Flip vs. Buy and Hold

People from near and far contact me regarding buying flips, or buy and holds here in Indianapolis. Having been in the rental business for over 25 years now, I’ve had experience in both worlds.

I started with the idea of buy and hold, for income and long term investment. That strategy has been really good to me. At one point, I owned and managed 29 units near downtown Indianapolis. They were a mix of single- and multi-family homes. Even throughout the housing collapse and beyond, my rental properties stayed full. I also obtained my realtor certification, so that I could help other investors (and non-investors) find and buy properties. Because my real estate brokerage has gotten busier, I’ve sold a few of my personal rental properties, but I still own and manage most of them.

I’ve also gone the route of flipping a few times. Here’s what I see as the challenge of being a flipper:

  1. First and foremost, those HGTV shows aren’t realistic! Somehow, they manage to make really good money on every purchase/flip. That just doesn’t happen very often in the real world, regardless of where you live.
  2. Secondly, people tend to believe the rehab is going to take “X” number of days and cost “X” number of dollars. Beyond that, they also believe they’ll get it on the market and sell very quickly. (After all, that’s how it happens on TV.) Well, it RARELY happens that way. During the rehab, additional issues are often uncovered, which means more money and time spent. And when done, what if the house sits? Two months, three months, six months? All of those “carrying costs” fall on the owner — utilities, taxes, insurance, etc. And sadly, they watch that big profit they planned on disappear.
  3. Lastly, in this market today, there’s not much “room” for profit between the purchase and rehab costs, vs. the ARV (after repair value) and actual profit made after paying a realtor or giving someone a finder fee for locating a buyer.

If you’re planning on being a flipper, go into it aware of these downsides. With either option, educate yourself thoroughly before jumping in … you’ll be glad you did!

Onward and upward … ūüėä

So, You Want to be a Flipper?

Yes, it’s all the rage …¬†reality TV shows like¬†Flip This House, Flip or Flop,¬†and even the one filmed here in Indy,¬†Good Bones …¬†they all make it look so easy, right? And the reality celebs reap incredible profits on all the sales. It’s no wonder I get approached fairly often by new investors who want to be flippers. I mean, what could go wrong????

When asked, I tell people the harsh reality of the flipping world:

  • When you estimate repairs/updates, there are always unplanned expenses and repairs that pop up. You should always pad your repair estimate to cover those unexpected surprises.
  • What if you can’t sell it immediately? What if it sits six months, or even more? You’re still carrying all your holding expenses, i.e. utilities, taxes, insurance, mortgage — slowly draining your eventual profit.
  • In a really tight, strong market, like Indianapolis (and many others), there isn’t a lot of wiggle room between what you can purchase a fixer-upper for, and what you can sell it for on the “flip side.” Bargains have gotten much harder to find.
  • Several of the HGTV celebrities have started programs/seminars you can purchase, where they’ll lend you money, teach you, get you set up, etc. How well do you think they know YOUR market? And many of their programs are 30K+ — crazy! I’m attaching an article that addresses the “business” of flipping and the pitfalls. It’s a good read.

Flip, Don’t Flop

My best advice would be to contact an experienced local flipper who might be willing to mentor you if you’re super serious about pursuing this route. Flipping houses isn’t guaranteed, steady income, and it isn’t for the faint of heart!

Before You Buy, or Rent …

I had a routine I used prior to purchasing all of my Indianapolis rental properties. ¬†And now that I’m a Real Estate Broker, I realize I’m giving that same advice to my clients who are looking at homes to buy for themselves and their families. Here’s what I recommend:

  • If you’ve found a home that interests you, drive the area at different times of day — morning, mid-day, evening, weekends. That will tell you a lot about the neighborhood activity.
  • If you get the chance, talk with a couple of neighbors. They’re a wealth of information.
  • Check for crime stats in the area by stopping by the local police station, or going to http://www.trulia.com/crime.
  • Check for what amenities are nearby: groceries, schools, parks, restaurants, other shopping, public transportation.
  • Pay attention to how well kept the homes are on that street and nearby.
  • And of course, look at what the home itself offers, in comparison to others. Is there value there? Are ¬†prices rising in the area? Whether you’re looking to rent or buy, it behooves you to be in an “up-and-coming” neighborhood as opposed to one that’s on the down side.
  • And if you’re using a Realtor/Broker, have that person run some “comps” for the area, so you’ll know what other places of equal size/amenities are selling or renting for … make sure you’re getting some “bang for the buck!”

Happy hunting!¬†ūüėČ

Rental Property Myths

When people ask me about owning and managing my Indianapolis rental properties, I get the same questions/comments again and again. Here are the most frequent  myths I respond to:

  • “I’ll bet you’re always getting calls in the middle of the night!” ¬†No, in my 21+ years of doing this, it’s rarely happened. Yes, I’ve received calls on the weekend and/or in the evening, if someone has an emergency, like if a furnace goes out. But fortunately, I have my trusted contractors to call, and they can take it from there. I’m not making trips to my rentals on those calls. And if it’s something minor (which it sometimes is) I have them wait until the next working day.
  • “Don’t you get tired of your tenants totally trashing the places?” ¬†Well, I’ve had tenants leave trash behind after a move-out, for sure. When I’ve evicted a person, sometimes they take what they need, and leave the rest. This happens more often in the lower economic demographic. But as far as vandalizing/destroying the apartment, out of anger or resentment, no. If you treat your tenants with respect, this doesn’t occur.
  • “I’ll bet you’re making a ton of money!” ¬† Uh, no … When you buy rental properties, you’re buying for income, yes, but also for long-term investment. It’s not a “get rich quick” proposition. If you’re buying with a loan, you want to make sure your rent will cover more than your loan payment and other expenses (i.e. taxes, insurance, utilities, etc.). You can make a “ton of money” if you buy a ton of rentals, for sure. But the commercials you see on TV are totally exaggerated! Don’t buy into that crap!
  • “You’re a slave to those properties…you don’t have a life of your own!” ¬†That depends on a couple things: if you fix them up well in the first place, you shouldn’t have many major repair issues going forward. And also, you have the option of hiring out the management if you don’t have the desire, personality or time to do it yourself. The cost per month is usually 8-10%/monthly rent, plus a percent of the first month’s rent. But beware — good, honest property management is hard to find.

So there you have the comments/questions I get most often — all myths. This business is intricate, demanding, frustrating, and very rewarding. I don’t regret beginning my journey all those years ago, and I do my best to educate others before they jump in. It isn’t for everyone, but for many, it can be part of a smart, long-term investment strategy.

Onward and upward!  :-))

 

Rent to Own?

Seller financing, rent to own, land contracts … these are creative ways to achieve homeownership if you can’t¬†qualify for a mortgage.¬†As a real estate investor here in Indy, I’ve sold a few of my rentals this way. It can¬†be a positive route for both the seller and buyer.¬†Laura Agadoni included me as one of her sources in the following¬†Trulia article about seller financing. If you —¬†or someone you know —¬†is¬†in the market for this type of financing,¬†her piece is a good way to get familiar with the process:

http://www.trulia.com/blog/pros-cons-seller-financing/

Personally, I enjoyed giving people the opportunity to become homeowners when they wouldn’t otherwise be able to do so. For the most part, they took excellent care of the properties, knowing the home was “theirs.” I even had one family make multiple repairs and updates as they moved through their contract.

The downside was that occasionally, tragedy strikes. People get sick, lose their jobs, split with their spouses, etc. But as I stated in the article above, they usually just “bow out” gracefully and apologetically, pack up, clean up, and leave. The seller keeps the down payment, and moves on.

Bottom line? As Laura states, seller financing can work well for everyone. The seller earns good interest on the loan, and the buyer achieves the American Dream … home ownership. It’s a win/win. ūüôā

 

 

 

Before You Buy …

When new investors consult with me about getting started in the rental business, the first question they usually ask is, “How do I know where to buy?”¬† After I ensure they have the finances for the purchase figured out, my answer is pretty straightforward:

1)¬† Make the property within a 30-minute drive from your home.¬† Gas is expensive, and if you buy a fixer-upper, you’re going to be spending enough money on the rehab without driving all over town to get there!

2)  Check the schools and amenities in the area.  Good schools and access to conveniences and the bus line attract renters and enable you to charge higher rent.

3)¬† Stop in at the local police station and get a crime run covering the past year.¬† Petty stuff like theft or disturbing the peace isn’t a huge deal, but if you see armed robbery, stabbings, drug crimes and worse, run!

4)¬† Drive your chosen neighborhood at various times of day … morning, noon, evening, weekends.¬† Notice who’s walking the street and “out and about.”¬† What do the residents’ vehicles look like?¬† How about the residents themselves?

5)¬† And lastly, TALK to people.¬† It’s incredible what you can learn this way.¬† Talk to neighbors, tell them you’re considering buying a home there (don’t tell them it’s going to be a rental … some may suspect you’re a slumlord).¬† Stop in at a local restaurant/bar and speak with a server or bartender who’s been there a while.¬† They’ll be a wealth of information … they may tell you more than you want to know.¬† LOL.¬† But that’s okay, you’re on a fact-finding mission.

If you do your “due diligence” prior to the purchase, you won’t suffer buyer’s remorse when the deal is closed.¬† It’s worth the time spent, trust me.

And, happy hunting!¬† ūüôā

The Case For Rentals

I’ve owned and managed low and middle income rentals in Indianapolis for over 17 years now, through the good times and the bad.¬† My goal was to purchase these rental properties for income and long-term investment.¬† I’ve flipped a few along the way, but that’s never been my model.¬† Through the years, I added property management to my list of skills … other people’s homes or rental properties.

Why invest in rentals?  There are a couple reasons:

1)  Housing is a universal need.  Regardless of fluctuations in the economy, people need a roof over their head.  And even when everything in the housing market went to hell through 2008 and beyond, my rentals held strong.  Yes, there was more turnover (people were losing their jobs and/or getting laid off more frequently) but I had no trouble filling my vacancies.

2)¬† There’s a segment of the population that will never be homeowners … those who earn less than $30,000/year will most likely be renters throughout their lives.¬† And according to the last census, that segment included about 35% of the population.¬† Furthermore, since the housing collapse, many people have become more wary of buying homes, and even those who can afford it (and get financing) are choosing to rent instead.

Indianapolis is a wonderful city in which to work and raise a family … it didn’t see the horrible downturn in the housing market that some other areas experienced.¬† Our rental market is strong and will continue to be strong in the foreseeable future.

We landlords and investors are lovin’ it!¬†¬† ūüôā

What Does it Take?

I’ve owned and managed my own rentals for 17 years now, manage other properties,¬†have written a book about the business, recently got my realtor’s license, and am going to be getting my broker’s license soon.¬† I’m frequently asked, “What does it take to be a property manager?¬† What personality traits are essential?”

I’d never thought about it but here’s the short list:

  • You must be very organized.¬† There are records to keep, tenants to manage, etc.
  • You must be laid back.¬† Things happen that are beyond your control and you have to roll with it. ¬†(Hmmm … organized and laid back?¬† Those qualities don’t appear very often in one individual.¬† Most laid back people aren’t organized.¬† Most organized people aren’t laid back.)
  • You have to be willing to evict people quickly when they get behind in their rent payments.¬† This is an income-producing business, and although tenants run into rough situations, you can’t let your heart rule your head.¬† You can’t just hope they’ll get caught up next week, or next month.

Tenant management issues are the main thing that drive people out of this business.¬† I’ve learned — the hard way — to stick with my lease agreement.¬† I’ve modified it through the years and it’s short but air-tight.¬† It protects me from all of the “sticky” situations that can pop up, and I know that if I adhere to it, I’ll be okay.

So for those who are considering buying their first rental, my advice is to educate yourself before jumping in.¬† Look at your finances, your personality, your risk tolerance.¬† And if you’re still excited about the possibilities, go for it, and enjoy the journey!

Landlord Intervention

For those of you interested in rentals, I wanted to let you know about a new book recently released, titled Landlord Intervention: How to Acquire and Manage Rental Property, available (paperback) on Amazon: http://www.amazon.com/gp/product/0615643213/ref=as_li_ss_tl?ie=UTF8&tag=therefofath-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=0615643213

and also on Kindle: http://www.amazon.com/gp/product/B008KA0TDA/ref=as_li_ss_tl?ie=UTF8&tag=therefofath-20&linkCode=as2&camp=1789&creative=390957&creativeASIN=B008KA0TDA

It’s written in a straightforward style by a no-nonsense guy, Joseph Brown.¬† He lives and works in PA but the material in his book is pertinent to investors across the country.¬† He’s been in the business for over 25 years and knows all the ins and outs, ups and downs.¬†¬†¬†¬†He’s “been there,” and tells it like it is.

I’m very picky when it comes to books written about owning/managing rentals.¬† I decided to write The Landlord Chronicles: Investing in Low and Middle Income Rentals¬†because I hadn’t found any¬†books that would educate people about all the facets of this business without boring them to death by the second chapter.

Landlord Intervention succeeds in holding your attention and educating you¬†at the same time.¬† Well done!¬†¬† Brown takes the reader through the entire process … buying managing, exit strategies, pitfalls, etc.¬† ¬†I was impressed enough that when I was asked to write the foreword for this book, I gladly agreed.¬† If you want to explore the idea of investing in rentals, pick up a copy of this book — oh, and maybe a copy of mine as well — you’ll be glad you did!

Before and After

Many of my rentals are 100 years old.¬† I know, that sounds scary … 100 year-old houses must be nearly falling down by now, right?¬† Not at all.¬† Actually, they were built better than a lot of the new construction we see today.¬† They’re sturdy.¬† They’ve had the plumbing and electrical updated (thank God) and of course, they have newer furnaces and windows.

But I do have issues from time to time, with flooring, leaks, etc.¬† This rental had a leak under the bathroom floor, from the toilet.¬† When my tenants moved out, I discovered the toilet actually rocked like a rocking chair!¬† And the floor around it was very soft.¬† The floor had to be torn out because there had been a slow leak which eventually rotted the subfloor and part of the joist underneath.¬† Here’s the before picture — not good!

The bath vanity had seen its better days, so I found a new one on clearance for $30 at Home Depot, and got a piece of sheet vinyl on clearance as well.  My wonderful handyman Craig did the dirty work and within a couple days I had a brand new bathroom.

This is the finished product:

And voila!¬† The house is now ready for my next tenant.¬† Craig put down a new subfloor, along with a couple new joists, and it’s ready to go.

Older homes have their own issues . . . the windows may be older, and drafty.  The walls may be plaster, and uneven in places.  But they were built to last.  And they do.

If the major updates have been done, I don’t hesitate to buy an older house.¬†¬†They have character,¬†and they have a lot of quality built in.¬† I like that.

So don’t be fearful of those oldies . . . they’ll be around long after you and I are gone!