[jjbrr]

helene_t, on May 6 2010, 02:50 AM, said:

My cousin bought some rental residential estate in Denmark in the mid-90s, when one pension fund of his parents' was released (his mother was in her late 50s so wouldn't need the money the first few years anyway, lol), refinancing when prices went up as to free money for down payment for new purchases, so his estate imperium grew quite quickly. He offered me a share in the beginning when he only had the pension scheme money, I regret that I didn't buy into it back then since it would have made me rich.

Some observations:
- Rental units in the posh suburbs are overpriced, presumably because rich people buy them for their children who attend university. Rental units in poor suburbs and downtown cause too much troubles although one could probably make good money there if one had the nerves, and is on good terms with criminal gangs etc. So the best place to buy is probably smaller towns.
- Units with a legal ceiling on the rent, and therefore in short supply on the rental marked, are overpriced because landlords can make additional income by collecting bribes from prospective tenants. So avoid those if you are not into criminal practices.
- It is amazing what insiders in the business are willing to tell you if you manage to make friends with them, especially if you get them drunk. So don't rely on public information, you can get better information if you build on your network first.

OK that was a Danish perspective, maybe not so relevant since I suppose you are aiming at the US market.

- Units in posh suburbs seem like an unattractive market to me. It seems to me that the likely demographic to rent a unit in a duplex is either university-aged students looking for all the features of a home but at the cost of an apartment or young-ish families using the duplex as a way out of apartments and towards a house. The people who can afford to rent an expensive unit in a posh suburb are good candidates to buy a house rather than rent. This is, of course, dependent on location, as a posh beach-front rental unit would receive more attention and have more room for appreciation than a comparable unit in a nice neighborhood in Dallas, for example. I expect to stay far away from bad neighborhoods and downtown in general, unless I can find an area with lots of growth potential. Despite what everyone believe, I expect, I don't actually have any connections in criminal gangs, so that's not really a hassle or a risk I'm willing to endure. Perhaps somewhere down the line when I can afford to hire someone to manage the properties for me, that will be a more reasonable option.

- The legal stuff is all very confusing to me. I'm not sure I'll ever get my head wrapped around everything involved, but I think I can recognize a red flag when I see it; recently I was looking at a property fo which I learned that, if I were to purchase it, I wouldn't be able to evict the occupants or increase the rent for one of the units in the event of any domestic violence against one of the female tenants. Dealing with potentially violent drunks does not sound like something I want to get myself involved with.

- Indeed, I need to network extensively. Just like most thigns in life, I think to be successful in this area, who you know is as important or more important than what you know.

[cherdanno]

jjbrr, on May 6 2010, 01:33 AM, said:

cherdanno, on May 5 2010, 11:11 PM, said:

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

Have you heard of that "housing bubble" that happened not all too long ago? It included an atypically high P/E ratio for real estate.

[jjbrr]

cherdanno, on May 6 2010, 09:07 AM, said:

jjbrr, on May 6 2010, 01:33 AM, said:

cherdanno, on May 5 2010, 11:11 PM, said:

The "hoping to sell" part obviously makes the risk much bigger (as it seems housing prices fluctuate more than rents).

Why?

I think housing prices correlate directly with rent. In fact, property value is a direct function of lease.

Have you heard of that "housing bubble" that happened not all too long ago? It included an atypically high P/E ratio for real estate.

Ya, the book that was linked earlier is from ~2006, so it doesn't mention any of the troubles of the past couple years. Not an insignifcant problem.

I'd be interested to know how the jump in foreclosures affected the demand for rental units.

Also, if anyone has a crystal ball or can contact Ms. Cleo for me, I'd like to know how the market will look in the next 5+ years.

[Phil]

Background: I've been doing a lot of research lately about investing in multi-family residential properties. The general premise of the scheme is that I can buy a 2-4 unit property (duplex, triplex, quad) and live in one unit while leasing out the rest of the units.

What's the rental market like in your area? How high is the vacancy? Are units hard to lease?

If everything works out, I put down the down payment, make cosmetic renovations to all the units, increase the rent slightly to reflect the improvements if necessary,

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

and hopefully use the cash flow generated from the tenants' lease to pay for the mortgage.

And hopefully a little more. If the market gets soft, you'll need a reserve in case you have some vacancies.

Long term the goal is more or less to own the property outright using none of my own money except the down payment. Alternatively, I can make the cosmetic changes and increase the rent (increasing the property value) and refinance after a year and use the appreciation and increase in value towards a down payment on another building; dry, rinse, repeat.

See above. If you are running this efficiently, and your down payment is large enough, then you should be building some equity after a few years. Again, improvements do not equate to increases in value.

My question: Does anyone have any experience in real estate? I understand that a successful investor will consider things like location and appreciation potential, but I'm curious about strategies to find houses with good potential. I assume this is a skill just like any other, and practice and experience with some degree of natural talent will lead to success. Surely there are things that one should look for, some red flags, some things that reduce risk substantially, etc.

Get a good broker involved and let her/him know you are serious about buying. 1-4 unit properties are normally handled by a residential broker instead of a commercial broker specializing in income properties. They will give you some good advice on what the good areas are, whats in decline, and most importantly, what good values are out there.

Assuming I've done my homework, is this something you recommend? I keep reading stories of "If only I had started in my twenties...", but for someone who has never taken out a loan for anything (free ride at college, bought a car with cash, currently renting an apartment), it's a pretty big leap to spend a quarter million on a house I would plan to only spend a year in.

I think its a great idea, but also understand that the lending market is very tight. Even before you start looking, develop a relationship with a local banker that is actively lending in this market. You might need someone to co-sign if you have never purchased property before, and your credit needs to be A++ for something like this. Good luck!

[jjbrr]

Phil, on May 6 2010, 10:01 AM, said:

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

Quote

Forced appreciation has often been compared to printing money. In apartment investing, taking a few simple steps this will give you the ability to increase the commercial real estate rents.

Forced appreciation is often as simple as new landscaping for your investment, or adding amenities and services such as cable or wireless Internet service. They are simple steps that are not overly expensive, but that give you the ability to raise rents higher than the past owner was able to get for the property. You can also offer premium suites to discerning tenants. This may have an initial cost for refurbishing, but it will also allow you to rent them at a much increased price. These simple ways allow you to use your property management to create a better environment for your apartment investing, giving it an advantage and creating an increase in income.

http://ezinearticles...asics&id=873842

All the research I've done suggests that paint, new carpet, maybe some new tile, maybe some landscaping are enough of an excuse to raise rent. Obviously lots of factors go into it. If the rent is already high, I can't force them higher without substantial improvements. But if the rent is on the low end, these are simple things to get them where they should be.

[Phil]

jjbrr, on May 6 2010, 11:13 AM, said:

Phil, on May 6 2010, 10:01 AM, said:

There isn't much correlation between the condition of the units and the amount of rent, unless the improvements are REALLY nice - like things you won't wan to spend money on (granite counters, upgraded appliances, etc.). The reason you make these improvements is because it makes the units easier to rent.

Quote

Forced appreciation has often been compared to printing money. In apartment investing, taking a few simple steps this will give you the ability to increase the commercial real estate rents.

Forced appreciation is often as simple as new landscaping for your investment, or adding amenities and services such as cable or wireless Internet service. They are simple steps that are not overly expensive, but that give you the ability to raise rents higher than the past owner was able to get for the property. You can also offer premium suites to discerning tenants. This may have an initial cost for refurbishing, but it will also allow you to rent them at a much increased price. These simple ways allow you to use your property management to create a better environment for your apartment investing, giving it an advantage and creating an increase in income.

http://ezinearticles...asics&id=873842

All the research I've done suggests that paint, new carpet, maybe some new tile, maybe some landscaping are enough of an excuse to raise rent. Obviously lots of factors go into it. If the rent is already high, I can't force them higher without substantial improvements. But if the rent is on the low end, these are simple things get them where they should be.

This has not been my experience at all. With flipping properties, certain cosmetic improvements, like paint, carpet and landscaping give you a good ROI. Improvements like swimming pools, new kitchens, etc.. do not bring an increase in value. Well, lets be clear, if you put in a $25,000 kitchen, you will get some increase in value, just not $25K worth. The cosmetic fixes mentioned about can get 3-4x their value.

As far as rentals are concerned, understand that unless you are renting very high end apartments in an affluent area, your buyers aren't 'discerning' at all. They are very price-conscious and the market tends to be very inelastic. Whats going to drive rents is the location of the unit and the neighborhood, as well as the age of the unit. Adding cable and high-speed internet to increase rents? LOL.

I stand by what I said that these improvements will make the units easier to rent, but won't give you much of a bump in rents.

[mikeh]

First: my 'credentials'. My first real estate ventures were buying a house for me, and buying, with a friend, a rental house. There had been a bubble, and at age 27 I didn't realize what a bubble implied.

The day after I moved into my home, the headline in the local paper was 'Real Estate Market Collapses'.

5 years later, after making accelerated payments on my home, I sold it and was left with a debt, and we also sold the rental property and had to borrow money to clear title.

I've done better recently, probably because I am now married to a realtor

If I were looking at your ideas, my main concern would be inflation.

Most governments in the industrialized world have printed and borrowed huge, in some cases staggeringly huge, amounts of money.

If and when the economies of these countries switch into full-blown growth mode (and while the US, for example, appears to be showing signs of life, its recession is clearly not yet over), it seems to me that there is a huge risk of inflationary pressures.

Superficially inflation may be good...if the value of your property increases at an inflationary pace, while your debt remains the same, your equity increases exponentially.

But the tool governments/central banks adopt most aggressively to combat inflation is to jack up interest rates.

The difference between a rate of say 8% and 12% is bad, but the difference between 3% and 7% is much worse. In the first case, your payments more or less increase by 50%, but in the latter they more than double. So if you are close to the edge at a low interest rate, you may be crushed by a significant hike.

My wife and I recently held a long discussion with her son and his wife, who were thinking of keeping their heavily mortgaged home as a rental and buying another: they make enough money that, at today's rates, they could handle it. I asked them to redo their numbers on the assumption that interest rates hit 8%.

That ended the discussion.

Fiftenn years ago, anyone saying rates would be 8% would be laughed at as being far too optimistic!

Bear in mind that higher interest rates will probably cause a reduction in property value, since fewer people will be able to afford to get into the market, so there is a risk that your equity will be disappearing at precisely the time you lose the ability to service the debt.

That was definitely the case in the early 1980s where I lived: high inflation combined with a bursting bubble.

The bubble may be over, but I have read that some economists think that most residential real estate in western countries is still over-valued.

[Phil]

mikeh, on May 6 2010, 11:37 AM, said:

Superficially inflation may be good...if the value of your property increases at an inflationary pace, while your debt remains the same, your equity increases exponentially.

(snip)

Then just get a fixed loan.

[jjbrr]

Phil:

I understand your point. Here is an example of a property I'm looking at right now with some research I've done:

The owner is about 80 and his mailing address is at a retirement home. He's owned the property I'm looking at for at least 10 years and hasn't raised the rent in at least the last 6 or 7 years. Similar homes in the neighborhood are charging $200-300 more/unit than this owner is charging. He seems to own a few properties and they're all on the market right now, so it seems to me he's been doing this for a while and is ready to cash in and not worry about managing the properties anymore. The location is pretty decent, imo, and it's zoned for one of the best elementary schools in the Dallas area.

The duplex is occupied - one of the tenants is month to month; the other is under contract for the next half a year or so. The month to month tenant has a dog and a cat; the other tenant has young children.

Since one method of evaluating the value of a multi-family residential unit is it's annual gross income, imo a quick paint job and new carpet will be enough excuse to raise the rent to the same level as that of comparable units in the neighborhood, which will increase the expected income and thus increase the value.

You can LOL all you want, but my current roommate works in IT and gets $30/month from the lady in the next apartment over to mooch off our wireless internet. I agree people won't be discerning about a lot of things, but they do assign some value to things like not having to worry at all about a plan with an internet provider. Do you think my apartment complex's managers would LOL if they knew they were missing out on $30/month extra?

Anyway, this is an example of a case where IME my strategy will be quite effective. In other cases I totally agree with what you said. I don't expect to get into properties that need major renovations or improvements, but instead properties that just need some cosmetic improvements.

Perhaps after building a network of reliable people who can do substantial repairs I can look into flipping houses, but for now I'd prefer shying towards keeping my hands off.

[Lobowolf]

I would assume that even current interest rates, you wouldn't be looking for an ARM anyway. For sure, go fixed. If you're buying a first property, and you're going to live there, it's probably FHA eligible, too, which gives you some flexibility on the down payment (I think 4 units or less is treated as residential, but maybe there's a disqualfier on income property; dunno, but my guess would be that FHA is a possibility if desired).

One way the housing collapse can work to your benefit is that it created another class of renters - stable, reliable working families who lost their houses when their adjustable rate mortgages went through the roof - they have good jobs and income streams, but don't have the lump sum currently required for another purchase, yet they don't want to live in an apartment. Good target, if you can find them.

[jjbrr]

Lobowolf, on May 6 2010, 10:48 AM, said:

I would assume that even current interest rates, you wouldn't be looking for an ARM anyway. For sure, go fixed. If you're buying a first property, and you're going to live there, it's probably FHA eligible, too, which gives you some flexibility on the down payment (I think 4 units or less is treated as residential, but maybe there's a disqualfier on income property; dunno, but my guess would be that FHA is a possibility if desired).

One way the housing collapse can work to your benefit is that it created another class of renters - stable, reliable working families who lost their houses when their adjustable rate mortgages went through the roof - they have good jobs and income streams, but don't have the lump sum currently required for another purchase, yet they don't want to live in an apartment. Good target, if you can find them.

Yes, I believe FHA eligible. 4 units is still residential; 5 units or more is commercial. Commercial is an entirely different kettle of fish (they generally require 20% down at least, which is prohibitive, among other problems). AFAIK income properties are not disqualified.

Your second paragraph is my line of thought as well.

[Winstonm]

jjbrr, on May 5 2010, 10:35 PM, said:

Winstonm, on May 5 2010, 09:22 PM, said:

The more units the harder it is and the more risk.  It is easier to rent a house than a duplex; a duplex than a triplex; a triplex than a fourplex.

Is this true? That seems counter-intuitive to me and it goes against what my research suggests.

Suppose the average rate of unoccupancy of some rental is 5%. If you're renting a single, you should expect to eat 1 in 20 monthly payments. If you have a triplex and offer 2 units for lease, it seems the 5% would be the same, and it would offer a little more protection. 3 units up for lease would offer even more protection.

I'm no math wiz, and questioning this sort of logic is exactly what I need.

Where did I go wrong? Do you just think people are less likely to rent a unit in a quad than a triplex? A unit in a triplex than a duplex?

Not necessarily ture - anecdotal evidence from my limited experience in owning real estate for rent. But in my judgement, the really key issue is not in the type building but in the type renter. It seems easier to get a higher quality renter in houses that 4-plexes, but that is not universally true but just a tendency.

[Rain]

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

http://ths.gardenweb.com/forums/
This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

[jjbrr]

Rain, on May 10 2010, 09:20 AM, said:

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

http://ths.gardenweb.com/forums/
This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

One of the tenants in the house I'm looking at is Section 8. AFAIK it's difficult to raise their rent, and like I said, they're currently paying $200-300 less than their neighbors every month.

Which leads to some sort of ethical dilemma. If you decided that you wanted to evict the Section 8 family for whatever reason, what's the best way to go about telling them?

[bid_em_up]

You might want to check on the Section 8 housing regulations. From what you have stated above, the current owner hasn't worried about "rent increases" for many years. However, Section 8 is supposed to make up the difference between what the renter is able to pay and the current fair market rental of the property. I doubt HUD increases this payment automatically, there is likely some paperwork that has to be filed, and the current owner probably hasn't bothered to do so.

So if the fair market rental really is $200-$300 higher in that area, it is entirely possible that HUD will make up this difference without actually having to replace the tenant in question, and without substantially increasing the amount the current tenant is paying out of pocket.

Another plus to being qualified for Section 8 (and as the landlord you have to apply for and maintain Section 8 qualification), is that you have a constant pool of available renters, so the property is unlikely to sit vacant for very long.

Of course, if you think you will be charging rent that exceeds the fair market value, it's an entirely different story.

[hrothgar]

jjbrr, on May 10 2010, 07:48 PM, said:

Rain, on May 10 2010, 09:20 AM, said:

I've been thinking about real estate for 2 years. I found Phil's post to be right on target. This works only if you're doing it in some parts of the country. Are you okay with managing things at a distance?

If I were doing it, I'll probably consider going after either Section 8 market to be guaranteed rent or university towns for student market.

http://ths.gardenweb.com/forums/
This site has so much info about the nitty gritty of houses, like what kind of garage (brand), toilets, sinks, etc. You name it. Nice free resource for the techie part.

A friend of mine is a full time landlord. Rents out houses in a university town in New England, and writes almost everything off as an expense. It can be really sweet.

One of the tenants in the house I'm looking at is Section 8. AFAIK it's difficult to raise their rent, and like I said, they're currently paying $200-300 less than their neighbors every month.

Which leads to some sort of ethical dilemma. If you decided that you wanted to evict the Section 8 family for whatever reason, what's the best way to go about telling them?

It can be incredibily difficult to (legally) evict folks who are renting section 8 housing.

My aunt was a social worker. When I was growing up, I used to hear all sorts of stories about the never ending battles between land lords and tenants, the ridiculous lengths to which the land lords would go trying to force out tenants, and the ways that tenants would (deliberately) trash the place when they were moving out.

Left me firmly convinced that I never wanted to be involved with either side of this...

[bid_em_up]

hrothgar, on May 10 2010, 03:23 PM, said:

It can be incredibily difficult to (legally) evict folks who are renting section 8 housing.

My aunt was a social worker. When I was growing up, I used to hear all sorts of stories about the never ending battles between land lords and tenants, the ridiculous lengths to which the land lords would go trying to force out tenants, and the ways that tenants would (deliberately) trash the place when they were moving out.

Left me firmly convinced that I never wanted to be involved with either side of this...

This is true when you agreed to accept Section 8 tenants and are then attempting to evict for non-payment, lease violations, etc.

I'm not so sure that it applies in this case, since as the new property owner, he is under no obligation to accept Section 8 tenants. It should be a simple matter of filing the eviction paperwork with the court, and having the tenants served. I agree that they may trash the place in retaliation.

However, the best recommendation I can make is that you consult with a good real estate attorney in your area regarding these matters instead of listening to us.

[jjbrr]

Surely if you buy a house with Section 8 tenants but you yourself would like to live in that house, there must be a (simple) process to get them out.

In the case of multi-family residential units, one has a choice of whom to kick out, assuming full occupancy. I hope the process doesn't change too much.

[y66]

Of possible interest:

Here comes the neighborhood

What's your walk score?

If all other things are equal, or close, check out the walkability index of various properties you are considering. In my experience, this is not just a proxy for quality of life. It's a pretty good indicator of future value relative to less walkable neighborhoods.

[jjbrr]

y66, on May 12 2010, 05:49 PM, said:

Of possible interest:

Here comes the neighborhood

What's your walk score?

If all other things are equal, or close, check out the walkability index of various properties you are considering. In my experience, this is not just a proxy for quality of life. It's a pretty good indicator of future value relative to less walkable neighborhoods.

The author of the book that was linked at the beginning of this thread describes his approach to buying houses is to look almost exclusively at beachfront property or property in yuppie, trendy, downtown locations where young-ish professionals can be in the middle of the downtown action but still be able to walk to work.

These types of places will generally provide (sometimes substantial) negative cash flows for the first several years, but they will frequently experience enormous appreciation, sometimes doubling in value in ~5 years.

I think it's a sound strategy.