THE DEFINITIVE HOME INSPECTION CHECKLIST FOR REAL ESTATE INVESTORS
As any seasoned property investor knows, real estate is a tough business where all that glitters definitely is not gold. This is why the details really matter when taking a look at your first property. Case in point: the property inspection. Aspiring homeowners need little convincing regarding the value of a home inspection, what with the twin requirements of their lender demanding one and their better-judgement knowing they can’t afford to risk their nest egg without one. Investors, however, often stand at the threshold of a property with a false sense of confidence, guided by their ‘instincts’ or ‘gut feeling’ on the potential upside of the deal, which can cloud their ability to spot issues during a walkthrough. There’s no denying that today’s market is red-hot, which, together with an appreciating neighborhood, can cover-up a multitude of sins for a poorly-selected property. Most properties, however, won’t be so lucky to have an upside material enough, especially in the first five to seven years of ownership, to conjure large returns out of thin air on their investment. As such, the condition of the property is crucial, especially during the first 12 to 24 months into ownership when cashflow is thin and expectations are high. Imagine for a minute buying a new home, only to have the roof leak the next day, literally raining on your parade. Or having your tenant point out large ruptures in the wall that you hastily wrote off as ‘settlement cracks’, which now seem to threaten the very foundation. These are the issues that a thorough home inspection can uncover, providing you with a clearer path to returns on your investment. To this end, My Smart Cousin has developed a Definitive Home Inspection Checklist to arm you with your own toolkit for your first or twenty-first home inspections. Before diving into this, let’s understand what a home inspection is, and those areas it should cover. WHAT IS A HOME INSPECTION The word “inspection” may sound invasive and even induce some knee-knocking, but it’s not as frightening as it may seem. A home or property inspection is a physical exam or check-up to gauge the infrastructural soundness of the house. Home inspections work in favor of the property owner to-be, that is, lil’ol’ you, and are particularly important to use when considering houses that are vacant and have sat unoccupied for many years. The home inspection profession is regulated in nearly all states, and licensed in a few. Your first step in selecting a home inspector is to ensure that he or she is licensed and insured. You are able to accomplish this by requesting a copy of the inspector’s license and liability insurance policy for the current year. WHAT INVESTORS SHOULD LOOK FOR IN A HOME INSPECTION Investors should use a home inspection checklist when looking to purchase an investment property, even if the only one doing the inspection is them. With an inspection, you can identify potential problems hiding beneath the surface. Some problems might be minor, say holes in the drywall or doors, while others could require significant repairs and remediation, for instance, extensive mold, flaking lead paint, or exposed asbestos insulation. Grouping issues into major and minor categories can help determine whether there are any issues that are significant enough to walk away from the deal. As mentioned earlier, home inspections serve buyers’ interests and can be a great bargaining tool for investors. If a long list of items doesn’t pass inspection, the prospective buyer can use one, some or all of the items on the list as leverage to negotiate a lower price. This is particularly the case if the investor is working with a motivated seller— a bank or a house that has been listed for months on end. And if the seller doesn’t bite and offer concessions, well, no harm no foul, you can proceed on with the deal if you’re satisfied with it as is. WHAT TO DO WHEN THE INSPECTOR FINDS AN ISSUE Once the inspector completes their inspection, they will provide an inspection report. The inspection report is a crucial part of the home buying process that will likely uncover at least one problem. Minor problems won’t affect your offer much and should be placed in the category of ‘fix-it-yourself’ once you purchase the property. But heavy-hitters affecting the structural integrity of the property will require a conversation or two with the seller. If the seller agrees to accept a reduction to the price or some other trade-off, ensure that the concession is binding by having it enshrined in an agreement that your lawyer prepares. And, of course, if the issue is too extensive or costly to repair, even with a discount, then walking away might prove the better option. Pro Tip: If you are a new investor, your real estate agent and home inspector can be great resources in understanding how bad, or not so bad, things really are. After your home inspection, you’ll receive a comprehensive report numbering some 20 to 40 pages that includes detailed descriptions and images of each item in the house that was inspected. Think of your home inspector as your teacher or mentor when you receive this report— ask the inspector to go through the report with you. Once you sign the report, you’ve essentially agreed that it’s complete and you accept it as-is. As such, now is not the time for bashfulness. Put aside any qualms you have about not wanting to be a bother, and get all of your questions out of the way regarding the report. CONDUCTING AN INSPECTION ON YOUR OWN Self-inspections are the best way to go if you want an affordable home inspection, and the property appears to be in good shape. Properties that are currently occupied with a renter can be good candidates for self-inspection because the house is habitable at some level. A do-it-yourself DIY inspection can also be used if time or money is in short supply. If so, then
Why Real Estate Investors Love Housing Choice Vouchers
Is it good business to rent to Section 8 tenants? At a federal level, the Fair Housing Act does not bar landlords from discriminating based on Section 8– I know, incredible— isn’t fair housing in the very name of the law? But I digress, even if discriminating against Section 8 were not legally permissible (as is the case in several states and municipalities), does renting to Section 8 pencil? Well, let’s follow the money. Corporate America The Housing and Urban Development agency (HUD) conducted a nationwide residential housing finance survey in 2018. HUD found that less than 10% of small landlords (those owning rental houses that have 1-4 units) rent their units to tenants receiving Section 8 while 25% to 30% of large landlords (read, Corporate America— those owning apartment buildings with 100 or more units) rent to Section 8 tenants. Call me cynical, but my money is on corporations and real estate investment trusts having a better understanding of the financial benefits of renting to Section 8 tenants than small-fry landlords. Underserved Communities Tenants who receive housing choice vouchers (Section 8) are concentrated in poor neighborhoods (a problem for another article). The average income of a family receiving a voucher is approximately $15,000. However, families who don’t receive Section 8 often have the same income as their Section 8 neighbors (given a waiting list of as long as 8 years for some communities). Since there is no meaningful difference in the financial stability of the two households, a voucher inherently lessens a tenant’s risk profile. High Income Communities If your investment property is in a tight rental market or high-priced community, HUD takes particular pains (as it should) to enable voucher holders to live and prosper there. As a for instance, in the county of Santa Barbara, CA one of the wealthiest counties in CA, HUD offers first time Section 8 landlords and property managers a signing bonus of $5,000, a bonus of $2,500 for lease renewals, $5,000 in insurance against damage to the unit, $2,000 towards the security deposit, and 24-hour hotline for landlords to call if needed. Answering the question, is it good business to rent to Section 8 tenants? Decidedly so. Recommended Read: How to Pick the Best Mortgage Loan Follow us @mysmartcousin
WHEN SHOULD I CONSIDER HIRING A PROPERTY MANAGEMENT COMPANY?
Whether you are an investor to-be cozying up to the idea of taking the plunge and buying your first house for the price of a car, or you’re a seasoned investor with many owned and flipped properties under your belt, property management is a key element that can’t be overlooked. In short, property management has the capacity to make or break the value of your investment portfolio as well as your success as a landlord. Taking time to dig into the ins and outs of effective property management can save you headaches, not to mention money, down the road. Which raises the question: what exactly does a property manager do, and when should you consider hiring one? Let’s dive in to learn more. WHAT IS A PROPERTY MANAGEMENT COMPANY? A property management firm is a company, a partnership, or sometimes just a single individual, who shoulders the responsibility, via a contract that you, the owner, signs with them, to ensure proper maintenance of your investment home. In the initial flush and excitement of buying a property, it’s easy to minimize the time and flat out inconvenience of maintenance. Until, that is, you get your first middle-of-the-night call or have to drop everything to find a plumber (have both of these scenarios happened to me?— yes and yes). A third party maintenance company serves as the chief point of contact and middleman between you and your tenant on such issues, as well as the the first-responder in addressing your maintenance issues. A second role that the property manager plays is finding tenants, collecting rent, and when required, taking a tenant to court who has not paid rent, for instance, or damaged the unit. Because property managers are often directly or indirectly affiliated with real estate companies, they have significant experience interpreting and applying estate regulations and conducting tenant screening. PROPERTY MANAGEMENT COST In exchange for performing the above roles, property managers are normally paid at least two fees: TASKS PERFORMED BY A PROPERTY MANAGEMENT COMPANY As illustrated above, two of the biggest values that a property management company provides is 1) peace of mind that your investment is managed professionally, and 2) distance between you and your tenant on day-to-day maintenance matters and court disputes. Skilled property managers can save you valuable time and increase your returns by providing the following services: WHEN SHOULD YOU HIRE A PROPERTY MANAGEMENT COMPANY? Hiring a property manager comes with benefit of someone else standing in the shoes of the landlord and the cost of having to pay them to do so. The following scenarios, in particular, are tailor-made for securing property management services post haste: Follow us @mysmartcousinsin
A GUIDE TO SHORT-TERM RENTAL OPTIONS FOR YOUR INVESTMENT PROPERTY
If you have one or several investment properties that you’ve bought for the price of a car and want added income without building a bathroom, bedroom or finished basement, read on for insights on growing your cashflow in the short-term rental market. WHAT IS A SHORT-TERM RENTAL PROPERTY? A short-term rental property is a property that is rented out for an evening or a couple of days to a few weeks or months. In short, anything rented out for less than a year under an annual lease is viewed as short-term. The types of properties that can be rented out short term come in many flavors including: your home sweet home a tiny house or cottage that you place, either temporarily or permanently, in your backyard or a side lot next to your home a single family investment property a small multifamily investment property of 2-4 units an entire apartment building bought solely for the purpose of short-term rentals ADVANTAGES OF A SHORT TERM RENTAL INVESTMENT PROPERTY Short term rentals can provide you with increased cashflow on the revenue, expense and personal budget fronts, giving your pockets a wonderful case of the mumps. Your Own Vacation Getaway: If your investment property is located in a city that you frequent for vacations, family reunions or get-togethers, then a short-term rental can save you money by avoiding hotel costs, and generate income when you’re not using it. Also, having a vacation rental that you own makes it easier to block off vacation timeframes that work for you. Fewer maintenance headaches: Short term rentals are subject to less wear and tear than year-round rentals because: 1) they’re occupied in only short bursts of time (for instance, an evening or weekend), 2) the unit is furnished so there’s no wear and tear from furniture or other large belonging being moved to and from, and 3) the damage deposit for a short-term rental of a couple of hundred dollars usually invites a greater level of precaution from visitors than a long-term rental might. Additionally, because of the gaps between guests visits, repairs and minor cosmetic work can be done quickly before any issues turn into a more expensive problem. Higher overall monthly rental income: The daily rate for a short term rental is higher than the equivalent daily rate for a monthly rental. As an example, the average monthly rent for a 3-bedroom, 1-bathroom house in New Jersey is $1,800, which translates into an equivalent daily rent rate of $60 over a 30-day period. The average short-term rental rate for a 3-bedroom, 1-bath house in New Jersey is more than twice this amount, or $130-$150 a day. Although your investment property will certainly have some level of vacancy, over the long-term, your short-term rental will out-earn its long-term peers. Real-time Price Adjustments: A long-term rental under an annual lease offers the ability to adjust prices only once per year. Additionally, depending on the state and tenant population, the annual increase amount might be capped. In contrast, short-term rental investors can adjust their prices after each and every occupant, based on market conditions and opportunities. Thus, if a concert or sporting event is coming to your area on a particular weekend, you can raise the price for your rental unit based on the increased demand. DISADVANTAGES OF SHORT TERM RENTAL INVESTMENT PROPERTY Of course, as with most investments, there are always downsides that should be discussed. Short-term rentals will require more day-to-day involvement than annual rentals in terms of marketing and communicating with the revolving door of guests you will have. As such, before diving headfirst into short-term rentals the moment your annual leases expire, consider the challenges that come with this territory: Edging out Competition: In order to minimize vacancies and negative reviews, short-term rental landlords will need to consider as competition both short-term rental properties as well as commercial properties like inns, long-term stay hotels and conventional hotels. Investing both money and time on well-appointed furnishings will pay dividends in the short-term market more so than for long-term, unfurnished annual leases. Likewise, promotional discounts and other marketing sizzle will be required to keep your property top-of-mind with potential guests. Maintenance and Repairs: While renting out your property or a room in your house to a new guest each week may result in less overall wear and tear versus an annual rental, the frequent in and outs mean lots of mini and ongoing housekeeping on your end. If you are serving as the head handyman and housekeeper for your short-term rental business, this translates into a never-ending list of chores, honey-do’s and home repair purchases. Off-Peak Vacancies: Just as you factor in a vacancy rate for a traditional real estate investment property, you will need to price in the cost of vacancies for a short-term rental property. Do your homework to find out when vacation travel is down in your area and adjust your pricing and offerings accordingly. Alternatively, schedule large maintenance and capital improvement projects during off-season. Property Management: In many ways a short-term rental is like a traditional rental property that is located out of state. Both will require the use of a capable property manager to screen and choose tenants, address repairs and collect rent. Because of the added work, however, a short-term rental will attract property management fees that are significantly higher, from a low of 10% of the rent to a high of 50%, vs. a long-term rental where property management fees range from a low of 5% to a high of 15%. This added cost will need to be priced into the value of the short-term rental opportunity. HOW TO MAXIMIZE YOUR PROFITS WITH SHORT-TERM RENTAL PROPERTIES Short-term rental properties will provide returns throughout the year, but as discussed above, a more active engagement strategy is required. LOCATION AND CONDITION OF THE PROPERTY – The largest driver of profitability, more so than with long-term rentals, will be the location of the property because of it serving as a vacation residence for guests. Inspecting your property from the vantage point of guest will help ensure that
SHOULD A REAL ESTATE INVESTOR OBTAIN A REAL ESTATE LICENSE?
Real estate, even in today’s hot market, offers the opportunity to buy a house for the price of a car, both for new and seasoned investors alike. The decision to buy, rehab and rent or buy, rehab and sell often comes down to market conditions. Which raises the question of whether a real estate license is required or provides an edge in assessing market conditions and becoming a successful investor. A REAL ESTATE AGENT OR A REAL ESTATE INVESTOR? First, to the question of requirements: real estate investors are nonrequired to become or to be licensed as real estate agents. While some real estate agents invest in properties and property-related businesses such as property management, and some real estate investors sell property as agents, the two are separate activities, and the pursuit of one does not require engagement in the other. That said, obtaining a real agent license offers certain advantages and can serve as an asset for real estate investors. Deciding on whether to pursue a real estate license should not be considered lightly as a significant time investment is required along with licensing costs. To help better inform your decision, let’s take a look at the pros and cons of pursuing a real estate license. BENEFITS OF OBTAINING A REAL ESTATE LICENSE One of the biggest advantages of a real estate license is instantaneous and comprehensive access to information on upcoming and sold properties. If your goal is to spend significant time researching, buying and selling properties, not just on behalf of your own portfolio but on behalf of others, then obtaining a real estate license will serve you well. Likewise, if you intend to amass a significant investment portfolio or plan on selling a number of properties through the services of a real estate company, then representing yourself in these transactions as a licensed real estate agent may offer advantages, particularly in terms of the commissions that will no longer have to be paid to a third-party selling agent. Real estate licenses are issued state by state, with some states allowing holders of a license in another state to qualify to buy and sell property in their state through reciprocity provisions. As such, if you have or intend to build a multi-state real estate portfolio or real estate agency, the requirement for multiple real estate licenses and availability of reciprocity should be weighed. ACCESS TO MLS- THE MULTIPLE LISTING SERVICE: As mentioned earlier, the biggest advantage of becoming a licensed real estate agent is access to the MLS (Multiple Listing Service): Particularly in a hot market, receiving immediate notifications of new sales listings can provide an edge in getting ahead of investment competition. The MLS system also speeds your research, offering detailed information about recent sales, fast-selling neighborhoods, popular home types and comparable properties without having to check multiple sites. INCREASED INDUSTRY KNOWLEDGE: Another advantage of becoming a real estate agent is firsthand introductions to appraisers, title companies, lenders, inspectors and other key players in the real estate industry. This exposure increased your expertise in the many facets of the real estate process. Additionally, directly working with lenders and appraisers improves your negotiating position and assists in reaching quick settlement on terms and conditions. GET PAID TO BUY AND SELL YOUR OWN PROPERTIES: By becoming your own agent and representing yourself as the buying or selling agent, you can receive the buying agent’s commission when you buy a property for your portfolio, and likewise the selling agent’s commission when you sell a property. As an example, if you buy a property that has a standard 6% commission, a commission of $12,000 would be paid to the selling agent, who would then split it, 50/50 with the buying agent. Since you’re representing yourself as the buying agent, you receive the $6,000 commission, effectively lowering the purchasing cost for you for the house from $200,000 to $194,000. EXPANDED CONNECTIONS: As a real estate agent, you will work under a licensed real estate brokerage firm. The relationships you form with other agents at your brokerage will yield tips and lessons about the market. Additionally, through your colleagues you will build a strong network that helps you find and close good deals quickly and gain intelligence on recently-visited properties. DRAWBACKS OF A REAL ESTATE LICENSE While becoming a real estate agent offers many advantages, it is not without its challenges, especially for beginners. DIFFICULT TO ACQUIRE: Obtaining a real estate license requires a time investment on the order of 4 – 8 months for most in terms of classes, exams, applications and background checks. While the required courses differ from state to state, they generally cover topics including fair housing laws, ethical standards, real estate practices and record-keeping. In addition to time, an investment of a few hundred dollars to a couple of thousand dollars is required to obtain a license, along with ongoing investments icon continuing education and license renewal. TIME COMMITMENT: Once a license is in hand, it can take new agents several months before they obtain their first client or close their first deal. Marketing, advertising, showing and helping to stage homes can take many hours a week, all of which takes time away from searching for investment properties. MUST ENSURE NO CONFLICT OF INTEREST: Real estate agents have a legal obligation to prioritize the interests of their clients. As such, agents must ensure that they act in the ethical interests of their clients and disclose any conflicts of interests, such as if an agent is selling their own investment property to a buyer that the agent represents. A conflict of interest could lead to a lawsuit and/or penalties and damages. As such, it is crucial that agents who are also investors ensure that no conflict of interest, perceived or actual, occurs. Read my other Blogs: Click Here Follow Us at: @MySmartCousin
Community Development Block Grants (CDBG), a Gateway to Affordable Housing
The development of its citizens is the surest path to the development of a country. People who are homeless or who cannot afford to purchase a home can become property owners through a little-known program sponsored by the U.S. Housing and Urban Development Agency (HUD), the Community Development Block Grants program (CDBG). HUD’s CDBG program, established in 1974, was created to provide a path to homeownership for low and moderate-income families. Under the program, states, cities, and counties are able to apply for grants annually to revitalize housing stock and infrastructure in their communities. Eligible activities under the CDBG program Funds provided through CDBG grants support housing-related activities including housing repairs and rehabilitation, down payment assistance and closing costs, and the purchase or construction of rental housing or owner-occupied housing. Housing counseling and relocation assistance are also provided to help aspiring owners in their home buying journey. You can read my recent blog here: Click Here
Ring in Mo’ Money This New Year
Ring in Mo’ Money This New Year Nothing keeps your head more in a spin than out-of-control finances. Since most of us didn’t grow up with banker parents teaching us the ins and outs of budgeting, make this your year of earning your ‘3M’ degree— your ‘Masters in Making Money’. Your first class?— the Envelope System. ‘Cause Money Don’t Grow on Trees The cheapest car is the one you already own. Same with money, the quickest dollar is the one already in your pocket. Grandma was on to something when she used different coffee cans to stash away money. The envelope system works the same way. The Envelope What? The envelope system is as old as the hills, but the need is even more critical in our credit/debit card society where money goes so quick, you’re not entirely sure you ever earned it. The envelope system forces you to put your hard-earned coins on the table and parcel them out to different envelopes or spending needs. Prime categories for envelopes are required expenses that leave you scrambling every month— I see you car payments, rent and light bill— and non-critical stuff that eats a hole in your wallet— cigarettes, eating out, shopping. An Example Let’s say you take home $700 a week, after Uncle Sam gets his cut, and you spend your money on five main things: groceries, rent, car (including the note/gas/repairs), utilities and hanging out. Your $700 a week, or $2,800 a month, is going to get divided into 5 envelopes. If your rent is $1,000 a month, then each week you’re going to put $250 in the Rent envelope. If you spend $100 a week on groceries, then you’ll put $100 every week in the Groceries envelope. And so on. Your envelopes will serve two purposes: first, they’ll help you really see where your money is going. No longer will money run through your fingers without a trace— you will have to physically carry the Grocery envelope to the store, open it to pay for groceries, and put the change back in the Grocery envelope. If you get to the supermarket and realize you forgot the Grocery envelope, guess what, no groceries for you, it’s back home you go to get the envelope. Second, the envelopes discipline your spending. So let’s say you’re midway through the month and your cousin says it’s been a minute since y’all have gotten together, and to come to the movies with her tonight. Checking your Hang Out envelope and seeing only a couple of singles, you realize, not unless the movie is playing on television, you can’t do it. But then you spy the Rent envelope and see it fat with $500 in it. Two words: back…off… No money, I mean no money, comes out of an envelope to pay for anything other than what’s written on it. In other words, no two-timing between envelopes. When money in an envelope is gone, it is gone. Leftover Money So you arrive at the end of the week, look at your Groceries envelope and what do you know, there’s still some money left. Cool beans, you’re under budget! Your options? Reward yourself, within reason, but enjoy your budgeting success. Rewarding yourself for a budgeting job well done helps you feel not just pain, but also pleasure from the process. Next Steps Start now! Gather your envelopes, get a pen, and get started with your 3M degree!