Real Estate Investing Articles

Real estate investors may, like many others, believe in the adage, “if you want something done right, then you’ve got to do it yourself.” Generally, that’s true, but at some point, a real estate investor may have too many properties that make the efficient and profitable overseeing of those properties, without the use of a property manager, next to impossible.

The twelve sure-fire signs that you need to hire a property manager to care for your investment properties are:

1. You’ve brought an exterminator to the property on Peterson Street to fix an electric ceiling fan, and you’ve brought an electrician to the property on Peterson Avenue to eliminate a pest problem. Your little mental mix-up resulted in two relatively happy contractors, each of whom charged you for two house calls, and two bewildered tenants, wondering what happened?

2. You’ve been so busy that you forgot to collect the rent in one of the properties you own, and now the tenant informs you that they’ve spent the money and will be late getting it to you.

3. You don’t schedule the new delivery of home heating oil in preparation for the upcoming winter and your tenants are calling to ask you how to light a fire in their fireplace… their faux fireplace.

4. You forgot to run a background check on a potential tenant, and they turn out to be serial evictees with a page full of judgments against them on their credit reports.

5. You don’t panic when the phone rings at 2:00 in the morning, worrying that it’s a family emergency; instead, you mutter an expletive before you answer the call, knowing it’s a tenant with a property-related issue (and not necessarily an emergency).

6. You feel bad about raising the rent, and guiltier still if you have to perform an eviction, because you allowed yourself to get caught up in the drama that is your tenants’ lives.

7. You don’t have the time to inspect your properties on a quarterly basis, much less a monthly one, and the majority of the properties are less than an hour’s drive from your office.

8. Your spouse and/or your kids are complaining that your tenants see you more than they do, and you’re neglecting the maintenance of your own property, because you’re exhausted from your handy-man duties.

9. Several of your properties are vacant, and the word-of-mouth marketing scheme and the FSBO signs you planted on the front lawns are just not working.

10. You have no idea what your local, state or federal landlord/tenancy laws require and whether or not you’re in compliance (“Tenancy law? What tenancy law?” and “Fair Housing Act? What’s that?”). Ignorance of the law is not an excuse.

11. You’ve kept your repair receipts, invoices, insurance policies, tenant application forms and all property related documentation in a big box underneath your desk; at the end of the year, when you need your financial statements prepared, you hand the box to your CPA and he starts to cry.

12. You’ve got no back-bone when it comes to confronting your tenants about NSF checks, noise related complaints from the neighbors and/or police, late rental payments and poor property upkeep. You put off the confrontation until you’ve mustered up enough courage, and then begin your conversations with, “Umm. I really hate to bother you…”

It’s true that no one will love your properties as you do, certainly not your tenant and probably not your property manager, but it is in your property manager’s best interests (after all, he does get paid to do this) to keep your interests at heart. Trust them to know the best way to maximize the income that your property can generate, while minimizing the risks of vacancies, non-paying tenants, property damage and loss of property values.

Let your property manager handle the (sometimes unreasonable) demands of the tenants, the middle of the night phone calls, the confrontations and the evictions. Your property manager will also have the responsibility of preserving and even enhancing your properties, through regularly schedule maintenance and landscaping , alerting you to potential problems before they become serious and costly, and handling the day-to-day minutiae that is so time consuming, such as collecting the rents, and paying the bills, utilities and taxes. When and if your property becomes vacant, the property manager’s role is to market your vacancies, help you to set your rental prices reasonably and fairly for the market environment, and run the background check on all potential tenants.

What’s your responsibility, as the property owner? Ultimately, everything is your responsibility; it is, after all, your property. Provided that you’ve chosen a competent, qualified and responsible property manager, though, you’ll spend less time involved in your properties, leaving you more leisure time to spend pursuing the things that you love. Really, wasn’t that the reason that you got involved in real estate investing in the first place, to have time to enjoy life?

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under Real estate investor resources & real estate marketing & rentals | No Comments »

Many investors shudder at the thought of owning negative cash flow properties. Negative cash flow means taking money out of your own pocket to cover the difference between your rental income and the property’s carrying costs. Without a doubt, most real estate investors prefer to own positive cash flow properties and for good reason. Yet, under certain conditions an investment in a negative cash flow property can end profitably. It is also notable that even your positive cash flow property is only a single mishap away from turning into a negative cash flow property.

In general, the reason that you might initially consider buying a negative cash flow property is in anticipation that the property will appreciate. In many areas of high appreciation, it is often impossible to purchase a cash flow producing property without putting down a significant down payment.

If you are planning to buy a property with negative cash flow, it is usually advisable to offer the lowest down payment that will be accepted. There are often ways to get creative with financing that can include seller financing or utilizing interest only loans. In the case where your interest in the property is speculative (based on the potential appreciation), then using more leverage equates to a higher potential yield. Keep in mind, however, that using more leverage generally means underwriting more risk.

Before you sign on the dotted line, and accept the risks associated with that negative cash flow property, be sure you’ve determined whether or not you can sustain all the costs associated with the property. This includes the length of time during which you will be able to hold it. What goes into your calculations to determine if a negative cash flow property will be a good investment for you? There are several factors, most notably your expectations of appreciation. Your accountant, CPA or advisor can help you figure them out. Many software solutions can also help you analyze these costs and can be downloaded from the internet.

Your basic calculations have to include your rental stream, tax savings, deductions, depreciation, mortgage payments and operating expenses. Another factor to take into consideration is how you intend to make the down payment. If you are using a home equity line of credit to finance the down payment on the property, you may be able to deduct that payment from your taxes. Once you factor in depreciation and tax savings, you may discover that a property with a negative cash flow will actually produce an overall positive cash flow.

Even though there are many ways to reduce the overall cost of operating a negative cash flow property, it’s valuable to establish a “sinking fund” whereby adequate money is put aside to cover ongoing carrying costs, as well as unexpected expenses. Most individuals have a down payment in mind prior to the start of negotiations. If you were successful in negotiating a smaller down payment, you should use the difference to fund your sinking fund.

It’s also important to consider exit strategies. You should factor in best and worst case scenarios for how long you may have to hold the property. If properties are appreciating at a conservative rate of 5% a year that means that your $100,000 property will be valued at $105,000 a year from now. What if your monthly out-of-pocket expense is $200 or $2,400 annually? You’re still ahead, after one year, by $2,600 (not factoring in sales costs).

It’s said that real estate is cyclical. Over the long term, if you’ve chosen the property and area carefully, you should see some appreciation over time. What you can’t be sure of is how much or when properties will appreciate. You may have to hold your property for longer than a year or two and you should be prepared to do so. That’s the idea behind maintaining a sinking fund to cover unforeseen expenses.

There are things you can do to mitigate the effects on your wallet of holding a negative cash flow property. Increasing your rents or passing on the utility payments is one quick way, though you risk higher vacancy rates as a result. You can also focus on ways to reduce your carrying costs. This could include trying a lower cost property manager or doing the property management yourself, provided you’ve got the time and/or inclination. You can also shop around for cheaper property insurance and implement ways to reduce utilities costs, such as individual metering of units. The majority of these options, however, are short term fixes that may have more detrimental long term consequences.

Barb Zigah is a freelance writer covering real estate and business topics.

If you are interested in reprinting this article on your website, newsletter, forum, printed publication or other communication medium, please consult our article licensing policy.

Posted by Barb Zigah under rentals | No Comments »