As you look around cities throughout our diverse country,you see more and more new players getting into real estate investment to capitalize on the distressed real estate market without really understanding how to run a successful investment and rental property business.
It seems many participants want to be a part of the very competitive and challenging real estate business. Unfortunately, these new property owners fail to realize that the game they have been attracted to for big profits is really a hands-on operating business… not a passive fixed investment.
As a business, it needs to generate more income than the expenses it takes to operate that business. Hopefully, if the rental business is effectively managed and operated over time, the net income will grow so that its investment value can also grow. With all the specialized experience it takes to run a rental business, do most investors really understand how to effectively compete in today's marketplace?
•Did they buy a property with opportunity to create and add value?
•Do they have the right property manager that knows their way around the jungle?
•Do they have a well researched business plan with conservative assumptions?
•Do they have the necessary financial resources to accommodate unexpected problems?
Well, most new investors entering the real estate business, and SOME experienced investors, rarely ask these types of necessary questions. They don't plan for problems to occur so they usually overextend themselves ( I have been there). They don't have great leaders/managers operating their properties so more problems occur. They don't really understand the business they're in because they never truly researched the business so quite often they are surprised when problems spring up. Make sure you understand the business you are getting into with real estate. Get education and experience within a specific property type and location and become the expert. Surround yourself with professionals that know what they're doing. Realtors, attorneys, contractors, accountants, property managers, bankers, investors.
If you do these things, then you will have the capability and expertise to run your real estate assets like a business so that you can successfully grow and add value - Know what you're doing before you get into the business. No shortcuts and use mentors/coaches to compress you time frame.
Great post and I fully agree this is a business and you need to stay on top of it. One important note I would like to add is that we all need to keep a separate reserve to weather the storm. In the spring I had four houses go vacant and my initial reaction was panic, but knew I set aside the reserves and though I didn’t want to see the money leave my account I knew that’s what it was there for. This is not a get rich quick scheme and I needed to remind myself I was in this for the long run. I feel that if I didn’t have the reserves my first reaction might be to offload properties.
Question for the group:
What type of reserves do you keep for each property (percentage)? I feel the reserves are dependent on many factors such as age and how many units you have. As a rule of thumb if the property is owned outright and not too old 4% of the purchase price has been a good starting point. If I have a mortgage on the house I like to have 6 months of rent on hand.
Patrick, excellent point you bring up about the reserves and it can be a life saver when units go vacant. For me many factors go into establishing my reserve policy but I like your 4% number and that is about where my reserves are. My challenge is rebuilding my reserves when vacancies start eating it up. In the Chicago area and specifically the Cook County area property taxes have taken a toll on cash flowing investors including myself. The system is tough to beat with properties I have held for a few years because values have gone down at the same time taxes have increased. Even with the county assessor giving lower assessed values on property the individual municipalities change the tax levy through the legislature which increases the taxes. Appeals take 18-24 months to take effect which in turn hurts my cash flow and slows my reserves being replenished. Do you have similar tax issues where you are?
For my properties in Indy taxes have been a struggle as well. If you are non owner occupied the rate is much higher. For each County/State the purchase process to establish taxes is different. In California it is based on the purchase price, but in Indy it is based on the counties perceived value and it can take you several years to get adjusted. I didn't learn of this till after I made first purchase there as I based my numbers on the purchase price.
On your point about rebuilding the reserves is something I haven't thought about much and the need is very valid. I had four units go vacant in the spring and I haven't brought up the reserves to the appropriate levels.
Patrick I have used a lease option to negate the non owner occupied tax increase. In my county owner occupied owners are given a "homeowners exemption" which usually equals about a 25% tax break in Chicago. In a suburban home I have the tax break was only around 7%. Since the lease option provides for an equitable interest in the property for the tenant and since I use rent payments to pay taxes potentially on their behalf the county allows the investor the exemption.
The only way I have been able to rebuild reserves is by flipping one of my properties for a cash profit or by going out and buying a property specifically with that goal in mind. The business model that my associates use at the Mack Companies is to buy and hold 3 for cash flow while they buy and sell 1 for cash/liquidity. So they sell off/flip 25% of their acquisitions. They also have a consistent marketing effort for new tenants and they state that they have a 4 month waiting list of tenants. That certainly helps avoid vacancies therefore maintaining the reserves.
Great advice. Since I have retired I have become more and more interested in the real estate market, but quickly found out that I didn't have necesary tools to jump in and start making money from day one. I invested in a course from a company out of Utah, and it has made all the difference in the world. I am only half way through the foundation course, but have learned so much. This program teaches every aspect of the real estate business.
Patrick, when I purchased the course a few months ago, It was $1695. It is a one year course which you can complete at your own pace. It is offered live, online, both, or archived and you can watch the webinair over and over. Please feel free to email or call me and I can tell you more.
Patrick, if you go to www.myrenatus.com, you can read a little about all the courses that are offered.
Hi Thomas, sounds like you are involved with the Noveau Riche company. I know they are big on real estate education in that area. I have heard alot of them if that is the company. Glad to hear it has been going well with you and you are learning. I say time to make a deal.
Actually, I am working with a company called Renatus. Some of the same players as the Nouveau Riche, but revamped, new players, and much more viable. I just looked at my first piece of property this week, and so far everthing is working just as I learned in the class. I wish I had jumped into the real estate market years ago.
Thanks for starting this discussion board. I am so glad I found it.
Thomas, thanks for sending that new resource for all those in the group. I say you can never have too many resources. I am going to check it out and if you don't mind I will send it out to all those who have been a part of the group. I would enjoy hearing about the property you have been looking at and the investment play you are thinking of taking with it. Please feel free to share. I am glad you are jumping into the market now since we are at the bottom end of the real estate cycle. I spoke to an investor friend yesterday who is very knowledgeable on the cycles and he is absolutely convinced that a housing shortage is on the way. It may be a few more years but that means those who get in now will reap the rewards of good investing. Look forward to hearing more from you.
Thanks Mike, I will keep you posted. This is so different from anything I have ever tried before, but it is fun.