Ignorance Comes with Age
The Advice of the Clairvoyant
The Future is a Bell Curve of Possibilities
The Prudent Investor
This blog was written by Dan Haberkost: firstname.lastname@example.org, 330-410-4952
This blog was written by Dan Haberkost: email@example.com, 330-410-4952
Humans are naturally inclined to squeeze everything into simple, categorical dichotomies. We want everything to be "Good/Bad" or "Correct/Incorrect" which is understandable. If we're able to fit everything into these black and white categories it makes life and decision making much easier. Unfortunately, the reality is that it's hardly ever that straightforward. An individual's situation can greatly affect whether or not something is good/bad or right/wrong. Context is a huge factor in determining how to judge anything and this is especially true in the case of real estate investing. In the RE world you will frequently hear new investors asking whether one asset class is better than the other or if some piece of advice they were given by a friend is right or wrong. We've all heard some guru talk about how multi family apartments are the superior asset class or how land investing is the only way to really become wealthy. The truth is, whether or not any of the assertions are accurate depends on the context and the individual's goals. What might be the best class of investment for one person may very well be the worst option for the next, it's never a simple dichotomy. Let's look at a few common examples in the world of real estate investing.
One of the first real estate podcasts I ever listened to focused on apartment investing. The host and all of his guests were constantly proselytizing about multi family as if it were superior to all other forms of RE investing. They spoke endlessly about the advantages of scale and how much quicker they were able to build their wealth and achieve financial independence through apartment investing. Fast forward several years and I was at an investment group here in Colorado. The guest speaker had been in business for over 3 decades and owned hundreds of single family houses around the southwest. Several times throughout his presentation he stated that single family houses were the best investment vehicle available, period. The host of the podcast I referenced and the speaker at the local RE group were both extremely successful in their businesses. They've both managed to build enormous amounts of wealth and create lives where they can work when/where they want. So who is right? The reality is that neither one is correct. Whether or not somebody should invest in multi or single family is entirely dependent on their goals/context (more on this later). It's not a simple dichotomy.
Another classic example that I see consistently is "Is now a good time to buy?." Novice investors ask this question in reference to the current state of the market with the expectation of a unquestionable "yes" or "no" answer when again the reality is that it's not that simple (unless of course you happen across one of those clairvoyant types who always knows exactly where we are in a market cycle). The answer to this question is entirely dependent on your financial situation, goals and the specific asset that you want to invest in. When someone makes a generalized, black and white statement that now is/isn't a good time to buy, you should be wary of their intentions.
There's an age old argument among investors about whether you should invest for cash flow or appreciation. Some people swear by purchasing cheap properties in lower middle class neighborhoods where the rent relative to value is extremely high. Others claim that buying in expensive cities and banking on appreciation/amortization is the best strategy for investing. Again, both camps claim that their strategy is the best, they act as if it's a simple question with a clear answer as to which option is better. This is completely ridiculous, just like the other examples the right answer varies dramatically depending on someone's situation and goals. Are you looking to quit your job as soon as possible and live off the income from your properties? Then cash flow is likely the most important metric for you. Do you have a high paying job that you enjoy and you're looking to utilize real estate as an avenue for diversification come retirement? Then perhaps more expensive B/A class properties may be the sensible option. In reality, a mix of the two strategies is most likely the best route for the average investor. I could go on forever with examples, but I think 3 of the most common ones should amply get the point across. It's not a simple dichotomy, it always depends on a variety of factors.
"Multi family is better than single family because your risk is hedged. If you own a fourplex and you lose a tenant you've only lost 25% of your income whereas with single family if you lose a tenant you've lost 100% of your income. Clearly, multi family is a safer, more predictable asset class to invest in."
"Investing in single family homes is a much better option than investing in multi family apartments because you're taking less risk. If you own a fourplex you're four times more likely to end up with a problematic tenant who doesn't pay rent and damages your property. With a single family house you just have the one tenant that you can screen thoroughly and the risk of ending the relationship with an eviction is much lower. Single family investing is undeniably the better way to go."
See how that works?? Any positive can quickly be turned into a negative. Whether or not something is good/bad or right/wrong is entirely dependent on how you frame it, it's never black and white. Let's look at another common example that pertains to our aforementioned discussion on whether it's a good time to buy.
(In a bull market) "The market is too hot to find deals right now, everything is overpriced and it would be much easier if it were 2008 and cheap real estate was available everywhere. This is not the right time to buy." (Or) "The market is extremely hot right now, capital is the cheapest it's ever been and available in quantities never seen before. It's extremely easy to fund deals and find buyers immediately. It's a great time to buy!"
It's all a matter of perspective.
In our earlier discussion on single family vs multi family, I referenced two well-known real estate investors who had virtually nothing in common when it came to their approach in business. However, there was one thing that they had in common...... they were trying to sell something. When you run into someone who does speak as if these common questions have a simple, black and white answers, be wary of their intentions. Investors who've been in the business for years and have had success know that there are many ways to build wealth through real estate investing. They rarely make definitive statements about one asset class or strategy being best, unless they're trying to sell you on their course/coaching/books/etc. At the end of the day, anyone who speaks in absolutes is either clueless or trying to sell you something (irony intended).
This discussion goes far beyond real estate and extends into nearly everything. Within the larger world of investing you'll hear people debate whether equities are better than real estate, whether managed funds are better than passive, whether hard assets are the way to go, ad infinitum. Again, it's never that simple! Do you have an excess of time or do you need purely passive investments? Do you enjoy your job and intend to work until retirement age or are you looking to create financial independence much sooner? These, among other considerations, all play a role in determining what the right answer is and even so it's likely a mixture of different strategies, it's rarely black and white.
Even beyond the investment world, are most issues really dichotomous? Is there a clear cut best political position? Would we suddenly be living in a utopia if we had a purely laissez-faire economic system? Is being conservative in all circumstances (or liberal) the obvious choice? Many people sure think so. But I'm not so sure, trying to squeeze everything into a simple dichotomy is difficult and just when you think you've found a case where it's appropriate you're likely to find a situation where your assertion is inaccurate. Talk to any doctor who is regularly treating a large volume of patients and you'll find that even in the context of medicine there is difficulty assigning basic, bilateral rules.
To conclude, let's bring this conversation full circle by returning to our initial discussion on real estate. "Real estate investing" encompasses a wide range of asset classes and a multitude of strategies for squeezing maximum returns out of them. There is no one best strategy or approach, few things are inherently right or wrong. Everyone has different goals, abilities, risk tolerances, etc so what it best for one individual may not be for the next. So if you're wondering whether you should invest in single family or multi, if investing out of state makes more sense than locally or any of the other common questions in the real estate investing world, avoid the gurus who give definitive answers in their attempts to sell you their exorbitant coaching program. Realize that there are many paths to your goal, analyze your unique situation and pursue a strategy that fits!
This blog was written by Dan Haberkost: firstname.lastname@example.org, 330-410-4952
Have you ever heard the story of the man who was 6' tall and tried to cross a river that was 5' deep on average? His friends warned him that it wasn't safe but he was sure that he'd be fine since he was a full foot taller than the average depth. Somewhat unsurprisingly, when he tried to cross, he drowned because the average depth doesn't ever have to be the actual depth. This slightly tongue-in-cheek story is analogous to the real estate investing world in many ways.
Over the long run, historical averages for growth in the stock market, real estate, etc will likely remain steady. But in the short term, we're dealing with an unprecedented pandemic that has caused a massive reduction in economic activity and asset valuations. As we were wading our way through the river that was 5 foot deep on average, we stepped over a cliff into a deeper section where we will likely drown if not properly prepared. On a macroeconomic level, everything regresses to the mean and is fairly predictable, at the micro level, anything is possible and unpredictable shocks to the market are normal. If you're not prepared you may not stay in business long enough to see the good times again. This is why it's imperative that you follow the basic tenets of real estate investing by buying at a discount, capitalizing your business properly and ensuring your properties cash flow after ALL expenses!
We've all heard the old saying "you make money in real estate when you buy". This can be done by finding a property where simple renovations/changes in operations increase the ARV well past what you paid or even by finding an asset that's distressed to the point that you can buy for pennies on the dollar without renovations (Undervalued vs Value Add). Regardless of which approach you take, buying at a discount is one of the basic keys to being successful as an investor (in any asset). If you talk to anyone that's run a profitable business through the ups and downs of the market they'll likely tell you that this is the most important rule of real estate investing. Buying below market value creates immediate equity which helps to hedge against unexpected drops in value. If you're able to buy a $100,000 property for $80,000 in cash and the market drops 20%, you're not underwater and likely won't have to sell. Even if you do end up selling you won't incur nearly as much of a loss as that extra $20,000 was your reward for buying right. On the other hand, if you purchased that same property at full market value of $100,000 in cash and the market drops 20% then you've suddenly lost $20,000 of your starting capital and may lose the asset entirely.
Many people look at historical averages and expect 3% appreciation in property value each year forever. But think back to our analogy of the 6 foot tall man, the same concept is applicable here. If you happened to buy a rental house at market value in early 2007 expecting continued appreciation you were sure in for a nasty surprise. 13 years later we can say that on a macro level the consistent appreciation has held true, but if you had bought at market value you likely weren't able to hold the asset through the Great Recession. On the flip side, if you had purchased a house at a 20% discount in January 2007 it may have been unprofitable for several years but holding it would have been viable which would have allowed you to enjoy substantial appreciation throughout the 2010s. This is why purchasing below market value is so essential to being a successful investor, not only does it immediately add to your net worth but it also helps protect you against the unpredictability of the market.
I'm writing in late April and many states have begun easing the restrictions that have been in place for the last 6 weeks. On May 1st many businesses will begin to reopen and if there isn't another spike in Coronavirus cases then soon after restaurants and bars will follow and life will slowly return to normal. Ideally, unemployment will sink back to a reasonable level, tenants will pay rent and the moratorium on evictions will be lifted. Even in this best case scenario, there are many real estate investors who will fall behind on their mortgage payments and lose their properties because they have not capitalized their businesses properly. They've followed the late night infomercial "no money down" real estate investing gurus and purchased properties where they're entirely dependent on rents coming in each month to pay the mortgages and maintenance. No, you don't need substantial capital to start investing in real estate BUT somebody involved in the deal does. Real estate is a capital-intensive business, especially when you're first getting started. If you buy property without adequate reserves, what happens when tenants don't pay rent for several months? When your unit goes vacant? When a pipe bursts and you're looking at a $10,000 repair? Well, that's the point when the investor who was more prepared comes in and buys your property at a discount while you go broke.
The problem is (again) too many people are looking at averages as opposed to reality. When they run numbers on a potential rental property they budget a certain amount for vacancy/cap ex/repairs & maintenance expense and if the rents cover them and allow for additional cash flow they assume they should purchase the property. Yes, the property should cover all of these expenses and each month you should be setting money aside in anticipation for their arrival, but you must also have access to liquid capital for the immediate future! Perhaps only once a decade you'll have a large, unexpected expense where you have to come up with significant amount of cash, and if you average that amount over 10 years the rents cover it. But what happens when it hits in year 1? You won't have accrued enough reserves to cover it and if you don't have capital set aside for the unknown you could be in serious trouble. Again, in the long run the numbers will approach the mean, but if your business wasn't capitalized properly from day 1 your investing career may not last long enough for that to happen.
As discussed, there is always a chance that you will be hit with a large expense shortly after purchasing a property at which point you would need prior funds set aside. But over the long term, your investment needs to be able to support itself. The rents coming in each month need to cover PITI, vacancy, capital expenditures, repairs & maintenance, management and any other miscellaneous expenses incurred from owning the property while still leaving additional profit.
Just like buying at a discount, monthly cash flow is a hedge against the unexpected. Again, many people make the assumption that they'll at least experience average appreciation so if they're negative a few hundred dollars a month in their cash flow it's nothing compared to the upside of 3% appreciation a year, especially on more expensive properties. This is a dangerous game to play, as discussed in the earlier section on buying at a discount, 3% on average includes many troughs and valleys in the market and you never know when the market is about to fall off a cliff. If you have a property that costs you money each month to own AND loses a large portion of its value, how long do you think you're going to be able to hold it?
At the end of the day, all of these hedges come down to not assuming best case scenario. Realizing that 5 foot deep on average could very well encompass several spots twice as deep. Too many people assume their rents/property values will increase every year, assume that vacancy rates will never increase, assume they won't get hit with a large expenditure in the first year or two, ad infinitum. One look at the current state of the world and it's clear why it's not especially prudent to assume that the average will be your consistent reality when investing in property (or any business endeavor). Everything regresses to the mean in the long run but in the near future anything is possible. If you want your business to last long enough to have a chance to benefit from average appreciation in rents & value, you have to buy below market value, buy from a position of financial strength and buy property that supports itself on its own!
This blog was written by Dan Haberkost: email@example.com, 330-410-4952
Most people stash away money for retirement by putting it in a 401k or IRA in hopes that it will grow and compound over time allowing them to retire comfortably at 65. They siphon off a portion of their income each month into their savings, working hard to build as large of a nest egg as possible. They scrounge and scrape together all that they can while simultaneously living frugally to reduce expenses to ensure they will not outlive their retirement accounts. This is the traditional middle-class American's approach to building wealth and saving for retirement. Now, saving money in a 401k or IRA isn't a bad idea but if it's your only means of saving it quickly becomes difficult, restrictive, and time-consuming. But what if you could put in a bit of work up-front to create a compounding savings account that someone else would fill for you? What if each month you had 5, 10, or even 100 people adding to a multitude of savings accounts, all owned by you? How would this affect your ability to enjoy your retirement and enjoy more of your income now? We'll come back to this a bit later.
When the average person thinks about owning rental properties, the canon for success is often the amount of monthly cash flow made after all expenses. Novice investors expect to buy their first house and have hundreds of dollars of extra income coming in each month after paying the mortgage/expenses. However, if you talk to successful investors you will often hear that $100/month in cash flow per unit (on a multi family property) or $200/month per single family is the metric they use for a successful investment (After ALL expenses). $100-$200 a month in cash flow per unit is not a very substantial income and would require a significant amount of doors to replace one's salary. So how do the wealthiest individuals in the world often get there by owning real estate?
Let's go back to our thought experiment from the first paragraph, what if you could create savings accounts that others fill for you? You can, that's exactly what you're doing when you invest in real estate and your tenants pay down the loan. Let's say you buy a 4-plex for $500k as your first investment property. You put work in initially to fix it up and ready the units for new tenants and then you give it to a property manager to handle. Now this is your first investment so it's reasonable to assume you may have paid close to market value for it and perhaps didn't get the best deal. Because of this, you break even every month on your expenses. Additionally, you bought in an established, east-coast town with a stagnant population so it doesn't appreciate either. On the surface, this doesn't sound like a very good investment. However, you now have a savings account that someone else is filling for you and all that you have to do is manage your property manager and read your financial statements each month. You put in an initial time investment when you purchased the 4-plex but now do little to no work while your tenants pay the property off for you. With this one investment you will now have a half million dollars saved (by other people) for you in 30 years that requires minimal effort. As if that's not enough, imagine if it did appreciate, cash flow each month, and lower your taxes? That sure would be a powerful wealth builder.......
As previously discussed, when owning rental properties someone else pays down the mortgage for you which is powerful as is, but what about the appreciation that (historically) can be expected when buying property in growing areas? Let's take the aforementioned example of the $500k 4-plex purchased on a 30 year mortgage. Again, let's assume that overall you're breaking even on cash flow every month but you purchased in a decent area and average 3% appreciation over the life of the loan. What would the value of that property be at the end of the 30 years? Well, let's see, $500k compounded at 3% annually for 30 years comes out to $1,213,631. By purchasing a single 4-plex and putting in a few weekends of work up-front to renovate it, you now have over 1.2 million dollars of net worth that someone else paid for. Now again, in this example we didn't get a good deal so we weren't getting cash flow over the 30 years and we only ran the numbers at 3% appreciation on average when in reality it's 100% feasible to get much more if you buy correctly. Are you beginning to see why the wealthiest people in the world almost invariably own real estate?
More often than not, people begin investing in real estate because they want to escape their day job. New investors want to buy several properties over a short period of time and live off of the income without having to work. They hear stories of successful investors who have been in the business for a decade or more and expect to get there in a quarter of that time. The problem with this is that the much of the wealth building comes from the amortization & appreciation which does not happen quickly. Your property will not appreciate substantially over night and you can amortize a loan in much less than 30 years but it will still take time! For this reason, successful real estate investing is best paired with a high-income career or profitable business. It's very difficult to (in a short time) go from a traditional day job to full time investor without also creating an income stream from the more active (i.e. starting a business) pursuits in RE such as flipping/wholesaling/etc. You absolutely can (and should) buy rental properties that cash flow each month. However, those who accrue millions (or even billions) of dollars from RE investing do so by purchasing property in growing areas and holding them (while occasionally trading up with a 1031 exchange) which allows the compounding of amortization & appreciation to take effect!
This blog was written by Dan Haberkost: firstname.lastname@example.org, 330-410-4952
That escalated quickly
It's early April of 2020, just over a month ago the stock market was roaring along on one of the longest bull runs in its history, the presidential campaigns were ramping up and March Madness was about to begin. Investors were busy speculating with excessive amounts of optimism which had become the norm of the past several years. The Dow was regularly hitting new highs and just about everyone who had put money into the market over the prior decade felt like a genius. Everything seemed to be business as usual with nothing especially earth-shattering on the horizon. Fast forward to today and a global pandemic has left the world economy shut down, nearly 100,000 people are dead and the vast majority of the civilized world is confined to their home. Businesses deemed non-essential are shutdown and many retail stores/bars/restaurants will likely never open their doors again. While there will certainly be permanent changes to peoples' personal lives, our healthcare system and the way business is conducted, is anything really different for the prudent investor? If you're investing for the long term, should this change the way you think or affect your investment criteria?
The rules have changed?
Across various mediums including investment forums, news articles, and blogs I've seen headlines that insist the old rules no longer apply and that this recession will be different than the last. For example, there have been a multitude of forum posts titled "should I be investing now" "Is this a good time to invest" etc. There was even a popular forum post floating around one of the biggest real estate investment sites titled "Dave Ramsey Looks like a Genius Right Now". This headline in particular caught my attention because of the absurdity of it. If you thought Dave Ramsey was a genius two months ago, then you should likely still think that way. If you thought his advice was off target, then you should still think so! (This is in no way about Dave Ramsey or his investment philosophy, the headline is indicative of the overarching theme of this blog post . Whether or not now is a good time to invest depends largely on your financial position and the specific asset's purchase price relative to its value (As always). Although the pandemic is far outside the norm, a recession after a long bull run is not. In fact, it's entirely in line with historical norms which becomes clear when you separate the virus from the ensuing bear market.
Two different issues
We're dealing with two completely different issues here: 1.) A Pandemic 2.) A Recession. Coronavirus may have been the impetus for the market crash but it is certainly not what caused the market to become overvalued. The virus is not responsible for a decade of obscenely low interest rates, poorly capitalized portfolios or foolhardy optimism from investors. The aforementioned causes of an over-valued market are consistent with historical conditions just prior to a market collapse, Coronavirus just happens to be the straw that broke the camel's back. Yes, the current pandemic is alarming and unprecedented. There will surely be preventative measures put in place that will allow us to react quickly and efficiently next time this happens. Many businesses will realize their employees can effectively work from home which may change many peoples' work life and necessitate a quick pivot of strategy from commercial real estate investors. Nonetheless, it's reasonable to expect that in several years the virus will be an unpleasant memory and it will not have a (significant) lasting effect on our economic system as a whole.
That leaves us with the second issue: a recession. Have we seen enormous drops in the market overnight due to an unpredictable catalyst? Yes, many times (9-11/Black Monday/etc). Did those catalysts cause a change in the fundamentals of investing or economics? No. These recessions played out as they always do with an eventual recovery and bull market. Every time the market is on a long bull run you will hear pundits talking about an imminent recession. You'll hear endless speculation as to what will cause the market to drop and when it will happen. The reality is that just as the current pandemic was unexpected and nearly impossible to predict, so is every catalyst that sets off a recession! There's a famous quote that's attributed to Mark Twain (but what quote isn't?) that goes something along the lines of "History doesn't repeat itself but it does rhyme". From a macro perspective, recessions tend to play out in a fairly consistent manner. However, the initial event that leads to a sell off and a massive reduction in value of the market is always unique and unpredictable.
Business as usual
So, have the rules changed? Is this a good time to invest? Are investment philosophies that were considered inefficient several weeks ago suddenly genius? Two months ago a long-term investor should have been buying undervalued deals while keeping sufficient capital reserves. In the wake of the Global Financial Crisis of 2007-2008 the same was true. Today, absolutely nothing has changed! Whether or not it's a good time to invest is determined by the asset you're investing in and your financial situation. Prudent investors will continue to buy great assets at a discount while holding adequate reserves. In fact, those who have substantial capital are likely to ramp up their purchasing. Take it from Howard Marks, founder of Oak Tree Capital, an investment fund with several hundred billions in assets, "As the environment becomes more precarious (with prices high, risk aversion low and fear lacking), a portfolio’s defensiveness should be increased. And as the environment becomes more propitious (with prices low, risk aversion high and fear prevalent), its aggressiveness should be ramped up." This quote comes from his most recent memo written 04/06/2020 and it effectively highlights the overarching point that although the initial cause is unusual, what is currently happening in our economy is part of the normal cycle. For knowledgeable investors, it's just business as usual.
"Calibrating." Memos from Howard Marks,
This blog was written by Dan Haberkost: email@example.com, 330-410-4952
This blog was written by Dan Haberkost - firstname.lastname@example.org
As a corollary to last week’s blog on self-managing (So, You Want to be a Property Manager?), I wanted to follow up with an article detailing what to look for in a property manager. After investing the time and money required to acquire an investment property, the last thing that you want to do is hire the wrong property manager. A rental property is a business, and the way that business is operated is largely what determines whether or not it will succeed or fail. For this reason it is absolutely essential to be sure that whoever manages your investment is qualified, ethical, and has their interests aligned with yours.
Many new investors want to manage their own rental properties when they should be outsourcing the job to a professional. One of the most common situations that necessitates hiring a property manager is when you do not live in the same city as the property. If you live more than an hour away, you should absolutely hire a local property manager to ensure that your tenants’ needs are handled promptly. When an investor’s rentals are not local they often neglect them and fail to keep up on regular maintenance/inspections. There is a reason that one of the best sources for seasoned investors to buy real estate at a discount is by contacting out-of-state property owners! Another good reason to hire a property manager often comes about when you look at the opportunity cost. Are you a business owner or a highly-paid professional whose time is better spent in your (other) business or job? If so, it may cost you more in lost revenue from your primary income source to manage your own rentals than it does if you pay a small fee to hire a property manager.Have you taken the time to educate yourself on Fair Housing Laws, screening tenants, and managing properties? Do you have a legally sound lease? If you haven’t done these items and aren’t planning to, don’t even think about managing your own properties. Find a professional manager and it will save you substantial frustration in the future.Finally, are you the type of person that is willing and able to have the difficult conversations involved in property management? Are you ready to evict tenants who do not pay their rent or charge late fees when necessary? If this doesn’t sound like you, find a reputable company to manage your portfolio!
A reputable property manager will handle all aspects of managing your rental units. Your property manager should find, screen, and sign new tenants immediately when your property is vacant. Additionally, they should handle all maintenance requests and tenant questions/complaints. Everything from evictions to late night maintenance calls should be taken care of by your management company. Your tenants should not even know who the owner of the property is. Your PM should also have a website where you can access all the information on your investment’s financial performance, your tenant’s leases, and all other pertinent information. The only item you should be tasked with is checking your monthly financial statements and approving repairs that exceed a pre-determined limit.
Most property managers charge between 6%-10% of the monthly rent for their services (closer to the higher end of the range if it’s only a few units, closer to the lower if it’s a large portfolio). At first glance, this seems to be relatively inexpensive for such a difficult job, which is why it’s imperative that you read the entire contract when hiring a property manager! All too often, property management becomes expensive when you consider the numerous fees that are included in the fine print of their contract. Annual fees, tenant signing fees, lease renewal fees, listing fees, inspection fees, and on it goes. This is where you have to be extremely careful when hiring a manager. If they take the entire first month’s rent when they sign a new tenant that’s 8% of your yearly revenue from that unit. When considered separately, these fees may seem arbitrary but if you do the math they can easily push the total monthly expense to 20% or more. Be sure to read the contract from beginning to end when hiring a manager so that you know exactly what you’re signing up for.
Does this mean that property management has to be this expensive? No, of course not. It means that you have to be competent in your due diligence when selecting a PM. There are professional managers out there that charge no fees at all beyond a standard monthly percentage but they are few and far between. If you find a manager who charges 10% of the monthly rent and has several hundred dollars in fees a year they may still be a good option. Especially if they have a positive reputation for being reliable and effective among investors who use them. What you want to avoid are companies who have unreasonable amounts of fees and especially those whose fees motivate them to cause turnover.
If your property manager keeps the entire first month’s rent every time that a new tenant signs a lease (and it’s regardless of how long the last tenant was there) are their interests really aligned with yours? Say that rent for your unit is $1000/month and your manager charges 10%. That means (if your unit stays occupied) they will gross $1,200 a year. But if that same unit turns over half way through the year and they fill it within a month they make an additional $1000 and only lose one month’s rent ($100). Additionally, when a unit is vacant there are usually repairs and maintenance that need done, does your PM mark-up the work they do on your unit? Suddenly, it would appear that your PM may not be happy to have long-term tenants. Be wary of property managers whose financial incentives are in conflict with yours, you want a manager who will act in your best interests and in order to achieve that their interests must align with yours!
When looking to hire a PM, check out reviews online to see what other landlords are saying about them. If you look at reviews on Google you’re likely to see numerous complaints from angry tenants who were evicted or charged late fees. This is not necessarily a cause for concern. What you really want to find are reviews from landlords who hired the company for at least a year. Check real estate investor networking sites like BiggerPockets and Connected Investors to see if you can find any additional reviews from property owners who hired the company. Attend local real estate groups and see who other experienced investors are using. Other real estate owners are your best source for honest feedback on the performance of a property management company.
Reputable property managers will often be members of various groups for professionals managers. When screening prospective PMs, check to see if they’re a member of groups like the National Association of Residential Property Managers (NARPM), the Institute of Real Estate Management (IREM), and Building Owners & Managers Association (BOMA). While not essential, membership in one or more of these national groups is a telltale sign that the organization is serious about their profession. (Yardi 2018)
When entering into any sort of business agreement there should be clear expectations on both sides. A good property manager will have standards for the properties they manage just as you should have standards for their services. Does the prospective PM take on management of just any property? Or do they require their units to meet a minimum standard condition? This is a great question to ask a potential manager as any self-respecting company will refuse to manage properties if the owner won’t invest their own funds to keep up on the maintenance. If they are willing to take on any property and have no standards for the condition of the units they place tenants in, this is cause for concern!
In addition to the aforementioned items, when screening a potential PM ask questions pertaining to their processes such as “how often do you inspect the property?” and “what does your tenant screening process include?”. Be sure to get as much information as possible about their systems and processes so that you know what level of attention your property and renters will be given. You also want to be able to get in touch with them when needed so be sure to ask who your point of contact is and how to best reach them.The key to hiring the right property manager comes down to conducting thorough due diligence. You should know exactly what you’re going to be charged for their services, what their process looks like, and who you will be communicating with and on what intervals. There should be no ambiguity as to how the relationship works. Remember, not all property managers are equal! Taking extra time upfront to thoroughly screen several different potential PMs is well worth it as it will greatly reduce future headaches and unnecessary expenses!
“4 Property Management Associations To Join – & Why You Should!” Yardibreeze, Yardi, 2018, www.yardibreeze.com/blog/2018/
This blog was written by Dan Haberkost - email@example.com
When it comes to real estate investing, the price you buy at is often considered the most important factor in being successful. However, if you intend to own your property for any length of time the manner in which you operate it (i.e. property management) is equally important. Tens of thousands of dollars can quickly be lost if you attempt to self-manage without the proper systems & processes in place. A house bought for a severely discounted price can quickly turn into a liability (and a significant source of stress) if you do not manage it effectively. On the contrary, a property that you may have paid slightly too much for can (in time) become a profitable venture with exceptional management.
All too often, novice investors with no prior experience purchase real estate and attempt to self-manage. They assume that it's easy and that tenants will treat the property as if they owned it. This assumption can lead to a very short career in real estate investing. A rental property is a business, would you attempt to run a business if you had no prior experience/education in the industry? There is a reason that one of the most reliable sources for successful investors to purchase properties at a discount is from small-time rental property owners who self-manage. They are often willing to get rid of their properties for any price because they are so tired of managing them (and losing money). They begin their (brief) careers as property managers thinking it's easy and end them with no desire to ever own a rental again. There are certainly investors who have self-managed their rentals from day but those individuals made sure they understood all of the following items from day one.
Property management can involve difficult situations and extremely unpleasant conversations. Are you prepared to post an eviction notice on a family's door? Are you comfortable having to explain to your tenant why you're keeping their security deposit when they move out due to damage? Are you prepared to increase rent when the market dictates? These are all realities of property management and if you're in the business for any length of time you will almost certainly have to have these conversations. All too often, novice managers let these items slide and avoid difficult conversations which ultimately leads to the loss of money and the steady decline of the property's condition. If you're planning on self-managing, you must be prepared to deal with these situations as they come up and not allow your emotions to affect your decisions.
Implementing effective marketing strategies to attract tenants to your property is essential to running a profitable business. You first have to determine what the appropriate monthly rent is which can be done by looking at what comparable properties are listed for, using sites link Rentometer to see what similar properties are currently rented for, and talking to local agents/property managers. Once you know what to charge for your unit it's time to start advertising. If you're in a hot market then this is relatively easy and you may be able to quickly fill your units simply by posting on Zillow. However, if you're in a slower market you will want to be sure to also post on other sites such as Craigslist, Hotpads, Trulia, Facebook Marketplace, Realtor.com, and your own website if you're business is far enough along to have one. You can also put a "for rent" sign in the yard but the reality is that few prospective tenants are calling numbers off of yard signs and nearly all of them are looking online. Utilizing several different marketing platforms will help ensure that you begin to get leads, but knowing how to screen them effectively is essential to being successful.
If you are going to manage your own rentals, thoroughly screening your tenants may be the most important step of the process. Before someone has moved in there are numerous (legal) reasons to not allow them tenancy. However, once they have settled in it is EXTREMELY costly, difficult & time consuming to get them out. Therefore, you must have a solid vetting process that ensures only responsible, trustworthy adults are renting from you.
First and foremost, you should always require that they fill out a rental application. This (seemingly) simple task disqualifies many people as they will take one look at it, see the multitude of personal questions, and decline to even fill it out (this is a good thing). A solid rental application will at minimum include all of the prospective tenant's personal info needed to run a background check, financial information, the phone numbers of their two previous landlords, their employer's information, names of all individuals that will be moving in with them, and questions asking if they've been evicted/foreclosed on. In addition, the tenant should pay an application fee that covers the cost of the background check. Here in Colorado, the law dictates that you can only charge a tenant the exact amount the background check cost you and you must be able to provide them a receipt showing that amount if requested. If you live elsewhere the law may vary but be sure to check on this item before you charge an arbitrary application fee. Additionally, be sure to check on your state's laws regarding what questions can and cannot be asked on your rental application as it varies tremendously depending on where you live.
Once you have the application filled out, you can now conduct your due diligence by running the background check, calling their references and verifying their employment. As a rule, the prospective tenant's gross monthly income should be 3 times the monthly rent at minimum. This should be verified by asking for two pay stubs and by calling the employer and speaking with their manager. In addition, if the background check shows any felonies, evictions, or foreclosures the applicant should be immediately disqualified. Finally, when you call the applicants previous landlords ask questions like "were they ever late on rent?", "was there any damage to the property when the tenant left?", "why did they leave?", and "would you rent to them again?". A 10 minute conversation with their last landlord will give you a good idea as to whether or not you want them in your unit. If you take all of the aforementioned precautions, you will significantly increase the probability that the tenants who make it through your vetting process are financially responsible adults.
When screening tenants, it's extremely important to be cognizant of fair housing laws. The Fair Housing Act prohibits discrimination of a prospective tenant due to their race, color, national origin, religion, sex, familial status, or disability. These are the protected classes outlined in the federal law and these items must not be taken into consideration when deciding who to rent to. It's important to keep in mind that this is a federal regulation and your state may have additional legislation outlining what might be considered "discrimination". (HUD.gov)
What if you have a tenant who is behind on rent? Perhaps they're a single parent and you know they're trying their best to pay on time so you decide to cut them a break by not charging them a late fee. You've likely violated fair housing laws. If you have charged your other tenants that late fee, but did not charge this specific one a fee due to their situation, you are discriminating. What if you have a "no pet" policy but a tenant claims they have an "emotional service animal"? You can request that they provide documentation proving that it is registered but you CANNOT reject them due to the animal or else you are discriminating. These examples illustrate why it's essential to know the subtleties involved in fair housing laws. When you think of "not discriminating" the first thought that comes to mind is often that you would never do so. That is, until you realize that helping a tenant out who falls on tough times may be considered discrimination. The key is to have standardized policies and procedures that adhere to the law that you never deviate from. (HUD.gov)
Once you have your screening process down, ensuring your lease is bulletproof is the next big step in effective property management. If you know an experienced real estate investor/property manager who is willing to share their lease with you (and they're in the same state, therefore, under the same laws as you) then using their lease as a starting point can be a good option. You should always have the lease looked over by a real estate attorney but having an existing lease for them to analyze will cost far less than creating one from scratch. Otherwise, you may want to bite the bullet and have them draft a lease from scratch to ensure it's legal and thorough. An effective lease will outline all of the responsibilities of both parties, highlight who is renting the property and for how long, and describe what actions allow for breaking of the lease by both parties.
This will likely be one of the first questions that the prospective tenant will have asked, but the amount of the security deposit should be clearly outlined in the lease. At minimum, the tenant should not be allowed to move in until you've received first month's rent and one extra month's rent as a security deposit. Ideally, you should require first AND last month's rent along with 1 month's rent as a security deposit. If you're in a decent market this should be realistic and is the safest way to go.
Be sure your lease isn't entirely one-sided. It should include clauses that outline the tenant's rights just as it outlines yours as the property manager. Leases that are too heavily geared toward protecting the landlord and that fail to include the tenant's rights are likely to be thrown out in court.
Once you've selected your tenant, they've signed the lease, and they're ready to move-in, it's essential to conduct (and document) a pre move in inspection that documents the condition of the unit before the tenant moved in. This should be a full-report with photos of all rooms in the unit clearly demonstrating that everything was in working order before the tenant moved in. Additionally, the tenant should sign & date the document verifying that they agree with the details of the report. This ensures that when the tenant moves out there are no questions as to whether or not damages were there prior to move in.
Your lease should clearly state what intervals you will be inspecting the unit on. Again, this should not be a one-sided relationship and the inspections are as much to ensure that the property is safe and well-kept as it is a chance for you to be sure they're adhering to the terms of the lease. You should be inspecting the property twice a year minimum and some managers go as far as quarterly. Whatever interval you decide to put in the lease is what you should follow and be sure to give your tenants several days' notice before you conduct your walk through.
When you conduct your inspections you will likely find that your property is in need of maintenance. Do not put off repairs! Always hire a qualified expert to do the work and be sure it's completed promptly. Novice property managers frequently try to save money by completing repairs themselves which can be a good option if it's a simple fix. However, if it's something that requires more specialized knowledge such as electrical work be sure to hire someone who has the expertise to do the work properly. Trying to save a quick buck by doing work yourself that you're unqualified to do can lead to significant management issues (and more expenses) down the road.
As a property manager, you need to remember that your tenants are your customers and treat them as such. Tenants need to be able to submit maintenance requests easily and you must respond to them quickly. Setting up a Google Voice number for your tenants to use when they need to contact you is a cost-effective way to avoid giving out your personal cell number.
If you manage rentals for any length of time, then there is a high probability that you will have to go through the process of evicting tenants. The process varies from state to state, but generally begins with the landlord issuing a notice requiring the tenant to correct whatever issue is causing the landlord to take action (non-payment of rent, violation of other parts of the lease, etc.). If the tenant does not fix this issue then (after a certain number of days depending on the state) the landlord can file an eviction suit against the tenant. The lawsuit can take several weeks or several months to go through depending on the details but once the process is complete a law enforcement official is the only person that can legally remove the tenant from the premises. This can be problematic because often times there is a significant wait for the official to come to your property and remove the tenant. Here in Colorado, it normally takes up to a month. Besides the lost rent, you're looking at $3,000-$4,000 in costs to go through the entire process. This is why it's so essential to implement a rigorous screening process that reduces the chances of ever having to evict a tenant. (Dillman, Beth)
It's also important to note that you must be 100% consistent in your process when evicting tenants. Your lease should state exactly what day rent is due and how many days after is considered late. If you serve a tenant a 3 day notice on the 3rd of the month for non-payment then EVERY tenant who has not paid rent by the 3rd of the month must be sent the same letter. Remember, your treatment of tenants must be consistent in all of your operations to ensure you're not in violation of fair housing laws.
Another mistake that leads to poor property management is the lack of funds to properly maintain the unit. All too often, investors over-extend themselves and end up not having the capital required to operate their property effectively. They end up deferring maintenance which leads to lower rents and less responsible tenants. With less money coming in via monthly rent checks and more negligent tenants many landlords then become even more hesitant to spend funds towards repairing their property. This is an unfortunate cycle that leads to an investment that is not profitable and tenants who do not get a functional and safe home. The takeaway here is that you must be financially prepared to handle maintenance as it comes up or your property will often become more of a liability than an asset.
As a real estate investor, it pays to be forward-thinking. Although you may manage your properties now, you never know what your situation will be in 5 years so even if you plan to self-manage you should be prepared to hire a property manager eventually (blog on this soon). Therefore, it's important that your monthly rents afford a margin to cover a property manager in the future.
Managing properties is not easy, but if you take the time to set up efficient systems & processes, to understand your state's laws, and to keep your property safe and functional a new investor can effectively (and profitably) manager their rentals.
Dillman, Beth. “The Eviction Process in Colorado: Rules for Landlords and Property Managers.” Www.nolo.com, Nolo, 19 Jan. 2016, https://www.nolo.com/legal-
HOUSING DISCRIMINATION UNDER THE FAIR HOUSING ACT.” HUD.gov / U.S. Department of Housing and Urban Development (HUD), https://www.hud.gov/program_
This blog was written by Dan Haberkost - firstname.lastname@example.org
Investing in real estate is one of the most effective methods for building long-term wealth. However, many people are discouraged by the high price of property in their market and the expenses that come with owning it. If you're buying an investment property in the traditional manner, you will need 20% down minimum which can (depending on your market) amount to quite a bit of money that greatly exceeds most peoples' savings. Additionally, if you don't have property management experience it can be intimidating to consider managing tenants yourself. Since you can realistically only inspect the property several times a year, it is extremely difficult to know whether or not your tenants are adhering to the lease and taking care of the property that you poured much of your life savings into! In this situation, house-hacking can be such a safer, less expensive, yet financially impactful first step into the world of real estate investing!
Simply put, house-hacking is a form of real estate investing where you rent out extra units (if you own a multi-family property) or extra bedrooms (if you own a single-family property) in your home while living in the property as to reduce or completely eliminate your monthly housing costs. The benefit of living in the property is that you're able to obtain owner-occupied financing which means you need a much smaller down payment than you would if purchasing an investment property in the traditional manner and you typically receive a lower interest rate as well. Depending on your situation, you may qualify for a loan requiring no money down or as little as 5%. This makes house-hacking far more feasible for the average person as it does not require nearly as much capital. Residential loans will lend on up to 4 units which allows you to purchase up to a fourplex with an owner occupied loan but you can also be successful with a single-family house that has extra bedrooms as well.
If you're like most people, housing is your single largest monthly expense taking up 1/3+ of your income. Consider how financially liberating it would be if you didn't have that expense anymore. Imagine what it would be like if someone else paid your housing, while increasing your savings, and lowering your taxes for you? Well that is exactly what house-hacking does! Consider the following scenario, you buy a duplex and your mortgage (principle, interest, taxes & insurance) is $950/month and your renter on the other side pays $900/month (this is 100% feasible!). You've just created a situation where your monthly housing expense is almost completely eliminated. Now imagine that each unit has 2 bedrooms and you also rent out the extra bedroom in your unit for $450/month. In this situation you would not only be living for free, but you would also be making money above and beyond your mortgage each month! Again, this is 100% doable and many investors have eliminated their housing expense while increasing their income exactly this way. The same concept works with a single-family home as well. In fact, house-hacking a single-family property can potentially be even more profitable if you buy the right investment. With the proper layout, a 4 bedroom house will often be substantially cheaper than a 4 unit building yet you can rent out the other 3 rooms while living in it and make a significant return.
As if having your monthly housing expense eliminated and making money on top of it wasn't enough, house-hacking (and real estate in general!) offers additional benefits through tax savings, appreciation and mortgage reduction. Let's go back to our example of house-hacking with a duplex. If you're living in one side of a 2 unit building while renting out the other, many of your living expenses now become deductible as well! Monthly utilities? 50% deductible. Weekly grass cutting? 50% deductible. The same principle applies to single-family house-hacks as well, the percent of the house rented will be the percent you're allowed to deduct of these types of expenses.
If you buy real estate in a city with strong population and job growth, it's reasonable to expect that it will increase in value over time. This is often the most significant way in which real estate builds wealth. If you're property is worth $300k and appreciates 3% in a given year, that's a (completely passive) $9,000 added to your net worth. If you buy right, appreciation is often substantially more than 3% in a given year which is why it's so essential to buy property in areas with strong demographic trends!
Last but not least, every month your mortgage is paid down which increases your equity in the property. The significance of this when house-hacking is that you are not the one paying the mortgage each month! Every month your tenants are paying down the principal on your loan for you which acts as a sort of forced savings account. At the beginning of your loan, the principle reduction is minimal but still (typically) results in an additional $3,000-$4,000 each year. As time goes on, the amount of principle paid each month increases at an exponential rate which leads to a snowball-effect of wealth building!
When one considers the financial implications of eliminating your housing expense, monthly cash-flow, tax benefits, appreciation, and mortgage pay down resulting from house-hacking, it becomes clear that there are few investments that compare. House-hacking sets you on a trajectory to be financially independent years (perhaps decades) before the average person and requires a minimal amount of effort. Additionally, few other investments allow you to get started with such a small amount of capital. Managing tenants in a house-hack tends to be much easier than managing them in a traditional rental as well.
For those concerned about potentially unruly tenants, house-hacking offers a solution to this too! Since you're living in the same building (maybe the same unit!) your tenants know that you're there on a daily basis and it will be far less viable for them to violate the lease. This is especially true if you're house-hacking a single-family home as the only area they occupy that you don't also use is their bedroom and (sometimes) bathroom. The communal living situation pressures them to keep the kitchen and other common areas clean while being considerate with noise in the evenings and early morning. There's no way for them to sneak animals into the house, renovate without your permission, or violate the lease without you knowing. Living with your tenants may sound uncomfortable, but if you do the work up-front and screen them thoroughly it can lead to a profitable win-win situation!
It's clear that house-hacking can have a tremendously positive effect on your financial situation, but it's still essential that you take the time to think through the subtleties of the arrangement such as the parking situation, your local laws, your tenants' schedules, and so on. Make sure that there is plenty of space for your tenants to park their vehicles! If they have to park on the street that's fine but they shouldn't have trouble finding a spot to park. Here in Colorado Springs the law states that no more than 4 unrelated individuals can live in one unit at a time. So if you're going to buy a single family home with 5 bedrooms and rent them out you would need 2 of the roommates to be related our you would technically be violating the law. Additionally, be mindful of your tenants' schedules when deciding who to rent to. If you and all 3 of your tenants have a typical 9-5 there may be conflict when everyone is getting ready for work at the same time and getting home at the same time. Ideally, you want roommates whose schedules vary to avoid multiple people using the common areas simultaneously.
Finally, screen your tenants thoroughly every time and do not vary from your policies/procedures. You should be conducting a background check on every tenant just as you would for a traditional rental. In addition, make sure that their (gross) income is 3 times the monthly rent, that you verify their income, and always call their previous landlords. Do not be lax on your due diligence or you are likely to create headaches for yourself in the future!
If you take the time to screen your tenants diligently, purchasing a home to house-hack can transform your financial situation and put you on a trajectory to retire years before the average person. With the elimination of your largest expense, house-hacking offers a level of financial freedom that few people have which ultimately gives you freedom to pursue the things that you enjoy!
This blog was written by Dan Haberkost - email@example.com
Spring has officially arrived. What an exciting time of the year! Whether it means cleaning, getting outside, taking a chance, or wishing it was still winter, there are plenty of things to do in this great city. Check out the awesome events Colorado Springs has to offer us this year!
Canon City Music & Blossom Festival
May 1st-5th, Canon City will be hosting this exciting festival. With parades, marching band competitions, craft fairs, a rodeo, and more, this event proves fun for the whole family! Find out more by clicking here.
Pikes Peak Birding & Nature Festival
There's a chance you know this one well! Annually on Memorial Day weekend, Old Colorado City hosts this action-packed festival. There will be entertainment, food, vendors, and plenty of fun! For details, click here.
Meadowgrass Music Festival
Starting May 25th, Black Forest will host this three day event. There will be music, camping, kids' activities, and top notch food! For details on pricing and volunteering, click here.
Manitou Springs Wine Festival
June 1st, from 11:00-5:00, Memorial Park will be hosting this awesome wine festival. Show up to enjoy the food, vendors, and wine paraphernalia. For tickets, click here.
Top of the World Rodeo
June 8th-10th, head to the Teller County Fairgrounds for a classic rodeo experience! For more information, click here.
Colorado Springs is an incredible place to live! With events like these, views like ours, and wonderful people, what more do you need? For additional details on these local events and more, check out the Visit Colorado Springs website. They prove a detailed and up-to-date guide on all things Colorado Springs!