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

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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

When That “Friend” or “Cousin” Stays Too Long

We landlords can’t be policing our rentals 24/7. Sometimes our tenants invite unauthorized ¬† people to share the apartment with them, and we have no idea this has happened. Often, the tenant explains it away by telling you, “Oh, they’re just my cousins, visiting me from Chicago for a few days.” And you have no way of knowing the truth …

That extra person — or persons — may have a criminal record, may have no job, may bring other undesirable cronies into the area. Unless the neighbors call you to complain, you may not find out about the situation until something devastating occurs and you get the dreaded phone call at 2 AM.

So, how can we landlords/property managers prevent this? How can we keep a 4-tenant household from growing to 8 or 10 without our knowledge? Here are a few tips:

  • Do a good job of screening your applicants. If your demographic is lower end, you may not be able to do thorough credit checks. But you can certainly do criminal background checks. I use a local site here in Indianapolis, at no cost.
  • On your lease, make sure you have language stating something to this effect: “Only the following people are to live here…” And list their names and ages, including children. The lease protects you and limits them.
  • Also in your lease, include a “Usage” clause, limiting visits to 14 days, and once every 6 months. I also state that no business may be run out of the home.
  • Do apartment checks! If you see unfamiliar faces, ask questions. And then, do a recheck later to make sure those faces are gone!
  • Create good relationships with your neighbors. My neighbors know I’m a dedicated landlord who wants to run a tight ship and take good care of ¬†my homes. I make sure they have my business card, and I encourage them to give me a call if they have any concerns about activities going on at my rentals.

Protect yourself, preserve your investment … use your lease and occasional checks to make sure you don’t have uninvited “guests” camping out for free!

Renting to Friends and Family

As a landlord, how do you feel about keeping your business separate from your personal life? Would you rent your property to a friend or relative? On the surface, it seems like a fantastic idea … you know and like each other, so it makes sense, right? You get to help ¬†someone you care about, and fill a vacancy as well. Perfect, right?

Not so fast! Yes, there are upsides to the situation but let’s think about the possible downsides:

  • What if they feel entitled to special “perks” because of their relationship with you? Asking for upgrades you hadn’t planned on?
  • What if they end up being total slobs who don’t keep the home up to the standards you normally expect and demand of your other tenants?
  • What if they get behind in the rent and expect you’ll “let them slide” indefinitely?
  • A friendship/relationship can end up in ruins over situations like these. Are you willing to chance it?

These are just a few issues that can arise when you rent to friends or relatives. This hasn’t come up in my experience but if it does, I’ll have an honest conversation with them before moving ahead with the tenancy, for sure!

AAOA

AAOA recently invited me to do a guest piece on their site…thought I’d repost it here. American Apartment Owners Association is a very useful organization (I’m a member) for all types of real estate owners/investors across the nation. Their site offers multiple forms and services to enhance and streamline the lives of people like me! Here’s the piece I contributed:

http://www.american-apartment-owners-association.org/property-management/landlord-quick-tips/know-time-go-2/#sthash.IEAg2vSi

Watch Your Back

Whether you’re a landlord, property manager or real estate broker — I am all of these — ¬†personal safety issues pop up frequently, and we need to be aware and prepared to deal with them before they occur.

Here are a few of my personal guidelines that keep me safe.

  • Never show a property after dark. NO exceptions.
  • Never walk in ahead of the person. Always position yourself between the applicant and an exit.
  • Don’t let them out of your line of sight.
  • Pre-screen them when they call you to set up the appointment. For example, if you find they want to squeeze six people into a two-bedroom rental, or if their income doesn’t qualify, you’ll save everyone time by denying them on the phone.
  • Don’t give out any personal information. (This doesn’t apply for real estate broker situations, of course.)
  • If you carry protection, have it with you.
  • Have 911 programmed into your cell phone. Everyone should do this, but for those of us meeting total strangers to show homes, it’s a good back-up, should all hell break loose.
  • Make sure the entire house, including windows, is locked and secure upon leaving.

Hopefully, you’ll never be put in a precarious situation but it’s like my mom always used to say … “Better safe than sorry.”

Thanks, Mom. ¬†ūüôā

Applicants With No Credit

If you’re a landlord and your properties are mid- to high-end, you probable run credit checks on your applicants, as you should!

With my lower income properties, I don’t normally do this, as many of my tenants have never established a credit history … they pay cash for everything. This is unbelievable to many, but makes a lot of sense to some people. They’ve decided they’ll never buy anything until they have the money to purchase! What a novel idea, right? And not a bad one, at that!¬†Others who have had credit in the past have totally trashed it … unpaid bills and credit cards, etc.

But that scenario isn’t limited to lower income folks, believe me. And so we get back to the issue of credit checks on the mid- to higher-income applicants. When you run someone’s credit (I use National Tenant Network — they’re excellent) and it comes back as non-existent, you’ll need to check on a few issues:

  1. Did they record their Social Security number correctly on the app? Have them¬†repeat it back to you for verification. If that can’t be done, raise the red flag!
  2. Maybe they really don’t have ANY credit that’s been established. This is certainly possible, especially with young people who have not used credit cards or had utility bills in their names.
  3. That person may not be included in that reporting bureau’s files. There are three major bureaus — Trans Union, Experian and Equifax. Make sure you recheck that.
  4. Did they mention any credit cards on the application? If so, and there’s no report that comes back, they’re lying. If you have¬†a credit card, you have a credit history.¬†¬†Recheck the driver’s license, SS number, etc. Something’s not right … get ready to raise that red flag.

Many people present well, and aren’t what they appear. That’s why the application process is another tool we use to help determine qualifications.

On the other hand, I’ve rented places to people with no credit trail, and¬†I’m not afraid to do that. I talk with the employer, verify income, talk with the previous landlord, do a drive-by of the previous residence to check the neighborhood and condition of the property, and assess the applicant personally. And from there, if there are no other parameters to lean on,¬†I go with¬†my gut.

Happy screening!

 

 

Renter’s Insurance

Some landlords force the issue and require their tenants to purchase renter’s insurance, some do not. It’s a personal choice.

For many, money is tight and spending extra money on insurance isn’t an attractive option for them, even though it’s fairly inexpensive … about $10-20/month, depending on what value you place on your belongings.

I make my own tenants aware that the owner has insurance on the building, but not their contents, and I leave the decision to them. But a few people I manage properties for have made renter’s insurance a requirement in their lease agreement. The tenant has to provide me with proof of insurance.

And this past year, a supply line for a toilet at one of those properties broke while the tenants were at work. Three rooms totally flooded, damaging several pieces of furniture. Those tenants were sooo glad they had that insurance!

The policy protects them in several situations:

  • Robbery
  • Vandalism
  • Flooding of the house due to rain or broken plumbing
  • Fire
  • Liability — the dog bites someone, or a guest gets hurt at the home
  • Many policies cover hotel cost in the event the tenant would have to move out temporarily

So although I don’t require it, renter’s insurance is probably worth the expense … just ask someone who’s had to submit a claim!

 

Fakers and Frauds

How do you spot a fake or a liar?¬† I’ve had hundreds of people submit rental applications over the years and some of the crap they try to pass off as “truth” is incredible!

So, how to prevent this?  Here are a few tips:

  • Have them show you a photo ID and check the address against the address they put on your application.¬† Also, make sure the name matches, of course.
  • Have them bring a paycheck stub or proof of income.¬†And then, take a good, hard look at it.¬† Are there shadowy areas on the paper?¬† Typos?¬† Different fonts?¬† These items can indicate photo-copying and tampering. ¬†Requiring this piece of supporting evidence of income will exclude many scammers.
  • Make sure there’s a spot on the app that asks for names/ages of people to live in the property.¬† And try to have all of them meet you there before you commit to a rental agreement.¬† If they’re not willing to do this, I’d be suspicious.
  • Check out the company that employs them; do a Google search.¬† Addresses and numbers should match what’s written on the app, and on the paycheck stub.
  • Although I don’t do credit checks for my lower income properties, I¬†use National Tenant Network (NTN) for my credit/background checks on all of¬†my middle/higher-end¬†¬†properties I own or manage for others.¬†¬† I¬†cover the cost¬†by charging¬†my applicants $35 as a fee for applying.
  • Charging an application fee weeds out people who aren’t serious about renting from you.
  • In addition to the above list,¬†I always try to drive by the place they currently live.¬† Is it a dump?¬† Is there trash in the yard and on the porch?¬† Does it look filthy?¬† Is the home in decent repair?¬† I find it funny that, quite often, people say they want to move because they have a slumlord who doesn’t fix things, etc.¬†¬†Really?¬† You¬†chose to move into that dump in the first¬†place, right?¬† Doesn’t make sense …

If you add the above items to your checklist, you’ll be¬†more likely to weed out the frauds and scammers.

Good luck, and happy hunting!¬† ūüôā

 

 

Finding Good Contractors

I do a lot of the work on my rental properties, but there are certain things I don’t know how to do, or just don’t want to do on my own.¬† So, how does a homeowner find good, honest contractors?

  • Networking — I’ve found some wonderful people through other investors.¬† I’d much rather use someone my friends have been happy with than take a chance on a complete stranger.
  • Angie’s List — I used to think this website included mostly higher-priced contractors, but I’ve actually found a couple of high quality people through Angie’s List, and their prices were reasonable.

I’ve had a few bad experiences after hiring workers who approached me, offering a good deal.¬† For example:¬† ¬†Someone offered to paint the trim on my big four-plex several years ago, and the price was fantastic.¬† He gave me references and of course, I checked those references.¬† He got glowing reviews so I went with him.¬† He asked for 1/2 the money up front, which is fairly common, and began work the next day.¬† And after that first day, I never saw him again!¬† Another hard lesson learned … His “references” were most likely friends or family members.

So over the years, I learned to rely on friends and other investors/landlords when looking for new contractors.¬† That system usually works well every time.¬† And if¬†an unknown¬†offers you a deal that seems too good to be true,¬†don’t be tempted to grab it … you’re probably being scammed!