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Month: April 2017

Rental Property Negotiation Tips

Rental Property Negotiation Tips

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Making an offer on a property should be a well thought out, calculated process. We do not recommend blasting every listing with a “lowball” offer, hoping something sticks.  Lowball offers are generally a waste of time and effort and, if accepted, it is probably the result of poor research and a hasty decision. An eagerly accepted low offer likely reflects that the property has serious issues that were deceptive to the quick buyer.  Proper property acquisition should be viewed in three processes, described below.

Property Value and Capitalization Rate

Before making an offer on any property, we need to establish a maximum acceptable offer. This process involves establishing the property value and the capitalization rate.

Establishing the actual property value starts with finding comparable property sales for your targeted property. A real estate agent should provide you with the comparable sales, but you should always verify them yourself.  Zillow will list recent sales. You should review sales that our within a mile of your property and have similar square feet and features to your targeted property.  Be sure to drive by the comparable sales to ensure they are, in fact, equals.

Capitalization rate is basically the net profit (gross rent minus all expenses, maintenance, property taxes, and property management fees, if applicable) divided by the cost of the property. The ideal capitalization rate for any property will vary in each market. Capitalization rate is dependent on many factors.  Examples on how capitalization rates vary include: areas that have a higher appreciation will produce greater property equity which will allow for a lower capitalization rate; areas that are more transient (such as homes adjacent to a college campus will require additional time and labor as the unit is likely to turn over yearly or biyearly, resulting in a lower capitalization rate.  Establish the capitalization rate in your area by speaking to other investors or researching actual listed rentals and their property value. It is a good indication that you have calculated the correct property value, if that property value equals the capitalization rate for your area, as these numbers directly correlate.

Making The Offer

Once the property value and capitalization rates are established, we can then create our offer. I like to make my maximum offer between 12 and 18 percent below the true market value.  This will ensure that if you need to exit the property for any reason, you should not lose any money, as the real estate fees for your sale will be 6 percent and you will have a few percent in property acquisition costs (title fees and closing costs if applicable).  An offer in this general area will be viewed but the seller as not ideal, but possible.  I generally recommend making my first offer my maximum calculated offer and I do not move from this price.  This ensures that my emotions or pressures from real estate agents won’t put me into a situation I later regret.  In addition to the offer, understand what is valued to your seller and who your seller is.  A private seller probably doesn’t care if the offer is cash or a loan.  HUD owned properties are similar, they will accept the highest offer regardless of how the funds are secured.  However, a REO (real estate owned) by a bank may value a cash offer, especially if the property is in disrepair. This is due to the fact that FHA (Federal Housing Administration) and convention loans are only available for habitable properties.  If it is a private sale and the property is vacant, the closing time probably has value to the seller.  Define your offer price to the seller.  Include your comparable sales plus bids for required repairs to seller allowing the seller to understand why your offer is lower than expected.  This tactic holds real value to REO properties where the seller is emotionally removed from the sale price, and the sale price only needs to be justified.

 

Negotiating The Offer

Most people believe since we already made our maximum acceptable offer there, is really nothing to negotiate. But remember, the terms of the sale still hold monetary value.  This is where understanding the seller’s situation can be exploited.  If the property is older, counter with accepting the offer in the “as is” condition.  This holds extreme value to the private seller.  If the property is bank owned, reduce the closing time and include in the offer a 3 percent non-refundable earnest money.  The bank will realize that closing is extremely likely and, if it the closing falls through, they have cash to offset their carrying costs. Countering with the same price plus a closing concession reaffirms your price while providing the seller some additional value and another chance to accept your offer.  After you have exhausted all negotiations, inform the agent or the seller that the offer is good for 30 days, if the seller should change their mind.  Remember, some of the best deals are the ones we don’t make and there will always be another opportunity.
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Property Management Software

Property Management Software

Proper property management in today’s industry is paramount in maximizing profits and limiting your time requirements. Lucky, maintaining self-made excel files and personally depositing checks are no longer required.  Today’s online property management software can manage all aspects of the property-management process and, when utilized to their complete potential, they can replace the services of the traditional property-management companies.  Savings can be extensive, as most property-management companies charge 10 percent of the monthly rent to manage the properties.  They also charge between 50 percent to 100 percent of the monthly rent for tenant placement.  The savings from moving to the online platform is substantial, providing investors additional liquid capital needed for expansion.  Below are property management software reviews of some of the industry’s preferred property management software options.

Buildium Property Management Software

Buildium is a full service online property management software that automates almost every expect of property management and provides detailed accounting. Listing rentals is a snap with Buildium. The software will save your previous listings’ narratives and photos and with one-click of a button, it automatically uploads the listing to Zillow, Trulia, Hotpads and MyNewPlace, reaching large audiences.  The resident portal allows residents to authorize automatic payments and request repairs.  The accounting software easily tracks accounts receivables and billings, allowing quick review of your complete financial performance.  The document storage feature provides an organized location for all your leases and forms.  Renter applications and tenant screenings are performed electronically and quickly on the Buildium platform.  The Buildium software provides a standard application and allows you to customize it to fit your needs. The e-leasing option allows for electronic leasing agreements with legally binding electronic signatures.  The intuitive software is easy to learn and Buildium provides unlimited phone support from 9:00 am to 8:00 pm EST.  Similar to Rentec Direct, Buildium offers a free professional website.  Buildium offers multiple packages depending on your needs and property quantities, the core package for twenty units or less is available for only $45 per month and $150 per month for the pro service.  Pricing for one hundred units is $150 for the core package and $200 for the pro service.  Pricing continues to escalate and is available at Buildium.  Buildium does provide a 10 percent discount when paying for a full year. The Buildium platform is ideal for landlords needing the full range of services, who own a few properties all the way to a few thousand properties.  The core package features include property accounting, financial reporting, maintenance management and leasing management.  Additionally, the core package offers online payments (50 cents per transaction, electronic leasing (5 dollars per lease), and basic tenant screening (criminal, credit and eviction) for 15 dollars per person (tenant screening should be paid by the prospective tenant).  The pro service provides all of the basic core package services plus offers the online payments, property inspections, electronic leasing and tenant screening services for no additional cost.  Buildium offers a free 15 day trial.
Buildium

Rentec Direct Property Management Software

Similar to Buildium, Rentec Direct is a full service online property management software with two pricing options. Both pricing options escalate depending on the quantity of units.  The Rentec Pro starts at 35 dollars per month for 10 units or less.  While the Rentec PM option starts at 35 dollars. Pricing for one hundred units is $90 for Rentec Pro and $100 for the Rentec PM package.  Pricing continues to escalate and is available at Rentec Direct. Rentec PM is really designed for property managers and the features of the Rentec Pro will meet the needs of most landlords.  Features for the Rentec Pro software include property and tenant accounting tools, automatic payments (credit card transactions are subject to a 2.75% transaction fee), online property advertisement, online rental applications, tenant portal, maintenance and work order tracking, and tenant email and SMS messaging. Rentec Direct even offers a free professional website for users.  The website can feature listings, and includes links to receive applications and application fees.  Use the website to promote lease-to-own programs, list important phone numbers and to add tenant testimonials describing favorable experiences.  The cost of a website can be hundreds or even thousands of dollars, making this an excellent feature.  Rentec Direct is ideal for any landlord looking to automatic property management.  Rentec Direct offers a free 30 day trial.

Clear Now

ClearNow Online Rent Payment to Collect Rent Automatically!ClearNow Online Rent Payment to Collect Rent Automatically.  Clear now is a cost effective solution for landlords not requiring all of features offered by the full service software products. The program only charges a small monthly fee of $14.95 for the first debit transaction, plus only 2 dollars for each subsequent debit transaction.  While clear now’s focus is cheap automated payments, they do offer additional free services including tenant screening and a simple-to-use profit and loss calculator, reporting of your 1040 schedules E’s, making filing simple and easy.  Receipts are automatically generated and emailed to your tenant upon payment.  Clear now is reputable and reliable as they have been serving landlords and property managers across the nation since 2000 and hold a perfect BBB rating.  The most overlooked feature is the tenant reporting to Experian credit reporting.  This is a must-have option for landlords who utilize lease options to tenants who need to build their credit.  Additionally, building credit for the millennials is major selling point as rental properties for new graduates have become a required a stepping stone to home ownership and good credit will reduce the cost of ownership for your tenants.  Most people recognize the value of a good credit, but lack the means to achieve it.  Clear Now’s flat fee format makes it the most cost effective option for landlords with smaller portfolios.

Landlordmax

Unlike the other property management software, Landlordmax requires a low cost, one-time fee. The software provides an easy-to-use interface for all of your accounting needs.  The program has many reporting options including graphs and charts.  Additionally, the software allows you to organize all of your rental business information, including mortgage information, insurance and pictures for each unit.  Landlordmax does lack the automated payments and the tenant portal tools that other software offer.  Priced at a low, one-time cost of 200 dollars, Landlordmax is ideal for users who just want to manage their financials, and don’t value the interactive tenant options offered by the other platforms.  This service, coupled with an online screening service, can automate a majority of the tasks landlords take on.  A Free trial is also available.

Traditional Property Management Services

The use of a traditional, live property manager, while costly, is desired for certain landlords and situations. Tradition property management is recommended for landlords who are operating out-of-state or for whom the commute is rather long to your properties.  It just becomes impractical and costly to be an absentee landlord and very difficult to fill vacancies and review property repairs from a long travel distance.  Traditional property managers also provide value to new landlords whom may not know the local laws and just need help learning the ropes.  A good local property manager will handle listing and showing vacancies, payment processing and handle maintenance requests.  They will also provide recommended repair and maintenance companies for the repairs.  The referenced repair companies are generally reliable, educated and probably a little cheaper than commercial repair companies found online.  Traditional property manager’s charges for their services are usually around 10 percent of the monthly rent, plus a placement fee equal to half or one month’s rent.  The associated costs are generally negotiable.  Reductions should be available for large portfolios or for individuals who will burden portions of their services, such as tenant placement.  Try to team up with a few other investors when shopping property managers.  This partnership will increase the quantity of properties to the point where the property manager may agree to reduce the monthly costs from ten percent to six or seven percent, or even five percent if all of your portfolios are concentrated in one area.  Referrals are the best method to finding a good local property manager.  Ask reputable realtors in your area for references or join local real estate investment groups to learn and discuss property management groups with other local investors.

Besides the cost savings, the other major benefit of all of the rental property management options is the time you save. Time saving extends beyond the obvious rental management tasks to responsibilities such as tax preparations.  The organized payment and expenses options allow for quick completions of 1040 schedule E. Both Buildium and Rentec Direct can manage and file your 1099s.  The electronic online applications and lease agreements reduce the quantity of face-to-face visits between you and possible tenants.

In the grand scheme of things, all of these options are priced extremely fair. Remember the costs are a business expense and are paid with before-tax dollars, making the advertised pricing actually lower since the income would be taxed if we didn’t utilize their services.

Buildium, Rentec Direct and Landlordmax all offer free trials. Try all three of them simultaneously with just one test property. Utilize the three to find out which features you need and which software is the easiest to operate.  Remember usability should be paramount as the program you chose will be used on a daily basis.  Also, switching between software packages isn’t advised, as the major benefit is the long term record keeping features. The more you use the program and input data, vendor information, property information and listing information, the more time you will ultimately save.

No Cost Ways To Increase The Profitability of Your Rental Property Portfolio

No Cost Ways To Increase The Profitability of Your Rental Property Portfolio

BuildiumCash
In any business, the difference between getting by and success is simply maximizing efficiencies and profits. Real estate and the landlord business are no different.  It doesn’t always require additional money to maximize profits.  In this post, we will review zero-cost ways to maximize profits.

Listing Vacancies In July

When you list a vacancy, the month during which you post absolutely makes a difference in the rental income your property will produce. The rules of supply and demand apply to leasing.  We want to lease in the environments that produce the highest possibly quantity of qualified tenants.  I once purchased a property in the November and, by necessity, listed it on the normal outlets (craigslist, Zillow, etc.).  I had only one showing in two months and, in December, was forced to accept a lower rent.  The same unit posted, the following July, resulted in four showings during the first week and an increase in rent of 200 dollars.  The holidays are a horrible time to list vacancies, as individuals are focused on family obligations and saving money for their respective celebrations. In direct contrast, July is usually the time of highest potential renters.  High school and college graduates enter the job market place and require new housing.  Families are far more likely to move during the summer so they don’t disrupt their children’s school year.  These two factors (among others) make July the best time the most profitable time to list vacancies.

Appeal Property Taxes

For most landlords, property taxes are the single largest expense besides mortgage payments. Therefore, you should always invent the time and effort to appeal your taxes.  While each county’s appeal process varies, the process is generally quick and easy and starts with a simple application.  Most counties will publish what comparable (“comps”) sales are used by the assessor to establish your reported value.  Review these comps for inconsistencies with your property.  For example, I had a property where the comps used were exact equals of my property and located within a mile of my property.  However, my property was located on a busy street, while the comps were all on quieter side streets.  It was easy for the assessor to recognize the inconsistency in the comps and reduce my property tax appraisal.  Also, find your own comps and submit them as true comparable properties.  Use Zillow to look up recently sold comps to your property.  If you can’t build a good case, or have time to perform the research, use a professional property tax consultant to dispute your taxes of your behalf.  These services generally charge 50 percent of the reduction savings.

Reduce Insurance

While property taxes are generally the largest expense landlords endure, insurance isn’t far behind. Increase your deductible to the highest deductible available (usually 2,500 dollars).  If you don’t specify a high deductible, chances are your broker or insurance agent has your deductible set to a more expensive amount.  The savings can be a hundred dollars or more on most properties.  Remember that as investors, it doesn’t pay to make small claims, as claims will raise your premium and you may be dropped altogether if multiple claims are made in a short period of time.

Open a Line of Credit

As landlords, we need to carry reserve funds to pay for sudden vacancies and unexpected major repairs. Most experts recommend carrying 6 months of your total property portfolio rent amounts.  I would recommend carrying closer to a year’s worth of rent, if you only hold a few properties and reducing to 3 months if you own twenty or more properties.  These reserves, while a necessity, do limit our profitability, as we have large sums of cash sitting on the sideline.  The reserves don’t necessarily need to be all cash.  You should consider opening a line of credit on a property you either have a lot of equity in or own free and clear.  Credit lines are also available on a group of properties.  The interest rates are generally adjustable and benchmarked one or two points above the prime rate.  Once set up, the funds are easily accessible, similar to a checking account.  Remember that you will still need some cash reserves for the typical repairs and issues that may arise.  Make sure you are capable and comfortable with the monthly payments if you choose this option.  Also, remember even if you carry a zero-balance on your line of credit, mortgage underwriters will count the total available line of credit against your debt-to-income level.  This option isn’t for everybody, but, when exercised, it frees up investment capital for what we do best: rent properties.

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Reasons Why Real Estate (Rental Properties) Will Always Beat Stock Market Returns Part 2

Reasons Why Real Estate (Rental Properties) Will Always Beat Stock Market Returns Part 2

Refinance now before rates go up! Get multiple rate quotes at GetMyLender.com.

Part 2 (Part 1 can be found here): In this post, we will take a look into the typical returns between traditional stocks and rental properties. The numbers used for this analysis will be industry acceptable values. Your returns, and expenses will vary.   We will also assume the rental property is leveraged as most real estate investor utilize leverage for their investments. The example below is based on a $20,000 investment utilizing historic returns of the S&P 500 compared to a $100,000 dollar rental property purchased with $20,000 dollars down payment and an $80,000 loan.  We will compare taxes of both investments based on a single filer making less than $90,750. State taxes are excluded as they vary with some states having no income taxes.

The median return of the S&P 500 since 1970 is 12.6%. 3.4% of the total returns comes in the form of dividends. Currently, the tax rate for both long term gains (the investment is considered long term gains if held for longer than 12 months) and dividends is 15% for single filers making less than $90,750.

Stock Investment Calculation

$20,000 investment x 12.6% (median S&P returns) = $2520 gains

Taxes – $2520 x 15% = $378

After tax gains = $2142 or 10.7 percent.

Rental calculation parameters:

Yearly Rent = 12% of property value ($100,000) = $12,000

Property Appreciation = 3% of property value ($100,000) = $3,000

Maintenance – 1% of property value ($100,000) = $1,000

Property taxes – 1% of property value ($100,000) = $1,000

Insurance – .5% of property value ($100,000) = $500

Interest – 4% of loan note ($80,000) = $3200

Loan principle – 1.25% of note ($80,000) = $1000

Property depreciation – The IRS allow the building value (not including property value) to be depreciated over 27 1/3 years and this amount is deducted from our taxable income. It is important to note, when selling a property you will be subject to a 25% recapture tax (in another post we will discuss ways to avoid this recapture tax). In our example we will assume the building value is $80,000. $80,000 divided by 27.333 = $2,926 yearly depreciation.

Rental Property Calculation

Total rents $12,000 minus costs (property taxes, maintenance, interest and insurance) $5,700 = $6,300 returns – $2,926 depreciation = $3374 total taxable income.

These returns are subject to ordinary income taxes rates. FICA taxes are not included in this calculation as most investors aren’t considered a real estate professional per IRS guidelines. Individuals who work more than 15 hours per week can qualify as a real estate profession, which changes taxes and tax deductions. We will discuss the advantages and disadvantages of a real estate professional in another post. The tax rate for single fliers making less than 490,750 is 25%.

Taxable income $3374 x 25% = $843 total taxes paid

Total Investment Gains

After tax gains = $5,457

Property appreciation gains – $3,000 -$450 (capital gain taxes) = $2550.

Principle reduction = $1,000

Total gains = $9,007 or a 45 percent gain on our original $20,000.

While this calculation was only hypothetical, it is intended to indicate how the use of smart leverage and tax advantages of rental properties can provide a substantial, low risk return.
Standard Lease Agreement