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July 17, 2018

The Top 10 Rental Features That Attract Cream of the Crop Tenants

by  | BiggerPockets.com

 

Let me share with you the cornerstone principle of long-term real estate investing:

 

The success or failure of your real estate investments depends on your ability to consistently attract and retain great tenants.

In the end, it doesn’t matter how great of a deal you got on the property or how strong your projected cash flow and return on investment are. Without great tenants that pay rent on time and take care of your property, the equity, cash flow and returns all evaporate into thin air.

So the question that naturally follows is: How do you find great tenants for your investment property?

The answer is so simple, yet so powerful.

The quality of the asset you buy determines the quality of the tenant you are likely to get.

Therefore, if you want to find excellent tenants for your investment property, you should first purchase an investment property with the qualities that attract excellent tenants.

 So a better question to ponder would be:

What do excellent tenants look for in a rental property?

To answer that question, I would like to provide you with the ultimate checklist for finding great investment properties, a lens you can use to filter properties, attract excellent tenants and make more money with your real estate investments. Fortunately, over the last decade, we have worked with hundreds of tenants on behalf of our clients. Many were “just ok” tenants, some were trouble—and some were excellent. Instead of guessing, we surveyed them and asked about what matters to them most.

The checklist you are receiving today contains the top 10 factors that excellent tenants look for in a great rental property in order of importance.

 

The Top 10 Rental Features That Attract Cream of the Crop Tenants

1. School Quality

The quality of schools zoned to the property was the primary deciding factor for over 85% of great tenants we interviewed. Schools are extremely important to families and single parents with school-aged children, and those tenants use this factor as an acid test. To these prospective tenants, if schools aren’t good, it’s as if your rental property didn’t exist. Furthermore, school quality is the best predictor of neighborhood quality—something ALL great tenants seek (even those without children). Therefore, to ensure your success, only purchase properties zoned to high-performing, desirable schools.

 

2. Safety

Safety is our most basic human need and a powerful motivator for excellent tenants. One of the main reasons why your prospective tenant decided to spend more to lease a home (as opposed to an apartment) is to provide a safe environment for themselves and their family. Therefore, research crime statistics and only purchase properties in safe neighborhoods.

 

3. Move-In Ready Condition

The condition of the property—and more specifically the ability to move right in—is very important to excellent tenants. You can rent out a property that’s not quite move-in ready (requires paint, flooring, cleaning, etc.), but I assure you it won’t be to an excellent tenant. Your target tenant plans to take care of your property and has high standards of cleanliness and maintenance. If you provide a move-in ready home, you are communicating that you share those same standards.

4. Proximity to Employment

Let’s face it, no one likes to commute! So proximity to employment centers is very important to great tenants. You can have a great, move-in ready home zoned to great schools, but it won’t matter if your tenant has to drive an hour to work each day. As you look at potential properties, think about where your target tenants are likely to work and how close the property is to that area.

5. Upgrades

Most inexperienced investors subscribe to the myth that their investment properties just need to be “good enough for a rental.” Therefore, they purchase starter homes with cheap finishes and rent them to mediocre tenants for mediocre results. Don’t do that; instead, purchase homes that have strategic upgrades that move the needle with excellent tenants: hardwood flooring, granite counters, stainless appliances, covered patios, etc.

6. Appliances Included

At the very beginning, your tenant incurs a large expense when leasing your property. They have to pay a month’s rent for the security deposit plus the first month’s rent. If your property does not include a refrigerator and a washer/dryer, the tenant would then have to purchase those items, increasing their upfront cost. So remove the friction to make their decision easier by providing those appliances on the front end. Often your tenants won’t mind paying a little more for a property that includes all appliances.

7. Neighborhood Quality

Neighborhood quality determines lifestyle quality. Think about the community you live in—didn’t the neighborhood amenities play a major part in your decision to live there? Wouldn’t your lifestyle be different in a neighborhood with running and bike trails, lakes, community pools, tennis courts, a gym, etc.? Quality tenants care about neighborhood quality. A community doesn’t have to have ALL those amenities, but the more the better.

 

8. Access to Transport & Basics

Access to modes of transportation and basic necessities like grocery stores, restaurants and shopping is very important because it affects other important factors such as commute to work and lifestyle quality. When you’re looking at investment properties think about: How easy is it to get to the main highway/park and ride/public transportation? Are there basic services within easy reach?

9. Age

Here’s one thing investors and their tenants have in common: They both don’t like hassle. The main factor that determines how much hassle either will experience is the age of the property. If you purchase older properties, they will have older systems (plumbing, electrical, HVAC) that break often, inconveniencing both you and your tenant. Purchase newer properties instead. A good rule of thumb is no older than 15 years, less than 10 if you can.

10. Rent and Price


Last but not least, your investment is ultimately a business decision for you as well as your prospective tenant. Your tenant will be concerned with the rent, and you will be concerned with the relationship between the rent and the price you pay for the property. Make sure the projected rent isn’t so high that it limits your tenant pool and so low that it lowers the quality.

Posted in Home Tips
July 9, 2018

VA Loans: Making A Home For The Brave Possible

Content From KCM and the KCM Crew

Since the creation of the Veterans Affairs (VA) Home Loans Program, over 22 million veterans have achieved the American Dream of homeownership. Many veterans do not know the details of the program and therefore do not take advantage of the benefits available to them.

If you are a veteran or you know someone who is, here is a breakdown of the VA Home Loan benefits that can be used to achieve the American Dream!

Top 5 Benefits of a VA Home Loan

  1. The greatest benefit of a VA Loan is that borrowers can buy a home with a 0% down payment. In 2016, 82% of all VA Loans put down 0%!
  2. Private Mortgage Insurance (PMI) is not required! (Most other loans with down payments under 20% require PMI, which adds additional costs to your monthly housing expense!)
  3. Credit Score requirements are also lower for VA Home Loans. The average FICO® score of a borrower for an approved VA Loan is 620, compared to 676 (FHA) or 753 (Conventional).
  4. There is also a limitation on a veteran buyer’s closing costs. Sellers can pay all of a buyer’s loan-related closing costs and up to 4% in concessions in some cases.
  5. Even with interest rates rising, VA Loans continue to have the lowest average interest rates of all loan types.

Who Qualifies for a VA Home Loan?

One of the most important first steps when applying for a VA Home Loan is obtaining your Certificate of Eligibility (COE). “The COE verifies to the lender that you are eligible for a VA-backed loan.”

You Can Apply for a VA Loan if You:

  • Serve 90 consecutive days during wartime
  • Serve 181 consecutive days during peacetime
  • Have more than 6 years in the National Guard or Reserves
  • Are the spouse of a service member who has died in the line of duty or as the result of a service-related disability

You Can Use a VA Loan To:

  • Purchase a Home
  • Purchase a Condo
  • Build a Home
  • Refinance an existing home loan
  • Make improvements to a home by installing energy-related features or making energy-efficient improvements

Bottom Line

For more information or to find out if you or a loved one would qualify to use the VA Home Loan Benefit, contact a local real estate professional who can help! Thank you for your service!

Posted in Buying a Home
July 2, 2018

4 Tests Investors Can Use to Find Holy Grail Real Estate Deals

BiggerPockets.com | By Andrew Propst

If you’ve seen the iconic film Indiana Jones and the Last Crusade, you’ll recall the climactic scene where Indy needed to pass four tests in order to retrieve the Holy Grail. The margin for error was razor thin, and the stakes were high. One wrong move and he would have failed the test and lost everything, including his head (as would have happened had he not knelt as the penitent man to pass the test).

 

When we make investments, we focus on the reward and balance it against the risk. These four tests, as far as I am concerned, will allow us to get to the Holy Grail of wealth without losing our heads.  

1. Cash on Cash Return ($/$)

Cash on cash return is a tool used to calculate the value of investment property based on your actual cash investment versus the income the property will generate.

Cash on cash return is expressed in a percentage that reflects the amount of income each year against the initial cash investment. This investment metric is calculated by taking your net income and dividing this by your initial investment to determine the percentage. Your initial investment will include the following start-up and acquisition costs:

  • Down payment
  • Inspection, appraisal, and any other due diligence costs associated with the acquisition
  • Total of repair and renovation costs
  • Closing costs

Your annual net rental income will include your total rental income less your annual recurring expenses—the result of which will tell you whether the investment will have a positive or negative cash flow:

  • Property taxes
  • Maintenance costs
  • HOA fees
  • Property management
  • Mortgage
  • Vacancy rate

Cash flow divided by cash invested equals cash on cash return. If you’re seeing between 5% and 10%, you are in the zone, generally speaking, taking into consideration the specific property risk and current market. 

2. Net Present Value (NPV)

Net Present Value is a metric used to calculate the present value of your net future cash flows from an investment property.

This metric is valuable in establishing the yield of an investment. It is based on whether anticipated future cash flows will present a value larger than what is required to invest in the property. Therefore, allowing an investor to calculate a yield that can be compared to other potential properties and opportunities by the same measuring stick.

To calculate NPV, future cash flows are discounted by the desired rate of return and deducted from the initial capital invested. In order to calculate IRR, you will need to begin with the following:

  • The total holding period in years
  • Cash flow generated each year
  • Discounted rate of return
  • Initial cash investment

This calculation is used to tell us if the present value of future benefits is greater than or equal to the cost of those benefits, thus providing your desired rate of return. You will want to see a positive number as a result, as that will mean the investment outperforms your expectations.

3. Initial Rate of Return (IRR)

Internal rate of return is a key metric in the valuation of a potential investment used to show profitability by determining a discount rate that makes the net present value of all cash flows equal to zero.

It uses the same information need to calculate NPV to determine the initial rate of return with the NPV set to zero and solving for the desired discount rate. This tool will provide you with a projected rate of growth expected from the investment. You want to see a positive number in this category, and generally speaking, the higher the IRR, the better the investment. This calculation is valuable in comparing multiple properties by creating a level playing field in which to do so.

With IRR, there is no magic number. In most investment properties that are currently being underwritten, an IRR of 10% or less seems to be more of a negative result, while an IRR of 15% or more are generally found to be good investments.  

4. Modified Internal Rate of Return (MIRR)

Modified internal rate of return takes your desired investment goals into consideration with reference to the determined IRR and overall financial metrics contributed to that calculation.

Pre-investment will help you determine how much initial capital investment is needed and evaluate your rates of return on that initial amount. During the holding period, your cash flow analysis will help you determine your returns during the life of the investment period. Finally, MIRR will help you determine your exit strategy by taking your projected sales price and returns and evaluating them against the returns of other investments, varied hold times, and how much to invest initially for the best overall return. MIRR is the big picture calculation that comes as a result of these metrics and gives you an overall snapshot on returns to make your final evaluation of the property. 

Equipped with this newfound knowledge, you’ll be able to assess potential investments to see if they pass each of these four tests as you evaluate both the short and long term performance of the investment. I strongly encourage you speak with a local property manager who has knowledge of the area to help determine the income to expense ratio so you can input accurate cash flows into your model. I would also never recommend a rent increase of more than 3% per year.

By following this guidance, you can avoid making poor choices, such as the one Marcus Brody made at the end of the movie when he was fooled by appearances and drank from the wrong cup. “He/She chose poorly” can be avoided. To put it simply: Never invest in something simply because it is shiny. 

June 25, 2018

How to Upgrade Your Property Just Enough to Make it Profitable

 

by  | BiggerPockets.com

Over improvement is a mistake that I believe everyone makes at least once — and usually more than once before they learn better. I have made this mistake myself and learned from it. And I’ve also been fortunate to learn from friends and mentors and the mistakes they have made. Having both the knowledge of other people’s lessons and the wisdom from having to learn this lesson myself, I am encouraged to pass both on to new investors so they can utilize them as well.

 

Let’s start with why over improving a property is less than ideal. It should be obvious, right? As we sink money into capital upgrades, there is a rate of diminishing returns.

Let’s look to the extremes for clarification. You don’t build a $10,000 gold-and-marble bathroom in a $10,000 single-wide trailer home. This is obvious, I hope. But it’s also extreme. What matters most is where we over improve at the margin. Meaning, should you put Formica or granite countertops in your unit? Should you put in fancy appliances or leave them white or black? Should you paint the exterior? Maybe you’ve thought about installing solar panels on the roof?

It’s hard to calculate how to maximize a return for each individual upgrade, and to sort it all out would be more work than it’s worth and ultimately not that useful. What’s most important is realizing that for a rental — different from a flip — is that you don’t need or want it to be the nicest house on the street. What we really want is to just be slightly above market-average quality, bring in top-of-market rent, and to last for the (very) long haul. Uninspiring, I know. But this is about making money, not getting on HGTV.

Rentals are not about creating emotional demand to drive sales. They are about creating a long-term viable living situation for multiple people over a very long period of time. This means passing on most fancy fixtures or complicated appliances in exchange for simple but functional fixtures and appliances. For instance, I recommend installing chandelier lights only and skipping on fans for all but the nicest of rentals. You’d be amazed how fan blades break. Water dispensers in fridges is another common skip for my units. Is it nice to have? Sort of. But it adds plumbing, extra complexity, and something that often breaks but will never create an increased return on investment. Same goes for under-sink garbage disposals. No one will pay more for this stuff, but it will for sure cost you more. So skip it!

Over-improving is probably most common in new investors. It’s just easy to get excited! It’s the first one. We want to be super proud of it, and we really want the new tenants to like it. I’m not suggesting or advocating not to care about your rentals or demand they are nice facilities. There is a space where you can make a rental look nice and have it be a great place to live without spending more than you have to. And it can be made fairly “tenant-proof” without having to make large sacrifices in quality.

Risks in Over Improvement — What’s the Big Deal?

Return on Investment is Lower

I would be inclined to think this is obvious, but perhaps not. If you over improve your property, the payback period is longer, and your return on investment in the short term is lower. This means it takes longer to get your money back, and the improvements are less efficient. Unless you intend to live forever, maximizing your time efficiency is critical.

Can’t Refi Out Your Investment

Let’s say you intended to buy a $50,000 home and put $35,000 in rehab into it. and after that cost the house is super nice. Nicest house on the block. The place looks fantastic. You find a tenant at $50 a month above market rate, almost instantly. Life is easy, right? Then the appraisal comes back and the house is worth $90,000. You’ve still created equity, but if Fannie Mae says you can borrow only 75 percent of that $90,000, you’re left with a loan of $67,000. You left $17,500 in that deal that you can’t extract, and you only earned an extra $50 per month for all the improvements. The rental next door to yours has only $65,000 in a similar house and rents for $50 less per month. You may own the superior home, but they own the superior asset. Remember, buy houses, never homes.

Higher Cost to Maintain Improvements

You went all out, you built the nicest rental. And man, the tenants love it. Who do you think is responsible for the $2,500 refrigerator you provided though? If your rental warrants buying a $2,500 fridge, then you have to. But if you buy a fridge far nicer than the next door neighbors, you may kick yourself later. The nicer a house is, the more your tenants will enjoy it. And the nicer they will expect it to stay. Again, it’s important to have a well-maintained and respectable rental, but know the overhead you sign yourself up for, especially for above market-average improvements. Putting frameless glass showers in a house that doesn’t need it is asking for trouble. If you have installed a garbage disposal, you will get calls when it clogs or breaks. And if you put expensive ceiling fans in kids rooms, you may have broken blades.

Here might be a better example: Imagine picking up a 10-year-old BMW 740i — BMW’s flagship sedan. The $140,000 car was fully loaded when new. Now it’s got 120,000 miles on it, and you can get it for a few grand, so you think it’s a deal and buy it. When the maintenance comes, you get a little dose of reality. Your $10,000 car needs $6,000 in routine maintenance — ouch! You think, how could this be? The car was only $10,000!? That’s because the maintenance requirements and costs of the car stay mostly static (or increase) while the value of the car depreciates. If you put a high-end stove in a cheap rental (or any large margin between the cost of repair and repair warranted), your long-term overhead will suffer more than the upfront cost.

So we know why we shouldn’t over improve, but how can people avoid this trap?

Stop Creating Things YOU Like

It’s certainly a common in practice, and some people even proclaim this proudly as they describe their buying style: “I would never buy a house that I wouldn’t personally live in.” That statement makes my blood boil. So let’s really unpack how short-sighted it really is. We are investors, not renters. Immediately, entering this scenario we have a different mindset, motive, and strategy than a tenant would. Why would we handicap a tenant base to requirements that are designed for an investor? What we like, or would live in, is irrelevant.

Two of my rentals are previous house hacks that I lived in. Now, I made a sacrifice to live in these houses and would likely never be willing to move back to a similar house. Imagine if, as my wealth and house tastes increased, I insisted on my rental houses doing the same. That’s an unsustainable growth pattern. Now, maybe the person who made that statement originally meant they would not buy something so dumpy that they’re embarrassed about it. This is not the worst position to take by any means. No one wants to be a slumlord, I don’t think. People like to be proud of their portfolio for sure. Again though, this is a dangerous thought practice, because this type of thinking can creep into your decision making when improving houses.

Are you going to convert a half bath to a full because you personally would want a two full baths? Will you put in stainless appliances because you don’t like white appliances? My partner and I buy scrap piles of wood plank floors from lumber liquidators dirt cheap, then mix and match them when we can do a whole house. Now, it definitely looks mixed and matched (though definitely not ugly), but in the grand scheme of things for our rentals, it’s not make or break. And it only costs 20 percent of what we would normally spend. I personally would never have them in my house, and you probably wouldn’t either. Yet my rentals are all occupied at the top spectrum within market rent. My costs were low, and tenants are happy. Easy!

Remember it’s not about what you like. It’s about what the market demands, the market rent rate, and how you can get there while minimizing costs. Here is another example: I have a house now that had a problem with the deck that took me a little longer to fix than I had liked. I apologized to the tenant, but she couldn’t have cared less — she didn’t use the deck! What she did ask of me was to remove the old chain link fence on one side of the property. The cost to do that was very low, while the cost of the deck was very high. But I had thought the deck was a big problem. I forgot the rule: Don’t build what I like, build for the tenant.

The Tenant Doesn’t REALLY Care About That House

Let’s be real clear about something: You own the house, and you’re the one who will care most about it — forever. You know why so many casual landlords have trouble managing their rentals or handling their property manager? Because those people don’t care about the house! The tenant won’t care. The property manager definitely doesn’t. And eventually, something goes wrong and it all falls apart.

Now, remember this when you’re rehabbing. For example, does the tenant need hardwood floors or will vinyl plank be fine? It’s important to get this right, because the spread in cost between the two is significant, but the income disparity might be nil. Now it’s tempting to say, “But a tenant who likes their unit might stay longer or treat it better!” But it’s a weak argument. And just because you can say it, doesn’t make it true in real-world application. The fact is, the floors need to last for multiple tenants, kids, spills, (maybe) dogs, and neglect. The first tenant might love nicer floors, but the next might not care. Always plan for the tenant who won’t care. They are the majority. For any renters reading this right now, would you pay more for more expensive floors, a nicer fridge, or a garbage disposal? Unlikely! You want to pay for market rent based on the size of the house, the location, and certainly some personal appeal. But no one pays premiums on fixtures beyond what the market average demands, so don’t purchase them for your rental properties.

It’s Exciting in the Beginning, But the Profitability Comes From the Mundane

In my opinion, buying houses is as fun as things get. It’s challenging, stressful, dramatic, and creates an aura of possibility! This is a good thing, but excitement is emotional. And emotions make terrible money decisions.

It’s very easy to get excited about transforming a distressed house into something beautiful that you love, but it’s more important to transform it into something useful. Emotional excitement is also the fastest way to over improve your unit with no resulting benefits. On the other end of that spectrum, you don’t want to be apathetic about the rehab either. Apathy is how slumlords are created. We must care deeply about the condition of our properties, but we need to be reasonable and diligent in our investments. Improving the unit as if it’s been done 1,000 times before is ideal. No one over commits on something boring. Once the excitement is gone, our commitment to creating a lasting property will come to the forefront of our decision making. And that’s what’s most desirable.

Where to Set the Goal Post

I’ve made plenty of comments on what not to do, but how do you know exactly what improvements you should be doing and which you shouldn’t? This part is fairly easy actually. The goal is neither to skimp nor is it to spend frivolously. The goal should be to make necessary improvements and then maximize value on any luxury improvements. Meaning, spend what you have to first. The extra stuff is fine as long as your investment goes a long way.

For instance, is it efficient to upgrade to stainless appliances when white appliances are normal for the neighborhood? Well, if you can get a good discount on scratch-and-dent stainless appliances for a very small premium, it might be worth it! Alternatively, it’s probably not wise to put marble tile in the bathroom of a mobile home.

Finding comps for a rental is similar to finding comps for rent price or for a home appraisal. Knowing your neighborhood is critical for this reason as well. If you know your house is in a C neighborhood, then you can upgrade appropriately. If you don’t know what the neighborhood warrants, then you’re guessing. Guessing is expensive. Craigslist and Zillow can be your best friends here. Check rentals in the area, and scan through pictures of comparable rentals. If you can match or slightly beat those houses while staying in your budget, then that should be perfect. If you improve more than the average, you may get a tenant faster — but they will be getting the deal, not you.

There are just a few quick upgrades that I’ve found either spending more on, or looking for a value on, are worth consideration:

  1. The first is appliances. I highly recommend to try finding used appliances — or at least scratch-and-dent models from the big box stores. Now, don’t make a big hassle out of doing it, but if you can find an upgraded set easily for a little extra cash, it’ll probably be worth it. Usually, if I can find a stainless set of appliances for an extra $200–$300 over what the cost of white ones would be, I’ll cough up the extra dough.
  2. Replacing a roof? The cost difference between three-tab shingles and architectural shingles, for most houses, is minimal. Go with the architectures. Not sure of the difference? Architectural shingles are rated to last longer — usually 10 years longer than their three-tab counterparts. Ten years for $500? Yes! Also, they look much nicer than traditional shingles. Usually on a $5,000 roof, I have to pay an extra $300–$400.
  3. Paint all your houses the same color! A few years ago, my contractor and I decided on one color we like, so we buy it in five-gallon buckets and paint all the houses the same scheme. It saves money, saves time, gets you a tiny bit of economies of scale, and you never have to worry about deciding on color again. If you do this and you don’t have a very solid contractor relationship, I recommend that you keep the paint… just in case.
  4. My personal favorite: A few years ago my contractor showed me a trick he had been doing for years. He goes to lumber liquidators and buys returned plank floors in “remnant” bundles. It’s usually 300–700 square feet total, and it’s certainly not enough to do a whole house with. It’s also unsightly to install different flooring in each room. So what he did was, he started buying bundles with different finishes but in the same sizes and shapes. This way, he could mix and match them on one floor. If you’re like me, you probably think this sounds bizarre and ugly, but you may be surprised. We do this in most of our rentals now. It’s unique. People love it. And after furniture and rugs, it doesn’t stand out like I originally thought it would. The best part? We spend a fraction in flooring compared to what we would have to if we were buying the entire floor at new prices and in proper amounts. 
    Cell phone shots from a recent example below. Not bad!
     

Summary

Over improving is a tricky problem, because it usually stems from emotional decisions. Under improving is also a problem, but that’s less from emotion and more from apathy — or sometimes people are just being cheap. Cheap is not good! Frugal can be good, but don’t be cheap. I hope no one reading this wants to be apathetic, short-sighted, or cheap. Since this is for new people, remember that emotion will present itself as a real issue to contend with. Follow these guidelines, include your team in decision making and strategy, and produce a great product with proper costs, and you’ll have no other option but to succeed.

Posted in Selling Your Home
June 18, 2018

Parents Say Kids’ Opinions Matter Big When Buying A Home

From: KCM BLog

A recent survey conducted by Harris Poll and released by SunTrust Mortgage found that “55% of homeowners with a child under the age of 18 at the time when they purchased their home said that the opinion of their offspring played a major role in their home buying decision.”

When the results were broken down by the parent’s age, millennials (those 18-36) led the way with 74% of homeowners saying that their child’s opinion was a factor in choosing which home to buy. Eighty-three percent of renters believe that their child’s opinion would be a deciding factor when looking to purchase a home.

 

So what features in a home are most important to kids?

Coming in at 57%, it should come as no surprise that gaining their own bedrooms was the top most-desirable feature of any home for kids, followed by a large backyard to play in at 34%.

Todd Chamberlain, Head of Mortgage Banking at SunTrust explained the reasoning behind the survey,

“As a parent of two kids, I know from experience that including children in the home buying process is not only fun for the whole family, but also educational for our homebuyers of tomorrow.”

 

Bottom Line

If you’re thinking about selling your home this year, make sure to highlight all the kid-friendly features your home has to offer so that you can sway the real decision makers.

Posted in Buying a Home
June 11, 2018

4 Reasons Why Summer Is A Great Time To Buy A Home!

From: Keeping Current Matters 

 

Here are four great reasons to consider buying a home today instead of waiting.

1. Prices Will Continue to Rise

CoreLogic’s latest Home Price Insights reports that home prices have appreciated by 7% over the last 12 months. The same report predicts that prices will continue to increase at a rate of 5.2% over the next year.

Home values will continue to appreciate for years. Waiting no longer makes sense.

2. Mortgage Interest Rates Are Projected to Increase

Freddie Mac’s Primary Mortgage Market Survey shows that interest rates for a 30-year mortgage have increased by half a percentage point already in 2018 to around 4.5%. Most experts predict that rates will rise over the next 12 months. The Mortgage Bankers Association, Fannie Mae, Freddie Mac and the National Association of Realtors are in unison, projecting that rates will increase by nearly a full percentage point by this time next year.

An increase in rates will impact YOUR monthly mortgage payment. A year from now, your housing expense will increase if a mortgage is necessary to buy your next home.

3. Either Way, You Are Paying a Mortgage

There are some renters who have not yet purchased a home because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that unless you are living with your parents rent-free, you are paying a mortgage – either yours or your landlord’s.

As an owner, your mortgage payment is a form of ‘forced savings’ that allows you to have equity in your home that you can tap into later in life. As a renter, you guarantee your landlord is the person with that equity.

Are you ready to put your housing cost to work for you?

4. It’s Time to Move on with Your Life

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. It appears that both are on the rise.

But what if they weren’t? Would you wait?

Look at the actual reason you are buying and decide if it is worth waiting. Whether you want to have a great place for your children to grow up, you want your family to be safer, or you just want to have control over renovations, maybe now is the time to buy.

If the right thing for you and your family is to purchase a home this year, buying sooner rather than later could lead to substantial savings.

 

Posted in Buying a Home
June 4, 2018

Interviewing A New Tenant? It’s Trickier Than You Think

 

by  | BiggerPockets.com

Seattle recently overturned its “first-in-time” mandate, which required landlords to accept the very first rental applicant who met their basic qualifications. The law, which was originally written to help avoid discrimination, received widespread attention as landlords lost several tenant-screening rights, including the ability to screen for criminal records. Just last month, the law was ruled a violation of the state constitution in Washington regarding a property-rights provision.

Anyone who manages or owns investment properties knows that navigating tenant rights can be a sensitive business. Screening applicants is no different. It’s one of the most important steps landlord can take to protect their properties. You probably have some clear qualifications in mind to evaluate prospective renters, but you must also ensure that you are in compliance with regulations and laws, both at national and state levels. The Fair Housing Act was created to make sure all applicants are treated equally, so it is important to familiarize yourself with some of its points.

Sometimes it can be difficult to navigate this process. It can be helpful to have clear guidelines to keep in mind. Here’s a short list of things to remember when it comes to tenant screening.Here Are Some Things You Can Ask About:

  • Income and employment. Making sure that they have adequate and reliable means to pay rent on time. Ask your applicants to provide pay-stubs and employer phone numbers so you can verify their employment status. Some property managers use the 30 percent rule, where at minimum the monthly rent must amount to no more than 30 percent of the tenant’s monthly income.
  • Number of occupants. It’s reasonable for you to want to know how many people will be living in a rental house and even to require all tenants over 18 to be part of the lease. Landlords must follow occupancy guidelines and should check with state rules on the maximum number of people allowed in a rental home.
  • Credit check approval. Property managers and landlord are allowed to run credit checks for tenant screening purposes only, but they have to get approval first. Make sure your application includes a section that acquires an applicant’s permission to run a credit and background check.
  • Eviction history. Prior evictions can be symptoms of problematic behavior. Tennant with priors should be avoided. Asking your applicants directly about past evictions gives them an opportunity to explain the situation. Online tenant-screening services let landlords check eviction reports and will expose the truth if your applicant lies.

 

Here Are Some Topics You Need to Avoid:

  • Questions that violate the Fair Housing Act. To protect tenants, landlords and property managers cannot ask rental applicants questions about race, religion, familial status, national origin, sex, or age. Double check the Act if you have questions.
  • Marital and parental status. Under the Fair Housing Act, landlords cannot ask tenants about familial status, including if they are married or have kids. This topic is tricky because asking about children and family is an easy conversation topic, but you must be careful as a landlord because it can be a serious violation of your tenant’s rights.
  • Arrest record. Don’t ask if a potential tenant has ever been arrested; it is considered illegal by HUD to use arrest records for tenant screening purposes. There is a big difference between getting arrested and getting convicted of a crime. Tenant-screening software lets landlords run a criminal background check that will inform you of your applicant’s legal violations on state, national, and county levels. Make sure to check your state’s laws against rejecting an applicant based on past criminal behavior.
  • Haphazard background checks. Make sure you screen all your tenants with the same process. If you only run background or credit checks on applicants that you feel look unkempt or irresponsible, you may be demonstrating discriminatory behavior. To protect yourself against discrimination accusations, set the same standards for every applicant, and screen every prospective tenant the same way.

While Washington State’s Superior Court may have ruled that choosing a tenant “is a fundamental attribute of property ownership,” much has not changed when it comes to sweeping regulations surrounding tenant screening. Property managers and landlords must follow state and national guidelines during tenant interviews, and balance finding the most qualified prospects and avoiding issues of discrimination. Keep the above tips in mind. Check your local regulations, and always perform a detailed tenant background and credit check to find out if your applicant has responsible financial tendencies and respects the law.

May 21, 2018

Sorry, But Cap Rates and Cash-on-Cash Are Worthless When Evaluating Multifamily

 

by Ben Leybovich | BiggerPockets.com

 

 OK. Fine. Cap Rates and COC are not worthless. But, they are almost worthless in reality — and totally worthless the way you are being taught to use them. That, and I needed a title that’d catch your attention because this stuff is important!

What IS Cap Rate?

Capitalization Rate is a metric that tracks behavior of the marketplace as it relates to risk appetite. Note, we are talking about behavior, marketplace, and risk, and we are not talking about property valuation. So, let’s talk…

Everyone is familiar with something called Comparative Market Analysis (CMA). The CMA is a method of estimating the value of a single family structure by comparing it to similar properties sold in the same location, called comps. In this process, we start out by taking a look at the comps and make adjustments to the known sold price to equalize as much as possible with the subject property.

For instance, if we are trying to estimate a value for a 3-bed, 2-bath home by using a 3-bed, 3-bath comp, then we’d need to start with the price for which our 3/3 comp sold and adjust it down for the fact that our subject only has 2 bathrooms whereas the comp has 3. And this type of arbitrage of specs and features would need to be completed at a rather detailed level in order to arrive at a reasonably refined estimate of value.

Further, having completed 100 of these, we’d begin to see the big picture, which would suggest that in this particular marketplace, and with this age range and style of home, people are willing to pay $X for a second bathroom, $Y for a third bathroom, $Z for a third bedroom, etc. Additionally, we’d begin to see that typical per-square-foot pricing of a single level 3/2 home is $A, and it needs to be discounted by $D with each additional bedroom, etc.

Related: How to Know What Cap Rate to Shoot For on Any Given Rental Property

This is somewhat of a science and a bit of an art. But, the thing to note here is the following: When we discuss pricing in this context, what we’re really talking about is how much people — meaning willing and able buyers — are willing to pay for this, that, or the other feature. Yes, we use the CMA to estimate the value of a specific house, but let’s not forget that what we are really tracking is market behavior.

Having put this into context, let’s come back to the cap rate.

 

What Is the Cap Rate?

The thinking in multifamily goes like this:

People buy multifamily because of the income (this is not actually completely true, but for now let’s just generalize). Therefore, while the CMA looked at property features to establish marketplace value, in multifamily we look at income and/or income potential.

The question our analysis asks is this: How much are people paying for this type of asset, with this much income potential, in this location?

Now, suppose you analyzed 100 closed transactions. Suppose you had accurate data as to the sale prices, incomes, and expenses for all 100 of these. With this data, you could figure out the NOI for each one and later back into the cap rate that the buyers paid, right?

Well, suppose all 100 of these closed transactions fell in the range of 7–7.5 percent cap rate. That gives you a pretty good idea of the market appetite, doesn’t it? I mean, they are not paying 4 percent cap, so they are not super aggressive — but neither are they holding out for 10 percent cap. From this data, you certainly glean a lot relative to market behavior.

A Question to Consider

Suppose you are analyzing this data in order to support your decision-making relative to a potential acquisition on your desk. Pardon my French, but what the hell did this data tell you that’s particularly useful relative to underwriting the worth of an investment? Did you find out how much or how stable your cash flow is likely to be in the years you are planning to hold? Did you find out what your expected appreciation might be? Did you find out how much the cash flows represented by this asset are really worth in the future (net present value of these cash flows)?

Don’t misunderstand me, cap rate is an important metric, just not the way most people use it.

What About Cash-on-Cash?

Suppose you work at BiggerPockets, which, aside for one or two people, means that you are like twelve years old. Well, when you are young like that, you get hungry a lot. Do you see yourself leaving the building, getting on your bicycle, and riding over to the closest sandwich shop to pick up a big-old sub, large enough to feed everyone in the office? I see it — do you see it?

The sub has everything on it. There’s the beef, the cheese, and even some kosher pork (that only happens when you’re twelve and working at BP, but there you go).

You hop back onto your bike and ride back to work as quick as you can, ’cause you are hungry. You find a cutting board, lay the sub down, and begin to cut.

You offer a slice to Mindy first, naturally. You’d offer the first slice to Josh, but he’s not there. And in his absence, Mindy is the boss, so you do the right thing. Her slice is awesome. Moist, with lot’s of mayo, cheese, beef, and ham. Just perfect. Mindy is happy!

You grab a slice for yourself, and whoops — no cheese. It still tastes pretty good, but somehow, you didn’t get any cheese. And the slice is light on the mayo. Mindy’s return is 100 percent. Your’s, just three inches away, is only 83 percent. Yep, that cheese and mayo is worth 17 percent return. And you ain’t got any.

Static Metrics Stink

Cash-on-cash return is what we deem a static metric. It is akin to a snapshot in time. A still image. It is a true metric for that specific fragment of time, but this fragment may or may not be indicative of the entire tapestry that is your sandwich (I mean, your investment). Just because something is true over here, doesn’t mean it’ll be true over there.

Wouldn’t it be better to collect data from all of your coworkers, see how everyone’s slice of sandwich tasted, and then evaluate the entire sandwich is a whole?  Cash-on-cash doesn’t do that.

Conclusion

Most of what needs to be said on this subject is indeed in this article. However, most of it is between the lines. I’ve got to have some fun too.

 

April 23, 2018

New! Share your rental documents

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Posted in Real Estate News
April 23, 2018

Proof of Funds Letter for a Real Estate Purchase: Why Home Buyers Need It, Bad

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Posted in Buying a Home