- 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.)
real estate investing
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.
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.
Your credit score can have a lasting impact on your ability to invest and get a mortgage.
Not only can it change a loan from being approved to being denied, but it can affect other aspects like interest and insurance rates, among others. You’ll want to make sure your credit score is good enough to allow you to take advantage of the real estate market. So, how important is your credit score when you’re looking to buy real estate?
A low credit score will impact the cost of your loan because it represents the level of risk to a mortgage lender.
A high score indicates that you pay your bills on time and will be able to repay your mortgage; a low score, on the other hand, means that you could be a potential risk to a lender. To compensate for the extra risk, lenders will increase your interest rates to protect themselves. Therefore, the higher your credit score, the lower your interest rates. But what should your ideal score be?
The short answer is that, ideally, your credit score should be above 740 and your total debt payments, including your future mortgage payments, should not exceed 43% of your gross income. The primary benefit of a higher credit score is that you’ll pay less interest. Forbes illustrates that the difference between a 3.5% and a 4.5% interest rate on a 30-year $250,000 mortgage is over $50,000 in interest.
The importance of a good credit score is illustrated by other benefits, like better credit card terms, higher credit limits, and lower insurance premiums.
Another important factor for home buyers is homeowners insurance. The insurance premiums you pay once you purchase a home will be greatly affected by your credit score. Unlike your regular credit score, your credit-based insurance score isn’t publicly available. To evaluate your risk factor, insurers use your credit report for many of the same things as traditional lenders. FICO estimates that 85% of home insurers throughout the United States use insurance scores to determine monthly premiums in states that allow it. The reason for this is that the Federal Trade Commission determined that these scores accurately predict risk, or the likelihood of filing a claim, to underwriters. What, then, can you do to improve your credit score?
Your credit score calculation is a bit complex. Some of the factors considered are your loan repayment history, the total balances on your accounts, how long those accounts have been operating, and the number of times you’ve applied for credit in the past 12 months. The best way to keep a high credit score high is to pay your bills on time, every time. Additionally, you’ll need to pay your existing debts, like credit card balances and other loans, and avoid opening new accounts, credit cards, or loans.
Content written for RE Mentor
By C. Mendoza
The moment any one utters the dreaded ‘R’ word the real estate industry seems to shake, rattle and collapse. Mortgages, borrowing, house selling and buying and house building, all slow down. Especially during a Recession. But not emerging real estate markets.
Yet, housing never really stops being in demand. People always want somewhere to live. Real estate investors who have seen the market go through its ups and downs know what to do. When the economy temporarily stalls what is required is an emerging real estate market to allow them to make money on the same scale as when boom times are there.
This is how it works:
Emerging real estate markets are created out of a real need. Which is then coupled to generous local incentives necessary for the development of a region. As such it is totally recession proof. Perfect for the savvy real estate investor who has managed to spot it first.
The reason an emerging market is recession proof is because it is driven by its own micro-economic realities. Independent of the larger economic picture. A new industry moving to town creates an influx of new jobs. It attracts new people and brings with it its own people and all these generate a buzz.
In response, the local government provides incentives to help them with their relocation. They do this to ease the expected pressure on housing.
This attracts new supporting business to the area. Helps other start ups get going and attracts even more people and suddenly you have a boom-town in your hands.
The pressure-cooker conditions this creates are perfect for closing deals fast in emerging real estate markets…
… and making good money from them. The skill of course lies in being able to correctly identify an emerging real estate market as it emerges rather than chase the far more risky tail end of it.
Here’s the truth:
An emerging real estate market always Peters out* and begins to normalize and reflect the rest of the economy. This means that the window of opportunity is small indeed and the real estate investor worth his salt knows when to get in and when to get out.
One of the things we cover in the courses we give is how to recognize an emerging real estate market and what processes you need to have put in place in order to be alerted about it and identify it correctly.
The thing you need to be aware of is that emerging real estate markets are like gold mines. You need to find them, work them and then move on, all the richer for the experience and with your bank balance better off.
*The earliest known use of peter as a verb meaning dwindle relates to the mining industry in the USA in the mid 19th century, and it is reasonable to accept that that is where it originated. Thoughts of US mining at that date bring to mind images of the California Gold Rush, which is sometimes suggested as the source of this phrase.