Having the long view in real estate investing

Having the long view.

My name is Kathryn King and I am an investor as well as a Realtor and company owner.  I work with owners of homes and small investment properties, mainly built of houses and duplexes and other small buildings.

Thinking over what sort of message I have, I started thinking about a financial book I have been reading.  It was written near the year 2000.  In the final chapter the author talks about taking a long view with regard to investments in the stock market.  Reading this at the end of this financial book was a breath of fresh air.  I need the long view in real estate for career, clients, and my own investments.

I don’t know about your experience of the past 18 or so months, but my experience as a person employed in the field of real estate and as that of an investor has been trial and tribulation.  I have experienced many things that I could view as failures and I think the opportunity lies in the ability to see them as hiccups on the ride.  To remain detached and keep stride I like the concept of taking the long view.

I did not have a short view or a “flip” mentality wit h regards to my real estate holdings.  However I did not anticipate the increased turnover, the decrease in rents, the sharp increase in concessions, and the literal demise of commercial real estate in the midst of an attempted reverse exchange.  With these experiences and the news repeatedly reminding me of the state of our nation, I somehow became a short view investor, losing sight of the end goal!  I can say the same is true for home owners and investors I know. 

Change has hit my segment of the market on a huge personal scale.

1. Clients and friends are being foreclosed on.  For many this is their financial vehicle going away.

2. Buyers have lost their jobs in the midst of home shopping this year.

3. Sellers are not understanding CAP rates—they never had to think about that in this decade.

4. Increased vacancy rate has had a very personal impact.

5. Default rental owners struggle with the concept of supply and demand, and rent as a pricing function.

6. The climate has required an ability to understand change as it is directly under foot.

7. My clients do not readily understand that economic factors are relatable to their investments in a very real and large sense. 

The end result of my experience is to plan for today’s economic climate as the future, and not to plan for increase revenue or rents in my planning.

There has been a powerful lesson in this period in time.  For one I had to remember that I purchased real estate investments as part of a long term retirement plan.  I had ideas about retiring early and the change of economy has helped me to take seriously the exit planning if I intend to take the plunge some day.  Another thing that I learned is to value that which we cannot place a dollar figure on.  In this time I have found opportunity to appreciate health, family, my new husband, my dogs, great weather, and the companionship of friends.

Overcoming objections at a showing

How do you know when a potential resident has an objection?  Why would it be important to know this?  By understanding the potential resident and responding you can increase your likelihood of getting an application.  What is the best way to work for the application when there are objections?  Some ideas: asking open ended questions, listening for their comments, and by watching the resident’s body language.  Let’s roll play.

I am a renter coming to see your home for rent. When I am inside the property I want to be able to look around without you crowding me.  How will you know this?  I will turn my attention to the property and will not be engaging with you.  I may walk away from you when I am inside the unit to “take charge” of my own direction without being led.

What should you do as the owner?  Observe my body language and let me look around on my own.  Perhaps comment that you are going to do a few things and will be available for questions.  This is a great time to change bulbs, sweep the floors, shake the entryway rug, etc.

When I have come back through and am ready to head out, ask a few open questions about the property such as:

Are there features you find appealing?

Can I tell you more about the parking, storage, amenities?

The home has electric heat, public water and public sewer.  The garbage is paid the owner’s

responsibility.

Perhaps I have some objections to the electric heat and I say: I don’t like electric heat; I have heard it is expensive.

How would you respond?  A reply could be “the heat is zonal electric and very consumer friendly.  You don’t have to heat the entire house like with gas or oil heat.  This can be a great cost savings, as you are in charge of how much or little you use.  Gas and oil prices have increased over the years and it is not uncommon for electric to be comparable.  Would you like me to check the total electric bill for the prior year and see if the past resident will share any usage patterns?” 

This invitation could engage me.

What if I have other complaints about amenities?  Perhaps I mention that there are not washers and dryers in the home. 

Try this response:  “we decided that because many renters have their own washers and dryers it would be better to keep the rent a bit lower and not provide them.  We could look into the cost of providing them at a higher rent, would you like us to do that and get back to you?

When the visit is almost over, is that when you begin to ask for the application?  It is probably a better idea to always assume they will be applying and phrase your comments accordingly.

“Let me give you my card.  I will be available this afternoon and all day tomorrow to collect applications.  Our screening company screens seven days a week.”

Give it about 24 hours and then do a follow up call to see where the resident stands.  Ask questions and see if there are more concerns you can help to resolve.  Don’t be afraid to ask for the application!

These simple tips are great for home buyers as well.  I would employ these strategies at one of my open houses any day.

For more tips like this, great landlord education, or to search for homes and rentals, visit my blog or monthly meetings at:  www.landlordstudyhallblog.com.  My group Landlord Study Hall meets the 2^nd Wednesday of most months at All Saints Episcopal Church at 4033 SE Woodstock Boulevard.  We have been meeting over six years and have a well informed group of rotating speakers.  If you or someone you know needs to buy or sell a home they can reach me several ways:

e: Kathryn@kjkproperties.com

Twitter: catincluded

Facebook: Kathryn@kjkproperties.com

P: 503-997-9035

Kathryn King, KJK Properties, 1603 NE 16^th Avenue, Suite A, Portland, OR 97232.

I look forward to hearing from you soon.

What about the investor that wants to sell into a passive investment?

Case study:  Mrs. Choo has 7 rental properties, 5 of them houses she bought over time and two of them duplexes that she built.  She knows she wants to retire in 15 years at age 50. 

Margaret could choose to pay additional to the principal of the loans to pay them off at a 15 year amortization during the time she is earning a steady income.  At the time of her retirement, Mrs. Choo places the properties for sale with a broker specializing in land sales contracts or mortgage and trust carried by an owner. 

Seven buyers are found with attractive terms to Margaret.  The down payments total $220,000, which she is able to invest with her financial advisor in the stock and mutual fund market, and the payments from the land sales contracts have in turn created a stream of income to her of a total amount of $10,000 per month. 

Mrs. Choo graduates her sales clauses in each contract so that she is paid off in graduated steps, according to the wishes of her tax advisor; likely in step with the reduction of her other taxable income or to offset anticipated future losses.  The money from each satisfied contract is invested with her financial advisor.  The additional money is invested to create an additional stream of interest income and increased principal investment in the account.

What makes a smart real estate investment nowadays?

It all depends on if you want cash flow, write off, appreciation.  What is your objective and what is your financial condition?  The best of all investments will give you good cash on cash return (the function of your down payment as related to the annual income after expenses), good value retention and appreciation, low maintenance, and tax benefit.  But how do you get there?

Many of us don’t have a pile of cash laying around to get us started.  I personally am not a believer in the get rich quick antics that I hear about on TV.  I believe in simple hard work and smart investing, so here is how I got to where I am.

I started by making my first home a rental after I had owned it about a year.  I moved because I didn’t like the area, but for some reason liked the concept of real estate as a wealth building vehicle.  When I turned this house in to a rental I had to buy another one to live in.  Owner occupied financing is more affordable so this was a great option.

About 1.5 years later I bought another house.  This one was an impulse purchase!  It had good potential (a fixer, indeed), and the house I was living in had grown small.  This third house was in Woodstock, a still sleepy urban neighborhood that had promise.  I fixed it up, fell in love with living in that great walkable neighborhood, and decided I had enough of moving.  I settled in and stayed over 10 years, while I did more investing.

About a year later I tried my first tax deferred exchange (a 1031 exchange), and sold that first house to get a better house in a better neighborhood.  With each of these houses I tried to get the rent to pay the payment.  Within reason, as long as I was not tapping the equity, these houses came close to paying for themselves when comparing cash flow only.  When tax write off and appreciation were taken in to effect, they were all adding up to growth in value and potential for wealth.  With all of these houses I put relatively little down, which helped with the cash on cash return.

What should you take in to consideration when deciding to invest?

1.  Amount of down payment

2.  Loan terms

3.  Area

4.  Design of home or investment

5.  Realistic rent

6.  Expected vacancy rate

7.  Minimum return on investment desired

8.  Length of time you intend to hold the home or investment

9.  Capital improvements required

10.  Reserves for replacements

This list is just a start.  There are infinite considerations when purchasing real estate.  Feel free to meet up with me at my monthly forum, Landlord Study Hall.  We have been meeting monthly for over 6.5 years and welcome your attendance.  Read more at www.landlordstudyhall.com.  This month we will delve into notices, terminations, and evictions.

More on this story next blog post!

Protecting the Seller on a Home Land Contract Sale

·         Obtain a Credit Report on the Buyer.

·         Demand a Title Insurance Policy.

·         Ask for a Hefty Down Payment.

·         Carry the Financing Short-Term.

·         Verify the Buyer’s Employment.

·         Ask for Personal References.

·         Insist the Buyer Obtain a Homeowner Insurance Policy.

·         Set Up a Disbursement Account.

·         Collect the Taxes From the Vendee.

·         Include a Late Payment Charge in the Land Contract.

·         Ensure Continued Maintenance and Care.

·         Prevent the Vendee From Assigning the Contract.

·         Talk to a Lawyer.

Selling on a Land Sales Contract

Topic: Selling on a Land Sales Contract

 Land sales contracts are a vehicle to consider when you desire a built in income and a better interest rate than other investments may provide. 

In Oregon it is not uncommon to use a note and trust deed in lieu of a land sales contract in order to create a similar stream of income on a sold property.  The process for foreclosure is different, as a trustee is given the “power of sale” in the event that the Vendee defaults on the payments.

 When selling on contract it is possible to graduate the interest rate as a hedge against inflation.

 When you have sold on contract you have shifted the burden of maintenance to the buyer.

 It is not a type of sale that should be considered if the desire of the seller is to participate in a 1031 exchange.

 It is recommended you seek legal advice to determine which instrument may best suit your situation.

If there is a current loan on the property it is important to speak to an attorney to determine if this is an option for you.

Is there a good way to live in your investment and still have it pay for itself?

Case Scenario:

You are a gainfully employed first time home buyer more interested in investment property than a home.  You would like to live in one side of a duplex and rent out the other side.

How should you go about it?  Obtain FHA owner-occupied financing, with 3% down, or by using a non owner-occupant, but related, co-borrower.  This scenario allows a gift down payment from a relative.

What are the pros and cons of this scenario?  Living by your tenant is not always easy.  Could be the best way to cash flow in the short term.  Live in for 2-5 years, save additional down payment, rent out owner unit and buy another investment property. 

I have equity in my home, now I want a multi-plex. How do I get there?

Case Scenario:

You are a single person with a home you have owned for 7 years.  You have roughly $100,000 in equity and you would like to buy a four unit multiplex.

How should you go about it?  Take out a 2^nd with a mortgage broker or a direct lender bear in mind that the higher the loan to value ratio on your home will be, the higher your rate will be.  That becomes your down payment and you can purchase a 4 unit rental in the price range of $400,000 to $500,000.  I would be inclined to go higher and get larger units with nicer amenities such as 3 bedrooms in combination with 2 bedrooms, garages and fireplaces.  This makes the units attractive to a higher priced tenant and gives you ability to push rents as a nicer unit.

What are the pros and cons of this scenario?  Borrowing the equity in the form of a 2nd could increase the debt service “against” the 4 plex so that you do not have any cash after debt service.  Benefit in foreseeable future would be write off and increase cash flow with pushing of rents at turnover or on an annual basis.  4 doors require more energy than 1.  Harder to sell a multi family in a pinch.  Harder to tap the equity of the rental, if not impossible, without refinancing first mortgage.

I have a home with considerable equity. Should I invest in Real Estate?

Hector and Martha are well established and have had several investment accounts for the past 15 years.  Their children are finally finished with college and they have disposable income and a great deal of equity in their large home.  They would like an investment that does not take regular action from them, but still pays financial rewards.

Solution:

Meet with lender.  Determine amount of debt load that is comfortable for new investment and where the down payment will be accessed from.  Consider rate and terms for borrowing from home equity or loss of income off investments.  Vet out what type of investment interests them.  Does their amount to invest qualify them to build a portfolio of more than one property?  How is the best way to do that, considering the learning curve and desire to be hands off?  Retain a mentor and good Realtor to advise on the purchase and structure of the portfolio.  Don’t anticipate that in the Portland market an investment property, residential or commercial, will offset any borrowed funds for down payment.

Option 1:  It is determined that the couple has $150,000 to put toward down payment on property.  35% down payment on a commercial property purchased through a qualified Realtor and using a leasing agent could allow the buyers to obtain a building with a price of $500,000.  Leases are renewable, with built in increases on an annual basis.  Many investments are “NNN” or “Triple Net,”  with tenant paying all utilities and maintenance.  Consider buying in an urban renewal area where Portland Development Commission has storefront improvement grants.  This would be good for increased value, lower day to day involvement (if any), potentially lower costs.

Option 2:  Split the down payment into 3 different rental homes.  Look in area’s that have lower price per square foot, newer homes, with higher rent values.  A good scenario is Southeast Portland, or a few pockets I prefer throughout town.

Buy 3 homes valued in the range of $250,000.  3 – 4 bedrooms, 20% down, increasing the offer price to cover the closing costs.  Rent homes in the range of $1450-$1500 / month, outflow on each house on a monthly basis $1659.  Cash loss $150 – $200 a month per home.  Consider it a payment toward retirement.  Take depreciation and maintenance expenses against your W2 income and gain from the appreciation of the properties.  Hold for 10 years, having an exit strategy in place for retirement.  Expect to cash flow even within 18 to 24 months.

Option 3:  Split the funds into 2 different rental homes for 30% down, total payments on two homes in similar area would be $1399, total rents $1450 to $1500, cash flow $150 a month on each home on average at outset.  Expect rent increases over time.

« Previous Page