How To Buy Your First Rental Property

how to buy your first rental property

I was recently quoted in a Fit Small Business article about how to buy your first rental property.

You can click on the above link to read the complete article.  But, here are two time-tested tips on buying a rental property along with some extra commentary.

When You Buy Your First Rental Property, Basic Is Better

Basic is always better when buying a rental property.

That’s because the more variables there are, the more things you have that can go wrong.

For example, a ‘plain vanilla’ house with very simple landscaping and inexpensive fixtures & appliances presents less of a risk to a real estate investor than does a luxury home with everything high-end, including a pool and a spa.

(Buying a condo to rent out is also a good option, but there are certain items to be aware of with this type of investment.)

While it’s true that a luxury rental will command a higher rent, there are also more things that can go wrong and more expensive repairs.

Often times, the bottom line or net income is exactly the same with a basic rental than with a luxury rental house.

Buy Where Renters Are

This is a common-sense item that buyers often overlook.  They get so caught up in the house itself but they forget that they’re buying the house to rent out, not to live in themselves.

An easy way to know where the home renters are is to look in an area where there are a lot of apartment buildings.

Apartment developers and managers have already done all of the market research, so that you don’t have to.

Plus, when you have a rental house in an area where there are a lot of apartments, you’ll be able to rent to people who want to ‘move up’ from apartment living.

Even if you already own a rental house or commercial property, it’s always good to go back to the basics every now and then!

Sample Real Estate Profile For LinkedIn

real estate profile for linkedin

Here’s an example of a real estate profile for LinkedIn . . . or for any other social media platform that you’re using to building your online real estate presence.

It can be used whether you work in residential or commercial real estate.  This sample real estate profile for LinkedIn is also good for both companies and individual real estate agents as a lead-in for your professional bio.

Real Estate Profile For LinkedIn

[Your company name] is a full-service brokerage serving the Greater [Your city] area.

Our brokers specialize in all asset classes of real estate including: single family, multifamily, mixed-use, retail, office, industrial, special use, property valuations, property management, fix-n-flips, JV equity sourcing, and note sales.

[Company] works with real estate investors of all sizes – from experienced private investors to beginning real estate investors.

We know from our years of experience in the business and successfully closing hundreds of transactions that maximizing the return on your real estate investment in [City or Market]’s competitive real estate market takes more than just one person.

That’s why [Company] utilizes a unique, integrated team approach when buying or selling real estate on behalf of our clients.

While other real estate brokerages in [City or Market] limit the opportunities that their clients see, [Company] thinks outside of the box. We understand the power of team work and cross-marketing.

Our proprietary global network of over 150,000 active investors allows us to reach as many qualified buyers and sellers as possible, as quickly as possible.

[Company] combines today’s high-technology with an old school, hands-on approach.

We’ve built our solid reputation in the [City or Market] real estate market the old fashioned way . . . one client at a time.

[Broker-specific copy goes here]

Rate Hikes, Credit Scores And Real Estate

credit scores and real estate

Recently a reporter reached out to me to talk about a client project I was working on about the relationship between rate hikes, credit scores and real estate.

Here’s the link to the published article:  House Loan Blog – Changes To Credit Score.

Credit Scores And Real Estate

Credit scores and real estate work together to affect the price of real estate along with the rent that a landlord charges for income property.

There’s definitely a relationship between interest rates, credit scores and real estate.  But often times it isn’t what the general public believes.

Professional real estate investors know this, and are able to leverage these three factors to make their real estate investments a success.

Credit Scores Increase Real Estate Prices

Real estate prices actually increase as credit scores increase.

While at first glance this might seem counter-intuitive, there’s a reason that this occurs.  As credit scores increase buyers can qualify for a higher-priced property.  This in turn allows sellers to raise the price of the real estate that they’re selling.

Rental Rate Hikes Can Be Tricky

Higher credit scores also allow landlords to raise rents.  But doing this is a little trickier than simply raising the price of real estate for sale.

That’s because landlords and property managers of income producing real estate need to be aware of the time and expense of turning a rental property.

Also known as a ‘unit turn’, turning a property refers to the delay between the time an old tenant leaves and a new tenant leases, along with any repair or updating expense the property needs.

For example, let’s say the current rent on a unit is $1,000 per month and the new rent will be $1,100.  That’s a 10% increase per month, which isn’t bad.

But if the property ends up sitting vacant for two months during the unit turn there is a short-term rental income loss of $2,000 plus the cost of any needed repairs or updating.

 

 

Three Tips For First Time Landlords

tips for first-time landlords

Owning and renting real estate is one of the best ways to create wealth.  If you’re just getting started in real estate investing, here are three tips for first-time landlords that will help make your real estate investment a success.

Great Tips For First-Time Landlords

First, always charge prospective tenants a small fee for processing their application to rent your property.

This is the most important of the three tips for first-time landlords.

Collecting a small fee serves two purposes.  First, it covers the actual cost of running a credit report, verifying the tenant’s income, and doing a background check.

But just as importantly, it weeds out prospective tenants who really aren’t serious about renting your property.

Experienced property managers will tell you that there are actually people who go around town pretending to be tenants and applying for property that they have no intention of renting.

Never Negotiate On The Rent

Negotiating on the long-term rent with a tenant almost always backfires on a new landlord.

That’s because if you give the tenant a reduced rent, they will come back for more . . . and more, and more.

This is the second most important of the tips for a first-time landlord.

Now, in order to not negotiate on the rent, the rent has to be based on comparable rentals in the area.  This means the landlord needs to survey the market and set a fair rate for their rental real estate.

Know The Landlord-Tenant Law

Some markets are landlord-friendly, and some are tenant-friendly.

Sometimes this varies by asset class as well.  In a given area the laws could be tenant-friendly for residential real estate, but decidedly landlord-friendly for commercial real estate.

Or there may be ways for tenants to break a lease that will catch you completely off guard.

As a first-time landlord it’s important to know the landlord-tenant law for both the market and the property class that you own, operate, and rent to tenants.

How To Break A Lease To Buy A House

break a lease to buy a house

Renters often times reach the point where they decide it’s time to break a lease to buy a house.

Here are a couple of ways that tenants can break a lease to buy a house that will also be a win-win situation for the tenant, landlord, and property management company.

Break A Lease To Buy A House – New Home Construction

New home builders can usually be a big help to tenants wanting to break a lease to buy a house.  As long as the house they are buying is the new home that the builder is selling.

That’s because new home construction usually has a lot of latitude in the pricing.

Granted, the tenant may need to pay termination fees to break its lease.  But the builder can sometimes reduce the price of the new home by the total amount of termination fees the tenant needs to pay to break its lease to buy a house.

Real Estate Agents Can Help Break A Lease

Another way that renters can break their lease to buy a home is with the assistance of their real estate agent.

Landlords that own income property, and property managers that handle the rented property are mainly concerned with keeping the property rented.

That’s where the help of a real estate agent can come in.

If the tenant is using a real estate agent to find a new house to buy, then the agent can also help the tenant break its lease.  The real estate agent can do this by finding a good, qualified new tenant to rent the property.

Many real estate agents will also offer to waive their leasing fee for doing this, since they’re getting paid a nice sales commission from the new home builder for selling a house for them.

How To Save On Housing Costs

save on housing costs

First-time home buyers frequently discover that their monthly housing costs are much, much higher than they anticipated.  So naturally they begin looking for ways to save on those housing costs.

Updating, furnishing, maintenance and utilities all add up quickly.  Add to these expenses the monthly mortgage, and even at today’s low interest rates these payments can put a strain on almost any budget.

Here are a few ways to save on housing costs.

Save On Housing Costs With Rent-To-Own

One of the more overlooked ways to save on monthly housing costs is to enter into a rent-to-own or lease purchase agreement with the seller.

This type of contract allows the buyer to become a tenant first.

First, agree to the purchase price of the house in advance. The next step is determining how much of the monthly payment is going to be applied to the purchase of the house.  The amount of the payment left over goes to the seller as monthly rental income.

There’s a right way and a wrong way to use a rent-to-own agreement to save on housing costs.

The agreement should be treated like a purchase contract, with an independent third-party such as an escrow company handling payment receipts and funding disbursements.

Sub-Renting Can Save On Housing Costs

Renting out extra space in the house is another way to keep housing costs down.

Some people rent to friends or family, others use an online service such as Airbnb and rent out to people looking for a vacation rental property.

There are both pros and cons to renting to people you know and finding good tenants that you don’t know.

But either way, home owners who rent out extra space frequently find that the extra income they receive is much more than they expected.

The additional money can add up fast, and be used for needed updating or remodeling.

Or even to pay off the mortgage balance much quicker than planned!

How To Lease Purchase Real Estate

lease purchase real estate

A lease purchase real estate agreement, sometimes also called a rent-to-own, is basically an option to buy real estate at a certain time and at a certain price.

One of the most important terms to have in a lease purchase agreement to buy real estate is that an escrow or servicing company collects the monthly payment.

After collecting the payment the escrow company accrues the portion of the payment that goes toward the purchase price into an escrow account.

Lastly, they remit the balance to the seller.

Basics of a Lease Purchase Real Estate Agreement

The seller and tenant/buyer should:

1) Agree to a future purchase price at a certain date.

2) Agree to the lease amount of the monthly payment.

3) Agree to the total monthly payment which includes the rent and the extra amount that goes toward the purchase price.

This lease purchase real estate agreement should be written and treated like any other purchase contract.

The seller and tenant/buyer should have a third-party such as an escrow company or attorney collect the total monthly payment from the tenant/buyer to the seller, accrue the funds that go toward the purchase price, and remit the balance to the seller.

Issues With A Lease Purchase Agreement

Many times people enter into a verbal lease purchase real estate agreement.  They don’t use an escrow company or third party to receive, account for, and disburse the monthly payment.  Instead, they do everything themselves.

Doing this puts both the seller and buyer/tenant at risk.  Normally people do this to try and save a little bit of money.

The two common issues that arise with a lease purchase agreement for real estate are:

1) Who pays the monthly servicing fee.

2) Determining the future price of the property.

In most cases, splitting the escrow fee between seller and tenant/buyer is the accepted course of action.

The agreed-to sales price of the property can be confirmed with an appraisal when the lease purchase real estate agreement is exercised.

Is Allowing Real Estate Pre-Possession A Smart Move?

real estate pre-possession

Real estate pre-possession means that the buyer or tenant are allowed access to the real property before the sale is closed or the lease begins.

There are pros and cons to a seller or landlord allowing real estate pre-possession.

Pros of Real Estate Pre-Possession

Probably the biggest pro of allowing a real estate pre-possession is that it creates a good working relationship between the two parties.

If you’re selling a property, allowing pre-possession can help keep the deal on track.

If you’re a leasing property manager or owner, allowing the tenant early access to take measurements and get bids from contractors can establish a good landlord-tenant relationship right from the start.

Cons of Allowing Pre-Possession of Real Estate

There are also some drawbacks to allowing a buyer or tenant early access to the property.

In the case of a real estate buyer, they may be secretly looking for a reason to cancel the purchase agreement.

Maybe they’re having second thoughts about buying your property.  Or maybe they found a better deal somewhere else.

If that’s the case a buyer will try to come up with an issue they claim was never disclosed to them.

Sometimes they will try this move even if all of the contract contingencies have been removed.  The threat of non-disclosure can create big problems for the seller both before and after close of escrow.

Allowing tenants pre-possession can also create potential problems for the property manager or landlord.

One of the biggest risks is that the tenant underestimates the cost of its tenant improvement.  Or they realize the cost of making their space move-in ready is more than they anticipated.

A tenant who has second thoughts will then try to raise all sorts of issues with the landlord.

They will try to turn minor issues into big ones.  This virtually guaranties the tenant will be a problem to deal with.

Often times over the entire term of the lease!

Five Steps To Forming A REIT

forming a reit

Many active real estate investors reach the point where they consider forming a REIT.

Forming a REIT – also known as a ‘real estate investment trust’ or a group investment – can be simple and straightforward.

Here are the five key steps to follow when forming a REIT.

#1 Create an LLC when forming a REIT

An LLC – or limited liability company – is the most common legal and tax entity for holding investment real estate.  The Internal Revenue Services recognizes this structure, as do the laws of each State.

#2 Seek investors

Investors in the LLC are buying shares of the company, not the real estate itself.  Usually – but not always – the percentage of ownership equates to the amount of capital an investor contributes.

Unless you have a strong past working relationship with the investor, you will need to have an idea of what type of property is going to be acquired, and have a P&L and cash flow analysis put together.

#3 Passive vs. active investors

Like the name suggests, a passive investor is one who puts money into the LLC and does nothing else.

In addition to putting money into the LLC, active investors also contribute their skills, time or knowledge.  Sometimes this is in exchange for a greater share of the profits or cash flow, or for an increased number of shares in the LLC.

Examples of an active investor activity in a REIT include putting the mortgage into one’s name, acting as a general contractor, or managing the property.

#4 Written document

While forming an LLC is consistent from state to state, it’s best to have an attorney draw up the LLC operating agreement.  An experienced real estate attorney will help you to address any unforeseen issues that may arise down the road.

#5 Distribute profits

This is the fun part.  There’s profit made on the property appreciation when it is sold, and there’s the profit from the net monthly cash flow.

Remember, depending on what the LLC’s operating agreement says, these two income streams may or may not be distributed based on the percentage of stock held in the LLC.

 

How To Make Money With Vacation Rental Property

make money with vacation rental property

There are a lot of ways to make money with vacation rental property.

Some people rent out a spare bedroom while others rent out their entire house.  Some hosts even rent the place that they’re renting out on sites such as Airbnb.

Make Money With Vacation Rental Property

Here’s the #1 tip to make money with vacation rental property:

Greet Your Guests In Person

This is absolutely contrary to the smart lock trend.

The rationale for using a smart lock is that it allows guests the opportunity for late arrivals and early departures.  And that’s a good thing.

But sometimes vacation rental hosts get lazy, or they’re too busy property managing other vacation rentals.  So they use the smart lock as a crutch and don’t meet their guests in person.

Guests really appreciate a quick tour of the place and being able to put a face to the name of the host.  After that a phone call or quick text message is all that’s needed.

Top Notch Internet Service

The #2 tip to make money with vacation rental property is to offer top notch internet service.  That’s because virtually everything we do now days is on the internet.

People Skype and use Netflix all the time.  Business travelers using vacation rental property as a home base often times need a speedy connection to hook up with the server at their main office.

Both experienced hosts and first time landlords will make sure the internet in their vacation rental is superior, and then tout that fact on their listing.

Including a screen shot of a Speedtest report is also a great sales tool.

Each vacation rental property market is different.  There are always unique factors to consider when buying your first rental property.

But using these two examples of how to make money with vacation rental property will help you do just that, no matter where your vacation rental is located.

(If you’re not familiar with Airbnb, using this link will get you a $25 credit on your first visit anywhere in the world!)