Benefits of Real Estate Investing

I’ve written countless times about the 4 Benefits of Real Estate Investing.  And while 4 sounds easy and cool, there are many more.  Some of the more benign benefits of REI are;

• Helping to improve/stabilize a neighborhood’s value and livability.
• Providing affordable housing to worthy tenants.
• Sweat-equity.
• Teaching your kids how to work with varying people for a long term financial goal.

Let me explain a little about why I’m writing this.  I have a real estate investor client from Vancouver, BC who bought a relatively inexpensive rental property here in the Kansas City area.  The neighborhood isn’t that good, but not that bad either.  Anyway, we bought the dump and then replaced all the outside siding, fixed the rotted fascia boards and gave it a fresh coat of paint.  In addition we cleaned up the yard and rehabbed the inside.

So I’m over there the other day getting ready to rent the property and a lady comes out from across the street and insists on giving me a hug.

“Thank you for making our neighborhood look better!”

That makes you feel kinda good, you know?  And we already have a few applications on the property to go through.

Commercial Real Estate Listings

You know, I’m continually amazed at how backwards our commercial real estate agent brethren are.  Oh, don’t get me wrong.  In some ways they are more advanced.  Generally, they are far more professional and actually educated about real estate.  At least their part of real estate.  But in others, it’s just so stupid.

Take a central place to shop for properties, for example.  Residential real estate agents all over the country have access to a local MLS that tells them, almost literally, everything!  Commercial?  It’s like the listings are a mystery to be discovered.  A real challenge to spend your $2,000,000.

Oh, sure, there is LoopNet and CoStar and Xceligent.  And then there are the countless hundreds of poorly SEO’d commercial real estate websites to search through.  But not a single clearinghouse for any given metropolitan area.  Isn’t there somebody, anybody, with the juice to get this done?

Multiple Offers…Multiple Interest

The Kansas City real estate market is strangely hot right now.  In several price pockets.  In the lower priced investment units, between $20,000 – $60,000, we are getting in to multiple offer situations every week.  I’m told by my brother realtors here in Olathe that “regular” real estate is flying off the shelves in several price points, including the bell curve homes ($160,000 – $225,000 here in JoCo) and $325,000 – $400,000 in Blue Valley specifically.

I suspect much of this is the annual “Spring bounce” that we all love.  Let’s see how the Dog Days of Summer go as the next big election draws nearer.

Bank of America Does It Again!

I wish I could tell you, the American tax payer and/or Bank of America shareholder, that this is a unique story in my past…but I cannot.  The following is sadly true and all too common.

A house came on the market for sale in Independence, MO. Yes, it was new and it didn’t have any restrictions barring real estate investors from bidding early.  The asking price?  $45,000.  We offered $40,000 with a 15 day cash close.  BOA stood firm and would only accept $45,000.  We passed.

Fast forward to last Thursday (34 days later) when BOA dropped the price to $39,900 and had the listing agent call us to see if we would re-bid. We did.  This time $35,000.  And it looks like they are going to take it.

So let’s get this straight.  They are going to close the a month+ later for $5,o00 less.  Heck of a business decision, wouldn’t you say?

Always Read the Addenda

Buying REO property from banks and Fannie and HUD is much different than buying homes from Joe & Sally Homeowner.  First, the condition is usually much less.  Second, you’ll be amazed at the extra paperwork!  Usually 20-40 pages of additional addenda that have to be culled over.  Some of the items you will find in there that will affect you;

• The over-priced re-key charge for crappy locks that you will throw away as soon as the rehab is done.
• The provision that says you cannot resell for 60 or 90 days.
• The per diem fee if you don’t close on time.

And of course pay attention to your sales price, earnest money and closing dates.  Sometimes they change them in that tiny type and if you are not paying attention, well….

The Change-Over

Whenever you buy a tenant occupied rental property there are challenges to be had.   Most tenants, and I do mean at least 90%, are good and honest and ethical.  They don’t lie about to whom the appliances belong and they don’t make up stories about how rent is paid in the past.

But…

There are those tenants that just can’t seem to to wrap their head around “the right thing to do”.  They will tell you the refrigerator belongs to them and that they paid the “other owner” rent already and that they had a larger deposit than they actually did.  So it’s very important to you, the investment property buyer, to get all of these issued clarified during the escrow period if at all possible.

Here are some items I would include in my contract;

• Rent roll.
• Delinquency roll.
• List of Security Deposits.
• Personal Property inventory.
• Estoppel Certificate.

Make sure  your would-be tenants don’t think they have one lease when you think the lease terms are different.  A common problem during any investment property turnover.

 

Rental Property…

Owning rental property is challenging and rewarding.  But it’s also not for the feint of heart.    On the one hand you can get better returns in real estate than you can with many other investment vehicles.  On the other hand, just like any investment, there can be great lows to go along with the great highs.  How can you avoid the lows?

First, know what you are getting in to.  Each rental income range has it’s pluses and minuses.  Vacancies can be longer on the higher end but payment, most times, more stable.  When empty that’s a harder hit to your wallet. Newer properties require less upkeep/maintenance than older properties but that in turn cuts in to your bottom line on a monthly basis. So many things to think about and trade-off for.

Second, avoid functional obsolescence by keeping your property up to date as the months and years roll by.  Little hits here and there keep the property looking better and the tenants happier.  Happy tenants don’t leave and probably take care of the investment house better.  And in the long run, trust me on this, it’s less expensive.

Lastly, SAVE!  Keep a couple thousand in your reserves.  Maybe that’s overstating it if you own the rental property free and clear.  But if you have a mortgage I would recommend always having access to about $1,500 for any emergency repair (very, very, very seldom will you need that much) and at least 90 days worth of mortgage payments.  That should ride out 99% of the storms out there.  Don’t have quite that much but itching to pull the trigger?  Delay.  My best advice to you.