Making Money with Real estate, what are the concerns?

Should you do it?

Financial concerns in making money with real estate.

• Type of property. When considering a property, what would be better, a single-family house, with the tenant paying for utilities and water, or a multi-units structure to spread the financial risk? (Keep in mind that multiple units mean multiple problems.)

• Your Down payment. For a rental real estate investment property, lenders usually require a down payment between 25 and 30%. Banks charge interest rates of an incremental one to two percentage points so overall you will need to bring more cash to the deal than for your main home.

• Location, location, location. Should you choose a steady but pure rental neighborhood or a more upscale area? Your choice will depend on whether you want current income and possibly lower appreciation (pure rental)(cash flow) or considerable equity appreciation (upscale)(asset gain) at time of sale.

• Cash flow is king. The area will dictate the maximum rent you will obtain. The idea is to cover expenses (monthly mortgage, insurance, & tax) and have some left over.

• Minimizing Risk. It is advisable that you obtain or increase your umbrella liability coverage to protect you from unanticipated circumstances. One of the first laws of investing is to protect your existing assets. Neither your umbrella nor your homeowner’s policy will cover renter’s personal items so encourage them to get their own.

• Prevention. Do not neglect to get a very thorough Engineering report covering all aspects of your property in making money with real estate. (i.e., roof, plumbing, boiler, foundation, termites) You can negotiate before purchase and have major deficiencies corrected.

• Getting the rent paid on time. You will need to establish good habits. Will you collect the rent personally on the first of the month? ( if you do, make sure you vary the time of day when you come by, you don’t want to be the target of a robbery)

  Alternatively, you could open a separate account where renters can deposit the check directly. Will you accept certain types of tenants with payment coming directly from the government, or go the more traditional route of evaluating prospect’s income against ability to support the rent?

• Protect your pocket. Initially most people ask for one-month security deposit and the first month’s rent. In this economy, get two months security if you can. Once, a tenant of mine moved out and left all his belongings behind. As this was pursuant to eviction proceedings, I had to follow the appropriate legal steps, which was to either put his belongings in storage for a period of thirty days or leave them in the place for the same length of time.

  The least costly alternative was to leave them in the apartment for the specified time. Thereafter I had to hire a company to cart things away, this also cost me an additional month of lost rental income. Now I incorporate a Move-out deposit (usually 1/3 of the monthly rent) to insure that the apartment is cleaned and emptied (that includes not leaving old furniture in the yard or sidewalk on non- pick up days). These are some of the real issues you will deal with in making money with real estate.

• Quick Turnover. With the Internet, you almost never need to rely on a Real estate agent or the newspaper to get the place rented. Go to R/E websites for research on local rent rates. You can place free ads for your rental on sites such as Craig’s list, however beware of scammers, if it sounds too good to be true it probably is.

• A good tenant. You will soon learn the value of a good tenant (pays on time and takes care of the place), so do not expect to raise the rent yearly. It is often worth foregoing an increase for a couple of years than risk losing good ones. Making money with real estate is about a steady cash flow. Of course, when they leave is the perfect opportunity to adjust the rate.

• This is a business. In making money with real estate keep that in mind: separate the income and expenses from personal accounts. Handle taxes, insurance and maintenance separately. Any repairs will impact profit (painting apartments between tenants, locks changes, rug replacements, new water heater etc...).There can be an occasional empty unit or a costly eviction, keeping an emergency reserve is a good idea. If you are not already using good personal financial software, invest in one, you will be grateful at tax time. (Quicken is an example,another one is Mint.com - The Best FREE Way to Manage Your Money).

  Rental concerns in making money with real estate

• Be thorough. I cannot emphasize enough the importance of a credit and background check, especially if you do not live on the premises. Several reputable companies will provide this service on line (consult the Better Business Bureau); the feedback is within minutes. (Have the prospective tenant sign a form giving you permission) and discard the information afterward (check your State laws).

  In addition, call jobs and personal references and/or review recent tax returns. Don’t just accept a recent pay stub. Eviction is a long process. Thorough advance screening is the best prevention.

• Landlord downside: Calls from tenants at inconvenient times about leaking faucet…etc. What’s your tolerance level? To minimize issues make sure all appliances, faucets etc are in good working order before you rent. Also, make sure the place is up to code, checking local ordinances would be a source for requirements. No matter how good a landlord you are, you might eventually encounter a difficult tenant, it may be just once (and once is enough!) but it could be a string of three in a row.

• Using an agent. If you place a listing with a real estate agency, don’t rely on their credit check and interview for making decisions on tenancy. Review applications yourself and interview prospective tenants. Remember, this is YOUR investment and your opportunity for making money with real estate, once the tenant moves in, it’s your problem.

• Keep Safety in mind. Make sure fire extinguishers, smoke detectors as well as carbon monoxide detectors are on the premise. This is money well spent. Check your town and state law.

• Trust your instinct. Do not rent to someone you have reservations about. Do not give in to pressure by the prospect or the agent just to avoid losing another month’s rent. Such actions can make you lose a lot more in the end.

• Maintenance. - The more you do yourself the more you save. If you are not handy however, get recommendations and a couple of names of plumbers, electricians, handymen, roofers, for emergencies. Don’t’ forget the mandatory service contract on crucial equipment such as the boiler. Get a landscaping service as well.

  Remember, the better your property looks the faster you’ll get it rented and the more it will be worth at sale time, curb appeal can make a big difference in making money with real estate. A good resource to consult is Property Management for Dummies by Roberts S. Griswold.

• Establish some rules. No washer/dryer is one of my rules: first it helps to conserve water, minimizing my water and sewer bill and eliminates accidental water overflow damage to the house. This rule requires ready access to public facilities (if urban area). Restrict use of the backyard if you have multiple units- [It is true that the road to hell is paved with good intentions; Tenants will promise you anything but if you allow this, it won’t be long before you have to arbitrate conflicts between them.] Buy a programmable thermostat and set it at state or city-mandated levels- get a lockbox if you pay for utilities. With rising utility prices, you don’t want tenants raising the heat to 80 degrees in the winter and opening the window when it gets too hot.

• Sanitation. Post recycling rules on entrance door and ask tenants to acknowledge these rules by initialing on the lease. If a ticket is issued for violation, they can’t plead ignorance, they will pay for it or it’s withheld from their security deposits.

• Proximity. Consider the traveling distance to the property if you manage it yourself, gas is expensive. Also for safety reasons remember that you may have to go there in the middle of the night on an emergency.

• The dirty work. Property managers can ease the burden by screening tenants, collecting rent and managing maintenance and repairs, but they vary considerably. The National Association of Residential Property Managers (narpm.org) can provide a degree of help, but for a small investor asking other landlords for referrals may be the best route. The management service may cost you around 10% of your rent roll.

Making money with real estate is not for everyone, but for those who feel up to the task, when done properly, it can provide nice additional cashflow as well as additional tax advantage (see your accountant).

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