Real Estate Investing Made Simple - Part 4

By Carole Higgins, Realtor® GRI

on 11/30/21

Real Estate Investing Made Easy - Part 4

Last week I talked about how to improve the ROI on an investment property. I provided specific suggestions for Ivan and Irina for the modest detached single-family (DSF) property in which Ivan invested. The salient point is this: Show your potential tenant that the property is loved, clean it up if it needs cleaning, including professional carpet cleaning. Paint- dollar for dollar you get a big bang for your buck when you decide to put in fresh paint. Get creative, instead of a total kitchen rehab, paint the cabinets and replace the countertops with solid surface Formica- it is inexpensive, holds up well and can improve a dated kitchen. So the question is: Do we stop with the inside cosmetics?

I don’t think so…. 樂

Safety and comfort are even more important than the cosmetic fixes I suggested last week. If you are going to invest in residential property it is important you know the basics of construction code. The code requires that GFI/GFCI outlets be installed in every “wet” area. GFI stands for Ground Fault Interrupter and GFCI stands for Ground Fault Circuit Interrupter. This means all the kitchen and bath outlets as well as any other areas where the outlet might get wet, like laundry rooms and wet bars need these outlets. In the event of an electrical surge or wetness getting into the outlet the flow of electricity will be “interrupted.” You will want to get an electrician to change these out and ensure that the outlets are safe and working properly. Since you are going to have an electrician at the property evaluate and determine if there is anything else that would benefit from the attention of an electrician. If there are non-working switches or outlets have them checked out at the same time. Code also requires that every stairwell have a handrail.

Handrails are a simple fix…you can buy brackets and railing at any hardware store and install them yourself with a power drill. However, it is important that the bracket be mounted in a stud because the only thing more disastrous than no handrail is one that gives way when your tenant is holding on to it to climb the stairs. As Ivan walks through his property, he should be looking with a critical eye and thinking, “What can I do to improve this home for prospective tenants?”

• If there is a furnace make sure the filter is changed at least 1x per year.
• If there is a boiler be sure that it has been serviced in the last 2 years.
• Check for leaking pipes under the sinks
• Make sure the hot water tank is functioning
• If you are in a hot climate or a climate with wide temperature swings, consider installing ceiling fans- preferably reversible. Tenants can use them to help with cooling in the summer and reversing them in the winter will help move the warm air that gathers near the ceiling down to the living spaces, saving energy

It is very important that the property is protected with smoke and fire detectors as well as carbon monoxide detectors. Do not neglect this as it won’t go well for you in the event of fire!

So, by now Ivan has had a myocardial infarction and if it doesn’t kill him Irina probably will.

How could Ivan have saved himself?

If Ivan did his homework from part one of Investing in Real Estate he will have avoided quite a few of these pitfalls. Ivan needed to choose an experienced agent to guide him through the process. When buying investment real estate the buyer has the opportunity to inspect the property. Upon inspection the buyer may do one of three things: waive their rights with regard to this contract contingency (do nothing), terminate the contract based on their rights under this contingency or request that the seller either make repairs or concede money under the inspection contingency.

If the inspection reveals material defects of the property which are either a hazard to the property itself or to potential occupants it is generally a good idea to ask the seller to correct these items. These items are typically things like smoke and fire detectors (missing or over 10 years old), carbon monoxide detectors, any problems with the mechanical systems of the house, such as plumbing, heating, and electrical, and problems with the roof or foundation. Generally, you would not ask a seller to replace a light fixture unless it was damaged or nonfunctional. Likewise, you wouldn’t ask for fresh paint, new cabinetry or countertops. If you feel like you are paying too much after inspection you may want to consider asking for a reduction in price or if you are utilizing a mortgage to finance the purchase you may want to ask for a seller concession to be applied to closing costs, prepaids, and escrows. In either case, this will help reduce cash outlay at acquisition allowing the buyer to preserve some reserves necessities as they become apparent.

️‍♂️See the latest fixer uppers on the market.

What about curb appeal? Well, you will have to check in next week to see how Ivan and Irina can tackle the question of curb appeal…

Related Articles

• Real Estate Investing Made Easy Part-1
• Real Estate Investing Made Easy Part-2
• Real Estate Investing Made Easy Part-3

           

Real Estate Investing Made Simple Part 3

By Carole Higgins, Realtor® GRI

on 11/30/21

How can you improve your investment?

In my previous blog we discussed what types of property can be investment property and I provided a little bit of insight as to why someone might choose one type of property over another. Then I got down to the nitty gritty parts of investing and introduced you to a real estate investor named Ivan. Ivan thought he was making a good buy but, looking closely at the numbers revealed that Ivan might need to figure out how to improve his investment. Unfortunately, none of my readers had any idea how Ivan could improve his investment and/or his ROI. For those of you that forgot or are new to my blog ROI stands for Return On Investment… one of the really important questions in any investment. So maybe I can help Ivan….

He bought it cheap but it still doesn’t make money- why?!

In review: Ivan bought a house for $100,000.00 and he rented it for $8400 per year. After all of the expenses on the house were paid his scheduled ROI was barely over $100.00 per month. However, there is a hidden additional return. By the end of year one Ivan has paid down his mortgage by $1535.35 and by the end of year two it has been paid down $3125.32 total. Now keep in mind that Ivan’s mortgage payment is actually being made by his tenants’ rent payment, which means the reduction in principle is actually a gain to Ivan. So Ivan actually realizes more like $250/month in year one. Is this enough? Only Ivan knows for sure. Some investors are looking for more of a tax shelter with forecasted equity gain. Those investors will hold and rent for 2 to 5 years and then sell and realize the equity gain as ROI. Personally, I don’t think $250/month is enough gain, particularly when Ivan doesn’t see half of it until he sells. So let’s see if we can help Ivan…

How to improve Ivan’s ROI:

The first and most obvious thing to do is raise the rent. Even raising it $100/month will make a material difference to Ivan. If the condition of the property is standing between Ivan and a rent on the high end of market rate, then Ivan will need to roll up his sleeves and work on the property. Cleaning and a fresh coat of paint will go a long way towards improving a property. Also, these are things that the investor can do themselves, thus not piling on costs to increase ROI. In this case maybe Ivan can enlist his wife Irina to help. (Pro-tips: Cleaning is for both men and women! Women love to decorate-let Irina choose colors and she will be more likely to pick up a paint brush). Keep in mind that paint isn’t just for walls. If the kitchen cabinets are dated looking, consider painting them. This is an easy process, sand the cabinets lightly and apply a primer like grabber and let it dry thoroughly. Then apply the paint in thin layers and sand with very fine sandpaper between payers. This will give you a smooth professional look for your cabinets. I always recommend white for the cabinets as it will make a small kitchen look bigger and blends nicely with almost any décor. If you want to improve the kitchen more you can consider ordering new cabinet fronts. I like Barker doors online. They have a comprehensive video that shows how to measure accurately for cabinet doors and they have a wide variety of styles to choose from. You can also consider replacing the countertops later. There are a number of nice looking Flormica choices, that are affordable, can improve a dated kitchen and hold up to tenant wear and tear pretty well.

If there are carpets in the property and you intend to keep them have them professionally cleaned and sanitized. Ask your carpet cleaner if he can apply scotch guard. So you might ask, “why am I spending all this time cleaning up a rental?” Two reasons: One this is your investment, even setting aside the fact that you have a loan on the property you still have to bring 20-25% of purchase price in cash. ( In Ivan’s case he has $20,000 invested) Two: a nicer property will lead to higher rental rates and if you deliver a property in good condition the tenant is more likely to take care of the property. Simple improvements will help you increase your rental dollars. Anybody have any other ideas for Ivan and Irina?

️‍♂️See the latest fixer uppers on the market.

Stay tuned to see if Ivan perishes in rehab hell or we can help him. Do you have any ideas?

Related Articles

• Real Estate Investing Made Easy Part-1
• Real Estate Investing Made Easy Part-2

           

Real Estate Investing Made Simple - Part 2

By Carole Higgins, Realtor® GRI

on 11/30/21

Still Thinking About Investment Property?

Last week we scratched the surface on how to determine if investing in Real Estate is right for you. I provided a little information about financing the investment, choosing trusted professionals and determining what type of property might be right for you. This week I am going to dive into types of investment properties, focusing on buy-and-holds. At a future point I will dig into fix-n-flips.

❓ What kinds of real estate can you invest in?

Just about any type of real property that you can think of can be an investment. There are three broad classifications to consider: residential, commercial, and industrial property. These classifications are established by the local zoning department. Wikipedia defines, zoning as “a method of urban planning in which a municipality or other tier of government divides land into areas called zones, each of which has a set of regulations for new development that differs from other zones.” Most municipal or county zoning departments will further define specific uses. For example: residential zoning may have specific districts for multi-family, single family residential, agricultural residential and high-density residential. Commercial is typically divided into multiple districts that include classifications like commercial retail, office buildings, free standing retail or office. Industrial is exactly what it sounds like, mostly factories, and manufacturing facilities. When considering an investment property, be sure that your intended use is an allowed use under current zoning code.

❓ Why would I choose one type of property instead of another?

It usually boils down to personal choice; sometimes it’s opportunity or a philosophically held belief, like a strong need to provide family housing, or an alternative to mall rental for a retailer or space for a charity shop. Whatever you are leaning towards, I always recommend focusing on what you know before you make the commitment to a certain property, particularly if it is your first investment. Some thoughts that might help: If you are well connected in the business world you may have a great pipeline to get tenants. If your day job is industrial in nature chances are you have some ideas about creative uses for an industrial property. Personally, I believe you can’t go wrong with residential property as folks always need somewhere to live, not to mention that in Northern Michigan as well as other parts of the country there is a shortage of housing. I typically advise that a duplex (deuce) or tri-plex are the best bets because they are not so big as to be overwhelming, and you have the added benefit of not placing all of your metaphorical investment eggs in one basket. If you have a vacancy, you still have rent monies coming in from the additional unit or units, which is different from a single family where if you are vacant, you are making mortgage payments and paying utilities out of your own pocket.

❓ How do I choose a specific property?

Buying investment property is not an emotional purchase. It is about the numbers; and by numbers I don’t mean the purchase price or the loan amount, I mean the cash flow. How much pretax cash flow can you expect and what type of tax shelter will the property create? Consider things like “how much cash will it take to get the property rent ready?” (if it isn’t currently rented) Once these factors are established or estimated using real time comparable property numbers we can determine the Return On Investment (ROI) for the property and determine if it is appropriate given the measure of risk. This is the time to be completely objective: would another property be a better investment given your specific goals? You should always be able to realize more on your money than if you had simply put it in a savings account. For example: if the Rate of Capitaliazation (defined as Adjusted Gross Income minus Annualized Expenses divided by Purchase Price) is less than 5 percent, it is very unlikely that you will have any cash flow. To demonstrate the net effect of a low cap rate see the example below.

Example:

• Ivan Investor purchases a house for $100,000.
• He borrows $80,000 and brings $20,000 of his own money for a down payment.
  $80,000 = $100,000 - $20,000
• The annual property taxes are $1200.
• The annual insurance is $1000.
• Ivan gets a 30 year conventional loan at 3.5%, so his monthly P&I mortgage payment is $359.24, annual debt service is $4310.88.
  $4310.88 = $359.24 x 12 (Annual Debt Service)
• Ivan provides trash service, water and sewer for his tenants. Learn why this is smart in the next article.
• Trash service costs Ivan $25 per month.
  $300 = $25 x 12
• The property has a well and septic system, so there is no monthly expense.
• Annual expenses include tax, insurance, trash removal, water and sewer, as well as repairs, maintenance and vacancy expense $2500 = $1200 + $1000 + $300
• Ivan rents the house for $700 per month.
• Ivan's annual gross income is $8400.
  $8400 = $700 x 12
• Ivan's annual expenses are $2500 and his net operating income (NOI) is $5900.
  

Dividing $5900 (NOI) by 100,000 (Purchase Price) reveals Ivan’s Rate of Capitalization is 5.9%. Deducting Ivan’s annual debt service of $4310.88 from his Net Operating Income (NOI) Ivan’s pretax cash flow is $1589.12 annually or approximately $132/month. This pretax cash flow generates a cash-on-cash rate of return of 7.9%. Although this seems like an okay return keep in mind that Ivan only makes this money if he has no maintenance or repairs or vacancies.

If Ivan encounters any of these unplanned expenses he will likely have to bring his own money to secure the maintenance, repairs or property upkeep and expenses if his tenant goes sideways. In my mind this is not enough cushion for Ivan given the risk involved in his investment. If this doesn’t quite make sense don’t worry. I will cover how to determine these numbers again and in more detail. For now just keep in mind that you need a realtor® that can help you determine this data and accurately analyze the property in detail. If this does make sense to you and you have an idea of how to help Ivan improve his cash flow please let us know in the comments.

Final Thoughts

Location is important. Your investment should be close enough to your home to make it easily accessible for you. It should be an area where people would want to be, either for work or to live. The neighborhood should either be static or ideally improving, meaning recent trends point to stable or increasing sales prices. Last but not least the property should be in an area that makes sense for the proposed use. A house located across the street from a manufacturing plant might be more difficult to rent. A freestanding retail space in the middle of a residential area could get pushback from the neighbors when rented. Try to also think of positive solutions to what may at first seem like a deterrent. In the first example maybe the flip side of the issue of being across the street from an industrial building is that you could market your rental to the workers at the plant and have a steady stream of potential tenants. In the second example brainstorm about what types of businesses would complement the neighborhood, perhaps a small market or a yard store with plants and supplies that the neighbors could use, then look for potential tenants. The ability to see opportunity where others do not is often the difference between a successful investor and a not so successful investor.

Clear as mud? …I hope that as you read my blog you will ask questions and/orleave me your thoughts in the comments.

🕵️‍♂️See the latest fixer uppers on the market.

           

Real Estate Investing Made Simple - Part 1

By Carole Higgins, Realtor® GRI

on 11/30/21

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里 NOT SURE HOW TO GET STARTED?

There is a lot to consider before you make the leap and become an investment property owner. The first thing to determine is how much money you want to invest. Typically, you need twenty or twenty-five percent of the purchase price as your down payment. Depending on the type of property you plan to buy you may need a bit of a cash reserve. You should also consider whether or not you like real estate as it is likely you will be spending a fair bit of time at your new “baby.” You might also want to consider if you enjoy DIY projects/property improvement projects as this might help you hone-in on the type of property you want to pursue.

 CAN I FINANCE AN INVESTMENT PROPERTY?

You should consider starting to interview lenders. Yes, I said that right- interviewing lenders. You need a lender that is experienced in making loans on rental properties/commercial properties. Don’t be shy about meeting with more than one lender and letting each one know you are meeting with others. Ultimately you want the best financing that you can get, keeping in mind that there is more to a loan than the interest rate. Other things to consider include the amortization period, the term of the loan and the costs associated with obtaining the loan. It is important to work out these details prior to beginning your hunt for your investment property. At this point you should also be thinking about what type of property interests you, commercial or residential.

 HOW SHOULD I PICK A REALTOR® (Your trusted advisor and consultant)?

A licensed real estate agent will be the next professional to consult in your hunt for an investment property. You will want to interview the realtors® as well. The realtor must be experienced in investment property, the type of property you are looking to invest in, and have a solid knowledge base to share. The realtor® will be your trusted advisor who should be able to help you identify the Gross Rent Multiplier (GRM), the Net Operating Income (NOI), and Cash-on-Cash return on any property under consideration. Your realtor should be able to generate a pro-forma that shows you anticipated cash flow, tax deduction and ways of segregating the asset to obtain maximum Return On Investment (ROI), for each property under consideration. A point to consider: a licensed realtor®, experienced in investment property may be able to give you a lender referral to someone with whom they have worked.

 THE HUNT!

Once you have your professional team in place, Realtor® & Lender, the fun begins! Finding a property that will help you meet your investment goals. Once you get started looking at prospective properties you will see that within each type of property there are lots of choices. Residential investment property can take the form of a detached single-family home, a condo or a multi-unit property consisting of 2-4 units located under one roof. If there are more than 4 units or there are multiple structures this property is classified as commercial even though it is residential usage. The difference is that 1-4 units under one roof can be financed on a residential loan (assuming the buyer meets certain criteria). More than 4 units or multiple structures can not be financed on a residential loan, it will require a commercial loan. There are pluses and minuses to each loan just as there are pluses and minuses to each type of property. So stay tuned…or rather tune in next Tuesday for a more in depth look at properties that can be used to generate cash flow and/or tax shelters.

So stay tuned… or rather tune in next Tuesday for a more in depth look at properties that can be used to generate cash flow and/or tax shelters.

️‍♂️See the latest fixer uppers on the market.

Related Articles

• Real Estate Investing Made Easy Part-1
• Real Estate Investing Made Easy Part-2

           

 

Brrrr! We are getting our first real taste of winter this week.  It reminds me of how bitingly cold it seemed when we first arrived in Suttons Bay, 10 years ago.   On the one hand, it seems time has whizzed by- like the blink of an eye.  On the other hand, so many things have happened during those 10 years that it seems like an entire lifetime has passed.  We moved to Suttons Bay to be near family and then BAM! We didn’t have any family again!   We were left reeling from the loss of Greg’s parents.  They passed within a couple of years after we arrived-actually just when our lives had settled into a steady comforting rhythm.  

Then chaos, mind numbing sadness and emptiness.   We dealt with the siblings who stuck around just long enough to settle the estate and then vanished again.  In our grief and sadness we decided to start a second family here in Suttons Bay.  We decided to adopt an 11-year-old girl who was a ward of the state of Michigan.  We dove headlong into the adoption- it gave us a new sense of purpose, something we could do to help just one little person.   We rearranged our work life to accommodate our daughter’s needs.  I drove her to various doctors appointments not less than twice a week.  We met with counselors, teachers, coaches and a whole host of other people, on her behalf.  We even got to know the Sheriffs of Leelanau county whose help was invaluable in managing behavioral issues.  We did our best to give our daughter every opportunity, often to our own detriment.  Sadly, she wasn’t able to adjust to a stable home-life, with us. So we have been working hard to recover and to continue our real estate practice.  I know we have dropped the ball on keeping up with friends, neighbors, and clients past and I have no real excuse.  We have absolutely loved getting to know everyone here and have valued your friendship, your referrals and your business probably more than we ever mentioned to you, for which I feel badly.  

I want to say, “Wee’rre Baack!”  We have gone back to what we know the very best: buying and selling real estate.  Our negotiation skills are still second to very few, as is our creativity in terms of finding viable solutions to help buyers and sellers achieve their goals.  I want to share that we have added some new people- agents and an associate broker named Deirdre.  It is my hope that you are going to be seeing a lot more of all of us next year.  We are planning some very consistent blog postings- timely information that you can use- so check out our Blog posts often.  We will also be sending out items of value from time to time, information you can use, coupons you can use and other good stuff.  If you aren’t on our mailing list you may want to be.  We look forward to hearing from you, seeing you and working with you in the new year.

We hope your holiday season is magical!

Real Estate Becomes A Favorite Investment Again

According to a Gallup poll released last month, a plurality of Americans now think of real estate as the "best" long-term investment, followed by gold, stocks and mutual funds, savings accounts/CDs, and bonds:

FHA Goes Full Throttle with Modernization Effort

FHA green lights acceptance of more e-signatures on mortgage documents.

As part of its modernization effort, the Federal Housing Administration is accepting more electronic signatures on mortgage-related documents. The policy allows e-Signatures on origination, servicing and loss mitigation documents. FHA insurance claims, REO sales and other contracts can also be administered by e-Signature. Under current policy, lenders dealing with FHA are used to electronic signatures being limited to only third-party documents, including sales contracts not controlled by the lender.

"By extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices," said FHA Commissioner Carol Galante. "This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process." This new policy begins immediately for lenders who want to use e-signatures on single-family forward mortgages and FHA reverse mortgage products. Lenders still have to follow the Electronic Signatures in Global and National Commerce Act.