Investing in Real Estate 4 – Small (2-4 units) Apartment Building
This blog will discuss a type of real estate investment, small apartment buildings, in the Cherry Hills area in Denver.

What this investment is:  Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms.  Usually what the rental home / condo landlords graduate to.  In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month.  Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket.  Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units.  The financing process is only slightly more involved than a residential loan.  Relatively small down payment requirements make it affordable.  The purchase process is also very similar to purchasing a home.  It's a good way for beginners to get started.

Equity needed:  20% - 30% down would be typical.

Importance of credit: Very important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  If you get a property manager, you’ll be able to figure it out easily on this small of a scale.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Next week, we’ll continue to explore small apartment buildings in more detail!

Investing in Real Estate 3 – Rental Condo or Rental Home
This blog will discuss a type of real estate investment, rental condos or rental homes, in the Cherry Hills area in Denver.

What this investment is:  Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term.  This is how most new landlords get started.  You can hire out all of the property management functions, but in many cases you will do many of them on your own.  There are smaller down payment requirements than for larger rental buildings.  The purchase process and financing process is very similar to what you experienced buying the home you live in now.  It's a great way for beginners to get started.

Equity needed:  Currently 20% - 25% Downpayment.  In some cases you might be able to do it with 10% down, but expect the second mortgage to be at a higher rate.  While Freddie / Fannie lenders might only let you have four loans, smaller local lenders will let you have more than that if you have strong credit.  Contact me and I’ll put you in touch with the right people.

Importance of credit:  Very important.  A 720 FICO score would help a lot.  Being able to document your income and your assets will be critical.

Importance of experience with contractors:  Some exposure would be helpful, but you are not likely to encounter construction projects any more difficult than you have maintaining your own personal residence.

Important of experience with property managers:  Not important; the majority of our clients manage their own rentals when they get started.  We run classes on how to do this from time to time.  Go to http://www.yourcastle.org/events.cfm to see when the next session is.

The next few blog articles explore related topics, such as rentals, fix and flips, and new construction.   Next week, we’ll continue to explore rental condos / homes in more detail!

Investing in Real Estate 2 – Assignments
This blog will discuss a type of real estate investment, assignments, in the Cherry Hills area in Denver.

What this investment is:  An investor who is interested in Assignments gets a property under contract for an attractive price then assigns the contract to another buyer, usually another investor.  The first investor will be paid a fee for the work.  If you don't have much equity to work with, and/or if your credit power is limited, assignments can be a way to get started in real estate investing.  You will need to have a strong "sales" personality to succeed at it, though.

Equity needed:  None, just earnest money.

Importance of credit:  Not important, since you are not purchasing the property yourself.

Importance of experience with contractors:  Not important.  The person that you ‘flip’ the property to will be doing the work.

Important of experience with property managers:  Not important.  The person purchasing the property from you will be managing the tenants.

The next few blog articles explore related topics, such as rentals, fix and flips, and new construction.  Next week, we’ll continue to explore assignments in more detail!

 Topic:  Special considerations for Investor loans

The talk around the water cooler these days is all about LOANS. Who can get them? At what price? What if I already have a few loans, do I still qualify?  A year or two ago the question was at what price do I get a loan (those were the days!).  Today it is "am I still in the game?"  
 
 Here's the deal:  if you have an owner occupied loan and 3 investor loans you cannot buy any more properties and get Fannie Mae / Freddie Mac financing, meaning you can't get a conventional 30-year fixed loan. Now, my hope is that someone reads this and tells me I'm wrong. That would be great!  But as far as I know that is the case. 
 
 Where does this leave you?  You can pursue loans that are warehoused by lenders, meaning they are not sold on the backend to Fannie or Freddie. You are probably looking at a minimum of 20% down but more importantly it will be almost impossible to get a 30-year loan.  But a 5/1 ARM is not out of the question. (Lenders, please start a dialogue here and let folks know who has what products available.)  There is also Hard Money available.  I met with a group of high-end Hard Money lenders today to discuss options and the consensus is that they are proceeding…but with extreme caution. 
 
 A final version is to contact smaller local lenders.  You'll need 25% down, but if your story makes sense, you'll get your loan - and usually at an attractive rate.  Let me know what your situation is and I'll try to refer you to the right person.

Topic:  Investor Series:  Why sewer scopes are important
 
 
A LOT of agents don't advise their clients to get sewer scopes when they purchase a property. This is a major mistake.  A broken sewer can cost between $3,000 - $10,000 dollars to repair and it only costs $99 ($99Rooter - others are more expensive) to have a tech put a camera down the sewer pipe and videotape the sewer all the way to the mainline. This will tell you  and the-buyer what the condition of the sewer is.  
 
So let's see, we pay to have the furnace inspected but a new furnace will only be about $2,000. We pay to have the roof inspected but that's probably a $4,000 job. So why don't we always inspect the sewer?  One reason is because, let's face it,  Realtors want closings. Many figure if they keep their mouth shut and don't go out of their way to recommend a sewer scope that's one less chance the deal will fall through.  Inexcusable, but all too commonplace.  Don't be a chump - get a sewer scope.

Topic:  Investor Series:  Estimating Rents
 
A lot of clients ask me how to figure out what market rents are in a neighborhood. This is a critical input into the calculations an investor needs to make in order to determine what their return on investment will be on a rental property. So you don't want to screw this up!  Unfortunately, this is one of the many figures new investors get wrong. 
 
One place people go to get rents is Rent-o-Meter. Rent-o-Meter is billed as an online resource to get accurate market rents. In my experience it is anything but!  However, I have a fairly simple solution. Multiply what you see on Rent-o-Meter by  80%  and you'll probably be close. I can't explain why but I find rents on Rent-o-Meter to be about 25% high, so multiplying their rents by 80% will get you close (do the math, it works out).  
 
So then, how do you get market rents?  Simple:  start at the subject property and drive concentric circles around the neighborhood. Call every For Rent sign you see (if you don't see any this is a good sign!).  Interview the landlords. A subtle but telling sign is how polite the landlords are on the phone. If they act overly solicitous and desperate it's a sign that vacancies are high and they're desperate to get tenants - not a good sign for you. If they are breezy, abrupt, and even rude, that's GREAT!  It means they have too many phone calls for their vacancy and it's a strong landlord market.  This is what you want to hear!  
 
In many neighborhoods around town today this is exactly what you'll find. I know. When the vacancy rate was 13% a few years ago I was very nice over the phone. Now that it's 4%...well, a little less nice.  Nothing like good -ol' market research.

Topic:  Investor Series:  Things to look for when you look at roofs

 
Have you ever driven through Aurora North looking for a rental property and taken a close look at the roofs?   Here's what you'll see: a bunch of 1950's ranches in varying states of repair or disrepair, lawns that are often grassless, old handcrank windows and roofs in almost perfect condition!  This surprised me at first and perplexed me for a long time.  Why, in a neighborhood devastated by foreclosures with properties with massive deferred maintenance are the roofs in such condition?  Really!  Stand in the middle of a typical street and looking at 10 roofs simultaneously, you'll be amazed. Well, it turns out the answer is pretty simple. There was a huge hailstorm in the mid-90's and most of the roofs were replaced by insurance companies then. The result is that while you certainly need to be careful about what you buy in Aurora North, chances are your roof is going to be fine.  Thank goodness for small favors.

Topic:  Investor Series:  Things to keep in mind when seeing a foreclosed home
 
As investors we face a number of very real and very scary challenges. Making sense of this market is no mean feat and one has to be very careful with his or her investment. However, we usually think about danger as financial. Unfortunately, on rare occasion it can be even worse than that. The majority of the homes investors are buying these days are vacant and once in a while people break in and live in these properties illegally.  The last thing you want to do is walk in on someone camped out in a house, perhaps conducting illegal an activity.  
 
This is no joke, you want to be HEARD when you walk into a property that is supposed to vacant. So make a lot of noise when you're at the front door. I always knock loudly before entering.  Stomp your feet a little. Yell "Hello!" a couple of times. When you start walking down into the basement repeat the process.  The goal is to have whoever is inside hear you and not panic and do something stupid.  I hope you never need this advice, but keep it in mind the next time you visit a foreclosed home.

Topic name:  Investor Series:  Understanding Egress Windows
 
 
A lot of investors ask what an egress window is and when one is needed. Technically, it's a window for a room below grade that a municipality has deemed large enough to be safe for exit in case of emergency.   While there are some variations, the window needs to be large enough that a firefighter with an oxygen bottle on their back could get in, then carry out an injured person in a fire.  Most often, it's associated with a basement bedroom window, making it a legal bedroom. Basement bedrooms without egress windows are illegal.  Installing an egress window makes them legal.  
 
The confusion is that different cities, counties and agencies have different size requirements and height-above-floor requirements for these windows. Therefore, before you start cutting into the concrete foundation you better make sure you've visited the local building department to get their requirements. In addition, HUD, distributing Section 8 vouchers, also has their own requirements for egress windows. So if you're going to rent to a Section 8 tenant make certain you know what their requirements are.  If you don't, you won't get credit for that basement bedroom and get way less rent than you expected - believe me it happens every day.  
 
To be honest,  there are probably hundreds if not thousands of rentals in Metro Denver that have basement bedrooms without egress windows. In my opinion, this is not only illegal, it's immoral. And if that wasn't enough to discourage you from having one, ask yourself what happens if there is a catastrophic fire and someone dies in your illegal basement bedroom. Not good!  For about $1,500 - $2,500 you can get a competent contractor to install an egress window (only one is required per basement bedroom) and sleep better at night.

Topics for Investors:  Basement Kitchens
 
You walk into a property you're looking to buy and rent and you walk down into the basement and voila! you find a full second kitchen.   Great!  You start calculating how much rent you could get if you could rent the downstairs separate from the upstairs and the cashflow is out of this world!  But wait, there are a number of very real problems with this scenario. 
 
First of all, it's illegal unless the property is zoned for more than one tenant and the property has been converted to non-residential use. But there are even more practical reasons why having two separate tenants is often not a great idea. The first is the utilities. Since it's a house there will only be one bill for Excel and water. Who's going to pay it?  Can you really get the tenants to pro-rate their share if you pay it?  Good luck.  Or do you just pay it, figuring the extra rent will more than offset paying the utilities?  Maybe, but what you'll find is that when a tenant is not paying the utilities they have the heat at 90 degrees all winter and every time you go to the house the kitchen sink is running.  
 
Your great cashflow gets eaten up by outrageous utility bills and you're back where you started. For these reasons and many more I suggest you don't try to put two tenants into a property made for one. But that doesn't mean the second kitchen has no value. It might be useful for an extended family who needs the extra space kitchen and might actually command a larger rent.  Check with your local building department and your insurance agent though, to make sure it's acceptable to have a basement kitchen in the first place.