Archive for the ‘ Deal Type ’ Category

Increase Your Cash Flow with French Fries

I know, I know that title has you scratching your head.  But rest assured, if you’re a rental property owner you’re gonna love this technique.

Yesterday I went to sign a lease on one of our properties.  Normally this particular property rents for $750 per month and that’s exactly what we marketed it for.  However, after a short discuss with the tenant he happily agreed to pay $815 per month for the property.

So how did we do that?

The answer is simple – we gave him the McDonald’s treatment.  When you go into McDonalds what’s the first thing they ask you after you order a burger?

Would you like fries with that?

I love fries and I’m sure you do too – they go great with a burger.  Well, let’s pretend we’re McDonalds but we’re not selling burgers, we’re renting houses.  What do you think McDonalds would offer their prospective tenants once they agreed to rent?  If you really think about it there are hundreds of things you could offer.  Here’s our menu of “fries” that we offer to our tenants.  You can see that each upgrade increases their monthly rent by a nominal amount.  For this particular lease signing the tenant took one look at the list and said:

I want the flat screen…make it happen!

There was no coaxing, no selling, no haggling to increase his rent.  This guy took one look at the list and knew he needed a big screen.  Heck he was even eyeing the lawn mower but that was “too expensive”.  So, just like that we increased our monthly rent by $65.  Sure, we’re going to have to go out and buy a TV, but let’s take a look at the numbers.

The TV we’re going to buy is a 42″ plasma TV from Costco at a cost of $399.99 ($424 with tax).  Over the course of the first year we will collect an additional $780 from this tenant which means we’ve increased our cash flow by $356 for the year.  Now here’s the kicker – if this tenant stays beyond the first year we’ll increase our cash flow in the 2nd year by $780 (I won’t even talk about the 3rd year).  The bottom line is that we set the pricing on each upgrade so that it will pay for itself during the first 6 months of the rental.  Everything after that is gravy.

This certainly doesn’t work with every tenant, but it’s an easy program to offer.  If you don’t offer things like this you could be leaving money on the table…so take a cue from McDonalds and start offering fries with your rentals.

Do You Have a Property Inspection Checklist?

Over the weekend, Kelly and I looked at six properties we were interested in and we ended up putting an offer on one of them.  We didn’t hesitate on the offer we put in because we were very confident in the property.  Now, when you’re looking at investing thousands of dollars on a property, it is extremely important that you know what you’re buying.  You don’t want to miss things, and looking at the property with a critical eye is very important.  It’s very easy to overlook things when you’re inspecting a property and that’s why we always take our Inspection Checklist with us.

Click on the link and you can see that this is a simple 1-page form that we can use when inspecting a property.  We simply print it out, put it on a clipboard and we use it to systematically go through each house we look at.  This checklist is a system for us and it incorporates several important elements:

  1. First of all, it provides a full checklist of potential issues with a property.  When we’re done we can be sure that we’ve completed a thorough inspection of the property.
  2. It provides a way for us to document the repairs that are necessary or the things we want ask our contractors about.  When you’re looking at six houses in one day, the repairs can start to run together and it is very difficult (if not impossible) to remember what needs to be done on each property.  The checklist takes care of this problem and gives us a way to take very good notes.
  3. For each item in the checklist we also show directional pricing for common repairs that may need to be performed.  With this information we can quickly develop an estimate for the repairs that are necessary.  This is very important for turning offers around very quickly.  If we know it’s a good deal, there’s a good chance other investors will think so too.  If we can get our offer in and accepted before anyone else looks at the property we have a big advantage.

Now, there are some houses we walk into that we know are not for us with a few sniffs (sometimes literally).  But for the properties that pass the initial sniff test our inspection checklist servers as a great tool for us to fully evaluate the property.  Once we have the checklist filled out we use it as input to our financial calculations, and we can quickly develop our offer.

So this weekend we used this system to look at six houses and we wrote one offer…we’ll see where it goes, but hopefully it will be our next property.

Stay tuned…

Don’t Be An Accidental Landlord…Plan For It

I recently had a friend who, because of his financial circumstances, had to move out of his home and rent it out.  He had purchased the home at the height of the real estate market in 2005, and for a number of reasons, his mortgage payment had gotten the better of him.  Rather than let the home go back to the bank he decided to rent the home out.

At the time, he asked me to help him get things setup, and the first thing I asked him is whether the house would cash flow.  He kind of looked at me funny and said, well I’m gonna try to get $1600 per month and that should cover my mortgage payment which is $1550.  You see, this is the common thought for most accidental landlords.  They think that as long as they cover their principal, interest, taxes and insurance (PITI) that they will cash flow.  What they fail to realize is that there are a number of other expenses that need to be accounted for.

Well, he ended up renting the property for $1550 (less than what he wanted) and he’s struggled ever since.  About a month into the rental contract he had some electrical issues with the house that cost him about $300.  Then a few months later his septic tank needed to be pumped to the tune of a few hundred dollars.  He hadn’t accounted for these maintenance costs, and when they come up, he has to come out-of-pocket to pay for them.

Now, if you’re considering becoming a landlords don’t be like my friend.  Please take the time to analyze your numbers correctly.  If you think you can make it work, you’re just fooling yourself because these costs are real.

When talking about rental properties, the number you need to analyze is your monthly cash flow.  Cash flow is simply the amount of money left over after you pay all of your expenses and any debt service on the property.  So here’s what you need to consider…

Rental Income

The first thing you need to establish is how much income the property will generate on a monthly basis.  The first place I normally start is by looking at a few online rental estimators.  There are three that I know of:

Of these three I like Zilpy the best because they give you a map showing comparable properties to yours.  Nevertheless, you need to take these numbers with a grain of salt because these estimates are based upon properties that are listed on classified sites like Craigslist and Kijiji.com.  You cannot be sure that properties are actually being rented for these amounts because these are the list prices, but they will give you a good start on what you may be able to get…plus they’re just a mouse click away. 

To get a better idea of your expected rental rate, you should speak with a realtor who can pull rental comps for you.  The rental comps that a real estate agent pulls are a much better indication because these will be actual rental rates for the properties that are found.  Another resource you can consult is a property manager that works in your area.  They should also have a very good idea of the rental rates because they are managing properties in your area.  Once you conclude this research you should have a very good estimate for what your property will rent for.

Expenses

As I talked about above, this is usually where most newbie landlords get into trouble – they simply do not account for all the expenses involved with a rental property.  Here’s what you need to consider:

Vacancy – Vacancy is the expense you will incur when the property goes vacant.  It is the single biggest expense you will face as a landlord.  You will want to do everything in your power to minimize it, but you must account for it.  With our rental properties I normally apply an 8% – 10% vacancy expense every month.  This means if I’m collecting $1000 per month, I will account $80-$100 per month for vacancy in my monthly cash flow calculation.

Taxes – This one normally doesn’t get missed, but you need to account for paying your property taxes.  However, if you are converting your home into a rental one thing you should consider is that your taxes might increase.  In Michigan, you will be taxed at the non-homestead rate because you will no longer be living in the home.  To get an idea of your tax rate in Michigan, you can visit Michigan’s Online Tax Estimator

Insurance – Again, this expense doesn’t normally get missed, but please acocunt for it in your calculation.  You’ll want to speak to an insurance agent because you should change your policy.  You will want to get a landlord’s policy instead of a standard homeowner policy.  This type of policy covers the building (not the contents) and it normally also provides you with liability protection.

Maintenance – Okay, this is a big one that most newbies neglect.   You will have things that come up, and if you don’t account for them, you won’t have the money to pay for the repairs when they are needed.  Normally I account for $50 per month on each of our properties.  This is a good number if you have several properties, but if you only have one, you may want to increase your maintenance expense to $75 or even $100 per month.  As you collect more properties you can reduce the expense a little because you can share the maintenance costs across all your properties.

Association Fees – If your property is a condo, or there is a homeowner association, you need to account for the monthly or annual association fee that is charged.

Property Management – Even if you plan to manage your property yourself you should include a property management fee in your cash flow calculation.  Doing this will give you the option later on to hire a property manager if you choose to do so.  10% is a standard rate for property managers, so again, if you are collecting $1000 per month, the property management fee would be $100.

Utilities – Normally we like to have our tenants pay all the utilities, but there are circumstances where we don’t do this, or it is not possible.  If you will be responsible for the utilities on your property, then you need to include the cost in your cash flow calculation.

Lawn Care / Snow Removal – Again, we normally have our tenants take care of these items, but if you are responsible, you need to include this in your cash flow calculation.

Legal Fees – You may incur fees for setting up an LLC, maintaining your LLC, filing your taxes, preparing lease documents, etc.  All of these expenses get lumped into tax and legal fees, and you should account for them.  Typically $25 per month should more than enough to cover these costs.

Other Expenses – Okay, this is a pretty exhaustive list, but if you know of any other expenses that you need to account for, you should include them in your cash flow calculation.

Mortgage Payment – We leave your mortgage payment last because we normally calculate a net income for the property before subtracting the expense for the mortgage payment.  We do this because the net income shows the maximum potential for the property once your mortgage is paid off.

Putting it All Together

Okay, I know this sounds like a lot, but honestly it’s pretty easy to put all of this together into a spreadsheet and make your calculations.  Below is an example showing our net income and cash flow generated for a property.  You can see that we collect $1000 per month, which after expenses results in a net income of $538.75.  After the mortgage is paid the property generates $329.18 in cash flow.

What We Look For In a Rental Property

As we talked about in our business plan, our long-term strategy for creating financial freedom is to purchase a number of cash flow rental properties.  We’re not just purchasing any properties though.  They have to meet strict criteria that we have developed.  These criteria are aimed at maximizing both our cash flow and appreciation potential for the properties that we are investing in.

Criteria # 1 – Location

The first three rules of real estate are LOCATION, LOCATION, LOCATION!  Well, it really is true because location is one of the few things you cannot fix on your property.  If you purchase in the wrong location, the performance of your property may be doomed from the beginning.

Now, there are specific things we look for with any location we are purchasing property in.

  • Good schools - when we say good schools, it’s really a relative thing.  You want the school district your property sits in to be better than the school districts in the surrounding areas.  This creates a natural demand for people to move into your area which drives home prices in  your favor and creates a generous supply of long-term renters.
  • Good neighborhoods – This goes without saying.  Obviously you want the neighborhood where your property is located to be a place where people want to live.  You need to look for things like well-kept lawns, flower gardens, and well maintained homes.  You don’t want to see weeds, overgrown grass, and houses that are falling apart.
  • Low home prices – At the end of the day, your property will need to cash flow.  Finding good neighborhoods is relatively easy, but finding good neighborhoods with low home prices is where things start to become difficult.  They do exist though…
Criteria #2 – Property Amenities

Once we find an area, we need to be looking at specific properties in that district.  This criteria is really aimed at maximizing your tenant pool by providing your prospective tenants with the amenities they are looking for.  So each property should have the following features:

  • 3 or more bedrooms – We really don’t like the idea of purchasing 1 or 2 bedroom homes because it simply limits your tenant pool, and your rental rate will be much lower.  We’ve found that 3 bedrooms is just about right for rental properties.  This size home will allow a family of 2, 3, or 4 to comfortably move into your property.
  • Basement – For us basements are a must.  They provide your tenants with extra room that they can use for storage or they make an excellent playroom for kids.
  • Floor plan – We don’t have specific requirements for a floor plan, rather what we are looking for here is to make sure there aren’t any oddities with the property.  For example, you don’t want to open the front door and walk into the kitchen.  Your tenants will find this weird too.  As a result you will get lower rents, and you may have a tougher time keeping your property rented.
  • More bathrooms are better – Obviously your property needs to have at least one bathroom, but having an additional bathroom is always a plus. It is not mandatory, but it will definitely make your property much more rentable, and it will increase your rents.
  • Garage – Garages are an excellent feature for a rental property because they provide extra storage space for your tenants.  Garages are not mandatory, but they make your property more rentable.
Criteria #3 – Property Condition

We’re not afraid of doing a little rehab on our properties especially if it means we’re getting a great deal.  However, there are specific things we’re on the lookout for with our properties.  These items can cause big issues and many times we don’t even want to deal with them because there are many properties out there that don’t have these types of problems.

  • Water Issues – We don’t like to mess with water because it can be a huge problem with any property. Water can cause damage to your property in many ways, and if you have water issues it can be a real nightmare. Generally if we see evidence of water in the basement or a leaky roof we start asking lots of questions.
  • Foundation Issues – Foundation issues can be very expensive to fix. If we see a foundation issue we really don’t like to consider the property.
  • Roof – Generally we want to see a new roof on the property.  If the property is in need of a roof, we may still purchase the property, but the cost of the roof replacement will be figured into our offer.
  • Windows – Windows can be a very expensive item to replace, so you’ll want to make sure they are in great condition.  Again, if they’re not, you need to figure in the replacement cost when you’re submitting your offer.
  • Mechanicals – We like to lump the plumbing, electrical and HVAC systems into one category called mechanicals.  The fact is these systems need to be in tip-top shape and up to code.  If they’re not, you need to figure in the cost of repairs in your offer.
Criteria # 4 – Cash Flow

Lastly, we need to make sure our property will cash flow, so you need to look at the rental income you can expect along with the expenses the property will incur.  We will talk about this more in our next blog when we discuss how to analyze the numbers on a rental property.

If you can meet all 4 of these criteria in the rental properties you are purchasing, you will be taking the right first step towards making your rental properties a success.  Remember, it’s all about planning with rental properties and meeting these criteria will help you maximize both your cash flow and your property’s potential for appreciation – both of which will increase your bottom line.

Day 49 – Sometimes You Don’t Need A Checklist to Evaluate a House…

Today we had intentions of showing you how we go through each property we put offers in on, but unfortunately this property was really just too rough to even complete one of our rehab checklists on.  We could tell with a simple walkthrough that the property needed way too much work for the numbers to make sense.  So, the lesson for today is that sometimes you don’t need a checklist to figure out the numbers aren’t going to work.

Honestly we probably shouldn’t have been wasting our time looking at this property, but the pictures were very deceiving online.  It happens sometimes, but we’ll have to do a better job next time…on to the next one…

More to come…

Day 42 – Details of Our Latest Property Sale

Well today is Day 42 in our drive for $60,000 in 60 days.  We’re heading towards closing on our latest property sale, and today I just want to go over some of the numbers on the property.

This property was actually the first investment property we ever purchased back in 2009, so it’s a little sentimental that we’re parting ways with it.  The property has performed greatly for us – it hasn’t seen 1 day of vacancy since our original tenant moved in, and the tenants are currently purchasing it on a lease option.  Over the 2.5 years we’ve owned the property we’ve averaged a 17% return, so it’s been a great property, and now we’re going to move on and re-invest those funds.

The details on this sale are fairly simple.  We have a sales price set at $51,000, and we currently owe approximately $33,000 on the property.  After transfer taxes, rent credit transfers, closing costs, and payoff of the debt service we expect to clear about $13,500 on this property.

So, this brings our total to date up to $27,815.86.

More to come…

Day 19 – SOLD!

So yesterday we told you that we had completed our Michigan Cash Flow Property Tour and that we hadn’t sold a single property.  Well, about an hour after I published that blog post, one of the investors who had been in town over the past couple weeks phoned me on the way to the airport and we arranged for him to purchase one of our properties.  So, now we’re well on the way towards our goal. 

We purchased this property at the end of March, and here are the list of costs we’ve incurred for the property:

  • -$15,500 Purchase Cost
  • -$2,500 Financing
  • -$2000 Closing Costs (Buy & Sell)
  • -$15,000 Rehab, & Holding Costs
  • -$900 Tenanting Fees
  • +$1,800 Rent Collected

Total Cost - $34,100

Sales Price – $45,000

Profit – $10,900

That’s right where we wanted to be with this property, so we’re very pleased.

This puts us a big step forward in our goal, and we have now earned $12,000 towards our goal of $60,000 in 60 days.

More to come…

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