Archive for October, 2007

Minneapolis Investment Property Workshop

The City of Minneapolis, the Minneapolis Police Department’s Community Crime Prevention, and the Minneapolis Housing Inspections department are working together to put on a Rental Property Owners workshop in Minneapolis on Thursday, October 25, 2007.  I have attended these events and found them to be a great resource even if you don’t own property in Minneapolis.
Investment [...]

The City of Minneapolis, the Minneapolis Police Department’s Community Crime Prevention, and the Minneapolis Housing Inspections department are working together to put on a Rental Property Owners workshop in Minneapolis on Thursday, October 25, 2007.  I have attended these events and found them to be a great resource even if you don’t own property in Minneapolis.

Investment Property owners will learn ways to keep their properties free of drug dealing and other illegal activity.  Other topics presented include:

• Working with the Minneapolis Police Department
• Working with Minneapolis Housing Inspections
• Tenant issues
• Hennepin County Housing Court
• Arbitration as an altermative to Eviction

This event is also a great opportunity to network with other Minneapolis Investment Property owners.  To get a registration form, click here.  The cost is $20 and includes a box lunch.  The details and location for the event are:

Thursday, October 25, 2007
5-9 PM
St. Mary’s Greek Orthodox Church
3450 Irving Ave S
Minneapolis, MN

You must RSVP by Friday, Oct 19 by emailing ccpsafe [at] ci [dot] minneapolis [dot] mn [dot] us or calling the message line at 612-673-2812.  Plan to attend.

Investment Property Analysis-Cash on Cash Return

There are many different ways to analyze investment property purchases.  These financial ratios include:  Cash on Cash Return, Cap Rate, Debt Coverage, Gross Multiplier, and Return on Asset to name a few.  Which ratio you use depends upon your personal preferences as well as your financial goals, your risk tolerance, and even the type of property [...]

There are many different ways to analyze investment property purchases.  These financial ratios include:  Cash on Cash Return, Cap Rate, Debt Coverage, Gross Multiplier, and Return on Asset to name a few.  Which ratio you use depends upon your personal preferences as well as your financial goals, your risk tolerance, and even the type of property you are analyzing.

Cash on Cash Return is a good indicator if the property is a cash cow or is potentially under priced.  Because most of the required numbers are readily available in the field, most investors will use this ratio as a quick test to determine if further analysis is required.  Less seasoned investors may want to use a property spreadsheet or a an on-line property analysis tool to do the work for them.

The math equation is: 
First, let’s calculate Annual Before-Tax Cash Flow:

• Calculate your yearly income from the property including rent and additional income such as laundry fees.
• Total all yearly expenses that you pay as the owner/landlord such as:
  • Utilities (heat & electricity)
  • Water/Sewer/Garbage
  • Snow/Lawn Care
  • Management/Care taking
  • Insurance
• Subtract your yearly expenses from your yearly income to arrive at your Annual Net Operating Income.
• Calculate your mortgage payment using any on-line mortgage calculators.  Multiply by 12 to get your annual mortgage payment.
• Subtract your annual mortgage payment and your annual tax amount from the above Annual Net Operating Income to arrive at your Net Annual Cash Flow.  Make sure you did not include taxes more than once!

Your Total Cash Invested is quite easy.  It is your down payment that you put in to acquire the property.  You may be thinking, “what about closing costs”.  Most investors will keep the process simplified by NOT including closing costs or other “acquisition costs”.

To calculate your Cash on Cash Return, simply divide Net Annual Cash Flow by Total Cash Invested.  This will give you a percentage/ratio that you can use to compare investments.  This number shows you how much of your cash out of pocket is returned to you each year by this investment.  Because this is a quick test, it does not take into account any tax implications, depreciation, or appreciation.

Most real estate investors are looking for at least a 24% Cash on Cash Return.  Many will not even consider a property unless it generates a ratio of greater than 30%.  I recommend that you run multiple examples to become familiar with this ratio before making a purchase decision using it.

Finding Your Flips

After all your flipping prep work, you will need to generate leads on potential properties to flip.  Unfortunately, not all leads will end in you buying a property to be flipped.  Many leads will be dead ends for various reasons including (but not limited to) the lack of a seller’s motivation, condition of property, and even competition.  [...]

After all your flipping prep work, you will need to generate leads on potential properties to flip.  Unfortunately, not all leads will end in you buying a property to be flipped.  Many leads will be dead ends for various reasons including (but not limited to) the lack of a seller’s motivation, condition of property, and even competition.  Because this is a numbers game, you need to define how many properties you want to flip each year or month and then how many leads you will need to generate properties to make offers on.  The following techniques, when used consistently, should allow you to generate enough flip leads which in turn will allow you to find (and make offers) on properties to flip:

• Prospecting-The following tools will generate leads on potential houses to flip.  Once you generate the lead, use the county’s on-line property tax system to find the owner.  Call them or send them a letter asking if they are interested in selling and that you can close quickly.
  • Use the MLS or a realtor to find properties that are below the average price range for your target neighborhood.  Although it is not a perfect statistic, use a price per square foot as a rough way to find leads on properties.  Also, look for keywords in the listings that say:  needs TLC, fixer-upper, As-Is.  Additionally, review properties that have been on the market for an extended period of time. 
  • Drive or walk around your target neighborhood.  Look for houses that have uncut grass or are vacant and/or boarded up.  Properties that also appears to need exterior work may be leads.
  • Sometimes desperate sellers will attempt to sell the property themselves first, before using a Realtor.  Check the classifieds in the local paper and Craig’s List for your area.
  • Check the foreclosures listings in the newspaper.  I do not recommend buying the property at the sheriff sale, but  contact the sellers to see if you can help them out of a bad situation.  Otherwise, simply make a note of what properties are going into foreclosure and watch for them to become available (probably on the MLS).
• Advertising can be an effective technique to generate qualified leads as people are calling you to discuss their property/situation.  Small “bandit” signs at intersections and boulevards is a highly effective technique that many national firms use.  You can also create letters or post cards and mail them to your target neighborhoods calling the recipient to call you if they need to get out of their house quickly.
• Networking involves connecting with as many people that you can find that many have knowledge of a lead on a house that needs to be rehab’ed.  These may include Realtors, contractors, neighborhood residents, and other investors.  One great source is to connect yourself with attorneys that handle estates.  Often the family members are not interested in going through the process of selling or fixing up their relative’s home and just want it taken off their hands.  Many times these will be homes that have been neglected for years by an aging owner. 

Even once you start your first flip, do not turn off your lead generation process.  If you intend on continuing to do house flips, you will want to always have leads in your pipeline.  The above techniques will not only generate property leads, they should also help you understand your target neighborhood better.

Investment Property Cash Flow=Good

In the last year I have had two different conversations about cash flow that I was amazed by.

The first was an investor that owned one property. He was so excited to tell me “It only took 3 years, but my investment property is finally making a positive cash flow”. I felt sorry for him that [...]

In the last year I have had two different conversations about cash flow that I was amazed by.

1. The first was an investor that owned one property. He was so excited to tell me “It only took 3 years, but my investment property is finally making a positive cash flow”. I felt sorry for him that his real estate agent had sold him the wrong property.
2. Secondly, I went to a seminar where the speaker (a mortgage consultant) recommended that it was OK to take $300-500 per month out of your pocket each month to pay for the negative cash flow of your investment. He suggested that you should simply reduce the amount you contribute to your 401k each month and divert it to an investment property!

Maybe I am going to get some letters for this post, but I am sad for the guy in example #1 and outraged at the mortgage consultant in example #2. If you are pouring $300-$500 per month into the property on your best day, what happens when you have a vacancy or a major repair?

My bare minimum rule is that an investment property must generate $100 per door per month. In other words, a duplex must make at least $200 per month. This simple math does not automatically validate a property as a good buy, but it is a start. You must still look at your cash on cash return and your return on asset. Do you think spending $600k for a duplex (with $60k out of your pocket for the down payment) to only make $200 per month would make you excited? Probably not. Using a highly qualified mortgage broker that works with investment property is good way to insure you are spending (and making) your money wisely.

In this market, with mortgage financing drying up, it is more difficult to find decent properties that cash flow. I believe you just need to work harder and look longer to find them. You also may need to take bigger risks by going into neighborhoods which may be depressed today. I also believe that using a real estate agent that works with (and owns) investment property is the only way to approach it.

Buying Foreclosure Properties

Foreclosures seem to be a hot topic of conversation even amongst people that are not in the real estate market. I am often asked “Are you finding a lot of deals with all the foreclosures happening now”. My standard answer is “yes, typically”. Foreclosed properties are usually a great opportunity to buy a property at [...]

Foreclosures seem to be a hot topic of conversation even amongst people that are not in the real estate market. I am often asked “Are you finding a lot of deals with all the foreclosures happening now”. My standard answer is “yes, typically”. Foreclosed properties are usually a great opportunity to buy a property at below market prices. You just need to understand some basic rules, differences, and tips:

• Foreclosed properties are also called REO properties and are owned by banks after a borrower (ie: owner/mortgagee) has defaulted on their loan and the bank has gone through the proper legal methods to take the home.
• Although foreclosed properties are often priced below market, the banks that own them are not interested in even reading “low-ball” offers. That type of offer will often go unanswered. Banks have an established (but confidential) price strategy that they rarely deviate from.
• The banks have no emotional connection to the house and in fact they have probably never seen it. It is just another file on a desk of someone probably in another state. These asset managers work a regular job and do not respond to offers outside of the work week. Typically because of their workload, they can take days or weeks to respond to an offer.
• Because of the length of time in working with a bank, do not count on closing on the date you propose in the purchase agreement. The bank will set their own schedule. Therefore, allow yourself enough time to move out of your previous house! You don’t want to be stuck homeless waiting for the bank!
• Read all the documentation that the bank provides regarding the sale. Often your earnest money is non-refundable after the inspection period ends if you fail to close. Additionally, the bank will normally charge a fee per day (per Diem) for every day the closing is late (but will then occasionally close late because of their own problems with no excuses or restitution to the buyer).
• Inspect the property thoroughly prior to the end of the inspection period. Typically the bank will not negotiate anything found on the inspection. They will simply respond that you an either cancel the purchase agreement or buy it as-is.
• There is no need to track the sheriff sales or foreclosure notices in the paper or pay for a list from an Internet provider. All foreclosures (in Minnesota) are listed with real estate agents. This means that they can easily be found on your local MLS via a Realtor or a public website.

These are only some highlights of the difference in the process of buying foreclosure properties. I recommend you use a real estate agent that has previously sold foreclosures. They will help you navigate your way though this unique, but potentially profitable process.

Free Help When Buying Investment Property

Would you pass up the opportunity to have an expert help you with a big decision if that expert cost you nothing?  If an interior decorator offered to help you redecorate your house for free, would you jump at the chance?  Would you be excited if a career counselor approached you and agreed to work with [...]

Would you pass up the opportunity to have an expert help you with a big decision if that expert cost you nothing?  If an interior decorator offered to help you redecorate your house for free, would you jump at the chance?  Would you be excited if a career counselor approached you and agreed to work with you for months or years to see your career goals and aspirations met, all for no money out of your pocket?  If you answered yes to the items above, why would you not find an experience real estate agent and have him/her teach you the ropes of investment property?

Remember:  Real Estate agents are typically paid, at the closing, by receiving a part of the commission charged to the seller.  In short, the seller of that property paid for your education!

I had always wanted to own investment property, but could never figure out how to get started.  Only after I met an experienced real estate agent who sold and OWNED investment property, did I jump in. 

He helped me find and analyze properties.  He wrote the offers and held my hand at closing.  Now, both of the things most real estate agents can do, but where he was most invaluable was after the sale.  Owning your first investment property can be a daunting process.  He was always there to answer questions about tenants, leases, rents, repairs, etc.  Even after all these years, I still use some of the same forms and contacts that he gave me with the first property.  And all of this advice (even months after the sale) was paid for by the sellers of those properties!

If you are new investor or maybe you own one investment property and want to acquire more, find an experience real estate agent that both specializes in investment property and owns investment property.  Their experience will be a invaluable guide as you build your investment property portfolio.