by Ben

Pros And Advantages Of Leverage In Real Estate Investing

May 25, 2021 in Real Estate Investing

Real estate investors know the importance of using every tool at their disposal in order to get a better return on their investment. One such tool that many investors use to improve their real estate investing portfolio is leverage. Leverage is the use of borrowed money, or debt to buy an investment property. Unlike most investments, real estate doesn’t require you to put up the full amount of the investment on your own. Leveraging an investment or getting the needed funds from a lender allows you to minimize your initial expense while still landing the investment that you’ve decided will give you the best return. There are several reasons to consider leverage if you’re planning your next investment move.

 

Less Initial Money Needed

The biggest benefit to using debt to fund your real estate investment is that you don’t have to come up with the full asking price for the subject property. For instance, if you are interested in investing in a property that costs $150,000, leveraging the property allows you to borrow a portion of the purchase amount or all of it, depending on the lender that you choose and their lending qualifications. If the property you’re investing in needs some work done to get it up to par, leveraging funds allows you to use your available cash for repairs instead of sinking everything into the purchase.

 

Number of Investments

It’s also worth noting that leveraging your real estate investing allows you to invest in more than one property at once. Let’s assume that you borrow that $150,000 that we just talked about. Perhaps you’re looking at multiple investment properties, none of which cost $150,000. If you work with a lender who is willing to loan you that amount, there isn’t any limitations about how many properties you use that money to purchase. You may only have enough cash on hand to purchase one property at a time. Leveraging funds for your investment business enables you to be able to purchase more than one property, generating multiple streams of income at once.

 

Greater Return on Investment (ROI)

The point of any investment, real estate or other, is to maximize your return on investment. Leveraging funds to purchase an investment property allows you to do just that. While it’s easy to assume that an all-cash purchase allows you to make a greater return on investment, it’s important to remember that so much of the money that you make each month from your investment property will simply go to recouping your initial investment. If you get approved for a 20-year mortgage, your monthly payment should be considerably less than the monthly revenue that your property generates. It’s vital that you remember that real estate investing isn’t just about the cold numbers. Instead, success and failure as a real estate investor is about how much money you make off the money that you invested. Leveraging allows you to invest less initial money and your monthly mortgage payment is simply part of your fixed expenses.

 

Diversification Protection

Let’s say for the sake of argument that you picked a bad property. There’s always a chance that a property that seems like a sure thing turns out to be an absolute money pit. If you make an all-cash purchase on a property that turns out to be a bad investment, your funds are essentially stuck in an investment that isn’t providing any sort of a return. If you leverage funds and turn that borrowed money into multiple investment properties, you aren’t saddled with one bad investment that holds all of your money ransom. Succeeding as a real estate investor is all about hedging your bets and making sure that you have at least one successful property to offset an unsuccessful one.

 

Leveraging real estate funds enables people who may not have access to hundreds of thousands of dollars in cash to enter the world of real estate investing. However, even if you do have access to that sort of money, leveraging funds for your real estate investment can serve as a great way to protect your investment and set you up to expand your real estate portfolio much more quickly.

by Ben

Is Out Of State Real Estate Investing For You?

May 23, 2021 in Real Estate Investing

As a real estate investor, you understand that location is everything. Some areas lend themselves to better returns on investment than others, and your success as a real estate investor hinges on finding those areas. If your hometown isn’t conducive to real estate investing, you have two options: either wait the market out and hold off investing until the market shifts or consider investing in out of state real estate. The prospect of investing in properties that are hours away from you can seem daunting to some investors. That’s understandable since it will make it much harder for you to personally oversee your investment. Consider some of these factors to decide whether or not out of state real estate investing is right for you.

Do You Want to Be Active or Passive?

Many investors choose real estate investing because of the opportunity for passive income it provides. Active real estate investors are those who like to be involved in the remodeling or property management aspects of the property they’ve invested in. While there is certainly nothing wrong with taking that approach, out of state investing doesn’t lend itself to active investing. Instead, passive real estate investors generally handle out of state investing better since they are fine with letting contractors, property management companies and other professionals handle the work while they simply sit back and collect their returns. If passive real estate investing sounds good for you, you may be interested in out of state investing.

Consider Similar Areas

Just because you’re looking into an out of state real estate investment doesn’t mean that you have to go into the investment blindly. Researching the area that you’re considering can provide some insight, but there’s also other ways that you can become more informed on your potential investment. Consider investing in an area that is at least somewhat similar to the area that you live in. When you do your research, don’t just look at market trends and recently sold properties. Instead, take a look at age demographics of the area, climate data and other external factors. If you find an area that is similar to your own, you will have a good reference point when looking at out of state properties.

Consider All Your Options

Out of state investing doesn’t have to include buying a residential or commercial property and trying to find a buyer or a tenant for it. In fact, if you’re willing to be a truly passive investor, you can put up some money and then let someone else do all of the work. For instance, REITs are essentially mutual funds where the only thing that the members invest in is real estate. As an investor, you simply put the amount of money that you’re comfortable investing into the REIT and then the REIT handles finding properties, investing, marketing and managing them. There is nothing for you to do other than collect your dividends.

You can also look into real estate syndicates and real estate crowdfunding options. Much like a REIT, both of these options involve multiple investors coming together to pool their money in order to buy an investment property. In a real estate syndicate, the sponsor, or the individual who oversees the investment, is responsible for overseeing the property. Things work pretty similarly in a crowdfunding investment where the person or group who orchestrates the funding is responsible for finding someone to handle the marketing and daily management of the property. This ensures that you can simply invest money and collect a percentage of the profits based on the size of your investment.

Out of state real estate investing can take on various forms. Yes, you can find a property in another state, contact a real estate agent and let them represent you in purchasing a property that you may have never seen. You can also choose to combine your money with other investors and let an established investment firm handle choosing the property and managing it while you get to relax and enjoy the benefits of passive investing. If passive real estate investing seems like a good option for you than out of state real estate investing is a wonderful opportunity. Taking geographic limitations off of your investing means you have access to an almost infinite amount of investment properties.

 

by Ben

How To Hire A Property Management Company

April 27, 2021 in Real Estate Investing

The decision to hire a property management company is one that most landlords will face at some point in time. Maybe you’re new to the world of being a landlord and you’re just not sure about how involved you want to be in the daily operations of the property or perhaps you’ve been managing the rental properties you own for a while now and you simply want to take a step back and earn truly passive income. Whatever your motive for considering a property management company, it’s important that you educate yourself on how to choose one, what questions to ask and what to entrust them with.

Research Your Options

Before you bought your investment property, you spent time studying all of your options. You made a decision based on which property you believed would give you the biggest return on investment. You should view the property management company that you’re going to hire as another investment which requires the same amount of study.

Start by talking to other property owners that you know and find out what property management company they use.

 

So much of property investment is about networking, so use the contacts that you’ve picked up and find out who they’re using to manage their properties. Also, find out information about property management companies they may have used in the past that didn’t pan out. The more information that you have, the more secure your investment will be.

If you want more options or don’t’ have any landlords to ask, you can do your own research online. Run a Google search for property management companies in your area and find the ones that have the best reviews. Spend some time looking at positive and negative reviews and make a list of companies you’re considering.

Shop Around

You don’t have to hire the first property management company that you run across online or through a friend. Make an appointment with all of the property management companies in your area that you’re considering and interview them. Remember, they’re vying for the opportunity to work for you. They only make money if you hire them. Treat every meeting with each property management company like a job interview where you’re gathering information about potential candidates. But now you need to know what questions to ask.

What Fees Do They Charge?

Property management can charge a variety of fees. Management fees, vacancy fees, leasing fees, set up fees and more can lead to you spending a lot of money even if you don’t have tenants in place. Get a clearly explained written copy of any fees that each property management company charges. Remember, your property is an investment and you’re hiring a company to help you protect it. You can’t protect it if you’re spending all of your profits on fees each month.

What Services Do They Offer?

Not every property management company operates the same way. You should have a list of services that you’re expecting from the property management that you choose. If a prospective property management company doesn’t offer many of the services that you need, you can confidently walk away and know that they’re not the right fit for you. The point of hiring a property management company is for you to transition into being a passive real estate investor. If you’re going to be passive, you need a property management company to handle all of the day-to-day details for you.

How Experienced Are They?

While some startup property management companies may be a good choice, you probably don’t want to trust your investment with someone who has never done this before. Ask the companies that you’re interviewing about how many properties they’ve managed in the past and how many they are currently managing. Look for properties that are similar to yours in their portfolio. This ensures that they know how to handle properties similar to yours which gives you the assurance you need.

It can be difficult to relinquish control of your investment property to a property management company, but it can also allow you to enjoy life as a passive real estate investor. Find a reputable company that you can trust and start sitting back and collecting the monthly checks that your property generates.

 

by Ben

How to manage an out of state real estate by yourself

November 25, 2020 in Real Estate Investing

We should begin by clearly understanding the roll (and responsibility) of the property management company with your investment:

  1. Make the property rent ready.
  2. Advertise the property.
  3. Show the property to potential tenants.
  4. Screen the potential tenants.
  5. Sign a contract with the desired tenant.
  6. Collect the deposit, and the monthly rent thereafter.
  7. Respond to tenant maintenance requests for issues with/in the property.
  8. Send a professional service provider to fix the relevant issues.
  9. Inspect the property after the tenant leaves.

And start this cycle all over again.

Now, how much such service should cost you?

  1. Monthly payment of 8%-10% of the gross rent income.
  2. 50%-100% of the first rent check.
  3. 25%-50% of the lease renewals.
  4. In some cases – repairs and turnover will cost more if the management company adds its commission to the cost.

 

These amounts can get up to 15% from the gross income in a good year, and even 20% or more in a bad year. If you calculate the amount from the COC aspect it can get up to 40% of your net income.

The only way you can save that 40% is if you live rather close to the property, and manage it yourself… For most out of state investors this is not relevant of course, and not possible.

 

How can you cut at least half of the cost?

These are some steps that you can take, but the most important – be efficient and organized, so you can be on top of any issue that may come up, avoid unnecessary costs and keep payment schedules on track.

  1. Centralize your investments as much as you can. Invest in one area. It will help you to know the area better and the people you need to create relationships with accordingly.
  2. Boots on the ground – perhaps the most important element of remote-management of your properties. Without reliable guys in that area, managing the properties will be hard and frustrating, almost impossible.
  • Realtor: you will need to develop a solid relationship with a good realtor that knows how to work with rental properties. The realtor’s roll is to take pictures before and after the tenant gets in and out, approve the property is rent-ready and let you know what the property condition is.
  • Handyman – a good handyman is a blessing, you need to find one that you can trust, that can be sent to do small repairs during the year, make the property rent-ready after a tenant moves out, and also refer you to reliable professionals for bigger repairs that he cannot perform (HVAC/roof etc’).
  • Yelp – Yes, Yelp is a very important tool for finding good and reliable professionals. Make sure you let them know you are calling them after you’ve found them on Yelp; it will motivate them to provide you with good service and the needed attention (they care for the good/bad Yelp review that may follow…).

Treat these service providers as your partners. Don’t forget them on holidays and other big occasions. You may not use them often (if at all) in a good year, but in a bad year you may need them, allot. Nurturing such relationships is acute, and these micro-partnerships will prove very valuable when you need to resolve a property issue fast, reliably, and in a good/low cost.

  1. Contract – signing the tenant on a good contract is a must. Each state has different rules and regulations, and you will need to get your hands on good lease agreement. Make sure to enforce any possible condition in the contract, such as late fees, repair responsibilities, smoking, pet damages, and more.
  2. Setup relevant protocols for you and your tenant. For example:

For your tenant:

  • How to contact you.
  • How to open a ticket for a repair in the property.
  • How to pay rent.
  • How to report on any new/other issues.

For you:

  • How to respond to a tenant request for a maintenance issue.
  • Who do I call for each type of issue.
  1. Software – find a good management software to:
  • Collect rent.
  • Send reminders on late payment.
  • Open tickets on issues on the property.
  • Send lease renewals proposition.
  1. Networking – it is very important to network with other investors, wholesalers, realtors and other local professionals. You never know when you’ll need another opinion or advice on an issue you have not experienced yet.

 

A few restrictions with this method:

  1. Start managing yourself when you have more than 2 properties. It will be hard to make people commit to you when you have 1 or two properties and you rarely use their services.
  2. It is hard to do it on class C- properties. It will be more effective on classes A, B and B-, but class C- requires hands-on on the rent payment, late fees, evictions, high turnovers and high maintenance.

 

Real estate is hardly a passive income, even with a property management in place. This is something to consider if you are looking to manage your property yourself. Yes – you will cut some costs, and have more control over spending, but it does consume time and effort, and requires attention.

by Ben

Real estate as a passive investment. A myth.

November 16, 2020 in Real Estate Investing

Social media self-proclaimed real estate gurus keep pitching real estate investments as a passive income path. You invest your money wisely, sit back, and enjoy the cash flow.

But nothing is passive about the real estate investment life.

Starting with the pre-investment due diligence, where you need to; research the desired area, find an available property, get it inspected, shop for a decent mortgage, appraise the property, get a few insurance quotes, and eventually close the investment, to; hire a handyman to get the property rent-ready (or a contractor to renovate if needed), hire a management company, vet some tenants, and hopefully find a good match eventually, sooner than later.

How passive does this sound? And this was only the beginning…

Yes, the checks do start coming in, but in most cases, also a few (if you are lucky, ONLY a few) repair requests and notices every few months. Each repair notice requires that you will approve the repair quote, and it seems that when you take the time to carefully review each request, cheaper and better quotes can be found if you only bother to research for the right service provider a little better than your management company has…

So, so far:

  • Finding the property and investing – not so passive.
  • Renting the property and management – not so passive.

Moving forward to the lease end. When a tenant leaves, you need to have the management company inspect the property, and in most cases approve the needed fixes/renovations. These procedures take time. Time which (to you) costs money, as the property is vacant, mortgage payments, taxes etc’ keep coming in – but the management company, naturally, does not share the same time-pressure you feel. So, you need to push them. Emails, phone calls, texts…

In the meantime, your insurance renewal date just arrived, and your rate ‘surprisingly’  increased, which now requires researching for a new insurance vendor. Again, phone calls, emails, texts… ( This, by the way, seems to be an annual process you cannot avoid)

You found a tenant. Tenant moves in. A year later the cycle repeats.

So, to recap:

  • Finding the property and investing – not so passive.
  • Renting the property and management – not so passive.
  • Lease-end procedures and new tenant process – not so passive.

 

As a ‘bonus’, lets add some occasional scenario to the mix:

Tenant stops paying or pays late – and now you need to keep chasing the property management to make sure they are enforcing the rules they set in place for such scenario. If the tenant eventually pays, great (…) but if not, a long eviction process will start, in which you need to keep nagging to the property management and make sure they keep ‘pushing’, because time is money and you have a mortgage to pay…

To summarize – You need to know that you are in charge, yet not always in control.

Even if you hire the best property management company, you have to maintain overwatch, double verify everything you are being told, check your insurance policy regularly, double check your property management’s decisions and actions, make sure your escrow pays your taxes and insurance, read twice the inspection report and ask questions, make sure the property management is responsive after you approve a repair, and so on.

Your tenant is your client and if he/she are not happy, you will feel the repercussions later on.

I am not try to scare you out of investing in real estate, I just want to let you know that noting is really passive about it. It is not a full time job, or even a part time job, but it will require attention more often than not.

 

by Ben

My 5 reasons why Real Estate is a great investment

September 23, 2020 in Real Estate Investing

Different people have different, multiple reasons why investing in real estate is the right thing for them.

On more than one occasion I have been asked by friends and family – why real estate?

  1. Cash flow

Good old cash flow… for me, that is the biggest advantage. The recurring monthly income I get from my rentals (after all expenses of course, such as taxes, insurance, mortgage payment, management etc’) is usually between 7%-10% of my investment, which is for me, a great monthly income.

  1. Appreciation

Historically, real estate appreciates 3%-4% per year. So, for example, if you purchased a $250,000 property 30 years ago, in today’s market it would be worth more than $750,000, without you doing anything except holding the property (and don’t forget, you need to add that to 30 years of cash flow).

  1. Leverage

You can start with almost no money at hand. With only 3%-5% down payment required from First-Time Homebuyers, you can buy a property, live in it for 2 years and buy another one. For investment property you will need 20%-25% down payment, but that too, provides you with good leverage ratio.

  1. Tax benefits

Investing in real estate allows you to take advantage of multiple tax benefit. I will refer to the 3 most clear and easy to explain benefits:

  • Deductions, you need to look at your rental as a small business, where rent is the income (sales) and everything else is an expense (so property tax, insurance, mortgage interest, property management fees, repairs, capital improvement, advertising, travel and all related costs  will be counted as expenses).
  • Depreciation – you’re allowed to depreciate a residential property value for 27.5 years. Please note that you can depreciate only the property not the land, so the overall number would be your Property cost – land cost / 27.5 years.
  • 1031 exchanges – you can sell a property after few years and thereby avoiding capital gains or depreciation recapture on the sale of the property, if you buy a more expensive property during a limited time period after you sold the property.
  1. You can manage your investment yourself
  • In most types of investments, you cannot control the results/outcome, and your investments’ destiny is simply not in your hands. In real estate investments you can limit your risks, optimize your investment and expenses, and thus gain more control of your own destiny.
  • Starting from the location of the investment, if you have the stomach for high risk you will buy in a ‘C neighborhood’, and get higher returns, but with more potential tenant issues. On the other hand, if you prefer a more solid investment, you will choose a ‘B neighborhood’ property, and get more solid return. This is a perfect example of how your preferences and actions will reflect on your return (its start from how you maintain the property, how good is your screening process, do you manage it yourself or partner with the right property management company etc’)

 

These are not tax recommendations and I am not a tax expert. I do recommend talking with a tax professional before investing in any property.

by Ben

How I managed to increase my real estate cash flow by $1,092.56 per month in the uncertain times of Covid-19.

September 9, 2020 in Real Estate Investing

I have a small portfolio of buy-and-hold properties (9 properties/ 12 unites). One of my goals for 2020 was to buy 2 more properties and increase my cash flow by $600 per month ($300 per property). Then came along Covid-19, and much like many other investors, I was forced to put my purchase plans on hold.

However, determined to better my numbers, I have done some (major) optimization to my portfolio and succeeded to increase my cash flow by $1,092.56 per month. Here is what I’ve done:

A few months after Covid-19 started I realized that it is here to stay and not going anywhere, at least not any time soon. I started looking for a new investment (Covid or not, I have my goals…), and after a few months on the fence I’ve decided that I need to take an action already, some action, any action – to increase my monthly cash flow. As prices are too high at the moment, and thus purchasing a new property is off the table, I have decided to invest time and effort in analyzing my existing portfolio and optimizing it to the maximum possible.

I started off by reviewing my investment tracking spreadsheet. I know most, if not all of the numbers there by heart. But I also know that 4 years into the process there must be some loopholes there, that I can exploit to optimize cash flow. There surely is money to be saved in the process.

After spotting a few potential saving-opportunities there, I started making some phone calls, and applying some changes;

  • I talked with my 3 insurance brokers and optimized my insurance policies (for example, changing my umbrella liability insurance to a commercial one saved me $632 annually)
  • I changed insurance companies for 2 of my properties and saved $112 and $230 annually.
  • This was also a good time and opportunity for me to change management company in my 4plex. When I reviewed the numbers, I realized that my units are vacant too long between tenants and replacing a tenant costs me too much compared to my other properties (I was aware of that but never had the time to deal with it). I consolidated the 4plex and other 5 properties under another property management company that I’ve been working with and got a management fee ‘bulk’ discount for those 6 properties (9 unites). This change has saved me $97 per month.
  • We have succeeded to increase some rents and add another $180 per month.

Now to where the big money is;

I made a call to my mortgage broker. On a side note, this amazing woman was the only one willing to make an effort for me when I got started back in the day, with low credit score and no credit history. She worked her way through to some fair mortgage terms for me, despite all obstacles! So now, 4 years in, with a good credit score and perfect payment history, I figured she can work some term-miracles to my loans.

We ran the numbers and realized that I can save a lot with the current rates. I do have to mention that I am not a big fan of refinance. I don’t like the idea of starting my 30 years loan all over again, increasing my debt etc’. but – with the monthly savings goal in mind, I decided to do it.

(this is the place to mention – no matter what they tell you, refinance costs money! Your debt grows, and you must take it into consideration)

So, we decided to refinance my 4plex’s $400k loan, (lots of meat on the bone) and I saved $307 per month in mortgage payment + my principle payment is now higher 😊

We continued with 4 single family properties refinances and I saved on each one of them $110 per month in average.

I decided not to refinance 4 other properties as the numbers for those specifically would not be good enough.

Reading this article you might think this was a great year. But it has not. I had more turnovers this year than usual, and more tenants struggle with rent payments than any time in the past (even one with more than $5,000 in debt that I don’t see how I will be able to collect and I cannot evict him yet).

 

Whether you have 1 property or 10, you too can optimize your cash flow.

Run your numbers, check the rates, and start making some calls.

If it is not the time to buy a new investment property, it is definitely the time to optimize current ones!

 

The numbers summarized

  • Umbrella insurance (change type of umbrella): $632 a year or $52.66 per month
  • Dwelling insurance (getting better quotes and changing companies) $342 a year or $28.50 per month
  • Management company (1% discount on management fee for 9 unites) $97 per month
  • Rent increase (upon turn over) $180 per month less management $167.4 per month
  • 4plex refinance saving: $307 per month
  • 4 single family refinances saving: $97 + $117+ $130 +96 = $440

Total monthly saving: $1,092.56