InvestorLoft Real Estate Investing Blog

Is it time to look for investment property beyond your own backyard?

The Wall Street Journal reported that July showed a 9.6% rise in new home sales, sealing the deal on a fourth month of a faster pace in the housing industry.

Is it cause for panic?

Have we missed the boat if we haven’t yet bought?

We don’t think so.

While business may be picking up across the residential real estate sector, there are plenty of deals to be had throughout the U.S. You just have to be willing to do the math and think beyond county or state lines.

If your own backyard is on the upswing and prices are picking up pace, why not consider shopping outside your local market? If there’s a rental property in a prime location with low vacancy rates (throw in turnkey to boot), does it make sense to keep dollars that could be working for you at bay because you can’t do a drive-by on your investment on a Saturday morning? For the do-it-yourself landlord, yes. Managing property yourself beyond state lines is, without a doubt, a task. But if you’re going to hire a property manager and prefer to leave the day-to-day to someone else, what does it really matter where you make your investment?

If you’re going to shop beyond your backyard for rental property or other investment property, here are some things to take into consideration:

• Property Management: for rental holdings beyond your backyard, it’s imperative. Why burden family with the task when you can keep the Thanksgiving table a friendly place to be by outsourcing to the pros?
• Vacancy Rates: do your research (and a property management firm can help greatly). Don’t get stuck with a great price on a property that will be vacant for 3 to 4 months out of the year.
• Know the Neighborhood: is it prone to floods? Hurricanes? Blizzards? What’s the average rent rate in the area for similar properties.
• Extra Expenses: don’t forget to ask about things like property taxes and HOAs.

Use InvestorLoft’s PropScout Investment Property Search Engine to begin the search beyond your backyard. What’s available in Fresno? Virginia Beach? Albuquerque? Las Vegas? Take a wider search for a spin and see what you might be missing.

How long are you willing to wait for a tenant?

Your rental home is sitting vacant and you’re left paying the tab on the mortgage and everything else that comes along. Sure, you expected a month or two of vacancy every year, but it’s still empty! Whether houses surrounding yours are in the same boat or getting snapped-up off Craigslist like $20 bicycles, there are certain steps you can take to drastically increase your property views and lower the likelihood of longer than necessary vacancy periods.

Photos. Blurry doesn’t cut it. And if you don’t have photos on your listing, that’s even worse. Photos are the difference between lookers and renters. Take the time to get some great photos of your rental property. Big backyard for dogs? Take a picture. Hardwood floors? Take a picture. New appliances? Take a picture!

Incentives. If your rental property has been vacant more than 45 days, it’s likely you’re at the threshold of your estimated vacancy rate. It’s time to get creative, and that’s where incentives come in. What are you willing to do in order to get a tenant in place? One month free rent, utilities paid for first month, pick up the water bill, free lawn maintenance, new ceiling fans, a brand-new garage door opener, or option to renew at 2^nd year for same rate all make enticing offers for prospective tenants.

Be a Craigslist Snoop. If you’re a self-managing landlord or find that your property management company is missing the boat with securing tenants for your rental property, start snooping on your own. Visit Craigslist and enter your zip code in the rentals section and see what your neighboring homes/apartments/condos/duplexes have that you don’t. You can also see how you compare to your neighboring rentals and whether you’ve got some work to do to be competitive or if yours really is the nicest property on the block. There’s nothing wrong with being nosey!

As big believers in quantitative data, InvestorLoft consistently tracks the numbers behind our site’s listings. We want our members to have access to the most timely data possible to help with their investment property purchase decisions, so we’ll be publishing quarterly results like those in this blog. Forbes.com and Forbes Magazine recently utilized our data in their article The Landlord Game, and we’re now passing on an enhanced version of that data to you! The following numbers were derived by analyzing all of the listings on InvestorLoft and then crunching those numbers a few different ways and under different scenarios (varying down payment amounts, types of residence, etc.).

Note on Cap Rate calculations:
The following is the method by which our cap rate calculations have been derived:

CR = ((income – expNotMtg)/PP)*100)
Cap Rate = ((income less expenses not including mortgage)/Purchase Price)*100

All results were multiplied by 90% to account for the following variances and arrive at more conservative figures:

Rent:

• Seller entered rent as the first value. If there is none, then we used median rent derived from between 1-5 miles averages.

Expenses:

• Some listings do not have HOA or taxes – the system does not currently estimate these numbers, so the cap rate would be very high in that case. Thus, we estimate numbers for insurance fees, and property management (based on the rent val) in the expenses.

Top Cities Nationwide for Cap Rate – National Totals
(includes both single-family and condo/town homes – multifamily excluded)

Top Cities Nationwide for Cap Rate – Single Family

Top Cities Nationwide for Cap Rate – Condo/Town home

Top Cities Nationwide for Cash Flow – National Totals
(sorted assuming 30% down payment)

Top Cities Nationwide for Cash Flow - Single Family
(sorted assuming 30% down payment)

Top Cities Nationwide for Cash Flow - Condo/Town home
(sorted assuming 30% down payment)

Share this post with your clients and colleagues and look for our Q3 data to be released in October.

Looking for rental property?

So, you’re thinking about getting into investment property. If that’s the case, there are a few basic questions you need to ask yourself before you get started. The first one is simple: are you most interested in appreciation on the property or cash flow? If your answer is cash flow, read on.

The concept behind cash flow properties is simple: take in more in rent than you spend to own the property. There is no getting around the fact that, in order to purchase a property that is going to generate cash in your pocket every month, you’re going to have to look at a lot of places and do a lot of research. You could go take a seminar from a “guru” who will tell you that you can get property that generates tons of cash for no money down to make you rich. If this the case, don’t you think he would be running around buying properties instead of giving seminars? Save that money for your down payment.

First, you have to decide what kind of property you want to buy. If you want to enter the rental market game for as little money as possible, mobile homes are worth a look. However, you should keep in mind this isn’t going to yield the most stable pool of renters. Maybe you’ve found a house or condo that you want to rent for a few years then move into when your kids are all off to college. Do you want a single-family detached home, a few condos or town homes, or a multi-unit building? Once you’ve weighed the different options and decided, it’s time to get busy with your research.

Who’s going to manage the property? If you are going to use a property management service, the property can essentially be anywhere. This might be an option if you live in an area with a unstable renter base, for instance, such as if industry is leaving the area and taking jobs with it. If you are going to save money and manage the property yourself, your purchase should probably be local … and you have to be honest with yourself as to whether you can really handle it. If you are a busy executive that works long hours, you may be able to handle one or two properties, but if you add any more you may rethink it. If you’re buying several units and your research shows that you can make a living off the cash, you can do it full time. But don’t underestimate the rigors of property management. When a tenant’s toilet breaks, she’s going to want it fixed today, NOT when you get back from vacation. Weigh the cost benefits. Is the standard 8-10% property management fee worth you having both the benefit of monthly cash flow AND your freedom?

There is usually going to be a trade-off between appreciation and cash flow. An executive home in a nice neighborhood may appreciate rapidly but not generate as much money per month because of the higher mortgage. Conversely, multi-unit structures that generate a lot of rental income every month may not be in the nicest part of town, and therefore appreciate less. And remember the lessons learned from recent market cycles: appreciation is never guaranteed.

Once you’ve decided what you’re going to buy, partner with a real estate agent that specializes in rental and income property. Insist upon seeing the records for any property for at least the past two years before you buy. Look at capital expenditures, rental income, maintenance costs, association fees and any other expenses. A positive balance sheet should ideally be accompanied by reliable, existing tenants.

Investment property can be an excellent way to make money every month from rental income, but don’t kid yourself. There are a lot of factors to consider. Are you cut out to be a landlord? Are you in a position to weather inevitable vacancy rates? Are you able to financially handle major problems like a new HVAC unit or replacing a roof? If so, don’t skimp on the research: start building your rental property portfolio the right way. Patient research, due diligence, the assistance of an experienced local real estate professional are all key to your success. It’s more than just finding what looks like a great buy and closing the sale: it’s everything beyond the sale that determines the cash flow potential of a rental.

Rental Property Goes Green! Tips for Real Estate Investors

There’s the popular slogan in modern marketing campaigns: “Green is the new black.” But is “environmentally friendly” really something a real estate investor needs to consider? Green (money) and black (net profit) together can be a winning team for real estate investment. Here are a few reasons why going green can help your investment property portfolio.

It’s a good long term investment

When an environmentally friendly home comes onto the market, the higher sticker price may be a bit of a deterrent to potential investors. But a shift in thinking from the cost of the property to the long-term benefits shows there’s a lot to be gained from buying green.

Many homes that have undergone remodels to integrate green energy production (like solar panels) get inspected as part of the upgrade. The installation company typically goes through the entire house and counsels on how to make the residence as energy efficient as possible, from replacing windows to fixing cracks and updating wiring and air ducts. These repairs are made before the renewable energy system is installed. What this means is that most homes with these upgrades will have the added bonus of more energy efficient windows, air ducts and heating/cooling systems. Double check to see if the house was inspected with the upgrade. If it was, it means less money out of your pocket for repairs and more immediate cash flow.

The other investment doesn’t show up on a financial report. Every effort to cut back carbon emissions helps to clean up pollution, reduce global warming and improves the quality of air in our urban centers. Properties tend to be more desirable when surrounded by good air quality and a healthy outdoor environment.

Significant tax incentives

If you’ve been putting off updating your current rental properties to be more green, the tax incentives put into place by the Emergency Economic Stabilization Act of 2008 make conversion to renewable energy more attractive to your bank account.

The new legislation extends tax credits to residential buildings that were previously only available to commercial properties. Until 2017, property owners can claim upwards of 30% of the cost of installation of solar panels or a renewable energy system deemed self-sufficient for energy use.

Not feeling up to the large project of solar panel installation? Small updates can be used as well to reduce your tax bill. Itemize any improvements you make, whether it be replacing appliances or just switching incandescent lightbulbs to more energy-friendly halogen or compact fluorescent bulbs. Just make sure you consult with your accountant to find out what paperwork and receipts you’ll need when tax time rolls around.

More attractive to potential tenants

Consumer awareness of green living has expanded beyond recycling and turning off lights. People are more likely to seek out living arrangements that enable them to reduce their carbon footprint in every aspect of their daily life. If you can advertise your properties with phrases like “green,” “renewable energy,” and “environmentally friendly,” it will help your listing stand out from other available rentals.

Potential tenants also appreciate the budget-friendly aspect of a green home. Just updating appliances to Energy Star-approved models can cut the electric bill for the home by 1/3. Insulated windows will help reduce heating costs for properties in states that typically have brutally cold winters or scorching summers. Highlight how your green property can save money for a tenant through reduced utility bills and you’ll be competitive in the market without having to cut your rent rates. Keeping rent rates at the upper end of the median means more money in your pocket and a better return on investment.

Improve your Rental Property on a Dime

Sometimes we have to face the reality that it’s time to spruce things up a little bit at our rental properties. However, improvements often mean down time between tenants – so how do we make decisions that will:

Improve aesthetics

Up our asking rent

Result in as little downtime as possible between tenants?

Here’s a list of five simple improvements that you can do to your rental property in less than two days that won’t only NOT break the bank, but result in virtually no downtime between tenants!

• A Fresh Coat of Paint: If you stick with a neutral color in a high-hiding variety that will go on in one coat, you’re done in a day! True Value has a handy paint calculator that will help you figure out just what you need. Don’t go for designer varieties – stick with staple colors from major paint manufacturers so you can get more when you need to touch up or paint again.
• New Baseboards: With the advent of the “no-mitre” variety, you can now just install all of your corner and radius pieces and make straight cuts. This decreases install time significantly. Check out Home Depot and Lowes as they generally have baseboards in contractor packs in sizes up to 3.5 inches. Get a contemporary look with low wallet impact. Hint: use a satin or kitchen & bath finish paint in Swiss Coffee instead of traditional white – shows less wear and can be wiped clean! Most condos and homes can be demo’d in a half day and re-installed in one. Paint your baseboard strips the same day as the demo to speed-up the process.
• Get Rid of that Grass! Xerascaping (also known as desert landscaping) is not only eco-friendly but easy to do as well. If you live in water-sensitive areas like AZ or NV, often the government has a program to PAY YOU to remove your grass and replace it with low-maintenance landscaping. Having a yard that a tenant does not have to keep maintained not only increases the desirability of your property to prospective tenants but lowers water bills, increases curb appeal and will make your property inherently “pet friendly” too!
• Plumbing Fixture Update: It’s a breeze to install new faucets and showerheads, so hop on it! They’ll spruce-up a lackluster sink or shower and lower your maintenance costs in the long run. Keep them fresh and even if you’re not the “handy” type, your property manager will have a handyman who can go in and replace everything for you in one day.
• Lighting Fixture Update: There are so many attractive, low-cost lighting options available that it’s time to put those “Hollywood lighting” bath bars to rest (permanently). Look for options where the sconces are upward-facing so you can use compact flourescent bulbs to save energy (especially important if you’re including utilities in the rent). For closets and hallways, flush-mount flourescent fixtures like these are not only cost-effective but easy to install as well!

Real estate saw one of the most turbulent markets in 2008 that we’ve seen in years. Now, as we prep for 2009, we’ve compiled this list of top move-forward trends to keep an eye on in real estate during 2009:

1. Realtor and Mortgage Industry Attrition – Those who got into real estate to ride the wave of yesterday’s boom are faced with dwindling client lists and tremendous regulatory changes. Realtors and yesterday’s mortgage brokers will have to a different type of business to have real “staying power” in the current economy. Those who persevere will find that nothing replaces superior customer service partnered with an unsurpassed level of expertise.
2. Growing Levels of Specialization in Residential Real Estate Sector – The recent crisis has demanded a certain level of specialization for real estate professionals. Those that know their way around short sales, alternative financing, foreclosures, seller carry-backs and investment property have pulled ahead of the masses and will likely continue to do so thorughout 2009.
3. Mortgage Metamorphasis – We’re on the lookout for more realistic lending standards. A-paper buyers can’t qualify and the sub-prime borrowers can’t pay, so what’s left? Look for banks to get creative, for the 20% downpayment of our parents’ era return as the norm and for lenders to consolidate and form national lending platforms that are more appealing to Joe American (and likely LESS friendly to Mr. Investor).
4. Hard Money Won’t be So Hard – Purchases still have to close and with the equity markets having been so turbulent, folks are looking for alternative investments in an asset class they know and trust like real estate. Look for a resurgence in private money lending as the real estate industry gets creative.
5. 1031 Exchanges: Hot, Hot, Hot – With 2008 having been so turbulent, we’re expecting more and more investors to look into the benefits of 1031 tax exchanges. Their value for a real estate investor’s portfolio is undeniable so we’ll be bolstering our educational content in this arena for our members.
6. Self-Directed IRA and Real Estate IRA Investing Will Surge – We’re predicting an all-time high level of assets rolled over into truly self-directed IRAs. Investors are seeking alpha outside the stock market and self-directed IRA custodians are wasting no time putting marketing dollars to work to educate investors about this valuable option. Take a look at InvestorLoft’s Self-Directed and Real Estate IRA Learning Center for our 7-part series on the basics of Real Estate IRA investing.
7. A Marketing Paradigm Shift for Real Estate – When lenders and other professionals realize that liquidity lies in the real estate investor’s realm, we expect to see a significant shift in marketing and advertising tactics. Why not advertise and market where your products will be seen by those with the need, desire and liquidity to purchase? Crazy stuff, we know!
8. Home Price Stablization – We can’t speculate as to where the bottom of the market is, but we expect to see home prices stabilize in Q1 of 2009 and remain static until about Q4. It’s a new Presidency and once tax time passes, we’ll see some available dollars head back into the real estate arena as folks see that prices have held for a few months.
9. Refined Refinancing – With so many mortgages set to adjust in the first half of 2009, we’re predicting a new scene on the refinancing front. Sure, rates are low, but if you can’t qualify – what’s the point? Lenders will snap-to and get savvy, tapping into the refinance market to pick-up great borrowers for their books and send high rates packing for those who can qualify. It won’t be so much about the rates this time, but the service and ability of lenders to work with a borrower’s personal situation as the mortgage industry continues to right itself from the 2008 capsizing.

When you’re a real estate investor, it’s likely you fall into one of two categories: those who use property managers and those who don’t.

This entry isn’t meant to bash one particular choice or the other, but rather explain some of the benefits to using a qualified and reliable property management firm for your rental properties.

• On-Site Property Management: For real estate investors holding rental property in a condo complex or the like, an on-site property manager offers many benefits to prospective tenants. Faster response to maintenance needs, a friendly face to answer questions and the benefit of having an on-site eye on your property more often than not. When your property goes on notice when a tenant decides to move out, they’re also a great source of walk-in traffic for potential new tenants. Make sure you obtain PTE (permission to enter) from your tenants so that you may show the property to prospective tenants when the time comes.
• Marketing: While Craigslist and your local newspaper are excellent places to list your property for rent, property managers establish relationships with local publications and sometimes the local MLS to get your property seen. Remember – they don’t make money for LISTING your rental. They make money from RENTING your rental.
• Tenant Screening:  Let’s face it – tenant screening is a time-consuming process and the credit report isn’t an end-all/be-all indicator of a quality tenant. Property Managers are interested in securing tenants for their clients that have all of the signs of being favorable long-term renters. Let the property manager do the tenant screening for you – and feel free to ask in-depth questions as to how they select tenants and their screening criteria.
• Potential Tax Benefits: It’s possible to reap some tax savings from the professional fees charged by your property management firm. Be sure to consult your tax advisor, but how cool is it to think that you can write-off what you’re paying your property manager to keep an eye on your investment?

Rental Property: The Time is Now

Real estate investors – get ready! There’s no better time than now to capitalize upon current market conditions and make your rental properties work for you. Tightened lending criteria dictates that many would-be buyers are likely to remain renters for an extended period of time. This means that a strategics acquisition of a rental property could potentially add value to your portfolio and give real credence to the power of the “buy and hold” strategy.

It’s a great time to work with your Realtor to explore the foreclosure/REO market. In many major metropolitan areas suck a Phoenix, Las Vegas and Denver, you can find both foreclosed and REO properties (single family homes and condos alike) in prime areas – many times newer construction and never occupied! In the case of condos, be sure to speak with the property manager (on-site in many cases) to explore average demogaphics and vacancy rates. You don’t necessarily want to buy a unit in a building where there’s a 60% vacancy rate and a ton of units just like your available. Rather, it’s the time to look for single family homes at steep discounts (maybe with a little TLC needed) and condos in areas close to colleges where you can take advantage of a steady student demographic.

Also consider condos and single family homes in areas that are adjacent to major business centers with convenient access to public transportation like light rail and bus lines. These tend to attract working professionals that are the ideal tennant – means to buy but cannot currently qualify, and thus, a candidate for a long-term renter.

Evaluating investment property. It stands to be a tall order to fill if you don’t know what you’re looking for! For the residential real estate investor, granite countertops and a built-in backyard BBQ island aren’t so important as the financial p’s and q’s of the purchase.

When evaluating your next potential residential investment property for your real estate investment portfolio, here are 5 key criteria to keep in mind throughout your search:

1. P/E Ratio – for what the property is going to cost you, will the annual cash flow put you in the red or the black at year’s end? You can determine this by researching average rents and vacancy rates in the area in which you’re looking to buy and dividing the purchase price by the property’s annual estimated income.
2. Accessibility – Depending on where your prospective property is located, accessibility will be key. School districts are always a top consideration and proximity to bus lines and/or public transportation and staple amenities like grocery & discount stores (think WalMart & Target) are important things to keep in mind as well. Dog parks (if you’ll allow pets), running and biking trails (think college towns like Denver and Phoenix) and family-oriented recreation like parks and public swimming pools are considerations.
3. Purchase Strategy – Are you rehabbing? Flipping? Aiming for a buy-and-hold? Knowing your goals before you buy will help you narrow-down the choices in shorter order.
4. Cash Flow – What are your needs? Some investors don’t mind a little bit of a negative cash flow when historical appreciation rates will make-up the difference upon final sale. Know what your cash flow needs are prior to getting into a place and understand that vacancy rates vary greatly between geographies. Have your Realtor do the homework for you on vacancy rates so you know what your financial carry is going to be in advance.
5. Crime Rates – Know what you’re going to own. If auto theft and burglary are off the charts, it’s going to be difficult to attract quality tennants regardless of how good a deal the property is. Your homeowner’s insurance will take a hit as well if you need to invest in repeated repairs due to criminal activity. Visit the local police station for crime stats before you buy. And don’t forget to drive-by at night!