Archive for July, 2013

Landlords: How to Increase Cash Flow WITHOUT Raising Rents

One of the biggest mistakes we continually see real estate investors make is buying a rental property that produces a NEGATIVE monthly cash flow.  When it comes to rental properties, positive cash flow is much more important than equity!

Here’s a typical example: An investor buys a single-family rental for $90,000.  The property will rent for $725 per month and have mortgage payments of $485.  The investor thinks: Wow, the property will produce a positive monthly cash flow of $240 – boy will I be sitting pretty.

But what about little expenses such as property taxes, insurance, repairs, vacancies, and management?  When you factor these costs into the equation you suddenly find yourself knee deep in a pit of money-losing quicksand.

Always remember that investors make their profit – including positive cash flow – when BUYING the property.  For a deal to be profitable, it’s critical that you know all the numbers and structure it accordingly.

Experience has taught us that expenses (property taxes, insurance, repairs, vacancies and management) often – but not always – run between 30% and 40% of rents.  Here’s the formula we use to determine the most we can pay in mortgage payments: Rent – Our Profit – 35% of Rent = Maximum Mortgage Payment.  ($725 – $250 – $254 = $221 Maximum Mortgage Payment)

Another common mistake made by landlords is using rent increases as the sole way of increasing cash flow.  Upping a tenant’s rent – especially above market rates – is a sure way to end up with a vacancy – and vacancies can be VERY expensive!

At our July real estate investors meeting, we discussed different ways landlords can increase cash flow without increasing rents. Knowing that most of the folks reading this column weren’t able to attend our July meeting, here are two of the strategies we covered. Be sure to get together with other investors and discuss these strategies!

We are pet friendly.  I know what you’re thinking: Pet smells, stains, hair, damage and poop.  Rest easy because pet owners are NOT created equal.  Some folks take GREAT care of their pets, while others do not.

So how do you tell the difference between the two?  The most critical thing we do before choosing a tenant is to conduct a surprise in-home inspection of their current residence.  Whatever their current home looks (and smells) like inside and out is EXACTLY how they’ll have our home looking (and smelling) one week after they move in.  If they have fleas in their current home, know that those fleas will be coming to your home.  If their home smells like a kennel, so will yours a few days after the new tenants move in.

And here’s how we make money with pets: We don’t charge a one-time pet deposit.  Instead, our tenants pay $20 per pet per month.  That’s right, at our properties pets pay rent!

Another way to increase cash flow without increasing rents is to regularly inspect your rentals – both inside and out…especially the first three months a tenant is in the property.  Most tenants have to be taught how to be good tenants.  And just who taught them to be bad tenants?  It was bad landlords, of course.

During the inspection, if we find property damage, the tenant is given seven days to repair the damage.  If they don’t, we do the repair, and then charge the tenant accordingly…plus we include a service fee for our trouble.  Our goal is to teach folks the importance of taking care of our property.  After all, the bedroom wall is not a drawing board, the bedroom door is not a punching bag, and our carpets are not a bib!

Hope these ideas lead to great landlording discussions.

Bill & Kim CookBill & Kim Cook are a husband and wife real estate investing team. They live in Adairsville, Georgia and have been investing in real estate since 1995. They specialize in buying single-family homes, mobile homes and mobile home parks. They also run North Georgia REIA and teach folks how to successfully invest in real estate.

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Real Estate Investment Hats

When in real estate, a person wears many hats and learns to adapt to a ton of situations. This mean, however, you must be knowledgeable enough to do so. You may be a buyer’s representative, seller’s representative, wholesaler, investor, contractor, mediator, property manager; the list goes on and on. The only thing that remains constant is you. One may argue that you can delegate these tasks out to a “specialist;” but, how do you know if the “specialist” is any good if you are not capable enough to evaluate their work? In other words, if you know and understand what the specialist does you can save thousands of dollars per transaction.

When wearing this many hats one cannot become a master of all. Therefore, focus on those positions that can save and/or make you the most profit. An easier position to understand and translate into savings fast is the contractor hat. This does not mean you have to pick up a hammer or paint brush. What this means is, know how much the nails and paint cost, what amount of each is required for the job and the estimated amount of time the project will take to complete. Knowing this information can save you money in three different ways. First, it can save you from contracting a property with hidden issues if you know what to look for during your initial walk through. Secondly, you can use this wisdom in negotiating with a seller. A perfect example was when I was dealing with a seller selling an older home. To most people the siding looked in great shape because it had newer vinyl siding. This neighborhood called for hardie siding so it needed to be replaced. I knew that these homes were originally sometimes built with asbestos siding, which increases the renovation cost quite a bit, and this house had asbestos. I informed the seller of this problem and, of course, they called around to see if I knew what I was talking about. I informed them that now that they knew of this they had to disclose it to any potential buyers. They called me back and accepted my offer because most of the other buyers did not want to bother with the asbestos issue. If one of the other investors/wholesalers had closed on this property, they would have killed their renovation budget or their investor’s budget by a few thousand dollars. Third, once you have the home, you have an idea about what it takes to complete a project and can negotiate the prices with the contractors. This will help prevent being taken advantage of by an unethical contractor.

If you are serious about being involved in real estate investments you need to continue developing your craft similar to any other professional in real estate. Nearly every person in real estate is required to take continuing education including real estate agents, loan officers, inspectors, attorneys, etc. This is required because real estate is ever changing. This should make you want to continue your education and not be left behind. Sooner or later you may become the “specialist” and deals will begin finding you instead of you having to hunt down deals.

Michael VazquezMichael Vazquez has been offering properties to real estate investors significantly below market value since 2006 in both Texas and Georgia. Michael taken on projects starting with just 4 brick walls (literally) to managing his own rental portfolio. When it comes to investing in real estate he has done much more than many twice his age. Michael is always looking for more investors to work with.

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