Five Real Estate Rental Property Expenses Not To Forget

real estate rental property expenses

Here’s a list of five real estate rental property expenses not to forget about when calculating your ROI.

As a good real estate accountant or bookkeeper will say, ‘Report all of your income and expense as much as you can’.

Tenant Credit Reports

Checking the credit and background of prospective tenants is a must-do and one of the most important tips for a real estate landlord or property manager.

While the cost of running an individual report is small, the annual real estate expense for credit reports can really add up.  Especially if you have a large multi family property or several single family rental homes.

Leasing Fees

Surprisingly, many beginning real estate investors overlook expensing out the finder’s fee paid for leasing the rental property.

One reason this happens is that the leasing agent will collect the upfront monies from the tenant – such as the first month’s rent and security deposit – then remit to the owner this money less the leasing fee paid out of those upfront monies.

The landlord mistakenly only accounts for the money he or she actually receives instead of the gross income from the tenant.

Back Office Property Management Time

The time spent on little tasks like answering incoming phone calls, balancing the bank statement, and endorsing rental checks can really add up over the course of a year.

One way to account for this time spent managing your real estate investment is to use a stop watch or timer on your computer.  Then, log the minutes on a spreadsheet along with the date and a brief description of the task.

Onsite Property Management

Just as with the back office time, onsite property management time can add up as well.  It’s also one of the most overlooked real estate rental property expenses.

This category includes tasks such as driving by or walking the property, meeting a vendor onsite, and checking out the competition.

Market Research

Speaking of the competition, don’t forget to expense the time spent researching your market.

This can include things such as dues and subscriptions, property drive-bys, shopping the competition, and online research.

Common Real Estate Rental Property Expenses

Some of the most common expenses with a real estate investment property include:

Top FSBO Commercial Real Estate Tips

fsbo commercial real estate

FSBO commercial real estate is commercial real estate being sold by the owner.  It’s not that uncommon in the commercial real estate business.

That’s because – unlike residential real estate – most FSBO commercial real estate is owned by professional business people.  As a result, the investment group holding the real estate includes an attorney, high-net worth individual, or even real estate professionals.

Here are a few tips for buyers thinking about investing in for sale by owner commercial real estate.

Buyer Representation For FSBO Commercial Real Estate

More often that not, with FSBO commercial real estate, or any commercial real estate for that matter, a buyer is buying problems that the seller can’t handle.

That’s not necessarily a bad thing.  Sometimes commercial real estate owners don’t have enough capital to make repairs or upgrades.  Other times they lack the property management resources to find and keep great tenants.

Situations like these can be a good deal for the buyer, if the buyer has what the seller lacks.

But whatever the reason, buying FSBO commercial real estate means that you’re buying someone else’s problems.

That’s why it’s important to hire a buyer broker to represent you in a for sale by owner commercial real estate transaction.

Commercial Real Estate Due Diligence

Commercial real estate investors should always be sure to do their due diligence.  It doesn’t matter if the property is a FSBO or listed on the open market.

There’s a lot more due diligence when buying commercial real estate than when buying a residential property.  Some of the things commercial real estate buyers should always verify include:

  • Tenant leases, tenant quality, and historical rent payments
  • Current zoning and potential business restrictions
  • New competition coming to the market
  • Discover why the owner is really selling

 

Real Estate Loan Scams

real estate loan scams

Whenever a real estate market heats up, real estate loan scams also rise.

Here are three common real estate loan scams to watch out for if you’re buying – or selling – real estate.

Seller Financing

Now, seller financing in and of itself isn’t a real estate loan scam.  But, this method of buying and selling real estate can be, if you’re not careful.

For buyers, seller financing can turn into a real estate loan scam if you pay the seller directly.  To protect yourself, always go through a independent third party such as an escrow company or attorney.  They will track payments received, the loan balance, and money disbursed to the seller.

For sellers, always remember that you are the bank, since you are carrying the note.  Sneaky buyers can turn seller financing into a real estate loan scam by providing you with bad credit information or selling the property to someone else without your knowledge.

Lease Purchase

Lease purchasing – real estate can also turn into a type of loan scam if you’re not careful to have everything in writing.  Also be sure to have written in your lease purchase contract what dollar amount or percentage of payment is applied toward the purchase price of the property.

Remember, a lease purchase agreement is different from a lease purchase option.  With an option, the tenant/buyer has the option to purchase at a predetermined price, but doesn’t have to.

Interest Only Mortgage As Real Estate Loan Scams

Using an interest only mortgage to buy real estate can also end up being a real estate loan scam if you’re not careful.

With an interest only mortgage, payments by the buyer only go toward interest and not principle.

In a real estate market where prices keep rising that’s OK.  But if the market suddenly drops, buyers can quickly find themselves upside down with negative equity on the property.

How To Market A Pocket Listing

pocket listing

A pocket listing is a listing that isn’t on the multiple listing service. Pocket listings are found in both residential and FSBO commercial real estate.

Sellers and real estate agents have pocket listings for a number of reasons.  But regardless of why, pocket real estate listings can be difficult to sell.

Here are three great ways to market a pocket listing.

Get Neighbors To Market Your Pocket Listing

Everybody loves a secret, especially neighbors who know that a place is for sale.

By letting the neighbors know you have a pocket listing, you’re putting word-of-mouth advertising to work for you.  It’s also the ultimate way of putting six degrees of separation to the best possible use.

Internet Real Estate Sites

The internet is the perfect place to market pocket listings that aren’t on the MLS.

Websites like Zillow, Trulia, and even Craigslist are great places to advertise a pocket real estate listing without having to go through the trouble of putting the property on the MLS.

This is also a good technique to use when you really want to zero in on qualified, serious buyers.

Most of the real estate agents on the multiple listing service are weekend warriors.  At most they’ll do one or two transactions a year, which means you’ll quite likely end up dealing with an amateur and their buyer client.

Social Media Real Estate Marketing

Marketing your pocket listing on social media is another great way to let people in your sphere of influence know you’ve got a great off market property for sale.

Part of your circle of friends probably includes real estate agents making six figures a year.  These are the types of agents that you want to share your pocket listing with.

They’ve got the experience and the contacts to help get your pocket listing sold to the most qualified buyer.

How To Get Buyers To Pay More

get buyers to pay more

Here are three easy ways to get buyers to pay more for your property.

These tips work in both a hot real estate market and cold real estate market, and for both commercial real estate and residential properties.

First Impressions Count

Experienced negotiators understand that first impressions are lasting impressions.  Once people have made a subliminal decision, it’s very difficult to get them to change their minds.

That’s why making a positive first impression is key to get buyers to pay more for what you’re selling.

In real estate that’s also known as curb appeal.  Well kept landscaping, no litter, and if you’re selling commercial real estate no vagrants hanging around the property.

You’re going for what’s known as the ‘Wow Factor’ when prospective buyers pull up the curb.

No Deferred Maintenance

Deferred maintenance items are things that need to be fixed or repaired but haven’t been.

Items like peeling paint, a loose shingle, or a small graffiti mark on the fence can be innocent enough.

But they can also make a buyer wonder why they haven’t been taken care of – especially if you’re selling your property.  Even worse, deferred maintenance that a buyer can see will also make the buyer think about things that can’t be seen.

Take a loose roof shingle for example.

A loose shingle means that water can get into the inside of the roof, which means dampness and potential mold issues.  Which in turn means potential health issues for the occupant and unknown legal issues for the new property owner.

Get Buyers To Pay More With A Good Story

Another key to getting buyers to pay more is by having a good story to tell.

As a seller you’ll need to be honest with yourself about the problems with your property.  Look at your real estate from a potential buyer’s point of view.

This doesn’t mean you need to apologize.  But it does mean you should foresee as many potential objections or questions as possible, and know ahead of time what your answers are going to be.

A smooth, practiced response goes a long way to convincing a potential buyer that they’re making the right decision to purchase the real estate that you’re selling.

Three Easy Ways To Increase Your Home Value

increase your home value

Here are three very easy ways to increase your home value and get buyers to pay more for it.   After all, like the saying goes, why spend (a lot) of money when you don’t have to?

Best Way To Increase Your Home Value

Real estate is all about location, location, location.  But real estate is also about appearance, appearance, appearance.

Improving the curb appeal of your home and its appearance is easy and relatively inexpensive.  Things you can do to improve the appearance of your home and increase its value include routine landscaping, decluttering, and fresh paint in today’s designer colors both inside and out.

Updated Fixtures

New faucets, electrical outlets and switches, and door handles are pleasing to the eye of the new home buyer.  Replacing these items is also pretty inexpensive and can usually be done without using a high-priced handyman or contractor.

You can increase your home value by thinking of updating fixtures as improving the curb appeal of the inside of your house.

Energy Efficient Appliances

For home owners who have a little extra money in their budget,  upgrading to LEED certified, energy efficient appliances can pay off in both the short- and long-run.

Are you thinking about selling your home in the not too distance future?  First-time home buyers will appreciate – and pay extra for – the work you’ve put into updating the appliances in your home to today’s Energy Star standards.

If you’re more of a buy-and-hold home owner, then the money you save by having energy efficient appliances will quickly add up over a few years.

Highly-rated air conditioning units, heating furnaces, water heaters, and kitchen appliances can help save a surprising amount of money with today’s energy efficient standards.

 

 

Real Estate Time Management Tips

real estate time management tips

Here are two real estate time management tips to help take running your real estate business to the next level.

Emails Take A Lot Of Time

There are certain tasks in any business that are affectionately called ‘time sucks‘.

Time sucks are things that, well, take up a lot of time without giving you anything in return.  Like more income, for example.

Email can be a huge time suck in any business, but especially in real estate.  That’s because real estate agents only get paid when a deal is done . . . and not by the hour or on a salary.

Even for correspondence that is time sensitive, checking, sending & receiving emails should be limited to two or three times each day.  Many people schedule their email times for first thing in the morning.  Then again around lunchtime, and toward the end of the day.

Have A Routine & Stick To It

Another good real estate time management tip is to have a routine and stick to it.

Devote a certain amount of time each day – at the same time each day – to tasks such as real estate marketing & prospecting, or client outreach, and administrative work.

Remember, having a successful real estate business isn’t about how many hours you work each day.

It’s about how smart you work!

Three First-Time Home Buying Tips

first time home buying tips

Here are three first-time home buying tips that will go a long way toward enjoying your new home.

These three first-time home buying tips all focus around saving money.  That’s because buying your first home will always, always, always, take more money that you might think!

Down Payment Assistance

Many first-time home buyers think that asking the seller for down payment assistance is an embarrassment.  But smart home buyers think of this as a way of using OPM or other peoples’ money.

This first-time home buying tip works especially well with sellers who have a lot of equity in their home, and with buyers who have few contingencies in their purchase contract.

Closing Cost Credits

This is similar to asking for assistance with the down payment.  It works well with sellers who don’t even have that much equity in their home.

The fees when buying a new home can really add up.  In addition to the normal buyer costs such as doing inspections, there will be fees from the home owner association, title and escrow company, attorneys, and lenders.

Individually these can be small dollar amounts compared to the purchase price of a new home.  Most sellers are quite willing to negotiate a closing cost credit with a qualified home buyer of the house for sale.

Home Updating Escrow Reserve

First-time home buyers can also ask the title company to hold money in reserve for needed repairs.

The funds come from the seller, but are held by an independent third-party – such as the escrow, title company, or an attorney – to directly pay contractor bills.

Any left over money gets returned to the seller.

Other First-Time Home Buying Tips

In addition to getting as much money back from the seller as possible – even in a seller’s market!  First-time home buyers should also:

  • Try not to underestimate the cost of repairing & rehabbing
  • Visit the neighborhood during different times of the day and week
  • Don’t be afraid to renegotiate the purchase contract if any red flags appear during the inspection period

How To Buy A Rental Property Investment

rental property investment

Owning a real estate rental property investment is one of the most time-tested ways to build wealth and generate income.

Here are three things to consider when buying a rental property investment.

A Rental Property Investment Isn’t Your Home

Many beginning real estate investors make the mistake of buying a rental property investment the same way they would buy a home to live in themselves.

They focus more on the amenities-  lush backyard, high-end fixtures & appliances, and a swimming pool – than looking at the property as a business.    True, items like these will attract tenants.  But they will also be more expensive to maintain, repair, and replace when damaged beyond repair.

Experienced rental property real estate investors prefer to buy a basic home with minimal upgrades and amenities.  Doing this allows for a quicker turn between tenants and less expensive repairs when needed.

Go Where The Renters Are

An easy way to determine where to buy a rental property investment is to buy in areas where there are already apartments or smaller multi family dwellings.

While doing this might sound like common sense, it’s surprising how many beginning investors in real estate don’t do this.

Apartment building developers & property managers have already done the heavy lifting.  They’ve figured out where the renters are and what the market rents are for the area.  Rather than reinventing the wheel, savvy smaller rental real estate investors simply adapt to what the big players have already done.

Treat Your Rental Property Investment Like A Business

As a small real estate investor it’s very easy to get caught up in tenant drama.

Remember, the tenant is your customer and not your friend.  You’re providing a nice place for them to live.  In exchange you expect the monthly rent to be paid in full and on time, each and every month, and the property to be well kept.

Experienced real estate investors know that once they allow a tenant to pay the rent late it will quickly become the norm and not the exception.

How To Calculate A CAP Rate

calculate a cap rate

There are two pieces of information that real estate investors need in order to calculate  a CAP rate or Capitalization Rate:

  1. NOI or net operating income of the asset
  2. Sales price or current market value of the asset

CAP rates are useful for comparing the performance of a real estate investment to similar properties in the market, to calculate what a sales price should be based on the property’s NOI, and determining what the net operating income should be based on the CAP rate of a property that’s for sale.

The CAP rate calculation can be used for residential and multifamily property, commercial investments, and even land.

Formula To Calculate A CAP Rate

The formula used in a CAP rate calculation is pretty straightforward:

CAP Rate = NOI / Sales Price

Let’s say we have a small multi family rental property investment that is generating $100,000 in net operating income each year.  The owner decides to sell and lists the apartment building for sale for $2 million.

The CAP rate is: $100,000 NOI / $2,000,000 Sales price = 5% CAP rate

Why Is A CAP Rate Used?

In addition to comparing alternative real estate investments in the same market, the CAP rate formula can also be used for calculating what a sales price should be and in determining what a property’s net operating income should be based on CAP rates for similar properties.

For example, if our apartment building above is listed for sale with an asking price of $2.5 million and market CAP rates for similar properties are 5%, then the property’s NOI should be:

$2.5 million x 5% = $125,000 per year

Based on the capitalization rate calculation the property is over priced compared to its peers.  Now, maybe there’s a good reason for this or maybe not.  That’s up to the buyer and seller to determine.

What Is A Good CAP Rate?

CAP rates for specific asset classes vary from market to market and sometimes even from neighborhood to neighborhood.

A good CAP rate for one investor will be a not so good CAP rate for another investor.  That’s one reason why it’s dangerous to call a CAP rate good or bad in and of itself.

But capitalization rates are useful for quickly comparing one real estate investment to another, and also return on investment for specific asset classes from one market to another.