Real Estate Investing Coaching - Brian Gibbons

How Do You Find a Good Property Manager

                                       

Posted by: admin, in Management                                

In recent years, many investors have bought houses in areas far distant from their home hunting grounds.  Some of them were attracted into investing out of their own area to buy at lower prices where rents would provide a competitive cash flow rental return.  That is a good reason to invest, but it overlooks the fact that no income will be forthcoming unless someone takes charge of the property, maintaining it and keeping it rented up. 

Bottom Line: No rental property will produce net cash flow unless it is managed properly by someone who is qualified to do the job.  A good manager is one of the most sought after and rare individuals in the entire housing spectrum.  From the manager’s point of view, good managers seem to be able to earn income for years with very little threat of being out of work.

So, where are these good managers?  How do you find them?

I have committed almost all the sins of others by buying rentals outside my own area; and I’ve hired my share of bad managers.  In fact, one manager was so inept that my gross rents increased when he died unexpectedly and I had no manager at all for several months.  The ways I have solved the management problem is to go to the area where the houses are located and find out the names of investors who either manage houses or hire managers.  Then I try to get these managers to tack my houses onto the other houses they manage.

When I can’t find a manager, I try to find an investor who already manages his own house portfolio.  I offer to pay 10% of gross rents, or to lease the premises to him for 90% of all the rents he or she collects from a sub-lessee.  All expenses related to maintenance, repairs, legal procedures, etc. are deducted from the rents sent to me.

A “performance lease” gives the local manager a lot of autonomy over the rents he sets and the maintenance he performs.  I’ve found that the best course of action is to take great care about entering into a management agreement which would include inspecting houses already managed by the manager, obtaining a credit report, getting local references, and doing an interview in which common management problems are described and the prospective manager given an opportunity to tell how he has dealt with them in the past.

When I find an exemplary manager, I offer him an Option to buy an interest in the houses he is managing.  This either takes the form of his managing them for no fee at all in return for half all future net profits on sale, or to give him the chance to buy one house each year at 10% below appraised market with me carrying the financing for a few years.  Either way, I’ve found that manager with ownership interests uniformly do better jobs than managers with them.

Going to all this trouble to find, attract, and reward managers can make the difference in being able to buy profitable properties outside your area, or going broke trying to squeeze enough cash flow out of a house to make the payments.

Have you got any ideas about management that I could use?

Dividing the Fee for Fun and Profit

Posted by: admin, in Buying Houses, Leasing

Most of us think of a house on a lot as a single piece of property, but that’s not necessarily true.  We all know about putting mobile homes on leased land, and we can do the same thing with a house simply by deeding the land to one entity and deeding the house to another.  Why might we do this?  Who would do this?

Much of the improvements on

Hawaii

and

Manhattan

Island

were made on leased land. In

New York

, it made a lot of sense to lease up a sky scraper, then to pledge the leases to a bank who would lend the money with which to construct the building.  This enabled them to use the borrowed money to build a bigger building while giving the owner of the land a very profitable and secure long term lease which could also be pledged to secure a loan.  There are all sorts of permutations of creative leasing.  If you want to read how fortunes can be made this way, try to find a copy of an old book called “Zeckendorf” and look at his Hawaian Technique.

When you buy a house, particularly on expensive land, many of the leasing principles that apply to large commercial properties are equally valid.  In my area, some waterfront land goes for as much as $6000 per front foot while luxury homes can be built for about $175 per square foot. 

• So, if you had $1,000,000 with which to build your dream house on      125 feet of waterfront property, the land would cost $750,000 and the      house $250,000.  At $175 per square foot, you’d wind up in a 1428 sq.      ft. house. 
• On the other hand, suppose you could lease the lot for a return to      the owner of 6% indexed to the appraised value of the land?  This      would cost you $4500 per month.  Ignoring for a moment any yield on      funds being held, you could then use $875,000 to build a 5000 square foot      house and have $125,000 left over to help support the lease payments.       
• If the lease also contained an Option to buy the land for $750,000      land parcel, you’d still be able to get all the benefits of appreciation      while you owned the house. 
•  
• Suppose you currently lived in an expensive house on an expensive      parcel of land.  You could split the house off of the land and sell      either the house of the land to an investor or user.  Using the      foregoing figures, if you could sell the land beneath your house for      $750,000 and pay 6% per year on a land lease, that’s the same as borrowing      money on a home equity loan at the same rate.  On the other hand,      suppose you wanted to sell your house but couldn’t find a buyer who could      obtain a $1,000,000 loan, or who had enough down payment to get one.      You could sell your house only and lease the land to him.  This might      work very well for someone whose profit in the house exceeded      $500,000.  The house could be sold for just enough to max out the      Section 121 personal residence sale exemption, and the balance of the      value could be held in the land, and leased to the homeowner.  That      would give you tax free gain and appreciation plus income taxed as rent      which could be sheltered by other real estate losses.

You can do the same thing with a mobile home investment.  The IRS tax code includes various tables that tell you how much depreciation you can take on a mobile home; currently the same as on a house.  But it also specifies that when a lease expires and the mobile home reverts to the land owner, all un-depreciated basis that hasn’t been expensed can be written off as amortization. 

· Suppose you bought a new mobile home and placed it on my lot.  I’d give you a very favorable rent in return for your signing a lease which specified that the mobile home would remain on the land at the expiration of the lease. 

· You’d wind up with a 10 year write-down and I’d wind up with a guaranteed leased lot plus all residual value in the mobile home.

· Once I owned both the mobile home and the land, I could sell it as a land/home package which would qualify it for 103% HUD financing today. 

· And because I was able to combine the land and home, I could mark the entire package up many thousands of dollars more than the value of the lot or home would appraise for if sold separately.

Last, but not least, by dividing a home and the land it sits on, any judgment lien would apply only to the land or to the home, depending upon who was sued. 

· If a long term lease existed on land that was liened, that lien would still be subject to the previously recorded lease and any Option it might contain. 

· If the lien was filed against the mobile home, the lease might specify that the land owner would have a right of first refusal

· Option on the home at a low price and be able to cancel the lease on any change of ownership. 

· This would limit the damages that any could collect, and might dissuade many a would-be predator.

Location Location Location

                                       

Posted by: admin, in Management,  Buying Houses,  Selling Houses,  General                                

Everybody has heard how much location affects real estate potential and value, but many of the people I talk to don’t seem to know exactly what that means.  To that end, allow me to elucidate.

When discussing single family houses, a good location would be one that attracted people to rent or to buy. 

• An A+ neighborhood would reflect a strong sense of pride. 
• Lawns and houses would be well maintained. 
• Trash would not be allowed to accumulate in either private or public areas. 
• This would be a low/no crime area. 
• There would be no derelict vehicles nor RVs parked in the streets. 
• There would be no apartments, mobile homes, duplexes, or other forms of housing other than single family houses in the neighborhood. 
• Nearby schools would have a good reputation for the quality of the education offered.
• Amenities such as churches, libraries, jobs, shopping, and access to arterial roads would be convenient, but not intrusive. 
• All the houses would be about the same size, configuration, and value.

Can you imagine how hard it is to find such a neighborhood today, and how easily you’d be able to sell a house at a premium price and to finance it; or to find a highly qualified tenant who was willing to pay above market rents to lease one from you? 

Best of all, a nice house in a neighborhood like this would appreciate faster than the same house in a less desirable neighborhood.

If this location were rated as a 10, how would you rate the neighborhoods where your rentals are?  If you’re having trouble attracting qualified buyers or tenants, that’s a pretty strong clue that your house isn’t in the best location.

Apartments, rental condominiums, and coops do well when they have the same locational advantages as single family houses.

• Because of limited space, being near a public park, zoo, or other recreational facilities adds to their value, as does waterfront, golf course access, security, covered parking, and limited access.
• The quality of the tenants is one key to their values; and the key to attracting the best of these lies in the apartment building and grounds being attractive, modern, well situated, properly managed and maintained; then setting high standards for those who would occupy them.
• It’s easy to see how an apartment managed by a company like Trammel Crowe filled with young, high salaried professionals would command higher rents and be much more desirable as an investment than an apartment that catered to HUD Section 8 tenants who were given on cursory credit checks prior to moving in. 

When all is said and done, better people who can pay higher rents that reflect in gross revenues are critical to valuation.

• “Gross rent multipliers” are what the vast majority of multi-family buyers look at. At the bottom end, a drab, outdated property might command a price equal to 6 times the rents, while an attractive modern building with steadily increasing rents might be valued at 10 times gross rents. This can represent hundreds of thousands of dollars difference.

What about retail sales locations?  Retail landlords often set rents by means of a formula that stipulates the basic rent, than adds a factor that enables the landlord to get higher rents with higher sales.  Retail sales depend upon traffic to generate high volume sales.

The more sales a location can generate, the more rent the proprietor is willing and able to pay, and the more value a prospective buyer and his mortgage lender will place on a retail property.

The easier it is to see, get into, and park at a retail store or outlet, and the more people who visit it and buy something, the more its location is worth.  When an inner city light rail system is installed such as the Bay Area Rapid Transit System around San Francisco, or the Metropolitan Atlanta Rapid Transit Authority in Atlanta were built, stores and apartments were swift to buy locations near the various stations along the routes.

When it comes to shopping centers and malls, the quality of the other tenants, the products they sell, and the numbers of people they attract can increase the value of the location.  The location can be further enhanced when nearby merchants offer products and services that attract higher volumes of customers to all venues.  Consider this when you notice how many boutique shops and free standing department stores, restaurants, movie theaters, and service stations there are in and around retail areas.  They all build traffic for themselves and others.

Commercial property: In this category we’ll include office space, hospitals, public buildings, post offices, hotels, restaurants, sports arenas, aquariums, spas dar dealers, etc.  Offices need easy access for customers and employees and parking.  They also need to reflect the values of those who use them or lease them.  Obviously, a tattoo parlor and used car lot won’t add much prestige to an executive office park, but a commercial parking garage and upscale restaurant would.  Where there is available space, the trend is for larger office complexes to be built in suburban settings, and for older, inner city offices to be rented to smaller businesses with less stable incomes.  Commercial properties are valued according to the income they produce, so choosing one in a setting that enables you to build income is the key to making money with them.

Industrial property value is enhanced when there is easy access to interstate highways, railroad spurs, air freight, and water transportation by means of which they can ship in parts and materials and ship out finished products at low cost.  For this reason you find factories situated on the banks of rivers, bays, and coastlines.  They are also to be found on the edges of towns where traffic in and out poses less of a challenge.  They are usually situated on large parcels of land where equipment and materials can be stored and moved easily. You’ll also see truck stops not far away along with warehouses. Availability of low cost utilities to the factory floor and high ceiling heights to enable them to store things vertically are a distinct advantage because it increases capacity at low cost.

Can you see why, for the small and inexperienced investor, or speculator, I prefer single family houses or mobile homes to all other forms of real estate?  What other kind of real estate is better?  Write back and we’ll debate it.