Tip # 1:
A great property manager will make or break you! Not only will they do a complete credit, employment and background check on your potential tenants, they will handle bookeeping, ordering repairs, and evictions. Do not attempt to manage the properties on your own unless you intend for your full time job to be managing properties! Think about it! The more properties you buy, the more management duties there will be! We all are only granted 24 hours in a day. So, if you are planning to grow a sprawling empire, buy the properties right and hire a good manager to run them so your full time job becomes buying even MORE properties!
Tip # 2:
Instead of doing a plain vanilla rental agreement, consider putting your homes on a "rent to own" program. Not only does this add more value in the eyes of your tenant, but they also treat the home with pride of ownership! Not only that, but most "rent to own" agreements are set up where the tenant takes care of any and all repairs in the home. That means no calls at midnight about general maintenance concerns! Also, most "rent to own" tenants are willing to pay a substantial percentage of the purchase price to secure an option to buy the property in the future. Basically, you are promising not to sell the property until their option expires. Most "rent to own" contracts are anywhere from 1 to 3 years, but all are negotiable.
Tip # 3:
If you opt out of doing a "rent to own" program with your tenants, be sure to find a reputable contractor you can trust! Remember that offering work in volume commands a reduction in prices! So, negotiate with your contractor to cut you some slack on fixing your homes!
Tip # 4:
How much of an annual return do you want to make? Most investors would say, "As much as humanly possible!" But we all have to start from somewhere. For instance, in Oklahoma City, which is the city I purchase homes in, I look for rental properties that generate a MINIMUM of 24% return. Did I pull this number out of the air? Is 24% my lucky or favorite number? The answer is no. How I came up with this number is going to my local real estate investors association and finding the wealthiest property owners who buy the greatest number of homes in my area. I asked the top 3 in my industry what they expect to make each year when they buy a property. Amazingly, they all said 24%. That is what the Oklahoma City market commands for investment properties. This means that it becomes harder and harder after you pass the 24% mark to find properties that will generate more of a return than that (but it is possible!) But you must have a standard to go by! You must know how to purchase your homes!
Tip # 5:
Get that property out of your NAME, including the home you live in (if you own it!) Here is the reason why: If you get sued, the first thing a lawyer is going to do is research and see what type of assets you personally own. If the lawyer goes to county records and cannot find properties in your name or any other assets, chances are, he will not take a clients case without a retainer fee, paid by the person who is suing. But if the lawyer sees you have thousands or millions of dollars in assets, he will go after you free of charge! See how that works?
Tip # 6:
It's not good enough to just get that property out of your name if you are buying multiple investment properties! It is smart to set each individual property up in a separate LLC or land trust. Why? Because if one of your tenants decides to sue the LLC that is holding your investment property, and you have used that same LLC to purchase multiple properties, then ALL of your investment properties will be frozen until the lawsuit is settled. This is why it is so important to set each property up in it's own individual LLC or land trust. This way, if one LLC is sued, your other ten properties are not effected by that LLC because they each have different names.
Tip # 7:
Make rent due on the 25th of each month, and late after the 1st. This gives your tenant a 5 day grace period instead of 5 extra days to not pay their rent on time. And it will also aid in your bookeeping, since most mortgages are also due by the 1st.
Best of luck to you in your new investment endeavor!
Wednesday, November 30, 2011
Tuesday, November 29, 2011
Does It Seem Counter-Productive To Blame This Mess On Mortgage Lenders And Appraisers?
I have a controversial response:
The government was not initially created to absolve the masses of personal responsibility, but this appears to be the direction it is heading.
The government was initially created to serve the public with products and services we all use collectively as a whole, such as the fire department, police department, the local library, etc. But in order for politicians to do mass advertising and marketing campaigns to influence the most amount of people, they have to raise money. And of course, the biggest globs of money come from huge corporations. So of course, these huge corporations are going to donate money to the politician... with a catch. And that is having the laws, rules and regulations written in THEIR favor, not the general population they have helped paid to influence.
In a nutshell, everybody wants to point the finger at everybody else, and absolve themselves of personal responsibility and blame the latest and greatest politician who was merely paid off by a big corporation to brainwash the public into voting for them.
So, which came first, the chicken or the egg? Do we blame the dumb, unsuspecting chattel we call American citizens? Do we blame the smooth, fast talking, and savvy politician who wins their votes? Or do we blame corporate America for buying the politician to lead the chattel to line their pockets even more?
I'm with John Kennedy. Ask not what your country can do for you, but what you can do for your country. Instead of demanding jobs, create jobs for others. Instead of blaming mortgage lenders, appraisers and corporate America for this big financial mess, see what you can do to be a part of the solution instead of the problem.
The government was not initially created to absolve the masses of personal responsibility, but this appears to be the direction it is heading.
The government was initially created to serve the public with products and services we all use collectively as a whole, such as the fire department, police department, the local library, etc. But in order for politicians to do mass advertising and marketing campaigns to influence the most amount of people, they have to raise money. And of course, the biggest globs of money come from huge corporations. So of course, these huge corporations are going to donate money to the politician... with a catch. And that is having the laws, rules and regulations written in THEIR favor, not the general population they have helped paid to influence.
In a nutshell, everybody wants to point the finger at everybody else, and absolve themselves of personal responsibility and blame the latest and greatest politician who was merely paid off by a big corporation to brainwash the public into voting for them.
So, which came first, the chicken or the egg? Do we blame the dumb, unsuspecting chattel we call American citizens? Do we blame the smooth, fast talking, and savvy politician who wins their votes? Or do we blame corporate America for buying the politician to lead the chattel to line their pockets even more?
I'm with John Kennedy. Ask not what your country can do for you, but what you can do for your country. Instead of demanding jobs, create jobs for others. Instead of blaming mortgage lenders, appraisers and corporate America for this big financial mess, see what you can do to be a part of the solution instead of the problem.
How Much Profit Do Flippers Expect To Make?
Not all flippers / rehabbers are cash buyers. Most of them are bound to the lending criteria of an asset based lender, AKA hard money lender.
A hard money lender will generally not lend more than 50% to 70% of the properties after repair value. (ARV) The total percentage they loan will be the total amount they loan, including setting aside money in an escrow account for construction purposes.
And let me tell you, those folks are not cheap. The average hard money lender charges 3 to 5 points, as well as 14% to 20% interest.
Most savvy investors factor in the cost of construction, the cost of the money, re-listing the property with a Realtor, insurance premiums, title fees, etc when buying the home so they don't have to come with any money out of pocket as a down payment.
The formula I use when I purchase a rehab property is as follows:
1) After Repair Value (ARV) - (minus) Repairs = As-Is Value
2) As- Is Value (divided by) 2 = Offer Price
It's funny when I was in high school I slept through algebra, but now I use it on a regular basis. :-)
Let's use a real life example:
$100,000 (ARV) includes stainless steel appliances, granite, ceiling fans in every room, new paint / carpet
$30,000 (Repairs) Cost to get home up to after repair value, which is top market values standards.
$70,000 (As-is Value) I simply subtract the top market value from the repairs needed
Then I divide the AS-IS figure by 2 and offer 50% of the homes AS-IS value, and that figure is:
$35,000
If my hard money lender agrees to lend me 70% of the ARV, my loan amount will be for $70,000 dollars. Here are how the fees break down:
$35,000 purchase price
$30,000 repair budget
$3,500 5 points to borrow the money
$3,500 $875 dollars per month interest only payments at 15% interest x 4 months holding time for resell
(We are using 15% interest only payments as an example, which would equal $875 per month pre-paid for a $70,000 loan)
$1,000 Insurance
$73,000 Total
In this example, the investor would have to bring $3,000 to closing in cash.
Now, let's say the investor fixes it up really quick and puts it on the market. Within 60 days, he gets a full price offer:
$100,000 purchase price
(minus)
$73,000 loan pay off (including $3,000 cash invested at the table)
$750 title fees
$6,000 realtor commissions
$3,000 buyers closing costs (common)
$17,250 dollars net
In a nutshell, the investor had to risk $3,000 dollars, his reputation with the hard money lender, manage contractors, deal with marketing concerns, and wait 4 months to get paid back $17,250 dollars. If you break that down to NET profit, that is $14,250 dollars in 4 months. If you break that down to a monthly salary, that is $3,562.50 per month for a great deal of risk.
A hard money lender will generally not lend more than 50% to 70% of the properties after repair value. (ARV) The total percentage they loan will be the total amount they loan, including setting aside money in an escrow account for construction purposes.
And let me tell you, those folks are not cheap. The average hard money lender charges 3 to 5 points, as well as 14% to 20% interest.
Most savvy investors factor in the cost of construction, the cost of the money, re-listing the property with a Realtor, insurance premiums, title fees, etc when buying the home so they don't have to come with any money out of pocket as a down payment.
The formula I use when I purchase a rehab property is as follows:
1) After Repair Value (ARV) - (minus) Repairs = As-Is Value
2) As- Is Value (divided by) 2 = Offer Price
It's funny when I was in high school I slept through algebra, but now I use it on a regular basis. :-)
Let's use a real life example:
$100,000 (ARV) includes stainless steel appliances, granite, ceiling fans in every room, new paint / carpet
$30,000 (Repairs) Cost to get home up to after repair value, which is top market values standards.
$70,000 (As-is Value) I simply subtract the top market value from the repairs needed
Then I divide the AS-IS figure by 2 and offer 50% of the homes AS-IS value, and that figure is:
$35,000
If my hard money lender agrees to lend me 70% of the ARV, my loan amount will be for $70,000 dollars. Here are how the fees break down:
$35,000 purchase price
$30,000 repair budget
$3,500 5 points to borrow the money
$3,500 $875 dollars per month interest only payments at 15% interest x 4 months holding time for resell
(We are using 15% interest only payments as an example, which would equal $875 per month pre-paid for a $70,000 loan)
$1,000 Insurance
$73,000 Total
In this example, the investor would have to bring $3,000 to closing in cash.
Now, let's say the investor fixes it up really quick and puts it on the market. Within 60 days, he gets a full price offer:
$100,000 purchase price
(minus)
$73,000 loan pay off (including $3,000 cash invested at the table)
$750 title fees
$6,000 realtor commissions
$3,000 buyers closing costs (common)
$17,250 dollars net
In a nutshell, the investor had to risk $3,000 dollars, his reputation with the hard money lender, manage contractors, deal with marketing concerns, and wait 4 months to get paid back $17,250 dollars. If you break that down to NET profit, that is $14,250 dollars in 4 months. If you break that down to a monthly salary, that is $3,562.50 per month for a great deal of risk.
Monday, November 28, 2011
What Financing Options Do I Have For Gutting And Renting A 6-Unit Apartment Building?
The rule of thumb in commercial investing is that the property must be 85% occupied and be at least a 10% capitalization rate in order to qualify for bank financing. Since only 2 out of 6 units are occupied, this means you are only sitting at 34% occupancy, which makes this a distressed property in commercial terms.
If you email me, I will send you a cash flow evaluator to analyze a performa you will have to construct. Based on the performa (what the future income / expense will be) you will base your top appraised value.
The formula you will need to use for your offer is:
1) Top appraised value (minus) repairs needed, divided by 2
That formula will be 50% of the AS-IS value.
This is assuming you are using:
A) Hard Money
B) Private Money
C) Cash
Since the seller is distressed, and cannot sell this property to ANYONE but a cash buyer, I would suggest you come up with some owner financing senarios. For instance, if you have the cash and know how to fix the property up, ask the owner to finance you with zero money down.
You can also do a master lease option, where essentially you are leasing the entire 6 unit from the owner with an option to buy it later down the line. You agree to pay the owner more in the future for giving you an option to buy. And you can negotiate in the contract to ask the owner for a construction budget.
Those are just a few ideas. But, once again, this property WILL NOT qualify for traditional commercial financing. This is considered a high risk loan that only a hard money lender or private lender will make.
If you email me, I will send you a cash flow evaluator to analyze a performa you will have to construct. Based on the performa (what the future income / expense will be) you will base your top appraised value.
The formula you will need to use for your offer is:
1) Top appraised value (minus) repairs needed, divided by 2
That formula will be 50% of the AS-IS value.
This is assuming you are using:
A) Hard Money
B) Private Money
C) Cash
Since the seller is distressed, and cannot sell this property to ANYONE but a cash buyer, I would suggest you come up with some owner financing senarios. For instance, if you have the cash and know how to fix the property up, ask the owner to finance you with zero money down.
You can also do a master lease option, where essentially you are leasing the entire 6 unit from the owner with an option to buy it later down the line. You agree to pay the owner more in the future for giving you an option to buy. And you can negotiate in the contract to ask the owner for a construction budget.
Those are just a few ideas. But, once again, this property WILL NOT qualify for traditional commercial financing. This is considered a high risk loan that only a hard money lender or private lender will make.
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