Buy Southernutah Properties

There are many more than five kinds of residential rental properties depending on how you classify them. But from the perspective of basic investment differences, there are five types that come to mind, each with their own problems and advantages. The first type is single family homes.

Single Family Rental Properties

Houses are appealing to investors for a few basic reasons. First, they provide the easiest way to get into real estate investing, because of the financing options and possibility of a low down payment. Second, they can build equity fast during times of rising prices – even if rents are not rising. Third, they can be sold to other investors or home owners. These two markets make the eventual sale easier.

Of course they have problems too. First, it is very difficult to find houses that can produce cash flow after all expenditures are considered. Also, as a single unit, if you lose your tenant, you lose 100% of your income until it is rented again. If you own multiple homes, it can be a lot of work to collect rent and maintain them versus an apartment building with a similar number of units.

Apartment Buildings

The primary advantage of apartment buildings is that the prices are based on income, because unlike houses, only investors are buying them. This means decent cash flow is normal (otherwise why buy?). Also, because the prices are based on net income more than anything else, if you can find a building with low rents, you can quickly increase the value just by raising them. Of course, the primary problem with apartment buildings is the greater difficulty in financing them, and the larger down payment normally needed.

Small Multiple-Unit Residential Rental Properties

Between single family homes and apartment buildings are the duplexes, triplexes and four-plexes. As long as you stay under five units, you can finance these like a home. Though this is an advantage, it is also the reason it is tough to make this type of rental produce cash flow. There are many people out there buying them to live in one unit and get the equity gains from the whole property. Most of them are not thinking of cash flow, so they push the prices too high. It is convenient to live where your rentals are, though, so if you can come close to breaking even, the eventual gain from equity build-up may be worth it.

Low Income Housing

Mobile homes and small houses in need of repairs get their own category because this low income market has unique advantages and problems. Normally you’ll have more late rent payments and other issues with tenants. You also will have more repairs. In general, investing in low income housing means more hassles and more time invested.

What makes it worth it? Cash flow. Suppose a normal three-bedroom house costs $130,000 and rents for $750 per month. You may find a three-bedroom mobile home on a lot nearby for $45,000, and get $600 per month in rent. Repairs, though more frequent perhaps, are cheaper, as is insurance and property taxes. You can see that there is greater potential for cash flow.

Low income housing is all about cash flow. As for the added hassles, there are ways to deal with that. I know a man who has forty rental properties with low income tenants (mostly mobile homes with real estate), and he gives free rent and a small salary to a handyman/manager who does everything from fix toilets to collecting rent.

Other Residential Rental Properties

This “other” category includes the less common residential rentals. Since these properties often don’t have the advantages that the ones above have, people invest in them for one reason: cash flow. For example, a large house that would lose money every month as a normal rental might do well as a boarding house, with rooms rented out individually. This can be very profitable in a college town.

Even less common, but still potentially profitable, are rentals of RVs, or recreational vehicles. You’ll see this more in the southwest than in other areas (it’s almost common in Arizona). Conversion of old motels into residential rental properties is another way investors create cash flow. Certainly there are a few I have missed as well. Probably houseboats are rented by the month somewhere.

Real estate money-making ideas and programs are often pitched to eager viewers on televison and through radio as “get rich” opportunities, but the fact is there is no “quick” in get rich. Rental properties are a great means of building wealth, but patience, persistance, and excellent interpersonal skills are all necessary to make it happen.

I am 24 years old and for two years now have been in the process of building my financial freedom through owning rental properties. I currently own two single-family homes, one duplex, and a four-unit building in the University town of Ada, Ohio. With my bank account nearly diminshed from investing in properties, I have come to learn that the programs on T.V. that preach the “get rich quick” by buying rental properties is simply wrong; a big lie.

With that said, they can make you rich, just not quick and not easy. As my properties are currently neting me around $10,000.00 a year and building equity on top of that, I thought I would share a few of the keys to financial success by owning rental properties.

First, open a bank account separate from your personal one and use it strictly for your rental business (invesetments). Secondly, if you don’t have enough money on your own to get started, find a partner that is willing to go in on it with you. Third, make sure you inspect the property thouroughly before buying it. Furnaces, water heaters, roofs, and plumbing are the biggest concerns. Lastly, make sure that you fill out a net-income sheet listing all of the projected expenses for the property (vacancy factor @ 5% monthly rent, maintenance @ 10%, property manager if you desire one, monthly and yard work etc) and projected income (monthly rent, laundry fees, etc). After that is filled out, you subtract the expenses from the monthly income and the result is the amount that you can afford to finance.

For example, if you have $200.00 in projected expenses every month and you have $550.00 in projected income per month, the result would be $350.00. This means that you can afford to borrow money from the bank and take on a monthly mortgage of $350.00 and still break even. My rule of thumb is that if you can get a property and break even the frist year, buy it! The next time you rent it out, simply raise the rent $25-$50/month and now you are making $300-$600/year profit. Plus, you are building equity in the home. Once you get enough equity built, you then refinance the proeprty and take the money and use it for a down-payment on another rental.

The above paragraph makes it clear, there is tons of money to be amde in rental proeprties, but it takes time, and often the beiggest reason people don’t invest in them is because they don’t have enough money to get started and buy the first property. If you can get past that hurdle, you are good to go. Personally, my properties are doing great, and I credit the sucess to three very important factors:

1.) I buy only properties that are currently rented. Some investors are against this, but it ensures me that I will not have a vacant property for atleast a few months (often longer). This helps me build cash up and ensures me that I will not be buying a property and instantly getting hit with a monthly mortgage coming form my own money.

2.) I buy all properties within one town, and that town is a huge university town. The tenant turnover is often higher, but you never get dead-beat people who don’t pay their rent because they have either wealthy parents supporting them in school, student loans that cover their housing, or professors who have money but don’t buy because they often travel from school to school teaching.

3.) I have built great credit, and great credit means I call my mortgage broker and say “I’m buying another property” and he gets me a loan approved within days. I had no credit until I bought my first rental ,and within months I had a score of 740.

With that said, I suggest that if you are considering going into the rental business, do it! Just be careful and realize that it’s not as easy as the T.V. gurus make it look. Also, always have leave enough excess cash in your bank account to cover rent checks becasue they often are received after your monthly mortgage is due. Also, have enough cash to cover a few months of rent incase you get a vacancy (if you planned correclty, you should have already figured in the 5% vacancy factor, so this shouldn’t be a problem).

Real estate appraisal for rental properties isn’t the same as for single family homes. If you were looking at a 24-unit building, it would be difficult to find similar ones nearby that have recently sold. Therefore, a market analysis using comparable sales isn’t normally used.

It is also not ideal to use replacement costs either. How do you figure replacement cost if there is no land for sale nearby with proper zoning? This is used as a secondary method, though, and can tell you if maybe you should be building instead of buying.

Real Estate Appraisal Using Capitalization

Investors buy rental properties for the income. Therefore it is the income that is used to determine value. The rate of return expected by investors in a given area gives you the capitalization rate, and this is what you use to accurately appraise an income property.

Start with the gross income. Subtract all expenses, but not including loan payments. If a building’s gross income is $82,000 per year, and the expenses $30,000, you have a net before debt-service of $52,000. Now apply the capitalization rate to this figure.

If the common capitalization rate is .10, for example (ask a real estate agent), divide the income of $52,000 by .10, and you get $520,000. This is the value of the building. If the usual rate is .08, meaning investors in the area expect an 8% return, the value would be $650,000.

Easy Real Estate Appraisal?

Net income before debt-service, divided by the “cap rate:” It really is a simple formula. The tough part getting accurate income figures. Is the seller showing you ALL the normal expenses, and not exagerating income? If he stopped repairs for a year, and is showing “projected” rents, the income figure could be $15,000 too high. This would mean the building is worth $187,000 less (.08 cap rate) than your appraisal shows.

Another thing smart investors do when buying, is to separate out income from vending machines and laundry machines. If these provide $6,000 of the income, that would add $75,000 to the appraised value (.08 cap rate). Do the appraisal without this income included, then add back the replacement cost of the machines (probably much less than $75,000).

Be careful when using any real estate appraisal method. No formula is perfect, and all are only as good as the figures you plug into them. Used wisely, though, real estate appraisal using capitalization rates is one of the most accurate methods.