Read This Before Getting in the Rental Business

Repairs to HouseYears ago I had a conversation with a friend about some repairs on one of his rentals.  It went something like this:

Me: “Brett, I have some bad news today.  The garage door on one of your rental units warped and fell off its hinges.  I had a professional check it out, and they said it was beyond saving.  It will cost about $700 to replace.”

Brett: “That is too bad.  You know how to stop that from happening, right?”

Me: “How is that?”

Brett: “Get out of the rental business.”

The phrase, “get out of the rental business,” is a common joke amongst many of us who have been in the business long enough.  We know that there is only one way to stop many of the expenditures of owning rental property: never own it in the first place.  Otherwise, we take expenditures as a fact of life (as in any business).  Once you learn to handle them, this can become a very rewarding investment.

But here is the problem that I see too often: not enough people are told about the realistic expectations of owning rental property.  There is a myth going around that once you have the money to buy real estate, you can just sit back and watch the money come in.  It isn’t as easy as that.

Let’s face it; there are a lot of things that can go wrong with a rental unit:

–       Obsolescence (problems arising from a house getting older):

  • Roof starts leaking
  • Water Heater stops working
  • Toilet, Window, Faucet, HVAC problems, and more

–       Vacancy and Collection Loss

–       Tenant can mistreat the property

  • Stains in carpet
  • Uncleanliness
  • Unkept Yards
  • And more

–       Non-Payment of Rent and Eviction Lawsuits

You get the idea.  No matter how hard we try to prevent these things from happening, there is no way to stop all of them.  A good application process can weed out the really bad tenants, and a good insurance policy can stop a lot of major bills, but there are still expenditures that come about through owning a rental unit.

As a property manager, I feel like it is my duty to let owners know of these problems.  If you are thinking about getting in the rental business, but haven’t heard about the risks of this business, contact me and I can help explain it to you.  If you are in the rental business, but were never told of the risks beforehand, we can help you out as well.

I love the rental business; it is where I put the majority of my money.  If I didn’t think that it could work, I would have gotten out a long time ago.  In writing this post, I am in no way demeaning the thought of owning rental units; I just want every owner to be prepared for the business.

So here is the bottom line… owning rental properties can be a great investment, but it also carries much risk.  We, as a property management company, will do all we can to lower the cost of a rental unit while increasing the revenue.  Our presence can reduce much of the risk, but we cannot stop bad things from happening.  It is up to the owners to know how much they can risk.

Therefore, if you contact Loewen Clovis Realty to learn about our property management services, or to learn how to invest in rentals, we will not steer clear of the fact that the rental business is tough.  We will give you the full impression of the pros and the cons of the business.  By doing so, we hope that you get a realistic view of the business so that you can properly prepare.  With enough foresight and preparation, rentals can be a great addition to your portfolio.

Are Foreclosures a Great Investment?

House in ForeclosureThere has been a lot of talk about investing in foreclosures over the last several years.  A lot of this talk is because foreclosed homes have increased dramatically around the country and many people think that there is easy profit in them.  The truth is that while a good deal may come available, there is a lot of risk in foreclosures, and only experienced investors should be purchasing them from the courthouse steps.

Before we begin, I want to clarify that this post only deals with foreclosures being bought AT AUCTION.  This does not deal with pre-foreclosures or OREO’s (foreclosed homes now owned by the lending institution).

Here are the 5 things that most consumers need to know about buying a foreclosure at auction (typically the courthouse steps)…

1. Buying foreclosed homes at auction requires all cash.

This rule alone will make foreclosure investing nearly impossible for most people.  In order to buy a foreclosed home at auction, you will need to pay the full amount of money (most likely a cashier’s check) on the spot, or within hours of the auction.  There is no mortgage process.  You either have the money or you don’t.

2. The previous owners have 30-days to redeem the house.

In New Mexico, there is a 30-day redemption period on foreclosed homes after auction.  This means that if the previous owner is able to come up with the money to buy the house back, they have the right to do it within 30 days after the auction.  The investor who bought the home would get all of their purchase money back, but they would not be reimbursed for any work done on the property.  Therefore, the general rule of thumb is to not do any work on the house within 30 days of buying it at auction, or you risk losing anything you changed.

3. There is no guarantee on a clear title to the property.

When an investor buys a house on the courthouse steps, they are issued a “Special Master’s Deed”.  This is a very basic deed which doesn’t guarantee clear title to the property.  So while many liens are usually wiped out in a foreclosure sale, some liens could still exist and remain attached to the property.  If the buyers aren’t aware of these liens, they could be in for an expensive surprise.  Therefore, foreclosures can be very risky if the proper title research is not done.

Also, since many foreclosed homes are pulled off the auction track at the last minute, it can be costly to pay for title work on every house.  For this reason, many investors often do their own title work.  Yet another reason why foreclosures are usually bought by experienced investors and not the general public.

4. Foreclosed homes are often bought without a proper inspection

Rarely does a buyer of a foreclosed home get the chance to do a proper inspection of the property.  In fact, most of them are not even able to see the inside of the house until after they have bought it.  The reason is because few default owners allow prospective buyers to snoop around their house while they are in the process of foreclosure.  And by the way, don’t expect someone who is being foreclosed on to leave the place in good condition.

5. Foreclosures can often require eviction lawsuits

Many foreclosed homes are still occupied by the default home owners after the auction.  Often the new buyers of the house must evict the previous homeowners.  This requires more money, time, and knowledge of the law.  Let’s not forget the amount of damage that the previous homeowners may do on their way out.

Conclusion

I want to make it quite clear that foreclosed homes are usually only bought by experienced investors due to the riskiness of their nature… all cash purchase, little to no inspections, and possible title conflicts.  Regular home owners should tread very lightly in this area.  If not, they can stand to lose a lot of money from not being prepared.  This is contrary to what many “get-rich-quick-books” will tell you, but it is something that you need to know.

Photo Credit: “Sign of the Times – Foreclosure” by JefferyTurner on Flickr.  CC Licensed.

The 4 Resources Needed to Invest in Real Estate

Over the last decade or more, it seems like there have been a lot of real estate investment books, TV shows, infomercials, and seminars talking about how much money can be made in real estate.  While there is money to be made in real estate, it may not be as easy as you think.  Many of these shows and books usually have a creative way to make money, but most of those creative strategies are very risky, take advantage of others, or are too time-intensive to be worthwhile.

If you want to make money investing in real estate, your strategy is heavily dependent upon these four resources:

1. Cash & Credit
2. Knowledge
3. Time
4. Expertise

Cash & Credit

If you do not have a lot of cash, your investment opportunities will be limited.  Most financial institutions will not lend money for investment property without at least 20% down payment.  Majority of auction strategies, such as buying foreclosures, require all cash. And while many real estate “gurus’ say that you can invest in real estate with no cash or credit, they are often wrong.

If you are really serious about investing in real estate, start saving up your money.  Real estate can cost quite a bit compared to alternative investments such as stocks & bonds.  At the time of this writing, average home prices in Clovis, NM are $139,000.  A 20% down payment is $27,800.

As my professor used to say, “Cash is King.”

Knowledge

If you want to invest in real estate, there are a lot of things to be knowledgeable about.  For starters, you will need to know the law.  Owning property brings with it a lot of legal responsibility.  If you own rental units, you will need to know what the law says about landlord-tenant relations.  There are a lot of myths about what you can get away with as a property owner… just because you think that you can lock out a tenant who owes you money doesn’t mean that you have legal permission to do it.

Other areas where you may need to be knowledgeable are finance, property maintenance, property management, and taxes.  Real estate can often be complicated, so you will need to have the right connections and knowledge to be able to handle the situations thrown at you.

Time

Time can often be an area that beginning investors don’t think about.  You will want to make sure that you have enough time to handle the tasks that are involved in investing.  If your strategy is to rehab houses, this is a very time intensive strategy.  If you invest in rental houses, they still require time to manage, maintain, collect rent, and more.  If your schedule makes it hard to do some of these tasks, it may be worth looking into a more passive investment.

Even if you have the time to be a good investor, it doesn’t always mean that it is worth your time.  For instance, if you can make $20 an hour on a side job, and the profit you make investing only brings in $10 an hour, your time is still better off working the $20 an hour job.  Few investors actually pay attention to the amount of time involved; all the time it takes to search, buy, market, manage, and maintain an investment property may be more than it is worth per hour.

Many big investors do well because they take advantage of economies of scale.  It often takes the same amount of effort to manage 10 houses as it does 3, so it works for them. It may be hard to make it worth it if you only have a couple of investment properties.  So, make sure to analyze the time it takes and whether it is economical.

 Expertise

Another resource to take into consideration is your expertise.  Many investors started making good money in real estate because they have a skill that they could do themselves.  For instance, someone in construction could rehab a house a lot cheaper than someone who isn’t.  Someone who is good at managing rental units can avoid the cost of hiring a property manager.  You get the idea.  The more hands-on you can get with your investment property, the less money you will spend to hire others.

You won’t make much money if you get a large loan, pay contractors to fix everything, and hire a property manager to oversee your investments, as there is not much left over for yourself.  Make sure to take into account the expertise required to invest, and exploit the areas that you can do yourself.

Photo Credit: Money” by PT Money on Flickr.