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BUYING, SELLING AND INVESTING IN SMALL RENTAL PROPERTIES
THE BENEFITS OF RENTAL OWNERSHIP
LOCATING AND ANALYZING INVESTMENTS
ACQUIRING GOOD TENANTS AND MINIMIZING MAINTENANCE AND PROBLEMS
UTILIZING APPLICABLE RENTAL FORMS
CREATING WEALTH FOR RETIREMENT
QUESTION AND ANSWERS
I. RENTAL PROPERTY BENEFITS
A. IMMEDIATE OR FUTURE INCOME POTENTIAL
1. If Rents are BELOW Market, raise them.
a. Do a simple rent survey prior to buying.
1) Drive the neighborhood, look for For Rent signs, call ask details. Realtors' MLS.
2) Newspapers, weekly magazine ads
3) Local property management companies.
2. Fund YOUR Retirement or College Costs
a. Rents tend to increase annually, cash flow
b. Expenses, Mortgage payments remain stable
c. Sell later for PROFIT, after retiring, or college
3. There are Tax Benefits to Rental Ownership
a. Your Active (Regular) Income is offset by:
1. Any annual losses. File a Schedule E tax form.
2. Depreciation of the building. (Not the land).
b. Exchange into another property and DEFER the taxable Profit (IRC 1031 Exchange)
B. FUTURE INCOME FOR AGENTS:
1. Agents acquire clients that buy and sell
a. Be there for clients, AFTER escrow closes
b. Clients need to rely on you, they will not go elsewhere. Build loyalty, help them.
2. Always give clients the 1st chance to buy
a. If not, they will doubt you - "if it is such a good deal, why aren't you buying it?"
b. You buy if they don't. Is it OK if I try to buy it?
1) Credit your commission towards the down?
2) Tell them how it is going - problems, too.
3) They will want to follow your success.
3. Take clients to lunch; ask for more business
a. Follow up, help clients with their difficulties: need advice? Tenants, repairs, forms, etc.
b. "Do they have any co-workers or friends that may be interested in investing, too?"
c. "Your long range investment plans are?"
How can I help You with these plans?"
II. FINDING AND ANALYZING GOOD BUYS!
A. Work with a REALTOR
1. Preferably an agent that owns or sold apts.
2. Commit to working EXCLUSIVELY with them
B. Read all Classified Advertising
1. Sunday Edition - Income Section, drive the properties
2. Weekly throw away paper ads, drive the properties
3. Drive the areas you like, stop repairmen/painters, etc.
C. If you find a building, read the meter tags
1. Tells you the turnover rate. Unless in owners name.
2. Most buildings do not make economic sense with existing income, you must consider your purchase or presentation to buyers on POTENTIAL INCOME!
D. Analyze the Building's Cash Flow with a PROPERTY ANALYSIS FORM
1. Some expenses are one time yearly expenses
a. Ex:: Taxes, Insurance, Scheduled Maintenance
2. Consequently, must annualize income and expenses for an actual, concise, yearly overview.
3. Then divide your annual income or loss by 12 to get a monthly operating cash flow estimate. People like monthly
Factors for determining value
E. Gross Rent Multiplier (times gross)
1. Sale/Offered Price divided by annual income= gross factor
a. usually areas will have range in factor
b. newer buildings/ lower # of units have a higher factor
c. difficult to use under four units.
d. a Duplex may have 14, while 6 units may be a 9
e. lower the factor better the cash flow
f. does not take expenses into the equation.
FACTORS SHOULD BE A GUIDLINE ONLY
F. Comparable Sales are the best for value
1. Determines possible value from a comparison approach.
2. Does not determine CASH FLOW
G. Capitalization Rate (cap rate)
1. Net Income Divided by Down Payment = Cap Rate
2. Determines return on investment.
3. Higher rate, the better the return on investment
H. The above are rules of thumb
1. They should not replace an investment analysis
a. Investment analysis determines cash flow
b. Separate meters allow tenants to pay utility expenses
c. Usually one water meter per building, (owner pays).
1). Keep toilets, all faucets leak free
2). Eliminate outside hose bibs if possible
3). Additional occupants not on rent agreement pay a surcharge to cover higher water costs?
III. Cash Flow Analysis Form
1. Gross Scheduled Annual Income minus) vacancies and Credit Losses =
2. Gross Operating Income
3. Gross Operating Income less Annual Expenses=
a. Taxes.
b. Fire and Liability Insurance
c. Utilities (water, trash, gas,electricity,cable, sewer,
d. Management: 5-10% of gross income
e. Repairs, Maintenance, Paint,
f. Gardener
g. Carpet, Appliance Replacement
1) Could be a Capital improvement?
4. Schedule Net Income.
5. Schedule Net Income (minus) Loan Payments = NET INCOME OR (NET LOSS)
EXPENSES FOR YEAR 2001
PROPERTY ADDRESS: 32-400 Sky Blue Water
INCOME ANNUAL: $32,076.
Unit
Unit
Unit
Unit
EXPENSES:
Property Taxes: 3,834.76
Trash: 0
Gardener: 2,717
Repair/Paint: 3,333.50
Legal: 3,330
Insurance: 1,148
UTILITIES:
Water: 1,437
Electricity: 1,885.
Gas:
TOTAL EXPENSES: 17,685.26<
OPERATING INCOME: 14,390.74
ANNUAL INTEREST PAYMENTS: $19,605
NET (OR LOSS) INCOME: ($5,215)
CAPITAL IMPROVEMENTS: 1 A/C $1,210.
IV. The Physical Inspection
1. Usually write your offer Prior to viewing the interiors
A) Cannot enter dwellings legally without a 24 hour notice.
B) Keeps tenants' interruptions to a minimum. (subject to)
2. How does tenant and owner maintain the interior/exterior?
3. Preferable if tenant is home- ask questions!
A) "How long have you been here? Planning on staying?
B) Does every thing work OK? What doesn't?
C) Are there any problems w/ your neighbors, Noise? Dogs"
D) How do YOU FEEL about what you see? Go with YOUR 6th sense relating to the property and the tenants.
4. What Repair/Changes are mandatory now?
Immediate Changes: Prior to committing to opening escrow.
A. Lower price, repair credit? 30 day notice to tenant?
B. Shower restrictors, dead bolts, smoke detectors
C. Lower the water pressure at valves? Strap water heaters?
5. After interior inspection:
A) Review the seller's rental agreements, you must approve
B) Will you need to replace carpet, vinyl, tenant, appliances or paint immediately, soon, or in a year? Factor in to $
C) Review seller's 18 month of bills, ledgers, Schedule E expense, You approve same PRIOR Opening escrow
D) Handle your own rent raises AFTER you close escrow
V. Maintaining AND Obtaining Tenants
1) Asking a tenant to vacate in 30 days by letter or phone 1st has less stress and nets results.
a. Follow up with a 30 Day Notice to Vacate Form.
b. Mail, Mail w/ return receipt requested is firmer.
c. Post or Hand deliver. Hand deliver is best
1. Fill out proof of service. 2. Cannot be on a lease.
2) Sometimes it's best to evict all if problems.
3) 3 Day Notice to Pay Rent or Quit.
a) If rent is not received within 7 days, call tenant, post or mail
b) Do not include late charges, some judges throw them out.
c) If tenant pays their rent within the three days, they stay.
4) Rental applications:
a) Form must be filled out neatly and entirely
b) If incomplete presume applicant is not sincere
c) MUST be signed, or you cannot run credit
5) If Possible drive by and see how the applicant lives
6) Do NOT even think about Rejection based on amount of children, race, creed, familial status etc.
7) Abide by Fair Housing Laws Common Sense.
8) Sometimes the best reference is the PREVIOUS owner; an existing owner may lie to get rid of them!
VI. Management Forms
1. Rental Application
2. Rental Agreement the Most --Important!
3. 30 Day Notice to Vacate.
4. Proof of Service
A. Fill out thoroughly - Sign and Date
B. If Tenant fails to vacate: Eviction Process
1). Call them 1st. Timeframe, Attitude?
2). Contact Eviction Service (cheaper)
3). Attorney, usually costs more and longer
C. Doing it yourself (filing) the Unlawful Detainer takes too much time, too emotional, and if a mistake is made you must start over.
D. Let a Professional do it
E. Usually problems and evictions are inherited tenants
1.If a tenant you put in, learn from the mistake!
2. You can obtain a judgement for your losses.
3. Plan on major cleaning, recarpeting and painting.
------------------------------------------------------------
3 DAY
NOTICE TO PAY RENT OR QUIT
CCP1161
TO:
WITHIN THREE DAYS AFTER THE SERVICE ON YOU OF THIS NOTICE YOU ARE HEREBY REQUIRED TO PAY THE RENT OF THE PREMISES HEREINAFTER DESCRIBED, OF WHICH YOU NOW HOLD POSSESSION AMOUNTING TO THE SUM OF
DOLLARS ( $ ) ENUMERATED AS FOLLOWS:
$ DUE FROM 20 TO 20
$ DUE FROM 20 TO 20
$ DUE FROM 20 TO 20
OR QUIT AND DELIVER UP THE POSSESSION OF THE PREMISES.
THE PREMISES HEREIN REFERRED TO ARE SITUATED IN THE CITY OF
COUNTY OF, STATE OF CALIFORNIA, DESIGNATED BY NUMBER AND STREET AS APARTMENT NO.
YOU ARE FURTHER NOTIFIED THAT IF YOU DO NOT COMPLY WITH EITHER OF THE ABOVE, THE UNDERSIGNED DOES HEREBY ELECT TO DECLARE THE FORFEITURE OF YOUR LEASE OR RENTAL AGREEMENT UNDER WHICH YOU HOLD POSSESSION OF THE ABOVE DESCRIBED PREMISES AND LESSOR WILL INSTITUTE LEGAL PROCEEDINGS TO RECOVER RENT AND POSSESSION OF SAID PREMISES.
DATED THIS DAY OF 20
_____________________________________________________________
(AGENT) (OWNER)
------------------------------------------------------------
5. 3 day notice To Pay Rent or Quit
A. Be Courteous to Tenants. We automatically give 3 day notices after 5 days if rent is not received
B. Say "WE" all the time. Be prepared. SMILE ALOT
C. Be Consistent and firm with your rules- however maintain some flexibility if warranted. Keep good tenants.
6. Estoppel Certificates
A. Should be obtained in escrow from seller
B. Signed by seller and Tenant.
C. Affirms no outside agreements
D. Verifies the Monthly Rental and Security Deposit amounts
E. You have a Confirmed deposit amount, tenant cannot demand more when vacating.
F. By Statute you have 21 days to return deposit but must state in writing what amounts you held out and what for
G. Be fair tenants will talk and upset good tenants
7. Clean and maintained properties obtain better tenants
8. Post a stake FOR RENT sign up. Applicants are pre-sold on the area.
A) Cheaper than running ads.
B) Neighbors friend, may already know the floor plan.
C) Tell painter or repairmen: "let prospective tenant come in while you are working, give then an application." What do they think of them?
9. Put a combo box on the door for prospect access.
10. Leave applications inside to be filled out.
11. Have aps delivered to you (the best), mailed w/ $20.00 or faxed to you in order to run credit report.
A) Compile applications to pick from.
12. Tell tenants what your rules are:
A) Trash, Cigarettes, Trash barrels, Pets, rent payment, guests, parking, noise, party issues etc..
1. Good tenants will appreciate that you are trying.
2. Speak from your heart not your mind.
3. Call Tenants by Last name all the time if you can.
13. At COE; MAIL existing tenants your letter of introduction as to where to mail rent and changes
A) Defines your rules and expectations
B) This is the time to include a Notice of Change of Terms of Tenancy or 30 day to Vacate. No emotion
Do what you say you will do!
14. Tell tenants submit repair requests with their rent checks
Saves nuisance calls.
A) They are less likely to send repairs in a letter.
B) You have a list in writing.
C) Less confusion if own more than one property.
D) Can give the repair lists to your repairman at 1 time.
E) If a major concern they can call about the problem if it will cause damage to people or property.
F) If frivolous calls, do not return tenants call, they will get the message. Or you can call them back and ask to submit in writing. Don't let tenants burn you out.
G) If you refuse to fix a health or safety issue within 30 days of written receipt, they can have it fixed and deduct from their rent. Never let anything deteriorate that far!
VII. Creating Wealth
1. We make a good living selling real estate
2. We make others and ourselves wealthy by owning it or selling property to others!
A) Never sell your investments unless necessary.
B) WHY? Equity builds up as rents/value increase.
C) 1031 IRC Tax Defer Exchange if something is better.
1. You can defer paying tax on your profit
a) Most investors are doing Delayed Exchanges
1) Must buy like for like kind of property
2) However, puts them under pressure.
a) if they sold 1st. 45 days to locate
b) Will a seller wait for them to liquidate?
c) Must close within 6 months of 1st sale
d) Scope not to go into 1031's now
D) Best to Refinance and keep both properties
1. Sometimes seller gets tired of a property and wants to realize a profit after years/months of hard work.
E) Share your knowledge HELP others get rich, leave a legacy. Add more value to your life and your career!
Closing: Buying, Selling, Investing, and Managing Investment Properties is easy but does take work. It is lucrative and can be fun! Investing in Income Properties is the best way to increase your income AND increase your wealth! If you and your clients keep your properties maintained and give people a clean and pleasant environment to live in, you will have less problems and longer term tenants. Maintain your dwellings as if you live there, you will have quality properties and your tenants will have pride in their living arrangements. They will enjoy renting from you. If your customers maintain their buildings they will have less problems and buy more property through you!
Everyone wins -Especially you!
Thanks again, GOOD LUCK!
web site: carlmitrak.com
(949) 248-7432 |
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