago.”  Of course, it’s because property investors have been gobbling up most of the foreclosure market over the last few years.  And this is especially true with institutional investing firms. 

She goes on to note “that a relatively small group or rich investors…is driving the real property investment adviceestate market.  That includes private-equity titans like Blackstone (which owns a portfolio of 20,000 rental properties) as well as high-wealth individuals who can pay cash  up front for property for themselves or to rent out. “Investors remain the dominant force behind the house-price bounce back,” says Capital Economics property economist Paul Diggle.  That’s reflected not only in the lower rate of homeownership but also in the swelling ranks of renters.  Not since 2002 have fewer rental properties been empty in the U.S., and rents are rising sharply in many cities.”   And that’s a scenario that makes property investments in residential real estate all the more valuable in the coming months, if not years.

Let the unemployment rate be your guide

Ms. Foroohar makes the case that tight credit policies by banks are still placing a stranglehold on mortgage lending nationwide.  She then makes a point I had property investment advicepredicted  back in my article of January 1st  here, entitled “Predictions For 2013.”   I had written then:  “watch the unemployment rate.”  I then went on to offer up these pearly bits of property investment advice:

“The unemployment rate will be one of the most important figures to keep a watchful eye on in the coming year. If it starts ticking upwards because of the effects of no deal being reached by Congress on the proverbial fiscal cliff, then look for overall U.S. rents to continue to increase as homebuyer malaise begins to sink in.  So individual rental property owner’s should be able to see increases in their cash flow as the new year progresses.  Clearly, residential rental properties will become even more valuable than they were in 2012.  So it would behoove the individual property investor to continue to search for and acquire additional rental property in 2013.’

property investment adviceAnd now, five months into 2013, Ms. Foroohar backs me up. She quotes  Jonathan Miller, CEO of a New York based real estate appraisal firm,  who said “to have a sustainable and healthy market, all that really matters is employment….You need higher employment and wages to support housing consumption and looser credit.  If we see some real economic growth over the next two to three years, then we’ll know the housing recovery is real.  Until then, we’re in what I call a precovery.”

The bottom line

She then goes on to bring it all home:  “ this precovery has been underwritten by the property investment advicegovernment at historically unprecedented levels.  Every month, the Federal Reserve is purchasing $40 billion worth of mortgage-backed securities.  And Freddie Mac and Fannie Mae stand behind the bulk of new mortgages.”  Finally, she notes that “it has long been said that you can’t have a sustainable economic recovery in the U.S. until the housing market is back.  In truth, it may be the other way around.  Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage….you can’t have a real housing recovery.” 

Sounding like a broken record

And, as I’ve been saying for months, the housing arena does not indicate nor showcase the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings.  I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well.”  I would have to amend that statement slightly, and say, if the unemployment rate remains stagnant, as it has been, or goes up, then look for increased cash flows on your rental properties.

property investment adviceMy best property investment advice continues to be taking your existing properties and make sure you continually maintain, if not upgrade, them in a down economy.  Especially in this House of Mirrors economy, where rent prices continue to escalate.  Continue to make your product more attractive relative to your competition.  In this way you’ll be able to maximize cash flow and profits. Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. 

 

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Property Investing Advice – The Best And The Worst

May 14, 2013 By Leave a Comment

Two extremes

Sometimes I am asked by novice property investors what types of advice I’ve received in my investing career.  And what was the best advice I ever received – as well as the worst.

The absolute best advice I ever got about property investing:

Roll, baby, roll. Leverage is EVERYTHING in real estate.  It is unlike any other investment asset class, in that you can increase your leverage with each new property you acquire.  Forget about the bank “owning” the property.  They’re simply your “partner.”  Lenders are what allow you to grow your business steadily over time…even without the need to put more of your own capital into each new acquisition.  If you manage your acquisitions properly, maintain them, improve them, then refinance them, all on a planned, strategic acquisition schedule, you’ll be able to roll your property investments up – that is, increase your leverage with each new property acquired.  Ultimately, you can build your own version of a “real estate empire.”  Keep things realistic, and you will succeed in property investing.  Keep growing your property portfolio with high leverage  – always putting down as little of your own funds as possible.  That’s the absolute best property investing advice I ever received.

On the south side…

The worst advice I ever got about property investing:

Anyone can do it.

WRONG!

It takes a certain temperament, a certain je ne sais quoi, to be a good property investor.  Basic personality qualities include being entrepreneurial, being decisive, and having a proper aptitude (though not genius-level)  with math, as well as being meticulous, grounded, and having stick-to-itiveness.  These are some of the basic qualities a good property investor will display.  Notice I did not include:  being good with people, or being a  “wheeler-dealer” type.  These two traits are not something you need…and they can be learned, as well as delegated to others.  That’s what property managers , as well as real estate agents come in and can do for you.

What are the traits that make a good real estate investor?

So be cognizant of what makes you tick – and what your passions are….Active investors in real estate (those that prefer to control their own properties, as opposed to investing in Real Estate Investment Trusts, REITS, for example) don’t get in strictly for monetary rewards alone.  There are too many pitfalls to running a successful property investment business to take on the added risks.  Rather, hands-on property investors enjoy wearing many different hats:  being the site locator, searching for properties, then being good numbers crunchers to see which are the most attractive properties available at any given time.

They then switch hats to become buyers, making offers, negotiating, then finding financing for the properties.  Finally, there’s the investor who needs to wear the hat of property manager – acquiring tenants, refurbishing units, and keeping them continually maintained properly.  This requires great diligence and attention to detail.  You are running an active business, not simply parking your investment dollars in a fund that will (hopefully) offer you positive returns.  So heed the worst property investing advice I ever got – that anyone can do it.  And make sure you have the right temperament and personality for the job.

 

photos courtesy of newmusicworld.org, dionisteam.ca, carterrealtyagency.com, sanpedrosquareproperties.com

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Property Investing Tips: Be Quick Like A Bunny!

May 9, 2013 By Leave a Comment

Increase your rental profits

One of the elements in trying to maximize your rental profits is to act extremely quickly, as the proverbial  bunny would…Besides making sure that you always have decent quality tenants in your units you’ll want to make sure that when there is turnover, you act as quickly as possible to get the unit rented out again with no further delays.

You should make sure that you keep your vacancy rates as low as possible.  No unit should go more than one full month being vacant.  If so, you’re going to lose money that is preventable from slipping through your hands.  In order to achieve this, you’ll have to act fast when a tenant gives you notice of leaving.

Tenants on the move

Since tenants move about many, many times before they ever buy a house, you have to expect turnover, and even with the best tenants, you have to expect them to move around a great deal – job promotions, relocations, family events – they all create change in tenants’ lives. And tenants move around.  That’s the nature of the business.

If a tenant stays two years, consider yourself lucky. Most tenants move within a year – or less!  That adds costs for you as you constantly are trying to find new, quality tenants.  With that, you have to ensure you get your unit filled up with another quality (read:  paying on time, no hassles) tenant as soon as possible.  It’s one of the most solid of property investing tips, and that means not leaving the unit vacant for more than one month.

Checking for damage

You’ll have to go in and check after a tenant leaves, and before giving them their security back (in whole or in part due to damages done),  make sure only normal wear and tear was done to your unit.  You can expect this simple wear and tear on any tenant’s usage of your rental.  You may have to do more than a simple cleaning after a tenant has been living there for a while.   The unit may require a whole new paint job. 

Hopefully, you won’t have to do any major repairs to the unit, and that your tenants kept it in proper shape.  In that case, to keep your vacancy rate as low as possible, and to not lose money for being vacant for more than one month at a time,  you’ll have to have your painting crew ready, as well as your cleaning crew on call and available in order to get in as quickly as possible after the tenant leaves.   In this way, you’ll be able to begin showing it to prospective new tenants immediately upon cleaning up the unit. 

Naturally, the sooner you can get the unit on the market to show, the sooner you can line up prospective tenants in to view it.  One of the best property investing tips is that the better your  place shows, the faster you’ll be able to get a quality new tenant under lease.

Time for small upgrades?

Also consider that (after a tenant has been in your unit for a very long time, and they decide to leave) whether it is a good idea to do a small bit of renovating to the unit. More than just a paint job, things like adding new appliances, or better yet, stainless steel appliances for a real spiffy image, will look great, and attract a higher-quality tenant.  It will really spruce up the overall look of your unit.  It will also mean you should be able to find a tenant faster, and be able to charge more rent for your refurbished, modern-looking unit.  Also, tenants feel you are maintaining your overall building with more care when you upgrade appliances…it’s a wonderfully positive psychological effect on prospective tenants.  Just figure in to your costs and time schedule, that with the addition of new appliances, you’ll most probably have to hire a plumber to install them as well – so you need to be ready for that expense, as well as prepare your crew to be ready to do the work in a very quick manner.

The quick turn-around

It’s all about timing…and the better you’re able to cut down the time between vacancy and new tenant, the better you will be able to maximize your rental profits.  It’s one of the most basic property investing tips,  So don’t leave your units open for more than a month after a tenant leaves. That’s the best way to ensure low vacancy rates overall on your building, as well as continuing to maximize your cash flow.  Also remember that the better your curb appeal, not only on the outside of the building, but on the inside of units as well (the minute they walk through the door), the faster you’ll be able to rent out your unit…and to a better quality tenant.

 

photos courtesy of scenicreflctions.com, iresvegas.com, lowesforpros.com, regulatedtenants.com, thatgreenmaid.com

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A Tenant’s Nightmare

May 1, 2013 By Leave a Comment

Being a  bad landlord – from the tenant’s perspective

I was recently pitching in with a local United Way “Day of Caring” campaign.  I was helping out by doing some yard work for a disabled woman in my area.  While there I was told that she was a tenant of the house she called home.  And while I was raking leaves and branches in her yard, I couldn’t help notice all the building code violations and generally unsafe conditions that existed around just the exterior of the house alone.   Items like rotting window sills, rotting foundation beams, missing gutters and leaders and unsafe walkways to name just a few.

Without going inside, I knew from experience that there had to be general water leakage problems present.  I asked her why her landlord had not made the necessary repairs.  She said that he just doesn’t do anything.  Basically, she painted a picture of a classic slum lord – except this house was not in an inner city, but rather more in a rural setting.

Reporting the violations – the basic problem

I then asked why she doesn’t call the town building inspector and report these violations.  That way, the landlord would be forced to make the necessary repairs and create a safe environment for his tenant.  But then her answer was chilling:  “because he’d kick me out.”   Folks, we’re talking about a blind woman with diabetes, who had recently suffered a heart attack.  And she’s scared her landlord’s going to throw her out for reporting safety violations.  So, for paying her rent in a timely manner, she gets the right to live in sub-standard, unsafe conditions.  This truly gives all property investors a bad reputation by inference.  For my part, I reported the problems to the United Way in hopes they can investigate and intervene.

Doing the right thing

I note this little story in the hopes that all property investors will be cognizant that running a cash-producing investment into the ground is unacceptable when other people’s lives, and safety, are at stake.  Basic, minimal and constant maintenance is required of all hands-on property investors.  God forbid there is a fire, or your tenant gets hurt in some way due to your negligence, it’s not enough to say, “I’ve got property as well as liability insurance.  And that will cover it.”

All property investors belong to the same club.  No one says you have to be a “people person” to be part of this club…Or want to earn as much profit as possible on your investments. That’s the goal, after all.   But if you’re not going to treat your tenants – your customers – like human beings…well, please stay out of our business.  You hurt the good name of all of us decent property investors.

 

photos courtesy of investors.housez.ca, neastphilly.com, 24dash.com, keypersonofinfluence.com

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Doom And Gloom…Or Real Opportunity?

April 26, 2013 By Leave a Comment

Get ready – it’s going to be a bumpy ride

A new article published this week in MSN Money on-line (“Welcome To The New Recession” by Anthony Mirhaydari, MSN Money, April 24, 2013) questions the underlying stability of the U.S. economy right now.  Mr. Mirhaydari, a regular writer on stocks for MSN Money, makes a strong case for this instability.  He cites that many indicators are pointing to very stormy weather for our economy in the near future.  This will occur despite the stock market’s current robustness, as well as the Federal Reserve’s continuing to pump more money into the U.S. economy.

Mr. Mirhaydari makes his case clear and succinct:  “But while the market suffers from Ben Bernanke’s reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago. As a result, by some measures, the economy appears to have succumbed to a new recession, invalidating the theory that cheap money solves all problems and casting a pall over the market’s recent rise.”

Backing it all up…

He goes on to back up his conclusions with more recent information:  “Just consider the economic data we’ve received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New-home sales disappointed.”

The writer then goes on to reach some rather obvious deductions:  “It wasn’t supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages.  But as I’ve been saying for months, none of this addressed the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings.  Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany, as illustrated by its abysmal Flash PMI manufacturing activity report Tuesday. Or the fact Congress hasn’t finished its budget battles, with $2.5 trillion more or so in additional budget austerity needed over the next 10 years to stabilize the national debt.”

How these conclusions will affect property investing

I had previously written here at the beginning of this year that “I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through.  The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs.  If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond.”

So I was wrong – sue me…

We did get sequestration.  Though Congress is trying to amend certain provisions as I write this article.  Nevertheless, the market data indicated above proves out that we are heading towards a new, secondary recession.  I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate.  And cash flows on rental properties would commensurately increase as well.”

Time to repeat myself

Oh, how I hate it when I’m right…OK, I won’t gloat here.  But again, my suggestions for residential property investing  from earlier this year are still as much, if not more, valid now:  “My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy.  Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties.  You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.”

Obviously, this will put you in better shape to ride out any recession that is forthcoming – regardless of how deep it becomes.  Your cash flows and profitability should increase as you beef up the attractiveness of your properties in a market that will see even more demand for rentals as people lose confidence in home buying.

One final note…

Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties.  With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings.  So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013.  And hold these properties in the short term until you see signs of a recovery.”

Can I get an amen, somebody?

 

 

photos courtesy of funagain.com,  singaporepropertycycle.com.sg, worldpropertychannel.com, ehow.com, phlegmfatale.blogspot.com

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Is It Time To Cash Out?

April 18, 2013 By Leave a Comment

Never cash out your money-maker unless it’s an emergency

With residential rental property, always stick to your long-range goals of steady yearly cash flow growth, combined with the tax advantages of depreciation and holding your investment property asset, as well as capital market appreciation in the long term.  The only time you should be cashing out should be reserved for emergencies.

Recent data from the National Association of Realtors (NAR) suggests property investors are intending to hold onto their rental property for at least eight years now (up from five years the prior year).   However, some are finding the strong demand for properties coupled with a decreasing inventory of foreclosures and investment properties in general, as well as continued low mortgage interest rates to be too irresistible.  And so they are placing their cash cows on the market now.  Again – big mistake if you’re not in an emergency situation, and must have the cash on hand quickly.

Investment drop-off

Since real estate investments peaked in 2011, there was a dropping off of property investing last year as inventories declined, and foreclosures available to the marketplace lessened.  With decreased inventory and market valuations rebounding, many investors decided to begin cashing out.  As noted in my prior articles, only negative-cash flow rental property (or, the “dogs of war”) should be jettisoned when consistently non-performing, or when you are unable to make positive cash flows when still renting out at full capacity and at top market rents.  Positive cash flow properties should remain within your stable of properties for increased leverage to acquire additional property, as well as future cash growth and appreciation.

Institutional investors

As foreclosures have dwindled in the past year or two, so too are property investors that originally came into the marketplace by swooping in and purchasing large numbers of foreclosures, fixed them up, then rented them out for positive cash flows.  As prices have been on the increase of late, and with fewer foreclosures readily available in the marketplace, investors (especially institutional hedge fund type investors) have cut back on their rental property investment.

Higher entry costs into the market

In addition, with the rebound in the entire housing market over the last year, prices to get into the rental property acquisition market concurrently have risen.  For example, according to the NAR, the median investment property price rose 15% from 2011 to 2012 – from a median price of $100,000 up to $115,000.  Significant to note is that while the median down payment on all investment properties remained the same, at 27% of property price, the percentage of buyers who paid all cash for their investments rose to almost 50%.

The combination of increasing prices and tight credit have also produced a scenario where investors are lessening their current buying schemes for investment rental property.  However, the NAR data also shows that 47 % of real estate investors intend to purchase another property at some point within the next two years.  Though with current tight credit standards in the mortgage industry, roughly half of all investors will continue to make all-cash buys.

 

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Appraisal Approaches of Investment Property Valuation

April 4, 2013 By Leave a Comment

Three different appraisal methods

Any licensed state real estate appraiser will utilize three different approaches when analyzing investment property valuation.  Since it’s a different animal than a standard home appraisal, the melding of the three approaches helps unify an appraiser’s valuation, giving it more weight.  While appraising is more an art than science, and no two appraisers will value a property exactly the same way, they will (or in theory, should be) very close in analyzed market value for any given investment property.

Of course, the more specialized the property (a specific-use manufacturing plant, for example) the more rigorous and difficult the analysis will be. The three approaches most often used are the market value approach, the cost approach, and finally, the income approach.   Naturally, each type of approach requires different methodology and information for the appraiser’s analysis.  They then determine what weight to place on each individual approach, based on what data is available to them, and then they pull all three approaches together in one last analysis to come up with an investment property valuation amount.

Income approach

With residential rental property, the income approach tends to be weighted the greatest.  When rents and expenses are completely known, this approach works best.  Even when a rental property is vacant, or only partially rented, this approach works well, since there is usually plenty of data to show what market rents in the same area will throw off in terms of likely income for the building.

Cost approach

The cost approach would then be used to determine what a like building would actually cost to build to create the same amount of rent.  Another part of both approaches takes into account the time necessary to build from scratch, as well as the time to expand to full capacity rentals.

Market approach

The market approach is used as another qualifying way of determining an investment property valuation, or the real market value.  It helps the appraiser see just how in line the other two approach valuations truly are.  Market approaches (also known as comparative market values) are commonly done for home appraisals.  With residential multi-family properties, the market approach may still be weighted highly if there are enough good, recent sales data available of like properties for comparison’s sake.  However, this approach is usually weighted less than the other two approaches when non-residential real estate is being appraised.

Reconciling the approaches

Once the three approaches are reconciled, one market value is arrived at by the appraiser for the income producing property.  This is known as the appraiser’s “opinion of value.”  The appraiser’s report not only contains all three approaches, but details how he has weighted them, as well as his analysis of how he related each to the other.

Commonly, lenders rely on the appraisal to help qualify the purchase price of a property they are considering offering a mortgage on.  If the appraisal comes in below the purchase price, some lenders will allow a second appraisal to be done.  But others will simply not make the loan – or will require the buyer and seller to “re-negotiate” the purchase price, based on what the lender will allow for a mortgage.  In some cases, the buyer may make up the difference in appraised value and purchase price with their own cash, just to make the deal happen.

 

photos courtesy of thorequities.com, thealternativeinvestor.net, haleycustomhomes.com, rohdeappraisal.com, giulioruffini.ifunnyblog.com

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Investment Property Tax Tips When Selling

March 28, 2013 By Leave a Comment

Yes, it’s that time of the year again

The Internal Revenue Service really, really wants to hear from you by April 15th.  And they want to know just what you owe them on your investment property sales.  Here are a few items you’ll want to discuss with your tax professional concerning your real estate investments over the last year.  While you’ll have to pay taxes on profit earned from your rental properties, you may be able to limit the damage if you bought more investment property, or if you were able to move in to one of your properties and made it your primary residence prior to selling it.  These are very basic investment property tax tips when selling your rental property.

Determining your profit

In order to determine your profit on a particular piece of rental property, you’ll first need to figure out your adjusted cost basis.  Your purchase price is only the starting point here.  You’ll then add in all your closing costs, as well as all your improvement costs to the property as well.  You’ll also need to add in the total depreciation you previously claimed on the property too.  Your profit is the amount you get when you subtract this adjusted cost basis from your sales basis (the selling price less costs of the sale, like broker commissions, for example.)

Are you eligible for the capital gains tax?

Assuming you did manage a profit when you sold your rental property as described above, and you held the property for at least a year, you’ll pay a capital gains tax.  In 2013, this tax rate is 15% (or 20% if your taxable income as a single taxpayer is above $400,000, or $450,000 if married and filing jointly).  In addition, you’ll have a surtax added to pay for Medicare – an added 3.8% of your profit if your taxable income is over $200,000, or $250,000 if married.

Buying more investment property advantages

A good way to avoid capital gains on the sale of your property is to buy more investment property!  There is a part of the IRS code, section 1031 to be exact, that allows you to carry your cost basis forward from a newly–sold property to a newly-bought property without having to pay taxes on the sale.  There are however, many IRS rules regarding how the monies are held between the sale and purchase, as well as strict time lines for achieving this little maneuver.  So while this is part of many basic investment property tax tips, again, check with your tax professional regarding the exact way to accomplish this tax deferment properly.

Converting to a primary residence

As long as you live in your former rental property for at least two years, you can claim a part of the standard home $250,000 exclusion for your primary residence (or $500,000 if married and filing jointly) when it comes time to sell your rental property.  This exclusion will be prorated based on the length of time you lived in it versus how long you actually owned the property.  (For example, if you owned the property for 8 years, but lived in it for 4 years, you’d be able to claim 50% of  the exclusion.)  Of course, always check with your tax professional for further advice on how to save from overpaying the IRS when investment property is involved.

 

photos courtesy of  amillionlives.net, statenislandlifestyle.com, buyersutopia.com, blog.turbotax.intuit.com,  denversrealestate.com, ehow.com

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The Most Important Flipping Investment Property Strategy

March 13, 2013 By Leave a Comment

How organized are you?

In the world of speculative property investment for quick profits (flipping), it goes without saying that the trite adage “time is money” holds absolutely true.  This is because the quicker you can get to making your renovations, completing them, and putting your investment property on the market, the quicker you should be able to make a profitable sale on it.  So it behooves you to have your plans, tradespeople and marketing strategy for selling your property all in place – before you actually go to the closing on your newly-acquired piece of investment property.

The power of incentives

Create a schedule for all work to be completed and drive your tradespeople with a steady but firm hand.  Incentivize the completion date for them by adding in a small bonus to their already-agreed to contract.  Or, if they’re on time and materials, build in a bonus for completion of work by a certain date.  It will be “extra” money well spent when ultimately flipping investment property.

The all-important window of time

You’re always looking to narrow the amount of time you actually own the property to as short a window as possible.  Carrying costs of insurance, taxes, heating, electricity, etc. all add up for every day you own the parcel.  So you can’t afford to waste a single day.  It’s always a good idea to try to acquire your properties for flipping which allow you ample time frames to make your renovations, and then be able to place the house on the market in one of the two prime real estate selling seasons:  Spring (beginning in early March and lasting through mid-June), or Fall (early September to the very end of October).

The time to work your ass off…

Pre-planning is everything.  From the date you get a signed contract until you actually close on a house should be the heaviest work-load period for you in any flipping investment property project.  If it isn’t, you’re not optimizing your time correctly – and you’ll be eventually holding onto your property, and incurring greater costs in doing so.

No deal is ever a 100% lock to go through – even all cash deals.  If there’s a problem with the seller’s title, for example, you may end up waiting a long time for them to clear the defect – or, you may decide (and have the right) to back out of the deal, with any deposit money returned to you.

However, this is a rarity.  I like to take the risk of doing all prep work right after signing a contract.  This prep work includes purchasing materials ahead of time, prior to actually closing on the property.  Many materials, such as custom kitchen cabinets for example, require lead times of a minimum of three to four weeks.  You never want to have your contractor or carpenter waiting on materials once they’ve begun their work.

Time to get your crew in…

In addition, you’ll want to start interviewing several sets of tradespeople (if you don’t already have your crew set – see my article on assembling your crew).  If you already use a standard set of tradespeople for all your projects, which, of course, you should, get them all in to discuss the project the day you have an executed contract (one which has been signed by you AND the seller)).  Discuss the renovations/repairs you want to make to the property.  You should have already drafted a set of “work to do” punch lists for each tradesperson – even prior to obtaining a signed contract!

Start creating your “exact” budget

Go over the punch list for each tradesperson with them, get their price, and negotiate a contract with each one.  If you’re on time and materials, discuss their guesstimate of the amount of time required to complete the project.  As mentioned above, also incentivize it for them so they complete the work even faster than what they predict.

If you’re planning major renovations such as kitchen or bath rehabs, work on developing full kitchen and bath layout plans in this crucial time period.  They too will become part of the overall costs your tradespeople will be figuring in, so you must have the full plan already created and ready to go for them - as soon as possible after signing contracts.

Coordination of people -  a difficult job

Ultimately, your goal is to hit the ground running after you close on a house.  When flipping investment property, one of the hardest jobs you’ll have is trying to coordinate the “tentative” closing date (which will eventually turn into the “actual” close date with your attorney – and then line your first set of needed tradespeople to come in and begin work immediately upon closing.  Demo and cleaning work is usually the first job on your punch list – and you or your contractor will also have to coordinate the delivery of a dumpster to the property immediately after the closing.

Sweating the details…

You’ll find the detail work to be more and more voluminous as you move from contract signing to closing dates.  Again, just be prepared for it.  This will obviously test your organizational skills.   It is the toughest, most grueling part of any flipping investment property project.  And it will require your greatest organizational skills to pull together those punch lists, materials ordering, negotiating and coordination with all  parties involved in the acquisition of the property, as well as the fix-up work to be done.

Honing your skill set

However, if you’ve planned well, you’ll find that with each succeeding project, you’ll define your methodology and hone your organizational skills.  And if working with a set crew, you’ll find the benefits of utilizing the same people for repeat business.  Getting them to move another job to accommodate your project’s time frame will become easier and easier.

In the long run, you’ll find that, while exhausting, the time period between obtaining executed contracts and actually closing on a property will become some of the most exhilarating time periods when flipping investment property.  Next to going to the bank and depositing the proceeds from the sale of your property you worked so hard on, that is.

 

photos courtesy of islaythedragon.com, askmen.com, inman.com, barnettassociates.net, fixandflipnetwork.com, cbsnews.com, home.howstuffworks.com, sandiegohomebuys.net, foreclosurequestionsguru.com

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The Bargain Basement Days Appear To Be Over

March 7, 2013 By Leave a Comment

Resetting your property investment strategy

After several years of horrendous declines in the valuation of house prices in the U.S., the latest reports show a definite pattern of a slow but continued rise out of the housing slump.  So much so, that it appears the days of the great “bargain” prices for those looking to buy investment property are beginning to come to an end.

Statistics don’t lie

Even before the traditional Spring selling season is about to begin, statistics show that house prices are rising at their greatest pace in almost seven years.  Home prices rose 8.3 percent in December, and are now reported to have jumped 9.7 percent in January, compared to the prior year’s data, according to CoreLogic, which tracks house prices in the U.S.  While price valuations are still down a huge 26 percent from their lowest point in 2006, this recent trend upwards is good news for all those looking to buy investment property.

Continued price rises

Except for Delaware and Illinois, prices rose in all other states in January.   Western states garnered the lion’s share of price improvements, with Arizona, Nevada, Idaho and California leading the nation, with double-digit percent increases.  The nation-wide inventory of homes for sale has been slowly shrinking, and that coupled with increased pent-up demand has been fueling the price increases.  Property investors with existing holdings finally have some cheery news to celebrate.  Now, for the first time in years, price appreciation can be added to your expectation of returns on rental housing properties, besides the positive cash flows from operations.

Moving off the fence

Another fortuitous sign of the housing recovery is the fact that the number of signed contracts for sale of existing properties jumped in January from December to their highest level in over two years.  Again, this activity is occurring prior to the Spring real estate sales market – a very good sign indeed.  It would appear that all the fence-sitting buyers are now starting to realize that this is the time to move ahead and purchase before house prices rise even further.  Especially with interest rates for 30 year mortgages continuing to stay at extremely low rates – for the time being.  So if you’re looking for a great “deal” now as you look to buy investment property, your mindset should be changing.  Instead of a good bargain, be more concerned with obtaining a proper cash flow return on your investment.  The increase in property valuation will begin to come to fruition naturally after that.

 

photos courtesy of  news.com.au, domain.com.au, robertsinvestmentproperties.blogspot.com, dailymail.co.uk, usprefrealty.com

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