Archive for September, 2007

Before you Flip!

If you’re new here (and you like what you read), you may want to subscribe to my RSS feed. Thanks for visiting! ScottSo you say you want to get into flipping houses.  If all you have done is watch a marathon weekend of “Flip this house”, you haven’t even begun to get ready!
To [...]

So you say you want to get into flipping houses.  If all you have done is watch a marathon weekend of “Flip this house”, you haven’t even begun to get ready!

To be successful at flipping houses, there is a considerable amount of prep work that you need to complete before you ever begin to make offers on houses.  You should be able to answer the following questions with confidence: 

1. Do you know what type of flip you are going to do?  Read my August 27 article:  “What type of Flip are you doing”.  The type of flip will determine how much prep work you need to get done.
2. How are you handling the financing for the initial purchase of the property as well as the renovation expenses?  Do you have an emergency reserve, in case the house needs an unexpected and/or expensive repair or it takes longer than anticipated to sell?  If you are planning to do a “Flip and Hold”, your financing should be slightly different to allow you to recoup your renovation costs and roll them into permanent (and possibly less expensive) financing.
3. Have you researched various neighborhoods and do you understand what price range is selling (and which is not) in your target neighborhood?  You know that you are ready on this point when you can walk up to a house for sale and name the price before looking at the Realtor flyer or on the MLS.  Your flip profit and your on market sale time are dependent upon you very accurately understanding the price range you are targeting with your completed flip.
4. Have you interviewed various contractors that you may need for the various phases of the project such as:  plumbers, electricians, carpenters, landscapers, etc?  Are they available to start when you need them?  Do they know they would be working on a flip (I have found some contractors that hate working on renovations).  Do you have back-up contractors in case your first choice is not available or does not show up?
5. If you are planning to do most of the work yourself, have you mapped out the project time-line and overlaid that with your availability?  If you are not working on the house, it is sitting idle, and the interest clock is running on your loans.  Do you have buy-in from your significant other that you can spend that amount of time working on the flip?!
6. Do you know how much new cabinets generally cost or what a new tile floor costs per square foot for the tile you want?  How about any of the other materials you will be installing?  Although each flip is different, if you  understand what price range you are targeting and what type of flip you are doing prior to finding the house, you should be able to do some early materials selection.  This will help you when you prepare your budget when putting your offer together on a prospective flip.  (It is also easier to be prepared with all those selections now instead of making them in a rush once you are in the middle of the flip.)
7. How are you planning to sell the completed property?  If you are using a Realtor, have you identified him/her?  If so, plan to include them in the property selection, the scope of the renovations, and material selection.  If s/he has to sell it, make sure the Realtor is confident in the price, materials, and property.  If you are selling it on your own, what are you doing to market the property once it is completed to generate interest?

The answers to most of these questions are not difficult.  You would need to have answers to all of them eventually, so why not take the time up front to do the research and make the best possible decisions you can?

Section 8 or not Section 8?

Should you accept Section 8 or not?  Many new investors are nervous about the program as they have heard horror stories about it.  Tenants that are on Section 8 are the same in every way (and must be treated the same way), but some or all of their rent comes from a government source instead of their bank account.   
Section 8, also known [...]

Should you accept Section 8 or not?  Many new investors are nervous about the program as they have heard horror stories about it.  Tenants that are on Section 8 are the same in every way (and must be treated the same way), but some or all of their rent comes from a government source instead of their bank account.   

Section 8, also known as the Section 8 Housing Choice Voucher Program, exists to provide housing solutions for low income families. The program provides families with a certificate or voucher that allows them to lease an apartment or home they otherwise couldn’t afford. Families pay some “reasonable rent,” which is a percentage of their income; the remaining rent is covered by the local housing authority. Total rents are determined by the local housing authority, and are capped by the Fair Market Rent (FMR), which is set by HUD (US Department of Housing and Urban Development).

In Minnesota, it is illegal to discriminate against anyone on public assistance.  As a landlord, you have the option to not participate in the Section 8 program, but you can’t disqualify an applicant for being on Section 8.

You should work tenants and applicants with Section 8 just like any other tenants.  They should follow the same screening criteria and process.  You should get the name and number of the applicant’s Section 8 case worker to verify the applicant is indeed on Section 8 and can afford the rent that you are charging for that apartment.  I have had situations where 2 weeks prior to the move in, the Section 8 worker calls and asks me to drop my rent by $100 per month so the tenant can afford the apartment.  That is a tough decision to make (drop the rent by $100 and get the tenant or refuse and possibly lose a month of rent).

The unit must be inspected by a Section 8 inspector prior to Section 8 paying any rent.  If the tenant moves in and then the inspection occurs, most likely the tenant will be responsible for the rent.  Work with the tenant and their coordinator to insure you are following all the deadlines.  The inspections are generally straight forward.  The inspectors are looking for health and safety issues and want to insure that everything in the apartment is in working order.  I always advise that you attend the inspection with a screw driver and 9 volt batteries in hand so you can take care of 2 minute repairs instead of trying to schedule a re-inspection for a missing battery in a smoke detector!

Be prepared to wait up to 45 days for the first check from Section 8 arrive.  After the intial check, though, each payment will arrive on the 1st of the month or even the day before.  Often you can also have multiple Section 8 tenants rents combined into one larger check.

I find that my Section 8 tenants are often my most stable tenants, often staying in the same apartment for many years.  To minimize the administrative work, Section 8 typically prohibits the tenant from moving during the lease.  They will also require a decision, 60+ days prior to the end of the lease, from the tenant and landlord if the tenant will continue to lease the apartment for another 12 months. 

Many of the above aspects of the program make it an appealing opportunity for the landlord.  I believe the horror stories are because of the tenant, not the program.

Realtor: Keeping the best for himself?

When meeting with new clients, a question often comes up:  “How do I know that my Realtor is not keeping all the good deals for himself?”.  The answer to that question depends upon your Realtor and their trustworthiness and motives, but generally I believe most Realtors are excited and anxious to find/give their clients the best [...]

When meeting with new clients, a question often comes up:  “How do I know that my Realtor is not keeping all the good deals for himself?”.  The answer to that question depends upon your Realtor and their trustworthiness and motives, but generally I believe most Realtors are excited and anxious to find/give their clients the best deals out there before taking any for themselves. 

Every investor, even a Realtor that is an investor, is in a different buying cycle.  Rarely is an investor buying constantly and buying everything they believe is a good deal.  There is typically a limit to an investor’s time, cash, and credit. 

• Time-Whether doing a flip or a bringing on a new rental, each property can take time to absorb and acclimate to your portfolio.  While many seasoned investors could take on several properties at once, most people are not geared up to take on several each month for many months.
• Cash-Buying new properties often require some outlay of cash for earnest money, downpayment, or closing costs.  As much as we would like it to be so, typically an investor does not have an unlimited supply of cash.
• Credit-Many traditional lenders will frown on rapid acquisition of multiple properties in a short time.  They like to see the properties “seasoned” before lending more money.  Often, your credit score will also take a dip immediately after the purchase until your credit adjusts to the new mortgage on your credit report.

Buying investment property is typically a long term investment strategy that yields only relatively small amounts of monthly cash flow.  Practically speaking….your Realtor needs commissions to pay his bills, put food on his table, and to buy his own investment property.  If you have a concern about your Realtor and their investment strategy and timing, ask them.  I am sure you will find your concerns will be calmed.

September Investment Property Newsletter

The September Minnesota Investment Real Estate Advisors newsletter is now available at www.mnirea.com/newsletters.asp.  It has great information for new and seasoned investors.

The September Minnesota Investment Real Estate Advisors newsletter is now available at www.mnirea.com/newsletters.asp.  It has great information for new and seasoned investors.

Minnesota Investor Club Meeting-Sept 12

The next Investor Club meeting will be held on Wednesday, September 12 at 6:30 at the Mendakota Country Club.  At this meeting, Scott Ficek will be presenting on Flipping 101.  
Our investor club meetings are a great opportunity to meet other real estate investors. The meetings last just over an hour and feature experts in the field of investment real estate, [...]

The next Investor Club meeting will be held on Wednesday, September 12 at 6:30 at the Mendakota Country Club.  At this meeting, Scott Ficek will be presenting on Flipping 101.  

Our investor club meetings are a great opportunity to meet other real estate investors. The meetings last just over an hour and feature experts in the field of investment real estate, including special guest speakers at each meeting. These meetings are also great places for new investors to learn how to avoid some of the common pitfalls of investment properties from more experienced investors.