What to Consider when Buying a Single or Multifamily Investment?

Many first time investors have the idea that their first investment should be a single family home due to the cost of entry and ease of management, however, this may not always be the best path to go down. One of the main issues that you have to consider is the fact that if the single family homes goes vacant you will have to cover the entire mortgage until you find a new renter, now if you have a duplex, triplex or fourplex that mortgage will be spread out across more units giving you some cash flow to help with the mortgage.

Another reason the first time investors tend to like the single family homes is that you can put a lot less down then you can on a commercial loan and the residential loan can be amortized out over the life of the loan. Residential loans can be on properties that have 4 units or less and can be acquired with as little 5% down, however, commercial loans are on 5 units or more will require at least 25% down and you will need to show a business plan plus as well as management experience and cash flow. When shopping for a commercial loan, be prepared to answer a lot of background questions regarding the property. Some of these questions include:

Who pays the utilities?

What types of maintenance are required?

Numerous questions regarding cash flow will also be asked. Commercial mortgage borrowers should be prepared to provide proof of business revenue and profits as well as a detailed plan for how the commercial property will generate enough income.

Where an investment in a residential property can be attractive is in the maintenance costs, you will have only one tenant in stead of multiple so it makes sense that your costs should be less providing you have a good tenant; however, multifamily properties typically afford synergies of scale (one yard, roof, etc…) so your overall cost per unit vs. rent will be lower.

When deciding on which direction to go with your first investment really look at your appetite for risk as having a home go vacant for a few months and having to cover all the expenses on your investment can be a big drain on your savings.

Top 5 Reasons To Invest In Rental Properties

They say that more millionaires made their money through real estate then through any other means. There are of course many avenues for investing in real estate, but I’ve always preferred rental properties for various reasons: Real estate investing can be simple and straight forward to get started

- The pathway to investing in real estate can be quite simple, you can start talking to experienced investors, read a few of the thousands of books available to learn the basics.

Once you have the down payment saved and an understanding of property management (or hire a professional to help you manage) you can start.

• Ability to invest with leverage- By using leverage you can spread your investment wider and be more diversified. Also, if interest rates are lower than what the current return on the property is, you will effectively be borrowing money for less than what you make on it, thus increasing your return.

• Utilizing your connections is a good investment- Utilizing your connections in the real estate industry is key to finding the right investments, in some other industries it might be considered insider trading.

• Stability and Predictability- The real estate market is one of the more stable and predictable investments you can make, do the proper due diligence and manage the assets with care and you will find that it will end up better than most other investments.

• Multiple ways to grow your investment- With a real estate investment you have multiple ways to help your money grow, rental revenue, tax deductions and appreciation.

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Successful Real Estate Investors Know These Pitfalls

Not Giving It 100%

If you feel you are ready for your first real estate investment and you think it will be an easy source of passive income then I would recommend you sit this one out. There are certain asset classes such as Single Tenant Net Lease investments that have less risk, but most other investments come with a degree of risk and are definitely in need of supervision on a regular basis.

Your first investment is most likely the one that will set you on a solid path so if you do not give it 100% you may end up missing out on the future opportunity to really create some satisfying wealth

Knowing The Numbers

Over the years I have seen new Investors focus their attention on numbers that are less critical to your investing success, you must know what numbers are the true outliers to making a critical investment decision. Here’s some examples.

1) Rent Ratio - The rent ratio is calculated by dividing the monthly rent by total cost of the property (purchase price + financing costs + rehab costs);

2) Cap Rate - Cap Rate = Net Operating Income / Total Cost – This will show you what your investment will generate if you paid cash. Also, a lower cap rate compared to similar properties in the same asset class, with similar rent ratios, may show you that there are areas to decrease your expenses, and thus increase your income.

3) Cash on Cash Return -Cash on Cash Return = Pre-Tax Cash Flow / Total Cash Invested – This is the return you realize immediately on the cash invested. It does not take into account taxes or appreciation that you may receive. You should recalculate this as your investment hold time grows, so that you can take into account the appreciation of the property, so that you are maximizing your returns. It can show you when it is time to sell.

Underestimating Rehab Costs

If you buy an asset that is in need of a rehab you must know how much it’s going to cost, you will need to get multiple bids during your due diligence phase and when you receive your bids you will want to go item by item to compare.

When doing the rehab make sure you do it to your market, you don’t want to put cheap fixtures, appliances or flooring in a high end property and you don’t want to waste money on really high end fixtures, appliances and flooring on a mid level property as you won’t get the return back. Also remember to calculate rehab and capital expenditure costs into your cash investment/return, unless you are financing all of it.

Needed More Experience

This one catches many new investors and it’s also why I highly recommend you mentor with someone that is doing what you want to do before you go it alone.

If you are not confident that you know all the ins and outs maybe consider partnering with an experienced investor, buying your first investment and having to be responsible for tenants is a whole new ball game. I am a firm believer in jumping in the deep in and figuring it out but with a real estate investment there are many variables that can cost you thousand of dollars if you don’t know what to look for.

10 Questions a Landlord Should Ask When Interviewing Management Companies

Finding a reputable property management company can be quite daunting as it is difficult to really know how well the company is run. We have put together a list of items you should ask when interviewing a potential property management company.

1. How long have they been in business?

You want to associate yourself with an established company, as this speaks to a company’s length of service in the community.

2. Do they manage other assets in your area?

A property management company should have a presence in your local area, managing properties that are in the same asset class as your property. For example, if you own an apartment building in West LA, you should look for companies that manage apartments in West LA. The properties they manage may be available on the webpage, if not, ask this question while interviewing them in your initial conversation over the phone.

3. Are they carrying the proper insurance coverages?

The company should at a minimum carry general liability and workers compensation for their business. In addition, it is always wise to look for a company that also carries Errors and Omissions insurance.

4. Do they have their own experienced maintenance team or do they have to hire maintenance companies?

Many times smaller property management companies will outsource their maintenance. In addition to asking if there is an additional service charge for this, also ask how the management company vets their vendors (do all of their vendors carry liability insurance, are licensed, and have workers compensation insurance).

5. Do they have emergency services?

The ability for a property management company to handle every property incident, particularly emergencies, is crucial. At any time, day or night, a property manager must be equipped to handle emergencies that occur on your property. Communication is key in any tenant / landlord- management relationship – a toll-free number that is answered by a human 24/7 should be a mandatory service provided by any reputable management company.

6. What kind of reporting do they offer the property owner?

Are the reports sent monthly, or do the owners have online access? If the management company offers online access to the monthly reports, do they charge extra for this?

7. How do they set up the bank accounts for your property and will you have access?

Is there one trust account, or do they offer individual property accounts for each of their clients?

8. How often will they visit your property?

You want to make sure your property maintains its great shape. A world-class management company will ensure the grass is being cut, maintenance requests are fulfilled, and property regulations are followed. Visiting the property on a regular basis will ensure all maintenance work has been completed to the highest quality, as well as check to see that any other issues are addressed.

9. How detailed is their tenant screening process?

A reputable management company should thoroughly screen their prospective tenants, running a background and credit check, as well as looking for any prior violations committed on other apartment properties, available with Incident Reporting from providers such as theRRD.

10. Do they keep up to date with current laws?

Different municipalities have different laws related to rental units. Are they familiar with the laws, do they update their information/forms to comply with these laws, and are they up to date on any changes in the labor laws?