Wholesaling

Wholesaling can be a way to make good money in the real estate investment business, but it is not for everyone. Is it for you? Here is a good resource into what wholesaling is and is not.

If you want to know MORE, you can go to the wholesaling post on my blog as well.

Is it time to buy an investment property?

Here in Louisville, Kentucky real estate sales have slowed significantly. With all the loan program changes for the first time homebuyer, it is getting harder for them to get loan approval. FHA has decreased the downpayment amount to 1.5%, but many first time homebuyers have trouble even saving up that amount. This means that many of the first time homebuyer homes aren’t selling.

Anytime a significant part of the market isn’t selling, prices have to come down. When prices come down the investors step in. My partner and I recently bought a 3 bedroom 1 1/2 bath 2 story home for $29,000, it needed about $8,000 in cosmetics and waterlines (no heat =broken pipes, vacant=copper pipes gone) and is worth about $70,000 in a normal market. This is not a normal market, so we have it for sale for $55,000. It will rent for about $700/month. If it doesn’t sell in 60 days, we’ll put a tenant in and wait a couple of years for the market to normalize and let the tenant pay off our mortgage.

This sounds easy, doesn’t it? It can be, but we already have a relationship with a local bank that will lend us 100% of the sales price for up to 3 years. We just have to come up with the repair money and get the work done. It’s also important to know your areas, it’s only a good deal if you can sell it, or put a tenant in. There are areas that are so rough that it’s almost impossible to get a tenant to live there. It’s not a deal if you can’t make any money! Be sure you do your homework, then jump in! It’s time to buy!

Leasing with an Option to buy

What is a Lease Option? 

 

A lease option is a wonderful way to hold off the sale of a property for tax advantages.  If you hold a property for a year and a day, it will usually qualify for long term capital gain treatment.  However, you must verify this with your tax professional to make sure this method fits into your overall tax planning.

 

A lease option is exactly what it says.  It’s a formal lease and an option to purchase at a later date for a fee.  Always use two contracts, one for the lease and one for the purchase.  This will save you time and money down the road.

 

If I buy a property and fix it up, I may discover that Fannie Mae’s anti-flipping rules require I not sell it again for 180 days.  No problem, just lease option it.  Finding tenants who want to buy, but need some time to clear issues is not difficult.  I advertise on the sign in the yard and with any media advertising I do.

 

I use a standard lease and all of the screening tools I would use for any tenant.  If ever problems arise and you need to evict, having a separate lease agreement will make this easier in eviction court.  If you only use one form for the lease and the option, the judge may decide the tenant has what is called an “ownership interest” in the property and require you go through the foreclosure process.  You won’t like that, it’s tedious, costly, and takes a long time.

 

I also use a separate “Option to Purchase Agreement” and charge a non refundible 3% option fee.  This fee is used as the down payment for the optionee (tenant) at closing.  In the event the optionee does not purchase the property in the time agreed upon (failure to exercise the option), then the money is forfeited.   This means you get to keep it.  At this point you can decide to extend the option period for an additional fee, or notify the optionee of their failure to perform and non-renewal of the lease so you can sell the property or re-lease option it.

 

Before I accept a lease option, I take the optionee to a lender to determine that they can perform in the agreed upon time frame.  I never want to take someone’s money knowing they won’t be able to perform.  If their credit issues are such that they can’t purchase a home in one year, then I need to agree to extend the time frame until they can purchase, or recommend they rent until they are financially able to buy.

 

 Remember, a reputation for fairness will keep those referrals coming!

So You Wanna be a landlord

Property management- or do I really want these people to know who I am? 

Once you have that first piece of property in your investment portfolio, you have to decide what to do with it.  There are really only a few strategies- each of which is covered in detail in another article.  This article covers two strategies- hold long enough for long term capital gain treatment, or long term hold for yourself.

I evaluate each property and decide what my strategy will be when I do my due diligence prior to purchase.  Once I decide to buy a property I plan my primary exit strategy as well as a back up plan.  Most of my properties I hold for “a year and a day” for long term capital gain treatment.  This means I have to make a management decision, either I deal with the tenants and all the issues, or I hire a property manager.

This article covers self management, we will cover picking a property manager at another time.  The cardinal rule of property management is to pick your tenants wisely.  If you screen tenants properly, 90% of your tenant problems never arise.  Cardinal rule number 2 is: Never let your cash flow problems convince you to take a bad tenant.  A bad tenant almost always costs more than an extra month’s vacancy.

But Anne, how do I find good tenants?  Well,

Virginia, two things come to mind.  First, be a good landlord.  Have your property clean and in better shape than similar ones.  This already makes the better tenants want to rent from you.  Before I rent a unit I do a basic inspection.  I check light fixtures, put in new bulbs, check toilets and sinks for leaks, make sure the plumbing fixtures work.  In fact when I get a new property, I usually replace the faucets unless they are obviously new.  It’s actually cheaper to do this, than have a leak later that causes damage under the sink or to the flooring.  I service my HVAC units at the end of every summer.  This lets us check both heating and air- if you wait until it’s cold they can’t service the AC.

The second way to find good tenants is to screen them.  Have an application form that asks for current and previous address, employment history, SSN, vehicles owned and license numbers, DOB, and a photo copy of their driver’s license as well as a recent pay stub.  Then I check them out through the National Tenant Network- it’s easy to join and has a quick turn around time.  I also search the

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County sheriff’s website for any outstanding warrants or notice of eviction.  I tell them at application that I will do these screens, and ask if there is anything they might want to explain beforehand.   Sometimes the prospective tenant will mumble they really didn’t need a place after all and leave. 

I always charge a fee for application.  The fee depends on what my cost is to run the credit check (currently about $25/ person) and what I need for the paperwork.  Most landlords charge about $50, but some are higher.  Your bad tenants don’t want to pay the fee, and they always want to negotiate the damage deposit.  I have found that a tenant rarely has the financial fortitude to actually pay you an extra $100 a month for the next 6 months, so be prepared.  You can’t evict for non payment of a security deposit either- your just stuck with a tenant who now has no real motivation to take care of your property. 

Okay, you’ve taken the application, and the tenant checks out.  Yahoo, you are already ahead of the game.  Now, download a copy of the Landlord Tenant Act so you are doing everything you are required to do.  You’ll need to make sure you have the 10 year sealed lithium battery smoke detectors installed per the

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County fire code.  I also have CO detectors in any unit with gas heat or gas hot water heater.  It’s not required, but having one probably saved the life of one of my tenants so I’m a firm believer.  You also need a good Move In/ Move Out checklist.  If you don’t have one and get it signed you can’t keep the damage deposit, no matter how much damage the tenant may do.

A good lease is the final step in the process.  Make sure it covers as many potential problems as possible, that it covers who responsible for maintenance, lawn care, and snow removal, and tenant caused problems like clogged plumbing.  Make sure the terms are clear- length of the lease, how it’s renewed, amount of notice required for termination, rent amount, when and where to pay, and any late fees or charges.  If you allow pets, that needs to be addressed, as well.  I put in the lease that the tenant is required to carry personal property insurance ( a Renter’s Policy) and that the owner is not responsible for their belonging.  If the tenant has a dog, they must provide proof of a renter’s policy that includes liability coverage for the pet.

Now you’ve got a lease, your damage deposit and the first month’s rent, what’s next?  Well first of all, make sure the damage deposit is in a separate account just for security deposits.  If you mix them up in your other account you automatically lose the ability to keep it if there are damages.    I never admit to my tenants that I am the owner- I am always the “Property Manager” and I often defer decisions to “the owner”.  This helps keep the tenants from taking out their frustrations on me.  It also makes it easier for me to tell them no, without them taking it personally.  It’s certainly easier to tell someone “Oh, I’m sorry, the owner won’t let me waive the late fee,” than to say “I realize your baby has been sick, but I won’t waive your late fee.”

I send my tenants an invoice on the 20^th of each month, and provide addressed envelopes for them to use.  Since some of my tenants are immigrants with English as their second language, it really helps insure the rent is sent to the right address and zip code.  On the 3^rd day of the month, if I don’t have the rent I send a 7 day letter notifying them that they must pay the rent in full, plus the late fee, in 7 days or we may begin eviction.  Eviction can take several weeks, so don’t delay on sending the 7 day letter.

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