Section 8 Offers “Free Rent”? 5 Reasons Many Landlords Still Choose Not To Participate
I saw an ad for a Section 8 speaker touting their government-sponsored rental assistance program as “Free Rent” for landlords. I had to laugh. As we’ve been told our whole lives, nothing worthwhile is free. And the Section 8 program is not an exception to the rule.
For the uninitiated, the Section 8 housing program allows people who earn under a certain income to receive a housing voucher to partially subsidize or pay for their rent in full. This seems like a boon for landlords.
The process looks like this: For the tenants, they need to scour rental home ads and find landlords who are willing to accept Section 8 vouchers. For the landlords, they need to willingly accept them. The problem is that many landlords choose not to accept them, which seems strange. The landlords do not want government-guaranteed “free rent”?? Well, maybe free isn’t always so free…
A big misconception is that the tenants are the reason landlords hesitate to accept Section 8 vouchers. To me, this is patently false. Some of our nicest and best tenants use Section 8. Really, on our rental applications for Section 8 tenants, we run them the way we typically do, but deemphasize income and credit score requirements as Section 8 has them partially backstopped.
So, if the tenants are good, why not accept Section 8? The 5 main reasons many landlords choose not to accept Section 8 vouchers:
1. Too much paperwork. It’s not easy for landlords, especially non-real estate professionals, to navigate the process.
2. The governmental standards for housing are really high and your house will fail the inspection. Slum lords (ex: the type of people who ask if tenants really need clean, running water) are not the only people that fail; almost everyone fails the inspections. I can speak from personal experience, anecdotal evidence, and conversations with the inspectors. I asked one inspector what percentage of homes passed their first time and he laughed. “Seriously? Zero percent. I’m not kidding.” He went on to say that his own house wouldn’t pass a Section 8 inspection. Our latest fail report had paint splatter on a strike plate and a loose electrical outlet as reasons it failed. When there are hundreds of items that the inspectors are looking for, you are behind the eight ball.
3. Customer service is typically unresponsive. I don’t really blame the employees. The workload that is saddled on them is immense. I asked an inspector the other day a question about a failed item on the inspection report and she exhaustedly told me she couldn’t remember- she conducts 15 different home inspections every day! So, bottom line, getting anything accomplished with them takes a lot of time, energy, and follow-up.
4. Waiting is the hardest part. We had a house that took 5 weeks to get an initial inspection. So, for 5 weeks, we ate the rent and utilities as the house stood vacant. There was no “free rent” or sympathy. After the home inevitably failed, there was another 2 week wait for a reinspection. The combined 7 weeks of non-recoupable utility and mortgage payments hurt. So did the vandalism that occurred as the house sat empty.
5. Re-inspection failures and rent abatement really hurt. So, let’s say you pass the initial inspection and the tenant moves in. At the ten-month mark of the tenancy, there is a reinspection where the Section 8 inspectors look for housing violations. We used to occasionally pass these, but that hasn’t happened in the past few years due to stricter regulations. The inspectors will find new things that happened during the tenancy; sometimes they find things they missed on the first inspection. Our latest fail was partially for a loose banister.
The problem with failing reinspections is that you are given one chance to fix the items. They provide a punch list so it should be as simple as giving it to a handyman to fix, right? Well, the descriptions detailing what is wrong are nebulous and getting the inspectors on the phone to ask them to remember your home and a specific issue is not likely. The handyman does the best he can, but when it fails, you enter into the unfriendly world of rent abatement.
Rent abatement is how property managers get fired and cash flow becomes difficult. It starts with the failed second inspection. This letter comes a week after the inspection letting you know what items you failed. You are instructed to fix the outstanding items and then schedule a final reinspection. During this time, not only is rent deducted for the abated period while waiting for the final inspection (your bank account is debited the following month on the 1st when payments are made), there is no rent paid for the coming month. For example:
Your rent due is $900/month and your abated 2-week period costs you ($450).
On the first of the month after abatement, not only do you not receive the $900 due (and the tenant is still living in your rental home and the bank wants your mortgage payment), you are clawed back $450 (payable immediately). This essentially puts you in the hole $1,350 (not counting the funds for the repairs on the home). Cash flow becomes a big issue. This is when “free rent” becomes “free rent” for the government. You’re a great citizen to do this, but you don’t feel so great when this happens.
If you pass on your final reinspection, you will get the $900 back the following month (the $450 is gone forever). If you fail, your contract with Section 8 is terminated and the tenant is free to leave. This presents a much bigger problem as the tenant usually doesn’t have money to pay rent, Section 8 is not paying you, and the tenant needs to enter the arduous, time-consuming process of finding a new Section 8-eligible home (while living rent-free in yours).
In closing, Section 8 can be a good program if you know it well and have repair people very familiar with their changing requirements. However, “free rent” for landlords is a gigantic misnomer and is about as far away from the truth as you can get. It can be intelligently argued that Section 8 vouchers are much more risky than working with non-subsidized tenants. “Nothing is free” is the true mantra!
Brett Furniss is President & Owner of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords, managing single-family homes, condos, and town homes in the Charlotte-Metro Area. BDF Realty’s services include property management, home fix-ups, and home sales, including Rent-To-Sell (“When You Need a New Solution to Sell Your Home”). His newest book is A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!) which is available on-line now.
Learn MoreCharlotte Property Management Monthly: 5 Crucial Expectations to Set Verbally With Your Tenants at Lease Signing
I’m a big believer in setting expectations in relationships; it seems to make things go more smoothly. If you know clearly what you’re supposed to do and I know what I’m supposed to do, there is less opportunity for hurt feelings and animosity. A beautiful, life-long relationship can blossom! (Cue the romantic music…)
This is why many married couples say the first year of marriage is the hardest. There is no book of set expectations for each partner; it’s created on the fly. The idyllic vision of married life begins to fade quickly when real life is thrust upon them. Who pays the bills? How many days are you staying out late with your buddies? You want me to iron the clothes? These fun questions need to be addressed and expectations of conduct need to be negotiated so both spouses are (mostly) satisfied. There is no marriage contract that explicitly spells this out.
Fortunately, a landlord-tenant relationship is governed by a set of rules known as “the lease”; this should theoretically make things easy! A lease is a perfect way to express your expectations to your tenant. That sounds good, but how come there often seems to be hurt feelings and bickering in leasing relationships? From the landlord’s perspective, the tenant should read the contract and follow it to the letter, right? If the tenants did everything the lease said, there would be no issues. So, of course, the issue lies with bad, rebellious tenants.
Wrong. The problem is a society who doesn’t have the time to read anymore. You are in the minority that you have made it past the Twitter-restricted 180 characters and are on to the fourth paragraph of this blog. Congrats! Pat yourself on the back!
And the standard lease is not exactly a page turner! It is legal jargon with no cool pictures or diagrams that goes on for page after long page…
If you want your tenant to know what you want them to do, you must verbally tell them. They will remember what you say and will usually act accordingly. Your leasing relationship will be the better for it! Guaranteed.
Tell the tenants what you expect (the Cliff Notes version please!) and what you are going to do for them (and won’t do for them!). The five most important things I make sure I cover with tenants in our lease signings:
1. The date the rent is due (the 1st of the month), the day it is late (it must be RECEIVED by the 5th of the month), and the day eviction is filed (the 16th) if we don’t hear from them and work something out. I also mention the late, bad check, and eviction fees that would be due in each scenario.
2. Where their security deposit is, what it is for, when it will be returned (within 30 days after move-out), and under what conditions some of it may be withheld.
3. Explaining that aesthetically the home is “as is”. When things stop working (HVAC, plumbing, etc.), what the repair process is and how it is handled.
4. I explain the 3 keys to a good tenancy: paying your rent on time, getting along with your neighbors, and keeping the home in good shape (including standard maintenance).
5. How early lease terminations are handled. Life happens and this is how you can get out of your lease and keep your credit intact. (Note: We ask that a 30-day notice be given along with 2 months of rent as a lease termination fee, in addition to the rent due up to the vacancy date)
6. Bonus item message to give for property managers: “We are not the owner of this home. We are the messenger. We don’t always like being the messenger, because messengers get shot sometimes. You don’t need to shoot us. We’d actually really appreciate it if you didn’t.”
This isn’t a comprehensive list, but it is important to remember that attention spans are not endless. These five points should be helpful in having a great relationship with your tenant!
Brett Furniss is the President & Owner of BDF Realty (Charlotte Property Management) which works with Charlotte real estate investors and homeowners and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn More
Selling Rental Properties: 3 Free Steps To Determine Whether You Should
There’s been a lot of good news of rising home prices coming from the Charlotte housing market, as well as the rest of the country. For real estate investors, this news is a mixed bag. There are less great buying opportunities for them, but their net worth is increasing. It also presents a good opportunity to turn their home assets into cash.
Making money on selling rental homes is a nice aspect of the investment real estate game. Buy low, sell high. When a real estate investor is able to do this, life is good! It makes all the repairs, waiting for late rental payments, and extra tax work worth it!
Let’s face it, there are two main joys of selling investment homes:
1. A good amount of cash is transferred into your pocket
2. The worry about your extra home is gone and given to someone else!
So if you have an investment property that you may want to sell, here are 3 free steps to make a quick determination on whether you should:
1. Determine the value of your home: Ask your property manager or friendly Realtor a realistic range of values for your home. Why a range and not a fixed number, you ask? Real estate pricing is subjective. If your home is in great shape and in a desirable section of the neighborhood, your home should sell in the top of the range. If it’s been beaten by years of tenants and little fix-up has been done, it will be in the lower range of the values. Estimate low for this exercise.
2. Estimate selling costs: Nothing creates a bigger vacuum of air on the phone when I explain that owners should factor in 10-15% in selling costs. After the initial scolding pause, they ask the requisite question, “What? How do you figure that, brother?”
This general estimate of 10-15% is computed by:
6% Realtor fees
1% Miscellaneous seller closing costs
3-8% Less than list price offer and seller concessions (typically paying for the buyer’s closing costs)
For example, MecklenburgCounty (Charlotte) currently has an average offer acceptance of 92% of the list price (and this is on the rise from 90% from last quarter).
3. Find out your loan balance: For a general idea, just look at the loan balance remaining on the monthly mortgage statement. If you don’t get a mortgage statement, you’ll really like this exercise!
Once these 3 figures are retrieved, the math looks like this:
Value of home (be a pessimist!) – Estimate the cost to sell (say 12%) – Your loan balance = Profit (or loss)
For example, take a $100K house with a loan balance of $60K:
$100K (home value) – $12K (12% of $100K) – $60K (loan balance) = $28K (Profit!)
This is a general estimate of whether it is worth putting your home on the market to sell. Now you can decide whether this approximate dollar figure works for you.
Selling homes can be a very good thing for your wallet! Just use this simple exercise to see if it is worth doing at any given point in time.
Brett Furniss is the President & Owner of BDF Realty (Charlotte Property Management) which works with Charlotte real estate investors and homeowners and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Don’t Return Your Tenant’s Security Deposit Just Yet
As a Charlotte property manager, I am a big proponent of returning as much of the tenant’s security deposit to them as possible. If the tenant took time to care for the property, did what they were supposed to do during their lease period, and paid all of their rent, they certainly deserve it back! There is a reason property managers are required to put the security deposit into an escrow account; it is a reminder that the security deposit is not the landlord’s money, it belongs to the tenants.
However, that being said, I’m also a proponent of the “slow return.” By NC law, the security deposit does not need to be returned to the tenant for 30 days. And also according to the law, if the landlord is still figuring out repair costs and won’t make the 30-day deadline, they just need to notify the tenant that the payment will be delayed in writing and let them know the approximate cost of the repairs at that point in time.
Why would landlords delay the tenant’s security deposit return? The most popular question asked (by far) when a tenant moves out is, “when can I expect the security deposit back?” If you want to be a “cool” landlord, shouldn’t you just give it back after the walk-through? You already know how much the repairs are going to cost (if there are any) and the tenant could use the money back. You certainly want to be good to the tenants who were good to you, right?
Well, yes, but not exactly. I recommend keeping the security deposit as long as possible. Once it is given back, you really need to consider the tenant gone and their account closed. You need to assume that you will never get any money from them again.
So? They moved out already, right?
Yes, but… Walk-throughs are an inexact science and sometimes things are missed. Think about home inspectors; they are professionals that take hours doing a walk-through to write a comprehensive damage report and they still miss issues with the home. I guarantee that landlords are not close to conducting several hour walk-throughs at the level of detail that they are (nor should they be). Things get missed and that’s life.
However, you can provide yourself some extra time so missed things can get caught before it’s too late and you have to pay for it! It may be one of the handymen working on your home that alerts you to new repair issues. It may be a Realtor or marketing person who wonders why something looks off. Or (usually) it’s the next tenant who moves in afterwards that lets you know what’s not up to par (and by the way, they want the issues fixed on your dime!).
Let tenants pay for damages they are responsible for. And, unfortunately, the delay in returning the security deposit to them is a good way to ensure this happens.
Brett Furniss is the President & Owner of BDF Realty (Charlotte Property Management) which works with Charlotte real estate investors and homeowners and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: Landlords- 5 Reasons Why Our Time Is Now
Wow! Has it already been over five years already since the real estate market tanked? TARP, the “new normal”, bailouts, CDO’s, and toxic assets were all the rage back then. Home buyers disappeared, home sellers were really unhappy, and real estate prices dropped like a rock. Renters were deemed the smart folks, and landlords, not so much.
It was a tough time for most people as the economy soured and landlords were no different. Rental rates were relatively low, almost no one could get a mortgage to refinance, and people (landlords and tenants included) were losing their jobs. This affected landlords in two ways. First, if they lost their job, they still had to pay for their home and their rental homes. And, secondly, if their tenant lost their job, they had to deal with that situation as well. The uncertainty made for tough times for all involved. Many landlords got out of the rental business either by choice or by economic necessity.
However, the times have changed in almost every way for the better now. The rewards for hanging in there the last five years seem to have arrived and I’m seriously wondering if we are entering into a golden age for landlords. Wait- What??? Why would someone vested in real estate for his livelihood make such an outrageous claim? Well, let’s look at the facts on the ground:
1. Rental rates keep on rising. Love you, extra cash flow!
2. Mortgage rates have dropped even lower making leverage really cheap. Locking into low interest rates is fun!
So, higher rents coupled with lower mortgage costs equals bigger profits for landlords. Sweet!
3. Home prices are still low and seemed to have bottomed out. For landlords with cash, they can pick up rental homes on the cheap that will immediately cash flow and be primed for a quick equity build-up when the market recovers. There are undoubtedly still more sellers than buyers in the market.
4. The rental market is healthy and homes are filling quickly with higher quality tenants. Many great former homeowners who hit a rough spot are now clamoring to live in rental homes on the market today. They pay on time and maintain the homes extremely well. They know the drill and are great to work with!
5. Being that it seems that home prices have stabilized (and with inflation coming at some point in the near future), home prices will begin to work their way up again. So the landlords who have held on and been paying down their mortgages over the past five years, will be rewarded with equity (cash) in a liquid market.
So, as a landlord, you should be excited! Our time is now!
Brett Furniss is the President & Owner of BDF Realty (Charlotte Property Management) and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn More
Charlotte Property Management Monthly: Cash Flow Happens On Both Ends: After You Check Your Rental Comps, Do the “Bank Thang”
A property manager’s most important task is to maximize their client’s cash flow. This includes looking at most of the inflows (good!) and outflows (bad!) of the property.
Cash Inflows: Rent from the tenants (typically the biggest or only inflow)
Cash Outflows: Repairs, management fees, & vendor fees
What is out of the property manager’s control, however, is typically the largest outflow for landlords- the financing of the property. This is the mortgage payment that goes to the bank each month. If this outflow can be sizably reduced, all other expenses (outflows) seem minimal.
So does that mean I need to start doing the “bank thang” (defined as giving up total control of your personal information and providing a ridiculous amount of documentation)? Unfortunately, yes.
You may not like dealing with the banks again (I didn’t either!). And you may think that the Fed is crushing the value of our dollar by printing money (I do too!). But one of the positive results of the Fed’s “Quantitative Easing” we read about in the news is that it has pushed interest rates on mortgages to historic lows (for now). And, as a landlord, you need to explore taking advantage of these low rates and minimizing your biggest outflow. And that means having a conversation with the banks about refinancing options.
The three ways to deal with refinancing (from best to worst option):
1. Read the mail the banks send you, especially the letters that come via UPS and FedEx. I got a letter from Chase (one of my existing lenders) the other day via UPS that offered to reduce my interest rate from 6.875% to 4.25% on one of my rental properties. I called them and it was legitimate (no closing costs and limited documentation needed). This took my payment down 30% on this house. That is a good outflow reduction!
2. Proactively call the lenders who hold your home loans and see if they can do anything for you. Mention government programs like HARP, HAMP, and HARP2. Then hope they know what you’re talking about.
3. Call a mortgage broker and ask them to look over your loans and see if they can refinance any of them with favorable rates.
Property managers can run rental comps to make sure their landlord clients receive the highest possible rents and try to minimize other costs. But landlords, especially in this historically low interest rate environment, need to do their part to maximize cash flow. And that means doing the “bank thang”!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreCharlotte Property Management Monthly: You Want A Good ROI On Your Rental Home? Hire A $600 Maid!
As a Charlotte property manager for a good nine years now, I’ve seen a lot of rental homes come and go; some rented quickly and some didn’t. Most of the houses weren’t perfect, but almost all of the houses that rented quickly had one thing in common- they were really clean. And you may be surprised on how many really dirty homes are on the rental market!
“Cleanliness is next to godliness” is the popular axiom, and it’s also a heck of a differentiator in the rental home business. The #1 secret of renting a home quickly is making sure it is really clean. That’s it. If you can get someone to look inside the home and it is really clean, the closing ratio is 80%-90%. I’m not joking. If the cleanliness does not meet the tenant’s expectations, it is the top thing property managers hear about.
But how clean is clean? Is a $150 baseline cleaning job sufficient or is a $600 cleaning job necessary (where every surface is touched by a great team of maids and one could ice skate on the floors after eating off of them)? That’s a tough question. Every tenant has a different idea of what is “clean”.
Rental homes are about ROI. So the real question is, “Is $600 a good investment that will procure a higher rental rate?” Most owners are not going to be happy paying $600 to clean a home that they don’t live in, when they would never pay $600 to clean a home that they do live in! But is it smart to do it anyway?
Renting out homes isn’t rocket science. It’s about the value proposition each house makes versus the other houses on the market. For example, if you go to the grocery store and see that regular bread is $1 a loaf and the whole wheat bread is $2, which do you pick? If you don’t see value in paying an extra $1 for whole wheat, then you’ll pass and buy the regular loaf. If a clean house is renting for $1,500 and a dirty house is renting for $1,400, which do you pick? It’s that simple. And a lot of people will pay extra for the value of a really clean home.
Before landlords have a heart attack and think that it is necessary to get a $600 cleaning job on all their vacant rental homes, I’ll give the caveat that it isn’t always prudent. The higher the value of the home, the nicer the cleaning job should be. This also works from a ROI perspective. If a really clean house allows the market to charge an extra 5% a month of rent (which isn’t unreasonable), then:
1. $1,000/month home becomes a $1,050.00/month home. On a one-year lease, that’s an extra $600 annually. A $600 cleaning probably isn’t warranted (0% ROI), but a $300 cleaning would deliver a nice ROI (100%).
2. $2,000/month home becomes a $2,100/month home. That’s an extra $1,200 annually. A $600 cleaning job would be warranted if it produced a ROI of 100%.
Besides the empirical ROI dollar figures, there are also the soft numbers to consider. Clean tenants who take care of rental homes like to move into really clean, rental homes. And guess what? Most of them are turned off by dirty homes and won’t move into them. The tenants who are willing to move into dirty homes usually are not concerned about the condition of the homes like the clean tenants are. So which type of tenant do you want to attract to your rental home?
With rental homes, ROI is king. And a $600 maid service can push you further into the black!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn MoreTop 4 Opportunities for Owners in a Hot Rental Market
As a Charlotte residential property manager, we are seeing the rental market really heat up! There are fewer buyers and more renters; this causes rental prices to go up and vacancy rates to go down. In the home sales market, sales prices and activity continue to stagnate making it a less ideal time to sell. The laws of supply and demand are in full effect!
We are also seeing an uptick in inquiries about purchasing the rental homes we have in inventory when they are vacant and on the market. Unfortunately, the dollar figures for the offers to purchase are not overly appealing. Buyers are still bargain hunting.
So what does this mean strategy-wise to an owner of a rental property? It means there is a lot of flexibility available on the rental side to improve financial positioning. The top 4 opportunities in this hot rental market for rental home owners are:
1. Raise rents: Rental comparables are rising. Make sure you are receiving market rate rent on lease extensions.
2. Lock-in security: If security is the #1 goal, offer to extend existing leases at the same rate for longer periods of time. Explain the good deal you are offering the tenants.
3. Fix up vacant properties and raise the rent: If you have a vacant rental property that is in marginal to bad shape, it is time to make the investment to fix it up. The market will reward you for this work with higher rents that will pay for the repairs.
4. Ride the hot rental market out and then sell: Enjoy the higher rents and subsequent increase in cash flow while the getting is good. Wait until your home’s value appreciates to the price you want before putting it on the market for sale. If your house is on an amortizing mortgage, even better!
As a wise man once said, “Don’t fight the trends, ride the trends.” Use this hot rental market as an opportunity to make more now and later!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn More
Charlotte Property Management Monthly: Investment Confessions of a Property Manager- 4 Takeaways
Many property managers first get into the property management business because they own investment properties and are already managing them. “Why not add a few more? The infrastructure is already in place!” This rationale brought me into this exciting world of property management.
Becoming proficient at investments is an ever-evolving process. It takes a lot of easy education (reading the investments guru rags) and hard education (making costly mistakes with leveraged property investments).
This current economy has really put investment decisions I’ve made in the past 8 years under the microscope. In a hot real estate market, investment decisions have a lot of leeway to succeed. The converse is also true in a bad economy and leads me to ask questions like: Did the properties I bought maintain value (relatively speaking) or did I misread the area? Do renters want to live in these homes when much more choice became available? Can I sell any of these investment homes in a flat or declining real estate market?
Tough questions. And, unfortunately, some tough answers.
When I look at my investment decisions, I’ve come away with these 4 takeaways:
1. Cash (flow) is always king. Properties always cost more in terms of vacancy, repairs, and fix up than expected. I remember an investment guru telling me, “If you need to pull out a calculator when analyzing a real estate deal, the deal isn’t good enough to buy.” Amen to that. When declining rents hit, I was hit hard as well.
One effective tool I’ve used is to liquidate some 15 and 30-year mortgages into interest-only. This has dramatically helped cash flow on my property portfolio. When the economy improves, interest rates will rise and I may need to pay the piper. But then I can look at refinancing or selling the investment homes in a rising real estate market, as opposed to selling in a buyer’s market.
2. Buying cheap isn’t always good. For a while, I loved telling the story about buying a home on my credit card. Not anymore. The problem is the home isn’t in a great area (making it tough to rent or sell) and has needed significant fix-up funds through the years. Sometimes there is a reason why homes can be bought on the cheap.
I like to defend this decision by saying, “At the time I bought it, it was a great deal in a transitional area on the rise.” I must have missed the newsflash at the time; in an overheated real estate market, almost every area is considered “on the rise”. This reminds me of two sports quotes that seem apropos:
a. “Having ‘potential’ means that you haven’t accomplished anything yet.” I never read any articles on Michael Jordan’s potential, but rather about his performance.
b. “Yeah, he has great talent. But there are a lot of talented people in prison.”
3. I like a well-rounded real estate investment strategy; it does the body good. We get many calls from prospective clients looking for options on what to do with their properties. I’m with you! Options are good! Good options are even better!
My idea of a well-rounded real estate portfolio consists of this:
A. Nice, expensive homes that will rise when the market comes back. Cash flow won’t be great, but will generate a nice chunk of cash when the market goes up. Then they need to be sold!
B. Cash flow properties that generate hundreds of dollars of positive cash flow a month. These will subsidize other properties that aren’t cash flowing. They probably won’t see any great amount of equity build-up (even in a rising market), but they will keep you solvent and smiling!
C. Long-term holds will be nice investment pieces for retirement. They are solid homes in solid neighborhoods that are really a mixture of the A & B properties above. They will give average cash flow and equity build-up, but should be easy to rent to good tenants for a long time.
4. The most important takeaway (by far) is to buy investment homes right (aka at a big of a discount as possible). This can cover up a whole lot of other mistakes. As another investment guru told me, “You make your money when you buy. Period.”
Best of luck with your real estate investing!
Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
Learn More