Archive for May, 2008
Comment
It’s commonly believed tenants must receive a 24 hour notice before the landlord enters their unit. There’s just one problem with that: it’s not true.
In Minnesota, a landlord must make a good faith effort to notify the tenant he/she will be entering. Reasonable notice may be a knock on the door, 24 hours, 48 hours — the definition of reasonable notice is open for interpretation.
The landlord, however, must have a reasonable business purpose for doing this. Valid reasons include:
- Showing the unit (for sale or lease)
- Doing maintenance
- Inspections
- Tenant disturbance coming from within the unit
- A reasonable belief that a tenant is violating the lease. (I.E. a barking dog inside a unit in a no pet building)
- Reasonable belief of unauthorized occupancy
- Belief that the tenant vacated the premises
- Pre-arranged housekeeping in a senior housing property
- Well-check (to make sure a tenant is still alive and well if there is reason to believe otherwise)
If a landlord enters the unit without the tenant’s knowledge or presence, he is required to leave a notice that he was there and for what purpose. Of course, once again, that purpose must be a reasonable business practice.
The only exceptions to notice requirements are to prevent injury to people or property, tenant safety, or to comply with local ordinances regarding unlawful activity.
Comment
Over the last several years, it seems as if almost everyone I meet is, on some level, addicted to HG-TV. We’ve all watched those shows and now dream of finding a fixer upper at a steal of a price. We think, “with just some paint, carpet and of course, stainless appliances…I could turn a $20,000 profit for just a weekend of sweat equity.”
OK, here are the facts. In the peak of the housing market I saw that happen…once in a while. Most of the successful rehabbers, however, were professional contractors; with crews. It was the only thing they did for a living.
So many of the foreclosures on the market are half-finished rehabs. And it doesn’t take a novelist to imagine the story behind each one. Someone bought it to flip it, and it took more money and time than they ever imagined.
In spite of this, everyone still has the “Flip This House” mentality. Even with duplexes.
The other day I showed four duplexes. All were either short sales or foreclosures, with some level of deferred maintenance. They ranged in price from $114,000 to slightly less than $260,000. All were in different, but equally terrific locations.
The least expensive was a converted single family home with some decent turn-of-the-century woodwork. As with most of these properties, the upstairs unit lacked a true living room. That unit also featured a makeshift kitchen and the most unconventional, skinny bathroom I’ve ever seen. The basement had one enormous octopus gravity furnace. And the soffits on the exterior of the home had clearly been converted to squirrel condos.
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OK, so I mean duplex. But house sounded better in the headline.
At this point, we’ve all been absolutely inundated with media reports about declining property values and the present buyer’s market. And, on many levels, those reports are right. There are countless properties on the market right now at prices well under what someone paid for them two, three, or even five years ago.
But many buyers think if a property is a great deal now, they can offer half of what the seller is asking — and steal the house. Let’s be realistic. If it was THAT much of a buyer’s market, wouldn’t EVERYBODY be buying?
I can think of one property in a south Minneapolis neighborhood that’s a perfect example. It sold in 2006 for $320,000, and was on the market at one point last summer for $359,000. It’s a beautifully maintained Craftsman, with built-ins, fireplaces, hardwood floors, newer boilers, a new roof…on an on. It’s a terrific value, and likely, very close to the right price.
It’s on the market now at $239,000. Twenty-eight percent less than what it sold for two years ago.
Buyers seem to love the place. But they’re all waiting for the price to be reduced to the ridiculous… like $150,000!
It will be long gone before then. After all, it’s not a great deal until you buy it.
And then will come the “shoulda, coulda, woulda’s“…
Comment
During the recent real estate boom, selling small small multi-family housing (duplexes, triplexes and fourplexes) was almost as easy as simply sticking a “For Sale” sign in the ground and getting the property on the MLS.
But the rules have changed for everybody.
When investing in larger apartment buildings, one of the first questions a buyer asks is, “What are the rents?” In other words, how much revenue does the building generate every year? If the property doesn’t generate enough money to cover its expenses and mortgage, it obviously isn’t a good investment.
That principle is increasingly true in the small multi-family market. In addition to location and condition, more buyers are comparing the rent of one building to another.
A client recently looked at three gorgeous duplexes, all next door to one another, all in a fabulous location. All were three bedroom units, with separate utilities, fireplaces, built-ins and good tenants. They were slightly different in size, but almost imperceptibly so. The only obvious difference was one had two bathrooms per unit. All three properties were in a short sale situation.
O.K., slight detour here. What’s a short sale? Think of it like this. If I borrow $100 from you, and when it comes time to pay you back I only have $90 on me. In that case, I may ask if even though I’m $10 short, if we can still call it good.
In this case, the sellers of these properties may or may not be behind in their payments. And their motivations for selling may or may not have anything to do with financial duress. However, they recognize under current market conditions they can’t sell the property for what they owe on it. So they’re talking to and working with the bank to find a way to pay back as much as they can.
Back to the buyer. Three comparable properties, virtually next door to each other. One was listed at $369,000, one at $395,000 and the third at $409,000. All had taxable values at or above $500,000.
Which one did he write an offer on?
The cheapest one, right?
Nope.
Would it help if I told you the first grossed $30,000/year in rent, the second $31,200/year and the third $38,400. Now which one did he want to buy?
The one with the highest rents; which was also the most expensive.
While it may seem like $7000-8000 a year in rent isn’t that important (after all that’s “only” $650 or so a month), it made the difference as to whether the property could support itself financially. The less expensive properties didn’t generate enough revenue to even break even. As a result, the buyer would have to reach into his pocket every month to make up the difference.
Due to higher vacancy rates the last five years (everybody who could bought a house), landlords have been forced to keep rents low. The poor housing market has turned rentals around, however. Now, more people have been forced to rent. So rents can be raised.
It’s important to keep your rents as close to market value as possible. It will make all the difference when it comes time to sell.
Comment
Over the years I’ve met countless first time home buyers. More often than not, they in a popular area (near a lake, river, shopping or great architecture) and understandably have decided they would like to put down roots there.
The trouble is, these popular neighborhoods aren’t exactly a real estate secret. Almost everybody wants to live there — which is where that stuff from that high school economics class kicks in — the law of supply and demand. There are only so many single family homes in these areas (supply), the demand for which is high, thereby forcing the price upwards.
In the Twin Cities market, most first time home buyers are uncomfortable spending more than $250,000. More often than not, the homes in the neighborhoods and with the features they like start at that price.
OK, yeah. What about a fixer? Well, fixer’s require cash. Lots of it. And most first time home buyers don’t have the thousands of dollars required for immediate repair.
It’s usually at this point that I ask whether the buyer has thought about a duplex. And I usually get a dumbfounded look as a reply.
Instead of looking at the whole price for a duplex, why not take the number and cut it in half? So if a duplex is listed at $400,000, the buyer would only pay for half, or $200,000. The tenants would pay for the other half (providing, of course, the rent was substantial enough). And, typically, properties can be found at or near those prices in these neighborhoods — in part because not as many people have thought of it!
“Yeah, but…,” buyers say. “I can’t afford that much”. Well, if the property has been a rental for more than two years, 75 percent of the rent can be counted toward the buyers income to qualify.
There’s more. The buyer can depreciate and write off the half he or she doesn’t live in on his taxes. Not to mention the ability to get a higher deduction for the amount of interest paid on the home loan (because the property cost more than a $300,000 single family home).
Finally, in coming years, if the buyer chooses to sell the property, the income he earned from tenants can be counted as income to help qualify for the loan for a new property.
Then again, it’s always nice to own a piece of property in a neighborhood everybody loves. Better still when it pays for itself!
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One of the questions I am most frequently asked by people considering purchasing their first multi-family property has to do with plumbing. More specifically, the toilet.
It seems the biggest fear about becoming a landlord is there will be a phone call in the middle of the night that a tenant’s toilet has backed up. And it will be up to the landlord to fix it.
First, I have been a landlord for over a decade. And in all those years, the only time I ever had a middle-of-the-night plumbing call was when a water heater actually burst and was spewing water everywhere. My inconvenience? Calling the plumber and signing the check! (It was the least I could do — my tenants were buying me my property after all.)
When it comes to toilets, however, a plumber charges too much. And, here’s a tip: they’re really, really easy and inexpensive to repair.
I had zero experience with fixing them prior to becoming a landlord. But I’d had the good fortune of stumbling across Home Depot’s book, Home Improvement 1-2-3. It had pictures, well, more accurately, how-to cartoons of almost every conceivable home repair or improvement. I took that book with me everywhere: propped it up on the back of toilet tanks, crawled under sinks with it…you get the idea.
The good news is, Home Depot still publishes it. The bad? No more cartoons. Just pictures.
And, if Home Depot’s actually closed, there’s always www.fixatoilet.com. No kidding.
Comment
Whenever I first sit down with someone thinking about buying an income property (either to live in or as an investment), I ask them a question:
What, besides mortgage and taxes, do you think is the most expensive thing for a landlord to pay for?
I get all kinds of interesting answers…things like water, mowing the lawn, painting. All of which are wrong.
Come on, confess. There was a point at some time in your life (probably college) when you lived on the top floor of an old building, it got hot in your apartment and you opened the windows. In January.
You weren’t doing it to punish your landlord. Well…maybe. More likely, you were young and simply didn’t understand the relationship between the open windows and the amount of your rent.
Of course, as soon as you bought your first home, you set the thermostat at “arctic” and decided that old, warm Norwegian sweater in the cedar closet was actually timeless and never out of style.
When evaluating a property to buy, it’s important to keep those little life lessons in mind. Given two equal properties, it’s always preferable to buy the one where there are separate furnaces.
That doesn’t mean a shared heating system is necessarily a bad investment. It just means that since the property is going to cost you more to own, it’s wise to purchase it at a lower price.
1 Comment »
We’ve all heard the reasons for the rash of foreclosures on the real estate market; bad loans, fraud, unethical loan officers– on and on. But I never hear anyone in the media mention the fact that some people just made really bad real estate investments.
Nowhere is this more true than in the small multi-family market (duplexes, triplexes and fourplexes). In the halcyon days of 2005-2006, I ran into countless buyers who wanted to leverage some of the equity in their homes to buy an investment property. After all, we all had been told real estate was a great investment, right?
I don’t know the statistics, but I’m sure hundreds of thousands of people across the country simply went out and bought an investment property. They used the same Realtor who sold them their house, and waited for the cash to simply pour into their pockets.
The people who ran into me didn’t do that. See, it’s absolutely imperative when you buy a property for an investment that it pay its own way (unless, of course, you’re looking for a tax write off or have some other goal). And it’s critical that you make that determination before you buy the property.
We’ve all read ads touting that a property “cash flows”. What most of those advertisers don’t say is that yes, it does cash flow — if you a) put enough down; b) own it free and clear or c) are 100% occupied all the time.
In the heyday of the Twin Cities real estate market, very few small multi-family properties sold at a price where they could cash flow. And those who bought then are losing those properties now.
I just showed a duplex in the Nokomis neighborhood that sold two years ago for just over $400,000. It came on the market yesterday for just under $200,000. It’s dated, with a lot of deferred maintenance, and even though it has two bedroom units and all the utilities are separate, it will still barely cash flow. No wonder it was foreclosed on!
The good news is I am now seeing properties on the market in highly desirable locations that do cash flow, or at least break even.
If you can, now’s the time to buy that investment duplex.
Comment
Most home buyers are familiar with FHA loans, which historically have been one of the best ways to purchase a home with as little as a three percent down payment. With these loans, the seller typically contributes up to three percent of the sales price toward the buyer’s closing costs and prepaids (such as insurance reserves), saving the buyer these costs. These contributions are capped by the lenders at three percent.
What most buyers don’t know, however, is that through what are called FHA Preferred Programs, the seller may gift an additional three percent to a non-profit agency that assists buyers in obtaining the necessary three percent down payment for an FHA loan. The most familiar of these agencies are Genesis, Ameridream, and Nehemiah.
Confused? Let me try to clear it up. Say you pick out a house you like that’s $100,000. Instead of offering a lower price, you could ask the seller to apply three percent of that price toward your closing costs; money that would come out of his pocket, leaving him with a net of $97,000.
You could also ask that he participate in one of the FHA Preferred Programs and donate an additional three percent to one of these non-profit agencies, as well as pay a required administrative fee(usually a few hundred dollars) . This agency would then make a gift to you of the three percent down payment.
By asking the seller for these two contributions, you are in effect, really offering the seller $94,000, as that’s what he’ll net after making these concessions.
Sometimes the seller will agree to pay one and not the other. If this is the case, it is often possible to raise the price slightly so the that the seller nets a higher amount. For example, the offer could name a price of $103,000, with the seller making the down payment and closing cost contributions. This would leave him with a net of $97,000. Of course, the transaction would be contingent on the property appraising for the higher amount.
Agents have been helping first time home buyers take advantage of these Preferred Programs for years. What very few Realtors realize, however, is that these opportunities are available to any property that qualifies for an FHA loan.
In other words, you can still buy a duplex, triplex or fourplex to owner occupy with nothing down!
Comment
I showed a gorgeous duplex in southwest Minneapolis to some first time home buyers last weekend. It was one of those big, sweeping properties many of us have often driven by and wondered whether the inside was beautiful as the outside.
The people I showed the house to were surprised to learn they could actually get an FHA loan for a duplex. Or a triplex. Or even a fourplex. But they’re not alone. Most people don’t realize that small, multi-family properties are viewed by the banking industry much the same as single family homes. And FHA insures the financing. Of course, this benefits only those who want to owner occupy a multi-family property.
As with single family homes, FHA has temporarily raised loan limits on multi-family properties. In the Twin Cities metro area, current loan limits are:
Duplex (Two Unit) – $467,250
Triplex (Three Unit) – $564, 800
Four Unit – $701,900
In other words, a buyer could purchase a $481,000 duplex with just the required FHA 3 percent down. Or less. But I’ll talk about that tomorrow.
