- Neighborhood: The quality of the neighborhood in which you buy will influence the types of tenants you get & vacancy rates.
- Property Taxes: Property taxes are not uniform across an area and, as an investor planning to make money from rent, you want to be aware of how much you will be losing to them.
- Schools: If you're dealing with family-sized accommodations, you need a consider the quality of local schools.
- Crime: No one wants to live next door to the real-life Breaking Bad.
- Job Market: Locations with growing employment opportunities tend to attract more people – meaning more tenants.
- Amenities: Check the potential neighborhood for perks that attract renters.
- Future Development: Will you be competing with future apartments? Or will the neighborhood lose or gain amenities with future developments?
- Number of Listings and Vacancies: Too many vacancies in one area? That’s like neighborhood wentthe bad.
- Rents: Rental income will be the bread-and-butter of your rental property, so you need to know what the average rent in the area is.
- Natural Disasters: Insurance is a necessary evil, so how much do you need? Is your property in the flood zone, snow zone, or Apocalypse cone? (jk on that last one, don’t ask.)
If you ask any banker, he’ll tell you that anything over 4 units is considered a commercial property. If you ask any municipality regarding their trash pick up, you’ll get the same answer, ditto with insurance companies but are apartments really commercial properties?
When you think of commercial property, do you think of tall skyscrapers, office buildings, and warehouses…and possible large apartment complexes?
Well, apartments over 4 units are commercial properties but there is one big difference between apartments and offices. One space is occupied by residents and the other spaces are occupied by businesses.
That’s a big difference! Did you know the 3 out of 4 businesses go out of business after the first year? Ninety percent are out of business by year five! If you're renting to businesses, chances are, your turnover rate is going to be higher than a residential property and you should know that tenant turnover is your biggest expense in any multi-unit property.
People always need a roof over their heads If they move out of your place, they are moving into someone else’s (if you treat them with respect, they will stay longer!) Businesses just disappear and when they break the lease, it’s hard to get money out of a bankrupt company!
A lot of commercial properties rely on 3 or 4 big tenants. If they lose a tenant, they’ve lost 25% of the income. If the property cost you $1,000,000 and you lose 25% of your occupancy, you could be at a breakeven point or worse…upside down.
Statistics show that it takes an average of six months to fill commercial space. The main reason is that the pool of potential renters is not that big. In contrast, with a residential property, there is a vast pool of potential renters and the turnaround is one or two months instead of six.
For the same million dollars, you could get a 20 – 60 unit property (depending on where you invest), if you had 20 units and lost one, you’ve only lost 1/20th of your rent, you still have plenty of cash flow and more importantly, plenty of spendable income.
There is one other thing you should consider, when you’re attracting a commercial tenant for your property, you usually agree to do a “build-out” which means you change the space to make it conform to the business. This could cost you thousands of dollars.
With an apartment unit, the “make ready” usually consist of paint and carpet. If more is needed, it’s usually paid for from the previous tenants security deposit.
Yes, apartments over four units are considered commercial properties but as you can see, they are in a class by themselves when you compare risk versus reward.
These steps will help you save time and eliminate risk with your investments:
- Decide what size buildings you want to start investing in.
- Decide where you want to invest.
- Determine what types of multi-family properties you’ll buy.
- Put your team in place.
- Market to get your deal.
- Analyze the deals.
- Create the offer or letter of intent.
- Negotiate the deal.
- Create and sign the purchase-and-sale agreement.
- Do your due diligence.
- Renegotiate the deal.
- Start your financing.
- Choose a management company.
- Close the deal.
We all get so wrapped up in the thrill of real estate investing (once you start buying, selling and cashing those big checks you will know what I’m talking about), that it begins to become all-encompassing. We have cell phones, so we don’t miss a call. When the phone rings at our home office we go running like a bat out of hell from the dinner table because this could be the Next Big Deal.
We take calls from contractors and suppliers at all hours and somehow especially on Sunday nights. We allow tenants to have us at their beck-and-call because we fear that if we don’t say “how high” when they say “jump”, they might move out.
Before we know it, our lives are consumed with nothing else. We left our jobs so that we could stop working for The Man, and be our own boss. Now we’ve come to realize that we are working for a much worse boss, a tyrant. That tyrant is ourselves.
How does this happen? It happens because we don’t effectively plan our businesses. I talked about planning earlier in this report. One of the benefits you will achieve from planning is you will be able to create systems and checklists to control your real estate investing business.
Once these systems and checklists are in place, you will know what needs to be done in any situation. You will look at the checklist daily, to review what has been accomplished and what still needs to be done.
You should have checklists for every aspect of your business. Here are some key checklists:
- Property Evaluation: Buying right, market analysis, property analysis
- Property Inspection: Estimating repairs, formula worksheets, room-by-room analysis
- Contractor Management: Bid process, contracts, and agreements
- Renovation Management: Cash flow, required activities, scheduling, and contractor management
- Tenant Management: Application process, move-in process, leases, and contracts
One of the benefits of systems and checklists is that—as you grow your business and hire people to work for you—you’ll train them by teaching them how to use the checklists and systems. You will train them to complete the tasks associated with each system and checklist. You will supervise them by revising the systems and checklists that they are working on.
This is the fastest way to grow your business.
To get help on systematizing your business, read this book, The Multi-Family Manifesto. It’s a great book that will teach you how to look at your business in its proper perspective.
If you don’t want to create all of those systems and checklists yourself, find someone who already has a successful real estate investing business and find out what they are using. The sooner you systematize, the sooner you will be free to make choices based on what you want to do, instead of what your business needs you to do.
Are you a broker or an agent?
If they’re an agent, then ask them for a little information about their broker. An agent reports to a broker so you need to know about them.
What kind of education have you had?
College or professional in-service trainings are good.
What kind of experience have you had?
You want to see experience in the local area as well as in the property type you are seeking.
What professional associations do you belong to?
These could be national or local associations. Check out the various association websites to see if the members follow any stated Ethical Standards.
What local meetings do you attend on a regular basis?
This will give you an idea of where they network. Those networking opportunities might be good for you as well.
Where are the popular areas in the city and why?
You want to know if the city is investing in certain areas.
What type of properties are you seeing for sale?
You want them to match what you are looking for.
Anyone you know of that’s thinking of selling? Anything coming up on the market?
This will give you an idea of how extensive their network is.
What types of properties does their firm seek out?
Do they match your needs or present new opportunities that you have not considered?
Where are you seeing CAP rates and Cash on Cash Returns?
The higher the better.
Who needs 10X when you have Deal Lab? New new monthly membership with constantly updated investor resources, latest real estate trends, mind blowing case studies, and a portal to connect with real estate professionals.
Charge "Cuddles" rent, By that I mean … PET RENT
Almost 70% of all households in the U.S. own pets. Charge Fido a small fee and you won't be isolating a large population that could become your tenants, and also the same tenants would love to pay for a convenience upgrade like a pet-sitting or dog walking feature.
Here's a win-win. Set up storage units on the property that a tenant can rent at-will. That way they are not violating their lease and any fire codes by over-stuffing their unit with their keepsakes, toy collections, or seven extra coaches they found on Amazon, or whatever they click-bought yesterday.
Make life a little easier? Sold. Occupied. Laundry services, dry-cleaning, UPS Dropbox, Netflix subscriptions, free WiFi… Pick one or invent your own. Small conveniences go a long way to make a tenant's life even smoother.
Need more ways to increase income? Check this out.