Cash Flow Investing Today Or Bigger Bucks Later?

August 16, 2016

Cash flow today or bigger bucks later is really about how to choose the real estate investing style that fits you and your goals. You may have always wanted to get started in real estate investing, even while you have a full-time job today, but are not sure where to start. Or, you may be a veteran investor and thinking about a change in strategy. Here are some thoughts to help.

By Larry Arth

With all the opportunities in real estate investing today there are many different styles.

From the seasoned investors like Warren Buffett, to the new Wall Street investors, the individual mom and pop investors and now even the new beginners. New first time investors make up about 50 percent of all real estate investors today.

With so many different investors there are obviously many different investing styles, so how do you choose?

Strong cash flow or long-term hold

Working with investors every day and hearing of all their different goals and objectives, I see the two primary differences in what types of property people are looking for. They generally fall into two camps:

Strong cash flow properties

Long-term hold properties

To be an effective real estate investor, it is imperative to know what exactly you want to invest in and why. Knowing the attributes of each investment type may be beneficial to identifying your desired investment.

The main distinction between the two is long-term, buy-and-hold properties tend to be more expensive on the purchase end with a smaller monthly cash flow, but with a larger gain when you sell. The large cash flow properties tend to be cheaper on the purchase with larger cash flow. The sale on the other hand will generate smaller, and often much smaller, gain on the sale price.

Attributes of long-term properties

Sustainable Markets

With 380 statistical markets (MSA) in the U.S. You can rest assured there are markets which are better poised and positioned to give you better, longer lasting more sustainable returns than others. Investors looking for long term are always looking to invest in emerging markets.

Sustainable Properties

Once you identified the best market for sustainability, it is imperative to find the properties that will be the most sustainable. There are a number of things to look for that make up these properties.

Sustainable leases

I have found great success in the two- to three-year leases. To maintain long-term sustainability having long-term tenants is paramount. Having a two- or three-year lease on a house will help you find tenants who essentially are telling you they too want a rental property for a longer duration. You tend to find tenants who are not interested in moving every year, but instead want the security of knowing they have a place to live for the duration.

The multi-year lease removes the mystery to the landlord (Will my tenant renew their lease or will I be stuck with another vacancy to fill next year?) and the mystery to the tenant of course is (How much will rent be next year, or will I be asked to leave because the landlord wants to sell the house?) The transparency that comes with two- and three-year leases helps both landlord and tenant.

I believe long-term hold properties represent the No. 1 investment objective today. The key to the long-term hold is finding the sustainability of all aspects of the investment from location to property to tenant and even property management for us passive investors. If you will be hiring property managers, you will want sustainability there as well and you want to hire the right property manager.

Attributes of cash flow properties

Age of properties

It is rare to nonexistent to find a new property that is strong on the cash flow arena. Typically your strong cash flow comes from homes in the older areas and these homes tend to be aged and more tired out. Things you want to watch for are deferred maintenance and outdated features and benefits. What I mean by that is today people want homes that are at least 3 bedrooms and 2 baths. When buying cash flow properties, always try to find structurally sound and well maintained (or updated) property with at least 3 bedrooms and 2 baths.

Pro-formas

Sellers tend to make a pro-forma appear to be stronger than the reality of them. Perhaps you are buying a property that is not turnkey and you must hypothesize a pro-forma. Either way you want to make all considerations for the age of the property and possible maintenance or deferred maintenance. These older properties can still be great investments and provide incredible cash flow. However, without proper due diligence, they are more susceptible to providing a much smaller cash flow than anticipated.

Exit strategies

You want to know your exit strategy going into the sale. Strong cash flow rental properties tend to be more of a tenant-style property as opposed to an end-user type property. When investing in strong cash flow properties you want to identify all opportunities for your exit strategy. If the property is in a strong tenant occupied area your only exit strategy may be to sell to another investor. Investors of course limit your buying audience and they will want a good deal on the purchase. They will not be the buyer looking to buy for full retail like the buy-and-hold property buyers are.

Don’t Buy a Sports Car if You Need a Pickup Truck

The metaphor of course suggests you want to buy the type of property that is best suited to accomplish your long term objectives. I always consult with my investors before introducing them to property, interestingly enough, what they say they want to purchase does not coincide with what their objectives for investing are.

Often I am told they want to provide a long-term retirement plan by purchasing real estate that will increase in value. They then say they are looking for cheap property. This is incongruent as the cheap property will not be a suitable investment for the sustainability of a long-term hold and the property value on cheaper property does not appreciate very fast, if at all. This is why knowing your long-term objective before shopping for property is so important.

Visit Larry's website here.

About the Author:

Larry Arth is a landlord and the founder and CEO of Equity Builders Group, a Florida based Real Estate investment Group. As a 36 year veteran to real estate investing, Larry understands that we are now in a global economy and as times have changed, investment strategies must change as well. Larry is an international recognized consultant and speaker and assists hundreds of investors per year, both foreign and domestic to realize their investment potential. He analyzes locations across the country for economic strength and the locations that yield the largest most sustainable return on investment. Within these locations he seeks out and gathers the best teams to deliver sound, high performing and most importantly sustainable turnkey investment. He works with investors to ride the wave of each area-specific market surge. Larry’s primary focus is offering (Non Listed) safe and sustainable turnkey investments to the passive investor.

5 keys that sway tenant decisions about your rentals

larry-arth

August 9, 2016

When a tenant decides whether or not your rental is right for their next home, what are some of the key things that will lead them to sign your lease and not the lease of one of your competitors?

Do you know the key factors?

This week blogger Larry Arth writes about some of the key factors he has seen in his 35 years of property management and investing.

By Larry Arth

How great would it be if you knew what your tenants or future tenants are thinking about rental properties?

It has been my experience that landlords tend to put all their energy into what they as landlords want without getting in tune with what the tenant wants.

The nice thing about owning my own investment properties, as well as working with hundreds of investors, is we collectively acquire the economies of scale knowledge.

Through this experience we have discovered the key to getting and keeping happy tenants is knowing what they think and the key factors in their decision-making process. Their thought patterns can change with the economy and their own personal financial situation, so you need to constantly keep on top of this.

Through a lot of interviews and surveys here is what we have found:

Top 3 reasons a tenant may move

Current lease expiring: As I mentioned above, most landlords do not try to understand what their tenants want and as a result they are not motivated to renew their lease. So a top reason given as to why they move was, “My lease was expiring.” Sad but true. Do not let this happen to you. I learned early on in the business world that success is all about building relationships. I knew I had to build a strong relationship with my tenants, and those long-term lasting relationships would translate into long-term loyal clients for my real estate investing.

Job relocation or new job: Relocation for jobs tends to be more common place for the professional white collar workers. I have in the past addressed getting two- and three-year leases at the time of lease. Their response to this may give you clues as to whether they foresee job relocation in the future. People who wish to take on a two or three year lease typically feel pretty secure in their long term stability at the current location.

Moving out of parents home: This, now more than ever, is common place. It is suggested that about a third of young adults age 18 to 30 have been living with their parents as a way to save money. Often referred to as the basement kids because they live in their parent’s basement. These may be great tenants but finding payment history will be more challenging. As an apartment or single family rental home may be a new expense for them, you want to be sure they can afford to make your rent payments.

5 keys that sway tenant decisions about your rentals

Photo by Larry Arth showing one of his rental properties he has kept constantly leased using the 5 keys that sway tenant decisions about rental property.

Price of unit: One of their primary concerns is price. When probing deeper, we realized that this is better illustrated as value. It may be human nature to look at the price but it ultimately comes down to value. When they compare what your rental offers versus another rental they want the best value. You want to be sure to promote the benefits and attributes that your rental will offer them so they realize the value of your property.

Location of the unit: Convenient location is of utmost importance. Knowing real estate is all about location, you want to sell the location of your unit. What is the reason you manage the property or why did you buy the property where you did? Share this within your ads. For example: near bus stops, near many businesses and places of work, near shopping or close to main roads and highway.

Crime statistics: People of course want to feel safe. Assuming you purchased the property because it was in a desirable and safe neighborhood, share this with your tenants. It is what they want and telling them up front will keep them from having to guess or figure it out.

School systems: First, remember that housing laws prohibit discrimination against children and “familiar status” is a protected class. You do not want to get into the conversation about having children. However mentioning the quality schools in the area is important to them.

Community amenities: Tenants too want a home not just a place to live. Share with them what is in the community or the nearby area. The walkability score can be a big benefit to them.

These are things that your tenants are thinking about. When you can address these triggers up front, you will stay ahead of your competition and keep your phone ringing.

Any good business does research and a lot of surveys to find out what their customers want. As renting property is your business, you want to stay on top of what a tenant thinks, so you can stay ahead of your competition. It is the little things that are remembered.

A few little differences can mean a lot to a tenant

These little differences in how we manage our properties have people wanting to stay and rent with us. As families outgrew their homes they would ask us if we had any other properties that were bigger, as they wanted to maintain our relationships. Their friends were always inquiring about renting from us. We have great reputations as property owners who care about their tenants. As a result, the only time people moved is if they left the area or if they bought a house.

You all heard of, or personally live the “Pride of ownership.” When you can create this same type of pride for your tenants, you have created a great partnership that will have them renewing their lease. A person’s home is his castle. It is his independence. Even though they do not actually own the home, you want them calling it their home. When they feel great about where they live and are happy with it, they will call it their home and they will treat it like their home.

When you show you genuinely are interested in a happy partnership where you provide a nice home and maintain the home in turn for happy tenants who pay on time, you have a successful business that is scalable and your investment portfolio can flourish.

Visit Larry’s website here.

About the Author:

8 Ways To Invest Capital To Make Older Apartments Sparkle

richard-montgomery

June 7, 2016

This question to Dear Monty prompted him to list 8 ways that can mean happier tenants, lower turnover rates and higher rents for incoming tenants if you choose the right tips to make your apartments sparkle.

Richard 'Monty' Montgomery

By Richard Montgomery

Q: Monty, we inherited two 16-unit apartment buildings from my father. They have been in the family for over 30 years. I never took an interest in real estate until now, but as a kid I did mow the lawns. They are free and clear, and we intend to keep them. Dad was a good caretaker of structural components and mechanicals, but the buildings look “tired” appearance-wise. What are the most beneficial improvements or upgrades to invest capital? — Jim G. Los Angeles, CA

A: The Internal Revenue Service allows certain property owners to depreciate their property because the IRS recognizes buildings and their component parts wear out and become obsolete. It sounds like some of the component parts or mechanicals have been replaced and others are original.

The preparer of the tax returns for the construction most likely has depreciation schedules that could be a factor in deciding which projects to tackle first. If your dad used component depreciation, the remaining life of existing component investments can help determine the order. If he did not use it, talk to your accountant about how to handle improvements in the

future.

Create Your Laundry List for Apartments to Sparkle

Create a “laundry list.” What you would do to make the buildings look like-new if money were no object?

Whittle it down to what makes sense. Develop a plan with some driving philosophies. Some examples:

What can we do that will improve the quality of life for the occupants?

What improvements can we make over what period to keep our rate of return from disappearing?

What improvements will make the building more eye-appealing and attractive? Which improvements give us the biggest bang for the buck?

Which improvements most easily allow us to justify an increase in rent?

These are just examples, as there are other factors to consider as well.

Seek Tenant Opinions and Options

Investing capital in older apartments such as these can make them sparkle and keep tenants happy and renewing leases.

If you have decided you are going to make improvements to your apartments, consider seeking tenant opinions on what they would like to see done.

Let them know up-front you may not be able to implement every suggestion, but you do not want to miss considering all ideas.

In some complexes, this will encourage a sense of community and cooperation. Let them know these changes will not affect their rent for some time, if at all. This one is delicate and may depend somewhat on the buildings' history of rental increases.

How Do Your Apartments Compare to Others in the Area?

Look around the neighborhood.

How do your buildings compare with other buildings in the neighborhood?

If your buildings are already the neighborhood “shining stars,” it may help you decide the philosophy of occupant quality-of-life is a more suitable goal than increasing the building’s “eye appeal.”

Often, some of the most-welcome improvements cost the least amount of money. Shutters are a great example.

8 Ways to Make Your Apartments Shine

Has the lawn been reduced to hardpan with constant traffic?

Are the trees and shrubbery overgrowing?

Are sidewalks heaved and cracking?

If the trim requires paint, would a fresh coat with a new color sharpen the architectural lines?

If there is a basement, how is it being used?

Might storage units be constructed in the basement and rented to occupants?

Is the parking lot full of potholes and broken curb stops?

Are the parking lots well-lighted and the poles fresh and straight-upright?

Consider Resurfacing the Apartments Parking Lot

Pay special attention to common areas that occupants or guests frequent.

If there are interior hallways or concession areas such as laundry or vending, how can they be more professionally presented?

Some of the projects being considered can be completed by general contractors while others require specialists.

If you are considering resurfacing the blacktop parking lot, that contractor will not also paint the trim.

With three competing bids for each group of tasks, the lottery list is now complete with pricing estimates. Ask each contractor with multiple tasks to break down the bid into separate tasks so they can be considered individually.

Review your philosophies, your lottery list and your budget and look to see what you can eliminate. This exercise is easier to achieve when included as part of the plan right from the beginning. The final product is a “master plan” that could take months or years to complete.

It is amazing to see the difference that these types of changes can accomplish.

For many landlords, that means happier tenants, lower turnover rates, higher rents for new incoming tenants and increased demand, just to name a few benefits.

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First Quarter 2016 Multifamily Loan Originations Up Two Percent Year-Over-Year

By The Editors

May 11, 2016

First quarter 2016 multifamily and commercial loan originations were 38 percent lower than the fourth quarter of 2015 but in line with the seasonality of the market, according to the quarterly survey by the Mortgage Bankers Association (MBA).

Overall first quarter 2016 saw these types of loan originations essentially flat compared to the first quarter of 2015.

“In the aggregate, commercial real estate borrowing and lending started 2016 in a similarly strong fashion to 2015,” Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research, said in a press release. “Borrowing backed by retail, office, hotel and multifamily properties picked up, as did lending by banks. Disruptions in the broader capital markets pushed originations for commercial mortgage-backed securities (CMBS) down. Across property types and investor types, changes in regulation and broader market conditions could have an impact on originations during the remainder of the year.”

First quarter 2016 multifamily loan originations up two percent year-over-year

A rise in originations for retail and office properties led the overall increase in lending volumes when compared to the first quarter of 2015. The first quarter also saw:

- 44 percent year-over-year increase in the dollar volume of loans for retail properties

- 18 percent increase for office properties

- 2 percent increase for multifamily properties

- 3 percent increase for hotel properties

- 56 percent decrease in industrial property loans

- 57 percent decrease in health care property loans

Among investor types, the dollar volume of loans originated for commercial bank portfolio loans increased by 44 percent year-over-year. There was a one percent year-over-year decrease for life insurance company loans, a 19 percent decrease in the dollar volume of Commercial Mortgage Backed Securities (CMBS) loans, and a 22 percent decrease in Government Sponsored Enterprises (GSEs – Fannie Mae and Freddie Mac) loans.

First quarter 2016 loan originations down 38 percent from fourth quarter 2015

In line with the seasonality of the market, first quarter 2016 originations compared to fourth quarter 2015 showed:

- 62 percent decrease for health care properties

- 57 percent decrease for hotel properties

- 57 percent decrease for industrial properties

- 46 percent decrease for retail properties

- 39 percent decrease for multifamily properties

- 23 percent decrease for office properties

To view the fullt, please follow this link here.

Detailed statistics on the size and scope of this loan origination market are available from these MBA commercial/multifamily research reports. • Commercial Real Estate/Multifamily Finance: Annual Origination Volume Summation, 2015 • Commercial Real Estate/Multifamily Finance Firms: Annual Origination Volumes, 2015 • Commercial/Multifamily Database Subscription

HUD Seeks to End Discrimination Against Tenants with Criminal Records

By The Editors

April 13, 2016

The U.S. Department of Housing and Urban Development (HUD) published guidelines in April, 2016, for the proper consideration of applicants’ criminal records when considering them for housing. HUD notes that because a disproportionate amount of people with criminal records are minorities, a blanket policy of refusing to rent to anyone with a criminal history may violate the Fair Housing Act.

Much like the 1991 HUD memorandum regarding occupancy standards (the “Keating Memo”) this new document provides general guidance for how to consider whether a housing policy violates federal law. The memo is not law in itself, but it interprets how the law may apply to certain situations. As with any new guideline, the legal ramifications will develop on a case-by-case basis as matters are heard in court and the guidance is considered.

According to the new guidelines, turning down tenants solely based on their criminal history may violate the Fair Housing Act. While the Act does not list people with criminal records as a protected class, HUD notes that minorities have disproportionately high rate of arrests and convictions. For this reason, while in some cases a landlord may refuse to rent to a party with a criminal record, the policy should not be applied automatically without further consideration.

Tenants with criminal records guidelines

The guidelines note that there is a difference between an arrest and a conviction. An arrest may occur if a police officer forms the belief that someone needs to be detained for their own safety, for the safety of others, or for the investigation of a crime. A conviction may occur only after a party has been formally charged with a crime and had an opportunity to defend himself or herself in a court of law. A judge or a jury must determine that it is beyond a reasonable doubt that the individual committed the crime. Both arrests and convictions may appear on a criminal history.

HUD takes the position that a policy of excluding individuals because of a prior arrest without a conviction is discriminatory. Quoting the U.S. Supreme Court, HUD states, “[t]he mere fact that a man has been arrested has very little, if any, probative value in showing that he has engaged in any misconduct.” In other words, an arrest is not, by itself, proof of a crime. A housing provider who categorically denies housing to a person because of an arrest on their record violates the Fair Housing Act.

Convictions, on the other hand, are different. HUD states in the memo, “In most instances, a record of conviction (as opposed to an arrest) will serve as sufficient evidence to prove that an individual engaged in criminal conduct.” Even so, a blanket policy of excluding all people with a criminal conviction probably violates the Fair Housing Act. The landlord with a policy of excluding applicants with a criminal history must be able to point to a “substantial, legitimate, nondiscriminatory interest” served by the policy. The landlord must also be able to prove that the policy achieves those goals. A housing policy must take into consideration the nature and severity of the crime, and the amount of time that has passed since the criminal conduct occurred

Whether the discrimination is accidental or intentional, during screening or just at the inquiry stage, the landlord or property manager is still at risk of a discrimination lawsuit. The best practices are:

- Do not impose blanket bans on renting to those with criminal history or arrest records.

- If there is evidence of a conviction, consider the nature and severity of the crime and how long ago the criminal conduct took place.

- Ensure everyone who interacts with applicants is trained well on current Fair Housing policies.

- Keep screening policies pertaining to arrest records and criminal history specifically related to safety of persons and property. The policy must distinguish between criminal conduct that indicates a demonstrable risk to resident safety and property and criminal conduct that does not.

- Obtain and use a standard screening policy in compliance with Fair Housing and HUD regulations, and apply it equally to anyone who applies. You may want to consult an attorney or housing specialist to develop a rental criteria relating to criminal conduct.

Keep in mind that HUD has not stated that criminals are a protected class. HUD recognizes that housing providers have an interest in providing safe housing to all their tenants. These new guidelines do not require landlords to rent to convicted felons, but do require landlords to examine the criminal history (if any) of its applicants with more care than before. Naturally, there will be applicants who refuse to provide details about their criminal history or provide inaccurate information revealed by a screening company. An incomplete or inaccurate application may be denied.

Following best practices will save you thousands of dollars in litigation and court costs, so it is well worth the effort. If in doubt about a policy, contact your legal resource for help dealing with tricky questions related to this new HUD guidance and the Fair Housing Act.

Evan L. Loeffler is the principal attorney at the Loeffler Law Group PLLC in Seattle, Washington. His firm’s practice emphasizes landlord-tenant relations.

www.loefflerlawgroup.com

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