Tips for investing in Income Properties

Rismedia has a great article about investing in property in today's market. After you read the article, come back and read my comments.

1. Location is the number one rule of investing in real estate. Because the market for rentals in the suburbs of declining areas is contracting, it might be better to invest in cities that don't have much appreciation, but do have positive cashflow.

2. It's good to not go overboard, but as you're buying for the long term, buy long lasting components like ceramic tile, tiled baths and showers, and go with low cost granite countertops. If you are handy, these are fairly easy to install yourself and save a ton of money, plus the saws that you use for large tiles can be used on granite backsplashes. Here is a True Value project site.
If you use drop-in stainless steel sinks (get deep ones if your units are older and don't have dishwashers) you can use a 4" wet saw or grinder to make cuts in the granite. Bullnosed 8' granite slabs can be bought for around $100 and will last longer and look better than a $50 formica countertop. As an added bonus, it won't be hurt by cigarettes. If you start early in the morning, this is only a one or two day project; you can do it on the weekend.

3. Appreciation really depends on your market. California is always cyclical. Southern states, and the Northeast have cashflow without much appreciation. Flipping at this point can be done if you have a lot of cash and can find a really ugly fixer that noone else wants.

4. Historically properties have been appreciating faster than inflation. These days, much of the difference is eaten up in new fees and regulations by the local jurisdictions (Rental license, Code enforcement inspections and tickets, proposed Fire Marshall Inspections for smoke detectors) and public utility rates have been rising with public employee union wages, which rise even when the private economy is contracting. If you have lower income rentals you won't be able to pass these fees on, so avoid low income rentals. The government also competes directly against you with low income housing projects. (Remember #1)

5. Cash is best. While leverage is great, less debt is better. Just protect your assets with corporate structures and insurance. A dollar in your pocket is better than a $0.37 tax credit on your interest write-off.

6. Cost of ownership is a big one. See #4. What are the utility costs? If the utilities are not paid by the renter, can the utility company recoup from the owner ? In California, water bills go against the property. Are there MelloRoos or other bonds that increase the tax rate? Ask your agent.

7. It's amazing what can be done by ripping out nasty carpet (I'm a huge fan of laminate flooring, ceramic tile), scrubbing the walls, replacing the countertops (cabinets if necessary, but refinishing is cheaper and usually works), and upgrading some of the lighting fixtures (adding ceiling fans and outdoor lighting) for comfort and security.

8. Hiring of professionals is great if you can afford it. A lot of minor plumbing and electrical jobs would be prohibitively expensive if done by a professional. There are a lot of great how-to and DIY sites online, as well as books in the library for free advice. (Don't take a library book to a plumbing job). I don't like to kneel, so I hire some help for my flooring. If you're paying $40-80 per hour, you have to calculate how many hours you'll have to work to pay the professionals. If you have renters that want to move in, then you have to determine whether you or the professionals can get the job done on time. I've had it go both ways: professionals could do it faster, or pros didn't show up and the renter went elsewhere.

9. Always. Read some of my posts. I like background checks in addition to credit checks. I don't rent to anyone that I can't do checks on. All adults must be checked. All teens must go on the rental agreement once they turn 18. I just had a lady call and tell me that her husband has no papers and ask if that was a problem. Yes it is--do you want someone selling drugs or pimping out of your house? I had it happen once because I accepted a personal reference.

10. For about $350 you can do your own eviction in San Bernardino. For about $550 you can have a lawyer do it. Go with the lawyer. This could take 2-6 months in California.Or depending on your rent offer the person money to move out (as long as the place is clean and undamaged) as you just want to start earning money. Do not offer to give a good reference. Lying to other landlords will eventually ruin your reputation, maybe faster with new technology.

11. Lower densities tend to have better behaved populations. Once you get 5 units, you need a commercial loan (higher rates and less money could be taken out of a property) and you usually get an added inspection by the health department.

12. Absolutely. If you buy a rental in a resort location you can even right off trips to the area. Vegas market is down, so it's a good place to buy right now. I like Reno a bit better; it's close to the snow and is not entirely entertainment driven.

Lease-option or Rent to own

In a rent-to-own (commonly called a lease-option) there are two separate agreements that you are going to enter. One is the lease. The second is the 'option to purchase' or 'option to buy'.

Generally, people who want to rent to own have poor credit, or unverifiable income. They are often self employed. Lease-options are also used by real estate investors, as there are new caps on the number of conventional mortgages an investor may have at any given time.

The lease, is generally a typical lease, which will spell out the responsibilities and rights of both parties. Typically, the lease conditions will reference the 'option' and all conditions of the lease must be adhered to for the 'option' to be exercised. The lease will generally have the right to renew the lease a certain number of times (a lease in CA can only be for one year, so generally people need more than one year to fix their credit and get a down payment)

Often, there is no 'security deposit' for the lease. You only have the monthly payment. As the intention is to transfer the property to the lessee (renter), most agreements require the lessee to take care of all repairs and maintenance, though many lessors will guarantee the property for a period of three to six months. The upside is that you're also allowed to paint and decorate the house in any manner you see fit. In fact, most agreements allow you to do anything that improves the property.

The 'option' is generally purchased from the lessor. This amount will typically be greater than the amount of a security deposit, but less than the cost of a typical down payment and closing costs on a purchase, but will also may be influenced by your credit history--typically $5000-25000. The 'option' money is usually credited to the purchase price once you buy the property. If you fail to abide by the lease agreement, you are not entitled to any of this money back.

Typically, a certain portion of the monthly rent will be credited to your down payment. This is completely negotiable by both parties.

Depending on who you are dealing with, you might be able to trade something valuable instead of cash. Examples include, but are not limited to: vehicles, jewelry, collectibles, or tools. It's entirely between the parties. The parties would have to agree to the monetary value of the items to be credited to the down payment.

Once your credit has improved to the point where you can obtain financing, and you have acquired the necessary down payment (through saving or accumulating the necessary credit through your 'option money' and your monthly payment) you can exercise your option. You and the seller enter into escrow and after completing escrow, you own the home.

That's generally how it works. Specifics vary from agreement to agreement. You should only enter into an agreement which you are certain you can complete in the time allotted by your lease and the number of renewals, though some sellers will allow you to re-up your agreement with additional payments.