Anatomy of a Deal: Duff Ave

September 21, 2015 by Lacie

We are always on the lookout for property, and all of our close friends know that. So it was nice to get a call last summer from a friend who said that he saw a house for sale in his neighborhood that he thought we might be interested in. Brad went into the local MLS, and could not find the house listed at all.

After some digging we found out that it was not listed in the local MLS. The house was a foreclosure and Wells Fargo, the bank that now owned the property decided to list it with a real estate agent located on the other side of the state. The house would only show up in their listings, which was nice for us. No one else in our town knew this property existed!

It was a large 3 bedroom 1 ½ bathroom brick home. It had a garage in the back with a 1 bedroom garage apartment. The house had been owned by an elderly woman who had passed away 3 years ago, and the kids had inherited the property but lived out of state. I don’t know all of the details, but I think there was some dispute over who would get what, and eventually the property ended up in foreclosure.

The outside with beautiful maintenance free brick!

The house was brick, with a newer roof. The electric was in good condition, and you could tell the place was well taken care of. It did smell, like it hadn’t been lived in for a while, but there were hardwood floors underneath the carpets that could be refinished. A fresh coat of paint was needed, but other than that and refinishing the floors, there wasn’t much work to do. The apartment in the back had also recently been updated. The carpet in there probably needed redone, as well as fresh paint on the walls. Most appliances were also included with both units. Overall, we estimated $5,000 would get the place in proper working order.

The kitchen included all working appliances.

It was shocking to us how nice the place was, and how little work it needed, and we knew we immediately wanted to make an offer. The place was listed for $59,000. We calculated that we could rent the house for a minimum of $800 a month (we felt like we could get closer to $900, but are always cautious with our estimation). The apartment would rent for a minimum of $400. That would give us $1200 of rent per month.

Using a mortgage calculator, like mortgagecalculator.org, you can estimate that the payments would be $404.94 a month if you took out a 30 year loan for $63,000 (the price plus our estimated repairs). Even with including taxes and insurance ($1,500 per year) and vacancy rates (.10 of rental income), we would still be making $549.06 a month in income.

We had no work to do on the living room and dining room.

A strange turn of events

After we submitted our offer for the full listing price, things got a little strange. We were on a train ride in the mountains with our boys when we got a call from our real estate agent that something was wrong with our paperwork, so we needed to submit it again. This happened two more times over the course of several weeks, where the listing agent needed something else from us, and we would always give her the information she requested quickly.

At this point, we weren’t concerned as we had offered the full listing price in cash. However, soon a friend of ours (who also does real estate) let us know that our property was relisted…at $51,000, $8,000 cheaper than our offer on Zillow.com. However, it was listed as under contract in the MLS. Needless to say, we were confused and upset and immediately contacted our agent.

Ultimately this is what happened: with a foreclosure there are quite a few people involved and it can take quite a while for all of them to communicate and accept an offer. There is the real estate agent, the bank contact person, and the bank’s board that have to vote to accept the offer. In this case, our offer had not been submitted to the correct people and in the meantime, the bank had decided to lower the price of the property. A person at the bank relisted the property on Zillow at the lower price without talking to the listing agent. Obviously, communication was lacking on their end.

Upstairs floors that we refinished

So what ended up happening? The bank decided to accept from us a lower offer of $51,000 as that is what they were listing it on Zillow. We resubmitted paperwork for that and our offer was accepted and we closed on the property. Yes, you are reading that correctly. The bank screwed up and lost out on $8,000 because they couldn’t communicate. Their loss was our gain, and the numbers worked out even better! Here’s the breakdown:

Income	Expenses
House: $1050	Mortgage: $381.07 ($58,000 taken out on a 30 year loan)
Apartment: $500	Taxes/Insurance/Miscellaneous: $125
	Rental Vacancy Rate: $155(10% of rental rate, which is $1860 per year)
Total Income $1550	Total Expenses $661.07

Total Rental Profit per Month $888.93

Now I will tell you that this is probably the best deal that we have ever done. It’s not that there aren’t deals out there like this; they are just very hard to find. But, hopefully this will give you a little inspiration and show you what is possible!

The Biggest Mistake That New Landlords Make

September 14, 2015 by Lacie

The biggest mistake is probably surprising, but I see it all the time. It’s under renting your property.

What do I mean by under renting?

Under renting is where you are asking way less in rent than the typical market rate. For example, I have some friends who I just recently found out that they have a rental house. The house is in the most desirable school district in our area. It is a three bedroom two bathroom house with a large garage and a fenced in yard. They have been renting it out for $350 a month. Yes, that’s right, $350 a month. I hope that makes you cringe. It should, because I wouldn’t rent that house for less than $1000!

Why do people under rent?

I think that people under rent their property for a couple of reasons. First, they don’t treat it like a business. They don’t take it seriously, and don’t realize the enormous opportunity for building wealth with minimal work that is property investment. Second, they think that by offering their place for rent way under what others are charging that they are going to beat the competition. They think that people will see their property listed next to someone else’s for hundreds of dollars less and will naturally chose the lower amount.

Why is it so bad?

Here’s the truth: I’ve never see it turn out well. Remember my friends that were renting out their house for $350? Well, they have had bad renters back to back. Their place has been sitting empty for the past two months because they need to repair the damage from the last renters and they have been wanting to quit. They just wanted to sell their place and cut their losses (sound familiar to anyone?). Luckily, I found out about the situation and we will be helping them get their place fixed up and rented to good people.

The psychology of renters

Let’s say that you need a new pair of dress shoes. You would have a ton of options to choose from to purchase your shoes. You can go to a high end shoe store, like a Nordstrom’s. You know that you will pay more than other places, but that you will get a high quality item. You can also go to Payless. At Payless, you are guaranteed a cheap price, but you also know that the shoes will be cheaply made and very low quality.

The same can apply to rental property. When a good person sees a property listed for significantly less than the other places on the market, they tend to think it’s a negative. They will probably assume that the place is a dump and not even bother calling on it. Think of the adage, you get what you pay for. The same typically applies here.

How it can lead to more problems

So if good quality renters are not going to be interested in your property because of the price, who will be calling? The bad renters! Typically in these scenarios, bad renters will be the ones that are interested in your place. They couldn’t usually afford a property as nice as yours, but at your cheap price they can. It’s seen as a pair of Payless shoes, and not the Nordstrom’s.

It comes down to respect and worth. By putting such a cheap price on a place that is worth much more, you are telling renters that you do not value your property much, and neither should they. You are sending a subconscious message that they can mistreat your property, because you do not care much about it anyway. Does that make sense? I hope it does.

How do you properly estimate your rental rate?

So, I hope by now we’ve established why you shouldn’t rent your property for a very low amount, but how do you know what the correct amount is? Do some market research! Check your local classified ads in the newspaper and see what people are renting their properties for. If you see that three bedroom houses in your neighborhood are renting for $600 then charge $600, if they are renting for $1,000, then charge $1,000. Not only will you be making more money in rent each month, you will typically avoid problems like evictions and having your property damaged. Happy renting!

The 6 Types of Real Estate Investments

September 7, 2015 by Lacie

Before knowing anything about real estate, the information can be overwhelming. I’ve tried to put together a simplified explanation of the six main types of real estate investments.

Residential Real Estate

When you think of real estate investing, this is probably most likely what comes to mind. This is probably the simplest and most common type of real estate investment. In this situation, you would invest in residential property, such as single family homes, vacation houses, town houses and apartment buildings. Then, you can rent the property to a person or family that will pay rent money every month to live in that property. The duration of their stay is decided in a rental agreement. Residential real estate is also the type of investment that is also “flipped”. A flipped property is one that was bought at a low price, repaired, and sold at a higher price in a short amount of time.

Commercial Real Estate

As the name suggests, this investment consists of office buildings. You can use your savings to purchase or construct a building with individual offices and earn a rent by leasing them out to small business owners and companies. This is usually too expensive for most investors to get into, at least as a first property.

Industrial Real Estate

This investment could be a car wash, storage units, or other special purpose properties that generate income from those who temporarily use these facilities. For example, these investments generate cash from fee and service income streams, such as placing coin-operated vacuum cleaners at a car wash garage to increase the return on real estate investments. Storage units can be a great investment for someone who has a large piece of land located near a busy area.

Retail Real Estate

Retail real estate investments are properties such as strip malls, shopping complexes, and other retail outlets where you earn by receiving rent from tenants of the store. In some cases, you can also choose to receive a percentage of sales made by the tenant in addition to the base rent so that a property can be kept in a good condition. Just like commercial real estate, retail is usually too cost prohibitive for most first time investors.

Real Estate Investment Trusts (REITS)

A REIT is a trust, corporation, or association that acts as an agent in a real estate investment or real estate mortgages. They trade like bonds and stock in the market and have a well-diversified portfolio of underlying real estate mortgages and real estate property investments. I don’t have a lot of experience with these, but I have heard from others who have invested in them with really good success.

Property Tax Liens

Property tax liens are probably the least known of all the real estate investment options. State, county, and city governments raise money to provide benefits and services by taxes. One type of taxation is a tax on real property. According to the law, the owner of a parcel of real property is assessed a dollar amount to pay based on the value of that real property. The assessed value is almost always much lower than the fair market value. In our area, for instance, the county is required to assess property at no more than 60% of its fair market value.

This assessed tax, in virtually all cases, is collected by the county where the property is located. If the owner of the property fails to pay the tax, the amount of the tax becomes a lien against the property. Governments don’t like property liens, as they don’t help the county and local governments pay for the services and benefits they have promised to provide for their citizens.

The county wants the money as soon as they can get it. It needs that money in order to fulfill its budgetary obligations. By state statute, each county is authorized to collect the taxes due that remain unpaid by selling at public auction, either a Tax Lien Certificate or a Tax Deed.

Most counties have a real estate tax lien auction once a year. Bidding per tax lien begins at a high interest rate (18% where we live) and decreases per bid. The investor who bids the lowest interest rate before the time expires gets the lien. The property owner then owes the new tax lien owner the amount of the lien plus the interest. If the property owner continues to default on their real estate taxes, the original tax lien owner is given first priority on the purchase of the subsequent liens. After a set amount of time (between 18 months and 3 years for most counties) if the property owner has still failed to pay their taxes, the tax lien owner has the right to foreclose and obtain the property. This amounts to almost no risk for the tax lien owner. If their tax lien is paid, they make all of the interest money. If the tax lien remains unpaid, then the tax lien owner will get the property. This is great for those who are hesitant to invest in real estate. However, it can be difficult to find all of the information you need to invest in tax liens. Check with your local county tax office to find out more information.

The Best Way to Find Your Niche

September 2, 2015 by Lacie

How do you go about finding your real estate niche (your area of real estate expertise) if you don’t know anything about real estate? How can you become an expert when you have no clue where to start?

Mentoring

Mentoring isn’t a new trend, but I feel like it has come back in style recently. Mentoring is a relationship you develop with someone who is more knowledgeable in an area than you are. A mentor will help you learn about that particular subject and offer their advice. So in our case, we are looking for mentors that are real estate investors.

Why You Need a Mentor

They will hold you accountable.
You will avoid costly mistakes by listening to their advice.
They can help you build your network.
You will become a better investor, faster.

How to Find Potential Mentors

Real estate investors are everywhere! You probably just didn’t realize it, as most tend to keep a low profile. The following are great ways to find local investors that could become your mentor:

Local Real Estate Groups

You might not realize this, but there are usually several real estate investor groups in your area. You can check out these websites to see if you have a group in your area:

National REIA

REI Club

Unfortunately, you can’t find these groups in every area. However, you still might be able to find a group by searching for “State name landlord association” or even “county name state name landlord association”. Most of the members of these groups have quite a bit of experience in real estate and love to share their knowledge.

Local Small Business Owners

Often local small business owners become successful in their business, and then decide to buy real estate as a way to protect and grow their wealth. Do you have a favorite neighborhood restaurant that is locally owned? Ask the owner if they invest in real estate. You might be surprised that they often do. . One of my very first business mentors owned a pizza shop that he started when he was 18 years old. We met him when he was in his early 30’s; by that time he owned the entire plaza that the pizza shop was located in. I think he could relate to me and my husband as we were so young when we were first starting out. He is a dear friend of ours and I know that his wisdom in those early years helped us avoid several costly decisions.

Newspaper Classified Ads

If all else fails, you can go through your local newspaper’s classified ads and call the number that is listed in the ad. Tell the person a little about yourself and that you are interested in getting into real estate. Offer to buy them a cup of coffee to pick their brain.

What You Should Do

Once you find a potential mentor, you can ask them if they would be willing to let you interview them about what they do. Offer to buy them coffee or take them to lunch. Try to make it casual and fun.

Before you show up for your meeting, do a little homework to make the most of it. Research the local real estate industry and the person you’ll be meeting with (if you can) so you have a context for the experience. Come prepared with questions, but be ready to listen. It is very important that you are respectful of the investor’s time. If you tell them that the meeting will only take one hour, be sure to keep track of time, and end the meeting in one hour. You will not be able to gather all of the information you want from one meeting with an investor, but you should see it as a great start to a fruitful relationship.

What to Ask an Investor

Here are some sample questions that you can ask an investor:

What made you want to go into real estate?
Can you tell me about the first property you bought?
How many properties do you currently have?
What’s your favorite type of property to buy and why?
What are some of your greatest challenges?
How have you overcome those challenges?
What are some characteristics of a successful investor?
What other people do you work with on a regular basis to make you successful?
What are some of your favorite books?
Do you have any routines or habits that you think have gotten you to where you are today?
What is something you wish you would have known when you were just starting out?

Building the Mentoring Relationship

At the end of the first meeting, you can ask the investor if they would be willing for you to follow them for a day so you can get a more in depth look at what a typical day is like for them. If they are willing, you should be prepared to help out where needed. If that goes well, you might want to ask if they would be interested in having coffee with you once a month. This is how a mentorship relationship starts. Don’t look at the relationship as a one-sided “What can he do for me”, but be willing to volunteer to help them as needed. You want to make sure that the investor would be gaining something from the experience as well. I’m sure that if you are helpful and polite, you will find a great real estate mentor who can help you on your path to success.

Invest in Your Local Area

August 31, 2015 by Lacie

I’ve noticed a trend as of late, and I thought that I would give my thoughts on it here. Apparently, there are quite a few people marketing to first time investors to purchase out-of-state properties. These properties are often billed as “turnkey”, meaning that there is no work involved and you will start earning returns immediately. Let’s break this down so I can show you why I’d be skeptical of this situation.

A Turnkey Property is Profitable?

In every instance that I can think of, the way that we have made money in real estate is by taking a property that was less than ideal and improving it. That’s why I have a hard time believing it when these people confess that there is no work that needs to be done to their properties. I never find anything on the market in mint condition that I can rent for a monthly positive cash flow (extra dollars in my bank account every month). Did the people that are marketing the property do all of the necessary repairs? If so, then why do they need me? It seems like something is amiss.

Buy Locally

More than just a cutesy farmer’s market phrase, I think it should also apply to real estate deals. I feel very strongly that at least your first few properties should be bought in your local area. All of our properties are in our local area. I know what you may be thinking, “But, I don’t live in a big city and there is just not enough available in my local area.” I think you’d be surprised at how well you can do in a small town. We live in a very small town of 16,000 people. Our entire county is only 68,000 people, and we are doing very well with our properties. You live in the area so you know it well. You know what neighborhoods would be good to live in (and buy property in).

You Can Evaluate In Person

There is something to be said about visiting a property in person. The numbers tell you so much, but there is so much information that you gain by physically visiting a property that I don’t think you can grasp through pictures or video. I wouldn’t feel comfortable investing in a property unless I have seen it with my own eyes.

You Will Learn Faster

Even if these out-of-state property deals are not a scam, I would still encourage you to purchase in your local area. You will learn so much faster. I know it’s scary to make mistakes, and that’s why something like this would be appealing to people, but an opportunity for mistakes is an opportunity for growth. You don’t have to be a genius to figure this stuff out, and you don’t need to know everything there is to know about real estate before you buy your first property. You are capable of being successful!

Being Broke Can Be Your Greatest Asset

August 28, 2015 by Lacie

As many of you may know, Brad and I bought our first rental property when I was 20 and Brad was 22. We were broke college students with a baby. When I say broke, I mean like, we would sometimes have $40 in our bank account and would need to make it through for a week on beans and rice. While I’m not sure I’d ever want to go back to those days, I know that those difficult times allowed us to take the risks that we never would have done otherwise. There are several reasons why being broke helped make us who we are today.

You Have Nothing to Lose

The truly freeing aspect of being broke is that you have nothing to lose. Like in our situation, we were already broke college students that had a child, so we figured why not try something crazy like invest in real estate? The worst thing that would happen would be that we would fail and have to go out and get real jobs like all of our friends were doing anyway, so the downside didn’t seem that bad.

You Work Harder

We didn’t focus on what would happen if we failed, because we didn’t think we would. I know that may sound naïve, but when we bought our first property, we just had the attitude that this was going to work. This was the path that we had chosen so we were all in. I think that sometimes people make a choice and then get scared or try to talk themselves out of it. We didn’t make that an option for ourselves, and were willing to do whatever we could to make it work.

Since we had very little money, we used one thing we did have: time. We put in a good many hours of sweat equity into our first few properties. This not only saved us money, but now that we hire out many of our property jobs, we know what we want and are less likely to get taken advantage of.

You Get Creative

Sometimes constraints can free you up to be more creative. If you have an unlimited budget and unlimited time, it becomes almost overwhelming with all the choices you would have. You would get so overwhelmed with all of the things that you COULD do, that you never end up doing anything. It’s kind of like Netflix. I love Netflix, but I think I actually spend more time scrolling through the entire list of movie options than I actually do watching movies. Why? So many choices.

When you have no money, you get creative with how you are going to accomplish your goal. This applied to us in our real estate adventures. We would figure out creative ways to finance a property. Our first property deal was great structurally, but was ugly on the inside. We spent the little money that we had on paint and refinishing hardwood floors that we found under old, nasty carpet. That first deal would not have happened if we weren’t broke, because we wouldn’t have had the constraints forcing the use of our creativity.

Success Can Be Redefined

Sometimes being successful is not always measured in dollars. There is value in learning, and to us the property that we invested in (among other businesses we tried) was a huge education. We were both taking classes in business at the time, but those were more theory than substance. There really was no better business education for us than the business projects that we were working on when we were broke. We still own those first few properties, and the lessons that we have learned from them have brought us to where we are today.

How to Rent Your House

August 19, 2015 by Lacie

So maybe you had a “starter home” for a couple of years, and have now found your dream home. Or, maybe you inherited a deceased family member’s home. Heck, maybe you want to travel the world for a year. These are all great opportunities for you to get into the rental property game!

Here are the basic steps you’ll need to follow to rent out your house:

Step 1: Research Your Local Rental Market for Demand

You need to know if there is a demand in your area for the place you want to rent. Look in your local paper at the rental ads, if there are a good number of ads for places like yours, then there is likely to be a big demand. You can also go online to Zillow.com and see what is listed for rent there.

Step 2: Find Rental Prices

While you are researching, make sure that you are also making note of what your property type is renting for. In our area, we can charge quite a bit for a single family home, as they are in high demand and are difficult to come by. Most renters of these properties stay in them for years, which is great for the landlord, but tough on the potential renter.

Step 3: Make Sure Odds and Ends are Taken Care of

Now is the time to take care of the 20 little things that need to be fixed. That outlet that doesn’t work, that drain that drains a little slow; these things should be fixed before you rent the place out. When try to do as much work as possible before we get a place rented, that way everything is taken care of and we don’t get calls at all hours for little things that stretch out over a month. You will also want to clean the place from top to bottom. Hire it out if you have to, but if you want to attract good people, you need a clean place.

Step 4: Advertise it!

There are quite a few ways to do this. Right now, we advertise in our local paper’s online section (it’s free!), Postlets through Zillow.com, and word of mouth. If you can include pictures in your ads, you definitely want to do that. It will help attract the people that you want. Also check out the post about placing a great rental ad.

Step 5: Field Calls/Texts from Potential Renters

As you are fielding calls and texts from potential renters, you want to get the people you are interested in to look at the property in person. You can eliminate a good amount of people just by talking to them on the phone. This is what you want. You don’t want to waste your time showing your place to people that you won’t rent to. If they ask for you to “work with them” on the deposit, or have a pet when you said no pets. No, no, no. Only schedule showings with people that don’t ask for concessions right off the bat, it will save your time and sanity. See this post about scheduling property appointments.

Step 6: Show Your Place

Now is the time to meet people in person and get to know them. It’s kind of a strange game at this point. The potential renters need to decide if they like your place, and then you need to decide if you want to rent to them. When I show a place, I am never a salesman. I just let them look around and answer any questions they may have.

Step 7: Decision Time

Once you’ve shown your property to several people and several tell you that they are interested, you have to make a decision about who you’d like to rent to. Truthfully, this is where the “horror stories” come from. The most important step in renting your house is to find good people. I’ve been at this for a long time, and I can tell you that every time, EVERY SINGLE TIME that I had a strange feeling about someone but didn’t listen to it, I got burned. Trust your gut. Does their story check out? Are they polite? Are all of your interactions with them professional and appropriate? It can take some time to find someone you really like. That’s ok. Sometimes, if your place hasn’t rented as fast as you would like, you start to get desperate and make concessions in your mind. Don’t do it! You could be dealing with these people for years, so think about that as you are making your decision.

Step 8: Sign the Lease

Once you’ve decided on your renter, you need to set up a time to sign the lease. Sometimes, things fall apart before you sign a lease. These people are looking for a place to rent so if you don’t make a decision fast enough, they could be long gone. Make a decision quickly, and then schedule to sign the lease as soon as you can with your desired tenant.

Step 9: Start Collecting Rent

The first month or two are where you will probably find out if you chose a tenant wisely. Things should run fairly smoothly from here on out. Keep in contact with them more often at first. Check in to see if everything is working properly. Fix anything that comes up as soon as you can to develop a good relationship. Then you can hopefully enjoy many years of rental income for almost no work for years to come!