Real Estate

[Phil]

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

Forced appreciation has often been compared to printing money. In apartment investing, taking a few simple steps this will give you the ability to increase the commercial real estate rents.

 

Forced appreciation is often as simple as new landscaping for your investment, or adding amenities and services such as cable or wireless Internet service. They are simple steps that are not overly expensive, but that give you the ability to raise rents higher than the past owner was able to get for the property. You can also offer premium suites to discerning tenants. This may have an initial cost for refurbishing, but it will also allow you to rent them at a much increased price. These simple ways allow you to use your property management to create a better environment for your apartment investing, giving it an advantage and creating an increase in income.

http://ezinearticles.com/?Commercial-Property-Forced-Appreciation---The-Basics&id=873842

 

All the research I've done suggests that paint, new carpet, maybe some new tile, maybe some landscaping are enough of an excuse to raise rent. Obviously lots of factors go into it. If the rent is already high, I can't force them higher without substantial improvements. But if the rent is on the low end, these are simple things get them where they should be.

This has not been my experience at all. With flipping properties, certain cosmetic improvements, like paint, carpet and landscaping give you a good ROI. Improvements like swimming pools, new kitchens, etc.. do not bring an increase in value. Well, lets be clear, if you put in a $25,000 kitchen, you will get some increase in value, just not $25K worth. The cosmetic fixes mentioned about can get 3-4x their value.

 

As far as rentals are concerned, understand that unless you are renting very high end apartments in an affluent area, your buyers aren't 'discerning' at all. They are very price-conscious and the market tends to be very inelastic. Whats going to drive rents is the location of the unit and the neighborhood, as well as the age of the unit. Adding cable and high-speed internet to increase rents? LOL.

 

I stand by what I said that these improvements will make the units easier to rent, but won't give you much of a bump in rents.

[mikeh]

First: my 'credentials'. My first real estate ventures were buying a house for me, and buying, with a friend, a rental house. There had been a bubble, and at age 27 I didn't realize what a bubble implied.

 

The day after I moved into my home, the headline in the local paper was 'Real Estate Market Collapses'.

 

5 years later, after making accelerated payments on my home, I sold it and was left with a debt, and we also sold the rental property and had to borrow money to clear title.

 

I've done better recently, probably because I am now married to a realtor :D

 

If I were looking at your ideas, my main concern would be inflation.

 

Most governments in the industrialized world have printed and borrowed huge, in some cases staggeringly huge, amounts of money.

 

If and when the economies of these countries switch into full-blown growth mode (and while the US, for example, appears to be showing signs of life, its recession is clearly not yet over), it seems to me that there is a huge risk of inflationary pressures.

 

Superficially inflation may be good...if the value of your property increases at an inflationary pace, while your debt remains the same, your equity increases exponentially.

 

But the tool governments/central banks adopt most aggressively to combat inflation is to jack up interest rates.

 

The difference between a rate of say 8% and 12% is bad, but the difference between 3% and 7% is much worse. In the first case, your payments more or less increase by 50%, but in the latter they more than double. So if you are close to the edge at a low interest rate, you may be crushed by a significant hike.

 

My wife and I recently held a long discussion with her son and his wife, who were thinking of keeping their heavily mortgaged home as a rental and buying another: they make enough money that, at today's rates, they could handle it. I asked them to redo their numbers on the assumption that interest rates hit 8%.

 

That ended the discussion.

 

Fiftenn years ago, anyone saying rates would be 8% would be laughed at as being far too optimistic!

 

Bear in mind that higher interest rates will probably cause a reduction in property value, since fewer people will be able to afford to get into the market, so there is a risk that your equity will be disappearing at precisely the time you lose the ability to service the debt.

 

That was definitely the case in the early 1980s where I lived: high inflation combined with a bursting bubble.

 

The bubble may be over, but I have read that some economists think that most residential real estate in western countries is still over-valued.

[Phil]

Superficially inflation may be good...if the value of your property increases at an inflationary pace, while your debt remains the same, your equity increases exponentially.

 

(snip)

Then just get a fixed loan.

[jjbrr]

Phil:

 

I understand your point. Here is an example of a property I'm looking at right now with some research I've done:

 

The owner is about 80 and his mailing address is at a retirement home. He's owned the property I'm looking at for at least 10 years and hasn't raised the rent in at least the last 6 or 7 years. Similar homes in the neighborhood are charging $200-300 more/unit than this owner is charging. He seems to own a few properties and they're all on the market right now, so it seems to me he's been doing this for a while and is ready to cash in and not worry about managing the properties anymore. The location is pretty decent, imo, and it's zoned for one of the best elementary schools in the Dallas area.

 

The duplex is occupied - one of the tenants is month to month; the other is under contract for the next half a year or so. The month to month tenant has a dog and a cat; the other tenant has young children.

 

Since one method of evaluating the value of a multi-family residential unit is it's annual gross income, imo a quick paint job and new carpet will be enough excuse to raise the rent to the same level as that of comparable units in the neighborhood, which will increase the expected income and thus increase the value.

 

You can LOL all you want, but my current roommate works in IT and gets $30/month from the lady in the next apartment over to mooch off our wireless internet. I agree people won't be discerning about a lot of things, but they do assign some value to things like not having to worry at all about a plan with an internet provider. Do you think my apartment complex's managers would LOL if they knew they were missing out on $30/month extra?

 

Anyway, this is an example of a case where IME my strategy will be quite effective. In other cases I totally agree with what you said. I don't expect to get into properties that need major renovations or improvements, but instead properties that just need some cosmetic improvements.

 

Perhaps after building a network of reliable people who can do substantial repairs I can look into flipping houses, but for now I'd prefer shying towards keeping my hands off.

[Lobowolf]

I would assume that even current interest rates, you wouldn't be looking for an ARM anyway. For sure, go fixed. If you're buying a first property, and you're going to live there, it's probably FHA eligible, too, which gives you some flexibility on the down payment (I think 4 units or less is treated as residential, but maybe there's a disqualfier on income property; dunno, but my guess would be that FHA is a possibility if desired).

 

One way the housing collapse can work to your benefit is that it created another class of renters - stable, reliable working families who lost their houses when their adjustable rate mortgages went through the roof - they have good jobs and income streams, but don't have the lump sum currently required for another purchase, yet they don't want to live in an apartment. Good target, if you can find them.

[jjbrr]

I would assume that even current interest rates, you wouldn't be looking for an ARM anyway. For sure, go fixed. If you're buying a first property, and you're going to live there, it's probably FHA eligible, too, which gives you some flexibility on the down payment (I think 4 units or less is treated as residential, but maybe there's a disqualfier on income property; dunno, but my guess would be that FHA is a possibility if desired).

 

One way the housing collapse can work to your benefit is that it created another class of renters - stable, reliable working families who lost their houses when their adjustable rate mortgages went through the roof - they have good jobs and income streams, but don't have the lump sum currently required for another purchase, yet they don't want to live in an apartment. Good target, if you can find them.

Yes, I believe FHA eligible. 4 units is still residential; 5 units or more is commercial. Commercial is an entirely different kettle of fish (they generally require 20% down at least, which is prohibitive, among other problems). AFAIK income properties are not disqualified.

 

Your second paragraph is my line of thought as well.

[Winstonm]

The more units the harder it is and the more risk.  It is easier to rent a house than a duplex; a duplex than a triplex; a triplex than a fourplex.

Is this true? That seems counter-intuitive to me and it goes against what my research suggests.

 

Suppose the average rate of unoccupancy of some rental is 5%. If you're renting a single, you should expect to eat 1 in 20 monthly payments. If you have a triplex and offer 2 units for lease, it seems the 5% would be the same, and it would offer a little more protection. 3 units up for lease would offer even more protection.

 

I'm no math wiz, and questioning this sort of logic is exactly what I need.

 

Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex? A unit in a triplex than a duplex?

Not necessarily ture - anecdotal evidence from my limited experience in owning real estate for rent. But in my judgement, the really key issue is not in the type building but in the type renter. It seems easier to get a higher quality renter in houses that 4-plexes, but that is not universally true but just a tendency.

[Rain]

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

 

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

 

http://ths.gardenweb.com/forums/

This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

 

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

[jjbrr]

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

 

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

 

http://ths.gardenweb.com/forums/

This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

 

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

One of the tenants in the house I'm looking at is Section 8. AFAIK it's difficult to raise their rent, and like I said, they're currently paying $200-300 less than their neighbors every month.

 

Which leads to some sort of ethical dilemma. If you decided that you wanted to evict the Section 8 family for whatever reason, what's the best way to go about telling them? :huh:

[bid_em_up]

You might want to check on the Section 8 housing regulations. From what you have stated above, the current owner hasn't worried about "rent increases" for many years. However, Section 8 is supposed to make up the difference between what the renter is able to pay and the current fair market rental of the property. I doubt HUD increases this payment automatically, there is likely some paperwork that has to be filed, and the current owner probably hasn't bothered to do so.

 

So if the fair market rental really is $200-$300 higher in that area, it is entirely possible that HUD will make up this difference without actually having to replace the tenant in question, and without substantially increasing the amount the current tenant is paying out of pocket.

 

Another plus to being qualified for Section 8 (and as the landlord you have to apply for and maintain Section 8 qualification), is that you have a constant pool of available renters, so the property is unlikely to sit vacant for very long.

 

Of course, if you think you will be charging rent that exceeds the fair market value, it's an entirely different story.

[hrothgar]

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

 

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

 

http://ths.gardenweb.com/forums/

This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

 

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

One of the tenants in the house I'm looking at is Section 8. AFAIK it's difficult to raise their rent, and like I said, they're currently paying $200-300 less than their neighbors every month.

 

Which leads to some sort of ethical dilemma. If you decided that you wanted to evict the Section 8 family for whatever reason, what's the best way to go about telling them? :huh:

It can be incredibily difficult to (legally) evict folks who are renting section 8 housing.

 

My aunt was a social worker. When I was growing up, I used to hear all sorts of stories about the never ending battles between land lords and tenants, the ridiculous lengths to which the land lords would go trying to force out tenants, and the ways that tenants would (deliberately) trash the place when they were moving out.

 

Left me firmly convinced that I never wanted to be involved with either side of this...

[bid_em_up]

It can be incredibily difficult to (legally) evict folks who are renting section 8 housing.

 

My aunt was a social worker. When I was growing up, I used to hear all sorts of stories about the never ending battles between land lords and tenants, the ridiculous lengths to which the land lords would go trying to force out tenants, and the ways that tenants would (deliberately) trash the place when they were moving out.

 

Left me firmly convinced that I never wanted to be involved with either side of this...

This is true when you agreed to accept Section 8 tenants and are then attempting to evict for non-payment, lease violations, etc.

 

I'm not so sure that it applies in this case, since as the new property owner, he is under no obligation to accept Section 8 tenants. It should be a simple matter of filing the eviction paperwork with the court, and having the tenants served. I agree that they may trash the place in retaliation.

 

However, the best recommendation I can make is that you consult with a good real estate attorney in your area regarding these matters instead of listening to us. ;)

[jjbrr]

Surely if you buy a house with Section 8 tenants but you yourself would like to live in that house, there must be a (simple) process to get them out.

 

In the case of multi-family residential units, one has a choice of whom to kick out, assuming full occupancy. I hope the process doesn't change too much.

[y66]

Of possible interest:

 

Here comes the neighborhood

 

What's your walk score?

 

If all other things are equal, or close, check out the walkability index of various properties you are considering. In my experience, this is not just a proxy for quality of life. It's a pretty good indicator of future value relative to less walkable neighborhoods.

[jjbrr]

Of possible interest:

 

Here comes the neighborhood

 

What's your walk score?

 

If all other things are equal, or close, check out the walkability index of various properties you are considering. In my experience, this is not just a proxy for quality of life. It's a pretty good indicator of future value relative to less walkable neighborhoods.

The author of the book that was linked at the beginning of this thread describes his approach to buying houses is to look almost exclusively at beachfront property or property in yuppie, trendy, downtown locations where young-ish professionals can be in the middle of the downtown action but still be able to walk to work.

 

These types of places will generally provide (sometimes substantial) negative cash flows for the first several years, but they will frequently experience enormous appreciation, sometimes doubling in value in ~5 years.

 

I think it's a sound strategy.

[PassedOut]

These types of places will generally provide (sometimes substantial) negative cash flows for the first several years, but they will frequently experience enormous appreciation, sometimes doubling in value in ~5 years.

 

I think it's a sound strategy.

When I started (mid-1970s), the common wisdom (especially from sellers) was that you had to "feed" your income properties for a few years in the manner you describe in order to reap the rewards of appreciation later. I was never tempted by that, partly because I did not want to lose flexibility by choosing to tie up cash that way. For me, it was better to start the profits rolling in right away and realize the appreciation later as well.

 

Of course that meant that I had to look harder for each good buy, but good deals are always out there.

[jjbrr]

My roommate is closing on a duplex in Dallas next month. I'll be moving there to help manage the property. First hand experience with minimal risk seems like a good play.

[wyman]

Jeremy,

 

Since I know you're semi-active on 2+2, go to BFI and read the Ask Me Anything about RE Investing by spex x. It should be on the front page of BFI most of the time.

 

The thread is long, but well worth reading and rereading, even over a couple days.

 

-BW

[mike777]

My roommate is closing on a duplex in Dallas next month. I'll be moving there to help manage the property. First hand experience with minimal risk seems like a good play.

1) what does manage mean?

 

 

2) i ASSUME YOU MAKE THIS UP ON THE GO...

 

 

3) WTF.... many make millions in real estate.......for sake of discussion you bet ...closer to bottom then closer to top.......win......go for it...

 

 

4) the muddle..middle never wins.......think... and go for it...or stop...

[jjbrr]

Jeremy,

 

Since I know you're semi-active on 2+2, go to BFI and read the Ask Me Anything about RE Investing by spex x. It should be on the front page of BFI most of the time.

 

The thread is long, but well worth reading and rereading, even over a couple days.

 

-BW

Thanks for the link. I never even knew about BFI, but I found the thread and I'm excited to read it. I started skimming some of the first 5-10 posts and I'll assume the thread will get better if it's 5 stars. The OP is doing something very similar to what I want to do, except I plan to stay entirely away from the low-income housing in rough neighborhoods that seem to be his target market.

 

He definitely lost some credibility with me, though, when he said his primary strategy is to buy and hold, but then he says, "Potential growth and projected appreciation and stuff like that is all too esoteric for me."

 

I understand he's focusing on positive cash flows and first quarter ROIs, but it seems a bit short-sighted to me. He started the thread by saying REI is not all about location like everyone hears, but for some people (like those who can eat large negative cash flows until the property appreciates) location is a huge part of it. So I just hope he recognizes that he has a fine strategy, but it's not the only way to real estate success.

 

Obv a trailer park is less likely to experience demand appreciation than a beachfront home, so he doesn't have to worry about potential growth in that context. Trailer parks can be built pretty much anywhere; they stopped making beaches a long time ago.

 

Dallas is another area where demand appreciation isn't such a big thing. In that past decade or so, our appreciation has been one of the lowest in the country. The market is stable, though, so I'm certain his strategy would work here too.

 

I personally just don't want to deal with the extra risk associated with low income housing in dangerous neighborhoods. I admit I'd have a hard time bullying people into paying their rent on time, and I hate the idea of hiring a guard to help me pry money out of people's hands. That's not the type of landlord I aspire to be.

 

But anyway, I'll keep reading the whole thread when I'm not at work. I'm sure I'll learn a lot.

[wyman]

I plan to stay entirely away from the low-income housing in rough neighborhoods that seem to be his target market.

I'll let you read the thread, but for completeness in here:

 

1) The OP owns at least one mobile home park and thinks that -- for people who aren't starting out with a ton of investment capital -- creating notes on mobile homes is one of the quickest ways to get a good cash flow going. If you create enough, sometimes (tough right now) you can package the notes and sell them to an investor. And as he looks hard at mobile home parks as investments as well, he's certainly biased toward them as an investment vehicle.

 

2) The OP definitely acknowledges that one can make money with appreciation, though his opinion is that this type of investing is riskier than buying cheap, cash-flowing, and improving the property.

 

3) I don't recall stories of OP collecting rent in tough neighborhoods. He does have some properties in worse areas, but he converted them to section 8. His rent checks arrive every month from the government with no hassle. He screens tenants hard and has rigid criteria for living in his buildings. Again, IIRC, he mentions having waiting lists to get into his apt buildings because they are some of the nicest section 8 housing out there, and he keeps them that way. He does not hesitate to evict.

 

Not exactly a slumlord iyam, but your concerns are duly noted. Feel free to PM him also, he's always been helpful when I had questions.

[jjbrr]

3) I don't recall stories of OP collecting rent in tough neighborhoods. He does have some properties in worse areas, but he converted them to section 8. His rent checks arrive every month from the government with no hassle. He screens tenants hard and has rigid criteria for living in his buildings. Again, IIRC, he mentions having waiting lists to get into his apt buildings because they are some of the nicest section 8 housing out there, and he keeps them that way. He does not hesitate to evict.

I can see how this can be very successful. If he really has waiting lists, which I don't doubt, this is a great way to get steady income. I might have to look into this more.

[blackshoe]

One RE investor I spoke to back in the 80s told me off a conversation he had with a (then) 80 year old Japanese guy who at the time owned about half of Honolulu. The investor asked this guy for advice. He said "buy low". Investor said "you mean, buy low, sell high?" "No," was the reply, "buy low. Don't ever sell." :blink: