Many first time buyers and even some real estate agents misunderstand how to analyze the cost of a condo.
Here are a few things to consider when analyzing the cost of buying a condominium.
Analyze The Cost Of A Condo – Balance Sheet Reserves
The financial strength of a condominium association or strata has a big impact on the actual cost of buying a rental property such as a condo.
Condo buyers make the mistake of looking only at the profit and loss statement of the association. They almost never look at the balance sheet showing the reserve budget.
The profit and loss statement can show a positive cash flow. But the condo association may have very little money in the bank for an unexpected common area repair.
Budget Reserves Are A Big Deal
When a condo association needs money and doesn’t have it, the condo owner gets billed for a special assessment.
While the phrase sounds innocent enough, what it really means is that the association didn’t plan properly by saving money for a rainy day. And the owners are the ones who will have to pay.
That’s why looking at the amount of reserves are so important when a buyer wants to analyze the cost of a condo they’re thinking about purchasing.
Imagine if you’re the owner of a condo and all of a sudden you have to pay $1,000 extra per month for the next 12 months to cover your share of an un-budgeted expense.
It’s certainly true that cash can be king. But there are also instances when seller financing can be a better option for real estate sales.
Seller financing is a good option in a down market, or in a real estate market where home prices keep rising.
Seller Financing Can Make Sense
Seller financing – also known as a seller carryback or a deed of trust note – offers advantages to both buyers and sellers of any type of real estate.
#1 Easy Sale In A Tough Market
In a down real estate market there are more sellers than buyers of real estate. Offering seller financing can help entice a buyer to purchase your property instead of the competition’s.
#2 Reduce Capital Gains
If the seller owns the real estate free and clear, or has a substantial amount of equity built up, seller financing can help reduce the upfront tax on capital gains.
That’s because rather than getting all of the profit at one time, seller financing allows the seller to spread out the profit over a longer period of time. The monthly payment received from the borrower will be part principle payment and part interest income to the note holder.
#3 Seller Can Sell The Note
Seasoned deed of trust notes are easy to sell on the secondary market.
Seasoning is a term used in mortgage finance that simply means the debtor or the borrower has made its payments in full and on time. Usually after 12 months of consistent payments a deed of trust note is considered to be seasoned.
Many times sellers agree to seller finance in order to defer capital gains tax and earn interest income. But then their situation changes.
Sometimes they want to raise cash for another real estate deal for example. To do this they simply sell the seasoned deed of trust note to another investor and invest their cash in something else.
A lease purchase of real estate is similar to seller financing and has pros and cons for both the buyer and seller.
If there’s one thing that real estate property managers try to avoid at all costs it is a problem property owner.
A problem real estate property owner is one who says one thing but does another. They’re the type of owner where nothing is every their fault.
Real estate property managers can only do so much. That’s why it’s always a good idea to avoid problem property owners right from the start.
Here are three ways to spot problem real estate property owners:
Contract Cancellation Clause
Make sure that your property management agreement has a cancellation clause that either party may use for any reason.
Good property managers will never have a property owner terminate their agreement. But good property managers should always reserve the right to get rid of a problem property owner unilaterally.
Cash Poor Property Owners
One of the biggest red flags to look for is a property owner’s unwillingness to provide working capital, or to maintain a minimum reserve in a trust account.
Sometimes property owners are actually cash poor. Other time they simply think that the cash flow from their property should cover any needed improvements or repairs.
Unbelievably, many problem property owners think this even though their rental property has a high vacancy level due to the poor condition of their property.
Signs Of A Problem Property Owner
Real estate property managers can usually discover a problem property owner before the property management agreement is ever signed.
Red flags include:
- Vacant units that are not move-in ready
- Obvious deferred maintenance items such as painting, parking, and landscaping
- Blaming the previous property management company for the condition of the property and the low occupancy level
Good tips for landlords are hard to come by, especially if you are new to the business of real estate property management.
Here are two more tips for new landlords that can save a lot of time, money and trouble.
Pictures Don’t Lie
Experienced real estate property managers and landlords leave as little as possible to the tenant’s imagination.
That’s why it’s a good idea to take photos of the appliances. This includes the model label on the back of the machine. Then, include this detailed information as part of the written real estate lease contract.
That way if an appliance happens to be missing during the move-out walk through it will be much easier to determine the replacement cost that the tenant is liable for.
Utilities Should Be Turned On
The rental lease that the tenant signs should specify that the utilities will be on when the move-out walk through is done.
Most leases actually call for this, but frequently the tenant doesn’t keep the electric, water, and gas turned on.
The reason for having the utilities on during the walk through is so the landlord or property manager can check for active water leaks and other damage that may have been caused due to tenant neglect.
Other Tips For New Landlords
New landlords are always anxious to get their first rental property rented.
But getting the wrong tenant will be much more expensive than taking the time to find and keep a great tenant.
A few other tips for new landlords include:
- Don’t negotiate on the rent amount or down payment
- Always run a tenant income and credit report and background check
- Put everything in a written contract
- Be aware of the landlord tenant laws in the market where your rental property is located
Remember, it’s always more expensive to get rid of a bad tenant – and to fix any damage caused by them – than it is to take the time and find and keep a great tenant to rent your property.
Land loans is a term that frequently comes up when selling real estate.
Despite the name, land loans aren’t just for selling land – although that’s how the term originated.
Other Names For Land Loans
Other names for land loans are deeds of trust, seller financing, or private equity loans.
The term ‘land loans’ comes from a type of seller financing – as opposed to traditional bank or lender financing. A land loan is when the seller retains title to the ‘land’ until the loan is paid off.
Why Use Land Loans?
There are three ways that land loans are generally used to buy and sell real estate:
- An owner has a property that is difficult to sell. Maybe it’s a buyers market or the seller doesn’t have the money to make repairs.
- A buyer can’t qualify for traditional bank or lender financing. The buyer may have credit issues or wants to use the property for an unconventional use.
- A legal technique where a seller can defer payment of capital gains tax
Let’s Make A Deal
Land loans are a creative way to finance real estate. There are no hard and fast rules to follow, so selling real estate using a land loan can be tailored to the specific needs of every buyer and a seller.
It’s always a good idea to have the sales contract in writing. Many buyers and sellers using a land loan also like to have an independent third party handle all of the loan payments and disbursements as well.
Last but not least, a seller carrying a note with a land loan should always think of him or herself as a bank. Especially if they decide they want to sell the deed of trust to an investor before the note becomes due.
One reason that home prices keep rising can be found in a recent report by the Pew Research Center. The report notes that more households are renting than anytime over the past 50 years.
Over the last 12 years the number of people who own a home has remained basically the same, while the number of people who rent where they live increased by over 25%.
Everybody Is Renting
This rise in renters is across all demographic groups:
- All age groups have seen an increase in rental households, with 65% of people younger than 35 renting where they live
- White, black, and Hispanic ethnic groups have all seen a rise in renters over the last 10 years
- People of all education levels are renting more, with households holding a bachelor’s degree or higher having the largest increase in renters
The rise in home renters is a pattern that is going to continue for quite some time. It is also a reason why the costs of condos and single family home prices keep rising.
Why Do Home Prices Keep Rising?
Since 2012 private equity has moved into the home rental market in force. Large REITs and smaller crowdfunding groups now buy homes in quantity and rent to the people that were foreclosed on and forced into bankruptcy during the last housing crisis. These mega-home rental organizations continue to buy both new and existing home inventory.
The shortage of skilled labor and zoning laws that constrain the supply of new construction are another reason why home prices will continue to rise.
In 2011 only 13% of the members of the National Association of Home Builders cited labor costs as a concern. Now 82% of home builders say rising labor costs are their biggest concern. Both immigration policy and the increase in natural disasters such as Hurricane Harvey in Houston cause labor shortages in the construction sector.
Lumber futures have increased by more than 57% since President Trump imposed tariffs on Canadian lumber. While that’s good for people in the lumber business, it is a disaster for single- and multi-family home builders who use lumber for framing.
An increasing amount of new home construction and existing inventory is being purchased in bulk and turned into rental property.
At the same time the supply of new housing is limited by rising labor and materials costs and well-intentioned NIMBY governmental zoning policies that cause a shortage of buildable land.
Many people consider giving up their day job to sell real estate full time.
Getting that first or second sale isn’t that difficult. But what is difficult is working in the real estate business full time.
Here are a few things that will help you decide if it’s a good idea for you to sell real estate full time.
Have A Real Estate Business Plan
Putting together a realistic real estate business plan will help you decide whether or not selling real estate full time is right for you.
When putting your business plan together for your new real estate career, remember that it’s always better to be safe than sorry.
Be overly pessimistic about your projected income and expenses for the first several years. Many business planning experts suggest that after you have what you think is a conservative business plan you should cut the revenues in half and double the expenses!
If You Sell Real Estate Full Time, Treat It Like A Business
Realize that business – just like nature – does not move in a straight line.
One very successful quarter or year doesn’t mean that the trend is your friend. Smart real estate entrepreneurs know that there are always peaks & valleys . . . and some valleys can be deep for a very long time.
Consider Having A Real Estate Business Partner
Some people like having a business partner while others prefer to go it alone.
Advantages to having a business partner are the sharing of risk and having access to extra start-up capital.
If you have a real estate business partner, just be sure to clearly define the responsibilities of each person involved. This will help to avoid conflict down the line.
A good way that first-time home buyers can save money on their new home is by hosting on Airbnb.
Airbnb hosting is also a good niche for vacation rental property managers to focus on.
Here are four things to consider about hosting on Airbnb.
Hosting On Airbnb Is Easy
The process for becoming a host on Airbnb is pretty easy.
But as Airbnb grows in popularity, there are more places listed for rent.
Because of that professional real estate copywriting and marketing are becoming more and more important. It’s also a good idea to have professional pictures of your property taken before you offer your place for rent on Airbnb.
Airbnb hostings can be very competitive. Making a good first impression makes a big, big difference between getting bookings on Airbnb and not getting them.
Airbnb Hostings Mean Extra Money
Some people make money on Airbnb by renting out an extra bedroom or listing their place on Airbnb when they go on vacation.
Then there are Airbnb hosts who pretty much rent their place out full time while they travel around the country or even around the world.
People who freelance and are able to work remotely – and those who have virtual businesses – love hosting on Airbnb.
Challenges With Hosting On Airbnb
Each time a guest leaves – and before new ones arrive – Airbnb hosts will need to make sure their place is thoroughly cleaned and ready to go. Having a reliable cleaning company is critical and important to avoid getting bad reviews from guests on Airbnb.
Hosting on Airbnb also means having a kitchen that is completely supplied with cooking supplies, dishes, glasses, pots & pans.
Many 5-star Airbnb hosts also find that guests appreciate welcome gifts such as a bottle of wine, along with some cheese and crackers. Remember, it’s always that extra little touch that people remember the most!
Having a real estate business plan – or a property management business plan is crucial if you want to succeed in the business of real estate.
That’s because real estate is about much more than just buying & selling, leasing & managing.
Here are the top two ways to make your real estate business plan better.
Rainmakers Should Make Rain Not Train
Some real estate brokers are rainmakers. They’re the ones who bring in the majority of the business and are great in dealing with clients.
If that’s the case, bring in a partner or key employee to recruit, train and manage the newly-hired real estate agents.
New agents will be attracted by the broker-rainmaker’s outstanding success stories. But new real estate agents usually lack experience, skill or motivation.
They won’t be able to perform and produce without having a lot of hands-on guidance – at least to begin with. The broker-rainmaker won’t be able to give new agents the attention they deserve because they’re out there making rain and bringing in new business.
A Great Real Estate Business Plan Is Niche Specific
Focusing on a specific asset class for your real estate business is much easier than trying to be all things to all people.
A real estate asset class isn’t just commercial or residential real estate. A asset class is a specific category – or niche – within those sectors.
If you have a residential real estate brokerage, concentrating on specific zip codes or neighborhoods is one example of a niche. Another is focusing on a certain product type such as small multifamily or fix-n-flips.
Commercial real estate brokers could identify high-tech industrial property, medical office buildings, or STEM tenants as their niche. Or they could concentrate on finding replacement property for 1031 tax deferred exchanges.
Here are three property management business plan tips to think about before expanding your real estate business.
Focus On A Single Asset Class
One of the most important things to do when developing a property management business plan or a comprehensive real estate business plan is to focus on a specific real estate asset class, and then ‘drill down’ to a specific sub-class.
An example of this on the residential side would be single- or multi-family homes. Then then focus on a specific price range, area of town, or number of units in the property.
An example of this on the commercial side would be multi-tenant retail or office. After selecting the type of commercial property you will property manage, determine the class of property (A, B or C) and the property size in terms of square footage.
Developing A Solid Property Management Business Plan
It might seem counter-intuitive by narrowing the type of property you will manage. But narrowing your focus is great for your real estate business for three reasons.
First, tenant personalities and issues will be more similar. Their wants and needs will be as well.
The things that a medical tenant requires are much different from what a mom-and-pop small retail business will need.
Second, owner personalities will be more alike as well. Real estate investors who buy office property are much different from those who invest in small multi family buildings. Plus you’ll learn how to avoid a problem property owner.
Third, you’ll develop a skill set much quicker when you manage only certain type of real estate asset classes.
This will let you grow your property management business faster. You’ll be able to transfer the skills you’ve learned in working with similar tenants and owners to other like-kind real estate. You’ll also be able to target your property management marketing to the audience most likely to respond.