Dallas Real Estate and Short Sale Blog

I was out finalizing a lease for one of my clients yesterday. The listing agent was not available so I met with the owner of the property. My clients got stuck in traffic so we had some time to chat. The conversation turned to investment homes.

Many investors confuse rental rates with cash flow assuming that getting the maximum amount of rent equals maximum cash flow. I'll argue the opposite is usually true.

There are at least two hidden costs that need to be factored into the cash flow equation. The first is vacancy rate and the second is the cost to lease. Both subtract from long-term cash flow.

Any time a property is vacant it's not producing revenue. Limiting vacancies should be a factor in rental pricing. Let's assume I have a property rented for $1500 a month on a single year lease. If the tenant vacates the property after the lease ends, I incur the loss of revenue while the property is vacant and I have the cost to lease it. The other "cost" is realizing that most damage to a home happens during turnover. If I can get a good tenant to renew, I avoid all three losses.

While you may need to raise the rent on a renewal to cover increased expenses, this increase may cause our tenant not to renew. If I raise the rent on my $1500 property to $1600, I hope to generate another $1200 a year in cash flow. If the tenant moves out and the property takes 30 days to lease, I've lost $1500 plus I have the cost of leasing the property. The best time to consider raising rental rates is in between tenants.

The other place to consider this concept is when a tenant is asking for a reduced rental rate on a multi-year lease. On my $1500 rental, I will often reduce the rent to $1450 for a two-year lease. Why? Long-term cash flow. I know I will not have any downtime after a year and I will not have the cost to lease it again. The $50 a month reduction is $1200 over the two-year lease. If I have 30 days of vacancy and I have to lease it, my loss of revenue and expense to lease it can reach $2400 in my market. Additionally, I have to pay for utilities and lawn maintenance while I'm leasing it.

Maximum rent does not alway equal maximum cash flow.

Want to work with an experienced team of agents on your next investment property? Contact us at 214-227-6626.

Photo licensed from iStockPhoto

Originally posted at http://www.thebranchteam.com/wordpress/2012/03/12/does-maximum-rent-equal-maximum-cash-flow/

In Part 1 we discussed how rental price impacts occupancy rate and the impact that can have on annual cash flow. In Part 2, we’re going to explore how rental price impacts the quality of applicants.

Let’s say you have a rental property where the fair market rent is $1500 a month. If you list the property at $1600 a month, not only will you receive fewer applications, we’ll argue that those applications will be of lower quality.

Applicants with good credit and clean backgrounds do not have to overpay for a rental home. Since they can easily qualify, they will spend the time to not only find a well-maintained rental home, they will not pay more “just to get in.”

At $1600 a month, you’ll likely find that your applicants have credit or background issues. They want a decent place to live, understand they have issues, and are willing to pay more. It’s no different than a mortgage applicant who is willing to accept a higher interest rate because they have credit issues.

In some cases the extra cash flow may be worth the risk. That’s a call you have to make based on the total application.

Our recommendation is to price the home at market value to attract the largest number of quality applicants. One bad tenant can eat up lots of time and destroy a property. That little bit of extra cash flow just isn’t worth it in the long run.

Have questions or want to work with an experienced real estate team on purchasing or managing investment properties? Contact us at 214-227-6626.

Photo licensed from iStockPhoto

Originally posted at http://www.thebranchteam.com/wordpress/2012/01/23/investors-do-you-really-want-the-highest-possible-rent-part-2/

The Internal Revenue Service has issued a 255-page guide in the Federal Register. The new rules, which went into effect on January 1, change the way investors can deduct repair and improvement expenses.

In the past, most investors took the one-time deduction of the repair or improvement expense during the tax year in which it was done. The new rules clarify what is a repair and what is an improvement.

An ordinary business repair of an asset is generally tax-deductible in the current tax year. An improvement is usually classified as a capital expenditure and gets depreciated over time.

Eric Lucas, a principal at KPMG LLP and a former Treasury Department tax counsel, said in an interview that this one of the more significant changes" from current accounting policy and could be troublesome for businesses that took "an aggressive view" in deducting repairs.

Investors should discuss these changes with their CPAs or Tax preparers now in order to make preparing their 2012 tax returns easier next year.

Photo Licensed from iStock Photo | Blog based upon a story published in Inman News

Originally posted at http://www.thebranchteam.com/wordpress/2012/01/21/investors-irs-issues-new-rules-on-deducting-repair-costs/

With the shift from home ownership to leasing brought on by the aftermath of the mortgage crisis, more people see the long-term investment and cash flow potential of residential real estate as a good place to invest their money.

We’ve all heard the horror stories about the “tenants from hell” who fail to pay the rent and destroy the homes they’re leasing. These tenants cost the landlords an untold amount of money from lost income, expenses of eviction, and damage done to the properties.

The real question is, “How do we minimize the risk and avoid the tenants from hell?” You have to filter out the problem tenants before you sign a lease and let them take possession. The key is tenant screening.

Before I discuss the various screenings, I want to encourage anyone who is considering leasing their property to establish their lease criteria before ever advertising the property. By establishing criteria in advance and not deviating from those criteria, you can avoid most Fair Housing issues.

When processing applications, we try to verify as much of the information on the application as possible. We verify employment and income with their current and past employers. We verify rental history with their current landlord or we can see mortgage history on a credit report.

We then calculate the rent-to-income ratio. We use 30% as our standard. While some people can support higher rent-to-income ratios depending upon their total debt load, we reject any applicant exceeding 30%.

A credit report is pulled on every applicant. The data is used to calculate the total debt load against their monthly income. Our standard is 50% debt-to-income ratio (including the proposed rent). Once again, we reject any applicant exceeding 50%.

We pull a criminal background check on all applicants. We reject any applicant with a felony conviction within the past 5 years and misdemeanor convictions within the past 2 years.

Applicants are checked against the Office of Foreign Assets Control (OFAC). Applicants on the OFAC list are rejected.

Last we search for past evictions. Applicants who have been evicted within the past 5 years are rejected.

While this appears to be a high standard for applicants, we find that applicants who meet these criteria pay their rent on-time and generally take care of the property.

If you are considering leasing your property, I encourage you to give some thought to establishing leasing criteria and putting a tenant screening process in-place. While this requires some time and thought, it can save you lots of time and money in the long run.

Looking for an experienced and effective property manager in the north Dallas area? Give us a call at 214-227-6626.

Source: http://www.thebranchteam.com/wordpress/2011/09/01/the-key-to-leasing-is-tenant-screening/

With real estate leasing going strong in many parts of the nation, you may be considering getting into Real Estate Investing. In this blog, I’ll describe some of the basic terminology.

All examples will be based upon a $100,000 purchase price, $1,000 a month rent, $300 a month operating expenses, and a $450 a month mortgage.

Gross Rent Multiplier

GRM is used to describe a ratio between the cost of a property and the anticipated rental rate. It calculated by dividing the purchase price of the property by the monthly rent. In our example, we would use $100,000 / 1,000 to arrive at a GRM of 10. The higher the number is the better.

Net Operating Income

Net Operating Income is the total cost of the property excluding any mortgage. It’s calculated by adding up all the operating expenses including taxes, insurance, management fees, leasing fees, maintenance, and HOA dues. The total monthly costs are $300 and the monthly rent is $1,000. We would use $1,000 - $300 to arrive at a Net Operating Income of $700. Use $700 * 12 to arrive at an Annual Net Operating Income of $8,400

Capitalization Rate

The Capitalization rate is a ratio between the Net Operating Income and either the original or current market value of a property. We would use $8,400 / $100,000 to arrive at an annual Capitalization Rate of 8.4 percent.

Cash Flow

Cash Flow is the movement of cash in and out of the property. Positive cash flow is usually the goal. It is calculated by subtracting the Net Operating Income and any existing debt from the Gross Income. We would use $1000 – ($300 + $450) to arrive at a monthly Cash Flow of $250.

Occupancy Rate

Occupancy Rate is the ratio between the amount of time a property is rented and the amount of time is vacant. If there is no actual data, I usually use 90 percent as a starting point for analyzing a property.

Knowing the basic terminology and how to calculate them is essential to evaluating any real estate investment purchase.

Looking to purchase investment properties in the North Dallas area? Contact us! We have the experience and knowledge to find good investment properties, lease them to suitable tenants, and provide on-going property management if needed.

Source: http://www.thebranchteam.com/wordpress/2011/08/13/basic-real-estate-investing-terminology/

Even with housing prices rising in the Dallas Fort Worth Metroplex, many homeowners are still unable to sell their houses. Many of those impacted have refinanced or did 100 percent financing, others are simply in pockets of homes that have seen a correction over the past few years.

Either way, they are unable to sell at a price high enough to cover the mortgage and the closing costs. That leaves the homeowner with a couple of choices. Take to house off the market and wait a couple of years for some more appreciation or consider leasing the house.

Leasing and property management is not right for all homeowners.

If you are considering leasing your home, the first step is to do the research. You really have to know the numbers to make sure that leasing makes good financial sense. You need to know the following:

How much rent you can reasonably charge? A local real estate professional should be able to give you details on comparable leases in the area. I usually advise clients to work on an 85 percent occupancy rate meaning the property is only leased and generating rent 85 percent of the year. On a monthly basis, simply use 85 percent of the projected rent as your base rental income.

How much are your monthly costs (including the mortgage, maintenance, taxes, insurance, HOA dues)? It is critical that you accurately project these costs. Not only are there expected monthy costs, but you have to factor in maintenance and repairs as well. I usually recommend a Residential Service Contract for houses I manage.

How much will it cost to lease? You can advertise and lease it on your own or you can hire a real estate professional to market the property for you. Real estate professionals usually include tenant screening and lease preparation in addition to marketing the property. If you decide to go it alone, you need to figure in the costs of advertising, tenant screening, and document preparation. Proper and legal leases become critial if you have to evict or take other legal action against a tenant.

How much is ongoing property management if you decide not to manage it yourself? Like everything else, the cost to have professional property management varies. Cost is not the primary factor in my opinion. What you’re looking for is a company that will find good tenants and take care of your property.

Once you know the potential income and expenses, you can do the math. Most of our owners are generating positive cash flow from renting their houses while they wait for housing prices to climb some more. Others are losing money each month, but they have decided that losing a few hundred dollars each month is better than selling at a loss or facing foreclosure.

As mortgage approval criteria tightened, the demand for lease and rental homes have risen along with it. Not only is demand up, but rental and occupancy rates are climbing as well. If you’re having problems selling your house, you might want to look into leasing it.

Source: http://www.thebranchteam.com/wordpress/2011/07/10/having-trouble-selling-your-house-consider-leasing/

I did an interview with Gary Sutton with WSBA in York, PA on June 1^st.

It was a follow-up piece to an article published in USA Today titled, “More Than 500 Cities See More Homes Become Rentals.” The authors wrote, “In the aftermath of the nation's housing-market collapse and recession, more than 500 midsize and large cities have seen a rise in the share of homes that are rented rather than owned”

Most of the cities with the higher changes towards renters were same cities hit hard by the mortgage meltdown and subsequent foreclosures. I saw another news story showing that home ownership peaked at 69 percent and had dropped to 66 percent .

Clearly this should not be a big surprise. Not only did we have a housing bubble, but a home ownership bubble as well. Further, the people who lost their homes to foreclosure still need a place to live and will likely be tenants for a number of years.

The good news is that investors are buying homes in these areas and rather than flipping them as they did in years past, they are converting them into income-producing rental properties¹. It’s a great time to purchase income-producing properties as prices have dropped, interest rates are low, and the demand for rental homes is up.

Contact us for more information on investing in income-producing real estate.

1. See "Flipping Versus Income Producing Real Estate Investing"

Gina and I spent the day at the Robert and Kim Kiyosaki - Rich Dad - "Get Smarter with your Money" event in Frisco yesterday.  We released our latest book, "Avoiding Foreclosure - The Field Guide to Short Sales" and conducted seminars on Short Sales at the event.  We're passionate about spreading the word about Short Sales and the win-win-win-win situation that Short Sales create.

I had the unique opportunity to be introduced on-stage during the opening session.  I finally know how a rock star feels on-stage.  First, you cannot see a thing with the spotlights beaming in your face.  Second, you cannot hear yourself speaking but you do hear the echo of your voice bouncing off the back wall of the arena.  I had about one minute to introduce our seminar topic. Gina and the folks are KRLD said I sounded fine, but I can't remember much of what I said.  New experience!

There were about 3000 people in attendance and they also streamed the event out to a worldwide audience.  In addition to several current and past clients, Gina and I met and talked with so many interesting people from all over the United States.  We also conducted six seminars on Short Sale Basics.  By the last seminar I had no voice left.  Note to self...bring a PA system the next time.

Many thanks to Bob Waterman and Sandy Poulin at KRLD for their invitation and support.

Photo Credit - Gina Branch