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Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

So you’ve found a property that could turn a spectacular profit after it is rehabbed, but now where do you find your contractor?  You may need a few different people to work on your property depending on the types of repairs.  A contractor does paint, dry wall, and miscellaneous fix ups.  A licensed HVAC contractor repairs the furnace, heating, and air conditioning.  The more straightforward personnel are the electrician and roofer, who work on the electrical aspects and roof, respectively.  Once the property is inspected, you will have a good idea of who you need to hire. Not all contractors are equal: some cheat and produce shabby work, and others are honest, hardworking and experts in their fields.  How can you tell which kind of contractor you are getting? It all comes down to how you find the contractor in the first place.

Word of mouth is probably the best way to find a competent and talented contractor.  Don’t try opening the yellow pages and picking an attractive ad or going online and reading reviews from strangers.  You want the opinion of people who know their contracting. A good place to start is at your local hardware store or at Lowes, Menards, Home Depot, or another similar store.  They usually have a contractor’s desk, and the employees there work with contractors on a variety of projects.  If you say you are looking to develop a long-term relationship with a licensed contractor for a property, then they can recommend a few names.  They’ll know who is respected and who offers low quality work.

The most important aspect of hiring any of these workers is to ensure that they are licensed and bonded.  They have to have a good liability policy: typically a million dollars is acceptable.  This is to protect you in case anything goes wrong and somebody gets hurt, because otherwise you could be sued as well as the contractor.  It’s also vital to have a written contract to avoid any misunderstandings.  In the event of a lawsuit, a written contract is better proof than a verbal agreement of the specific tasks the contractor was responsible for.

Ultimately, it all comes down to finding a contractor with a respected reputation.  There are a whole host of problems that can come with contractors, but as long as you find one who has been in business for a while and has experts in the field vouch for him, you can feel assured that your contractor will be the diamond you are looking for and will treat your property honestly and professionally.

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Multi-unit properties, ranging from two to four units (a greater number of units is considered a commercial property) have special advantages that single-family homes do not have.  Multi-units provide multiple streams of income, which can generate more income than a single-family home.  Additionally, the expense of vacancy is mitigated by the fact that other tenants are in the building; thus vacancy is not as large of an expense in a multi-unit than in a single-family home. Essentially, the advantage of the multi-unit can be boiled down to more cash.

The key to taking advantage of multiple streams of income is to know how to price your multi-units.  The rents must be in accordance with the market conditions, keep in mind, however, that location, amenities and quality of unit can have a significant impact on the pricing of your units.   You want to make sure your rents cover the expenses of the property and then some.  A good rule of thumb is to generate a cash flow of $200 per unit after expenses, which includes maintenance and vacancies.  If utilities are included in the rent, (which they shouldn’t be, but that’s a different topic), then the $200 should be calculated after utilities are taken out.  You want to generate enough profit to make it worth your while, but not as to scare away good tenants.   To illustrate the benefit of multiple streams of income, let’s say you have a single-family home that you can rent for $675 a month.  If you turn it into a multi-unit, then you can charge $450 per unit and get $900 out of the deal.  That’s $225 more per month!

This example can also illustrate the advantages of multi-units when applied to vacancies.  If you can’t fill your single-family home, then your expense is whatever the mortgage is on the building, say $550.  If it is a multi-unit and you can’t fill one unit, your expense drops to $100 per month.  If you can’t fill both units (which may indicate a larger problem), you’re expense is no greater than if it were a single-family home at $550 per month.  Multi-units help to alleviate the costs of vacancies by increasing the chance that at least some of the mortgage will get paid every month.

Multi-units are a great way to generate more income than you could expect with a single-family home and help to alleviate stress and expense if the rental market is a little soft.

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http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

If you’re just starting out in rehab and retail, it may be tempting to do the repairs yourself.  If you have a background as a contractor, then you’re one of the lucky few who do not have to shell out thousands for repairs.  In all other cases, however, it is a bad idea to try to fix up the property yourself, it is much more wise to hire a contractor.

Unless the rehab only extends to a new coat of paint, it is better to accept the cost of a professional contractor to repair and/or renovate the property.  Would you do a surgical operation without medical training?  Or fly a plain without aviation training? Then why would you rehab a property without carpentry, electrical or roofing skills?

Additionally, how would you accurately estimate the costs of those repairs without having experience in those areas?  It is much safer to hire a contractor to inspect the property before you buy it and get an estimate of the work involved.  If you disagree with the estimate, then by all means contact another contractor to get a new estimate.  However, estimating the costs yourself while you are new to the industry is a dangerous thing to do.  You’re budget depends on the costs of the rehab and if you underestimate it, you could easily loose money on the property. Before you bid on the property, you should already have created a margin based on rehab costs so you know your maximum allowable offer. Know what your costs are going into the negotiations and prevent yourself from overbidding!

When you rehab, something unexpected almost always happens.  Because of this, you should expect the unexpected by setting aside more money than the estimated costs.  In all of my rehab properties, the vast majority of the time there is always something significant that needed to be fixed which was not able to be seen until we dug deeper into the project. It is vital to allow yourself some protection in these kinds of situations.  Budget this into the margin and adjust your maximum offer accordingly.

If you invest the few hundred it takes to inspect the property and accurately estimate the costs, you will be much safer in the long-run.  Imagine skipping the few hundred and ending up with a bill thousands of dollars more than you expected. Bottom Line- Hire a professional contractor.

Tell us what you think by leaving a comment.  If you would like to be notified when new posts are made to this site, be sure to subscribe to the RSS feed.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

So you found a multi-unit property you like? Perhaps you found a single-family home that you could foresee as a multi-unit.  Either way, there are some key considerations to keep in mind before you purchase a multi-unit property.  Multi-units are a wonderful investments, but there are a few caveats unique to multi-units that can tie you up and prevent you from realizing the full profit they can offer.

1) Zoning

Multi-units are subject to zoning laws, which are determined by each community.  Communities generally want multi-units to be in certain areas and prohibit the conversion of new multi-unit buildings in other areas.  They also regulate what features a multi-unit must have. They control the location and structure of multi-units through zoning permits, which a building must have if it is a multi-unit, similar to a driver needing a driver’s license.  If a multi-unit violates the zoning law, it is subject to steep fines that can be in the thousands of dollars.   Unfortunately, the permit system is not perfect and many multi-units exist that violate zoning regulations.  If they are sold, the new owner is responsible for the fees and construction involved to comply with the standards, even though that owner did not build or initially create the multi-unit complex.  That is why it is imperative that you make sure your building is in compliance with zoning laws, even if it has existed for quite a while.

2) Costs

Maintenance in a multi-unit building is often more labor intensive than in a single-family home, because you have a larger number of appliances, more people to deal with and often a yard or a common area that no one is responsible for.  A safe way to determine maintenance costs is to set aside a minimum of 5% of the gross scheduled income per unit.  This is not your total cost, however–vacancy should also be a minimum of 5% of the gross scheduled income per unit.  If it is an older building, bump the numbers up to a minimum of 10%.   If you figure in taxes and insurance, your gross operating costs should accumulate to about 30% to 40% of the gross income. If you hire a property management group, obviously the costs are going to be a little bit higher.  If the multi-unit has a yard and you don’t feel like making the trek to manage it, it is always possible to ask a tenant to do this in exchange for lower rent, or just pay him or her. Again, this would add on to your expenses.

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If you decide residential real estate is the path you’d like to take to become a successful real estate investor, then you are posed with the option of multi-unit properties.  Multi-units are defined as consisting of two to four units (two is called duplex) while anything greater than four is considered commercial real estate, and pertains to a specific set of laws and procedures which govern commercial real estate.  Owning a property which houses one family or owning one in which multiple families can live are two different processes, and although you act as a landlord for both cases, those two kinds of properties should not be treated identically.  There are nuances that differentiate multi-unit properties from single-family houses that you should be aware of before purchasing a multi-unit property.

The first such difference can be seen in valuation.  In a single-family property, the sales comparison method plays a pivotal role in determining valuation.  In duplexes, three and four unit buildings, the properties should be valuated through a cash-flow analysis.  Although up to a four unit is still considered a residential property, and therefore the sales comparison approach could be used, you as the investor, need to evaluate the property from a cash-flow analysis approach as if it were a commercial property. This analysis relies upon the potential rents from each tenant, and ignores the sales comparisons numbers of similar properties.   The net operating income, which is calculated after all the expenses are subtracted from the profits, is very important, since when you buy a multi-unit property, you are essentially buying streams of income. This valuation method is more similar to commercial properties, so if you’d like to learn more about it, research how to value commercial real estate.

The second difference between multi-units and single-family homes is that that you are dealing with a greater number of people, and that has unique implications.  If all the units are single-bedroom, you can conceivably be responsible for the living spaces of eight people in a 4-unit building.  Eight people living in close quarters are bound to have some issues, be-it smoking, pets, or cluttering up the hallways.  The person they will always call to mediate these conflicts is the landlord, and as un-tasteful as that may sound to you, it is part of the job of owning a multi-unit building.  There are also a greater number of appliances that can break, which you are responsible for fixing in a timely manner.  Ideally, you could live in the multi-unit building as well to fix all the problems, but it is by no means necessary.   If being responsible for the living spaces of multiple tenants does not fit in with your lifestyle, property management groups are available for hire, but keep in mind this will be an added expense.

Multi-units are a great way to generate income and can often be more profitable than single-family homes.  However, they should be valuated differently and the dynamics of multiple tenants living in one building should be considered as distinct from single-family homes.

Tell us what you think by leaving a comment.  If you would like to be notified when new posts are made to this site, be sure to subscribe to the RSS feed.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com

Based out of Indiana, Jay Redding is a real estate entrepreneur, consultant and educator with experience in residential and commercial investing.

Assigning Real Estate contracts is all about the paperwork.  You, as the middleman, secure a contract with the seller that forbids them from selling the property for 30 days, and then you pass the rights of that contract, or assign it, to the buyer that you already have lined up.    You never take the title and therefore your capital and credit history are irrelevant.  In exchange for this service, you can negotiate an assignment fee, which the buyer normally pays and is usually a percentage of the sale price of the property ranging from 2% to 15%.  The objective as the contract assigner is to find properties that your buyers are interested in and negotiate the seller down to a price in which the buyer would be interested.  You have to do the workup on the property for the buyer to be interested, so if the property requires rehab you have to be adept at estimating rehab costs.  Negotiation skills are also a plus because the buyer is more likely to buy the larger the potential profit for reselling the property.

There are two ways to handle a contract assignment.  The simpler way is to have the seller sign a purchase contract that has an assignment clause in the contract. All of the details of the sale are negotiated and cemented in the purchase contract. Then assign that contract to a new buyer, who will close on the property and pay the assignment fee at closing.  The second way is to use an option contract.  The option contract can be thought of as an exclusive right to purchase at a specified price within a specified time period.  An option contract provides, you as the buyer, the exclusivity to purchase the property in the given time frame and is a binding contract.  It is possible to put a penalty in the option contract if the seller breaks the agreement and sells to a different party.  To be legal, an option contract needs consideration, which essentially means an exchange of money that can be as little as $10 (you as the buyer gives the seller the money).  You as the exclusive option contract holder, have control of the property for the given time period in the contract.  You now go and find a new buyer.  When you have a new buyer, you move the option contract to a purchase contract and assign the contract to the new buyer.   At this point, it is possible to ask for a deposit in escrow from the new buyer to show good faith that the new buyer will close on the property within the thirty-day limitation.  At closing, the buyer will pay the assignment fee and the purchase price of the property.

It is also important to realize that banks will not allow you to directly assign a contract for an REO, HUD or Fannie Mae property.  There are still creative ways to accomplish this, but would require more advanced knowledge than what is provided within the scope of this post. If you are planning to assign real estate contracts, make sure you sit down with an experienced real estate attorney who has specialized knowledge in this area to make sure you are not overlooking anything.  A mistake in the contract could cost you a sale, or worse, obligate you to buy a property.

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Assigning real estate contracts is a strategy that does not require much capital and can be a great way for somebody who is just starting out to get involved in real estate.  The assignment fee can generate anywhere from $1,000 to $10,000 or more, depending on the price of the property, so it is a useful tool for generating capital.  Additionally, assigning contracts is a short process and although it requires time to be invested up front, it is possible to assign multiple contracts per week.

This strategy would work for a range of people, from fulltime jobs to unemployed, because the time required will vary with the number of contracts that are assigned.  For investors with fulltime jobs, it is possible to network at work and research the properties during the weekends.  For the unemployed, networking can involve joining community activities and setting up lunch dates, and there is plenty to research during the week.  Research involves scouting out the properties and can consist of driving by neighborhoods looking for signs that indicate the house is for sale, looking at the MLS online, or actively posting notifications in newspapers or on the street that advertise you buy houses.  However, before you know what properties to hone in on, you need to know what the buyers are looking for.  This is where the networking skills come into play—find your buyers in real estate meetings, community gatherings, real estate magazines, or any other creative avenue where you believe you can find active buyers.  Discuss what they are looking for, and then go out and find it!

Assigning contracts is not as labor or capital intensive as rehabbing properties, since no physical work is required.  Additionally, the person who secures the contract never buys the property, so there is no need for him/her to have enough funds to cover the property in question.  The contract assigner does not close either, leaving the closing to the buyer, which further simplifies the process.  The one thing you want to be careful about is that your buyer is going to retail the house or rehab it and then sell it, not pass it on to another investor.  Passing it on not only artificially jacks up the price, turning it into speculation, but it also runs the risk that the second investor may not close  since the profit margins are smaller, resulting in your investor failing to close, which means you don’t get the assignment fee.  You can make sure that your investor plans to sell to a homebuyer or rehab the property by asking and by prohibiting them from writing ‘and/or assigns’ next to their name.

Assigning contracts is a useful strategy for new real estate investors who are looking to get introduced to the field, as it builds confidence, expertise, and does not entail a large financial risk.

http://www.indianainvestmentpropertygroup.com

http://www.practicallyfreehouses.com