Good news for home owners in Boone County as sales and values in general are on the rise. This means your home is gaining value through appreciation and that is a good thing. The board of realtors released the following statistics for Burlington, Florence, Union and Walton:
Burlington: 467 sales in 2016, up from 399 in 2015h.
The median sales price was $172,500, up just over 5% from 2015.
Florence: 780 sales, which is very consistent with its previous year sales of 773.
The median sales price was $143,700, which is up just over 5% from 2015
Union: 539 sales, which is up from 481 in the previous year. The value held steady with the previous year with little change in value at $270,000; however, Union still continues to maintain its top spot overall for priciest homes in Boone County.
Walton: 218 sales in Walton, which is up from 203 in 2015. The value jumped slightly to $184,500, which is a 1.59% increase from 2015.
What does this mean? Boone County Kentucky continues to be a place that people want to move to, with sales going up, and values continuing to rise thus showing the desirability, stability and all the more reason to invest and live in Boone County.
Boone County Fiscal court through its new initiative to fund the 911 dispatch center by placing a “dwellings tax” on all apartments could wind up taking money from the schools. If you are not familiar with the “dwellings tax” let me explain. Boone County Fiscal court is going to vote for a tax that will put a $90 per unit per year tax on apartments on each parcel. So, if
someone has let’s say 100 units on one property then that apartment owner will be responsible for a $9,000 tax, in addition to all the taxes and fees they already pay. This is an astronomical number and for now popular opinion is to put it on the backs of landlords because they are perceived as rich and the general population does not care about them; however, if they do pass this then there will be some unintended consequences that could affect the schools in a major way.
I know you are probably scratching your head at this point at how could the new 911 tax being put on landlords possibly affect the local school system. It’s not as complicated as it sounds and I’ll explain it. Larger apartment communities get their value primarily from how much income they produce. If the same 100-unit apartment complex has a new $9000 per year tax bill assessed to it then the income is impacted, thus dropping the value. Just how much value can a loss of $9,000 per year cost an apartment owner? Honestly quite more than you think.
Income producing properties often trade on what is referred to as CAP rates. Simply stated a CAP rate is rate of return on a real estate investment property based on the amount of income the property produces. Typically, properties that are in great locations and easy to run have lower CAP rates, meaning investors pay more for them and make lower returns whereas consequently properties with higher CAP rates typically are in not as good areas and investors take on greater risk for the potential to earn higher returns. Now that you understand what a CAP rate is you can begin to understand how this will impact our area.
Properties in Boone County trade (meaning this is what they sell for) on a CAP rate of around 7, which is on the lower side given the property here is stable and in decent areas. So, when you lower the property income by $9,000 and factor in that it should be valued on a 7 cap you are consequently lowering the value of that same property by just over $128,000. Now it may not sound like much and it certainly isn’t off setting but you have to ask yourself is it fair to steal anything from our local schools, which in reality is a large part of why our property values are what they are, in order to pay for a 911 system that you knew 20 years ago needed replaced and let’s not forget to mention you already have been subsidizing it for $2,000,000 a year and still continue to have a surplus budget. It’s not like the County is in a tight financial position and unable to pay for this without raising taxes yet our elected officials would rather increase fees and taxes and take money from schools, libraries and other areas that rely and depend on their revenues to thrive and succeed.
Tax payers received a victory in Boone County Kentucky recently when the county Fiscal Court decided not to pursue the insurance premium tax that it had been suggesting they would to
pay for a new 911 dispatch system. With efforts led by County Commissioner Cathy Flaig and a social media information blitz by Aaron Gillum, the county has decided to not impose it.
While this is a great victory it is now leaving the county with limited options to increase revenue and fund a new 911 system. One of the items they are going to look at is imposing a “dwellings” tax on apartment owners and their reasoning is that apartment renters tend to use more 911 services than others and this would be a fair way to generate the revenue. The amount of tax they are initially talking about is astronomical, as it’s being projected to be to the tune of $80 - $90 dollars per unit per year.
Recently Campbell County passed the same tax to the tune of $45 per apartment dwelling per year and Kenton county is looking at and getting ready to pass a similar tax of $65 dollars per unit per year. Keep in mind all these taxes are absurdly high and putting them on apartment owners because renters “use more 911” services is a crock but let’s assume they do how could Boone County be potentially projecting something that is double than that Campbell County has already passed?
The problem is they don’t exactly know what the system is going to fully cost, or at least that is what they claim, yet when they originally, we’re wanting to put the insurance tax in place they we’re building in a surplus budget for other county capital projects. So, if they knew they we’re wanting a surplus budget for other capital projects then surely, they must know what the system is going to cost right?
So now that the insurance tax is defeated the county will turn to what the public presumes to be “rich landlords” to fund the system because who cares about apartment owners! They will attempt to put it on the backs of landlords on top of all the other taxes and fees we already pay in hopes to pass it through, build up their capital budget and move on. The problem is the apartment owners will not take this lightly and will not just pay the cost and be happy. Ultimately what will happen is this will be passed down to the renters themselves who live in the apartments and push their rents up. A lot of renters, not all but a lot, are on fixed incomes or live pay check to pay check so all this is going to do is increase their already strained living budgets.
So now you have to pose the question, are the county leaders and the ones fighting to end these taxes only looking out for those residents and voters who are property owners or are they looking out for the rights of ALL voters, including those who rent because if this new Dwellings tax is passed and these fees imposed all they did was shift the burden of responsibility of this new 911 system from property owners to renters, and last time I checked renters are citizens too and they have a vote just like everyone one else. It seems to be the real solution would be for the county to be more responsible with this, figure out what is needed for it and maybe do a little better with the money already coming in and then decide a fair and balanced way to spread the cost to its citizenry and businesses
If you own rental property in Kenton County Kentucky, then get ready as there are some new fees coming. If you are like me, you must be scratching your head and thinking “what now?” I already pay occupational license fees, rental license fees, property taxes, 911 parcel tax, storm water tax so what else could they possibly charge me for? Well the current
administration is looking at imposing a
“911 Dwelling” tax on apartment owners. So, if you have a 10-unit property then you will be assessed an additional $650 per year to help fund the 911 center. Their reasoning? Campbell County did it (to the tune of $45 per unit) and the state of Kentucky supreme court upheld it.
The belief is that apartment dwellers utilize 911 services more than non-apartment dwellers therefore the per unit fee is fair and just to help fund the 911 dispatch center services. Keep in mind that commercial retail spaces under the current proposes legislation counts as 1 dwelling and will be assessed the fee once. Now how is it that a large commercial retail store for instance has less calls for 911 service than say a 10-unit apartment building? Does that sound logical or fair? But under this legislation being proposed by the Kenton County Fiscal Court that same 10-unit building will pay $650 whereas Walmart will pay $65.
In my opinion if you want to assess it fairly do it based off a square footage of your commercial space. This way commercial apartment buildings and retail centers will pay their fair share based on the size of space they occupy. If they leave it the way it is then you can surely believe that the cost will be passed down to the renters ultimately, and given that there are a lot of renters that are on fixed incomes or leave pay-check to pay-check this will ultimately hurt their pocket books.
In the end, some sort of fee is going to levied and places on these types of properties let’s just hope Kenton County Fiscal court does the fair and right thing and spread the cost equally instead of making the apartment industry bear the cost.
Now that the shock of the presidential election is over and Trump is on his way to taking up residency at 1600 Pennsylvania I want to give my opinion, just like everyone else has, on why Trump won and what America is saying by
electing him. Before going on I want to get a few things out of the way. I personally did vote for Trump but this isn’t an article bashing anyone that voted for Hillary, Johnson or any other person they may have wrote in. I had personal reservations, just as millions of other Americans did and for me the choice wasn’t an easy one. The purpose of this blog is to just discuss the why and not the “who’s right or who’s wrong” in the election.
When America elected Obama for the first time they made a huge statement. That statement is the same statement that was made recently with the election of Trump and it’s simple: “It’s time to change.” The last eight years have not been perfect by a stretch of the means but the problems that Obama faced during his tenure were the results dated further back than him. He was not a perfect president by any sense of the means but this blog post will not go into what he did right or wrong as he is not the subject. But what Obama did represent at the time of his victory was change and that he was different from the normal in every way possible.
Americans were fed up with the spending on the war, job loss, housing crash starting and they wanted something different. Obama not only looked different, being that he was the first African American elected to the office, but he had little political experience and he was offering a message of change and America bought. Now whether you like it or not it’s eight years later and America again is wanting something drastically different. People that once voted for Obama at a young age now have had eight years of their own struggles and hardships and they want something different. Trump is the furthest thing you can get from Obama, or at least he appears to be. He is white, he’s a pure capitalist, he is not soft spoken much like Obama nor is he a “politician.” He’s not only opposite Obama he is completely opposite of anyone that was considering running being that he has never held a single political office in his life. Whether you like that about him or not he’s clearly representative of the most change possible that Americans had to choose from and that is one thing that bolstered his popularity at the polls.
You may not agree with what he says but you must admit that Trump will say publicly what a lot of average everyday people are thinking, whether it makes sense or not. A lot of it I think was for “shock value” and to just find a way to make a connection with Americans but totally unrealistic. Let’s take the “build a wall” as an example. The logistics of creating such a wall will be challenging to damn near impossible yet I know personally that I have experienced frustration with our lack of border security and how our tax dollars are used on illegal immigrants for benefits. Many Americans have read an article or saw a news story about homeless vets or other domestic problems or perhaps experienced a tax increase in some form or fashion that is probably totally unrelated but still ads to growing frustrations. It’s an issue that needs handled somehow someway yet no one has a viable plan. Trump came out with “build a wall” and while that plan is probably not realistic it’s a plan nonetheless and a lot of Americans are just fed up with the growing problem that the fact that someone came up and suggested anything at all gained him popularity in his campaign message.
Another thing Trump offered was honesty and transparency. You may not have liked what he had to stay on issues or things that he had done but at least you knew about them and how he felt. With Politicians historically hiding things from their past and being secretive Americans feel lied too. Honestly the entire email debacle with Hillary probably was more of her being not so smart with emails than a deliberate liar; however, she was labeled as dishonest with it and she certainly did not do herself any favors or make any real efforts to paint a different picture so because of that, among other inconsistencies, half-truths and lies she appeared to be a liar and dishonest and the voters are tired of feeling betrayed and tricked and with Trump, while they may not like his stance, opinion or past action, at least you can feel like you know what it is therefore and no what to expect and what is coming next.
If Hillary would have offered something different in her campaign of change then her chances would have greatly been increased. For all intents and purposes she ran a very similar platform and Campaign that appeared to most people a continuation of the Obama administration, and whether you support that or not is not the issue, the issue enough other voters did not support that and were set on having some sort of change happen. It does not matter if you voted for Trump or not the election is over, the people have spoken and he is the next President of the United States and it’s time for our nation to move forward together for the next four years until it’s time to decide if President – elect Trump deserves four more years or not. If you disagree with Trump and his administration, then there is a right way to do that. Denouncing him as president, moving to Canada, being nasty to people just because their political views are different than yours or worse being violent are not the right ways. Nothing positive comes from these sorts of activities and by engaging them you persuade those who do support him to support him even more. As I said before I did vote for Trump and I pray that we as a nation made the right choice with it and I’m hopeful of what is to come.
Real estate Broker, Author and Investor
If you look at any great thing accomplished by mankind, you will notice a pattern. It does not matter what this great or successful thing is, when it was done or even where. There is one fundamental thing that you will see consistent no matter what and that is it was done as a team. Now I know what you’re thinking. You are thinking of all the great things
that individuals have done. Won big elections, or became the world champion in a solo sport such as boxing or won an Olympic medal of some sorts and while the individuals are what you see initially you must look beyond that and see all the help and support from their coaches, mentors and those that were there to help the keep working and push through when times were tough. No matter what greatness was achieved we all need help at one time or another and running a successful business in real estate, or any other business for that matter is no different. You need a team and support network behind you and I’m going to tell you why.
For this blog, I’m going to focus on building a real estate business, primarily because that is what I know and do; however, the principles and reasons for needing a team can be slightly altered and fit to your industry or business. These team members are not in any specific order of importance as they are all vital for their own purposes and reasons.
When you first start building your business, things will be hard on you mentally. You will come up on road blocks and challenges often needing some creative outside of the box thinking and if you are like most people it can be easy to develop tunnel vision on your problems. This is where a good support network of close friends and mentors in and out of the industry will come into play. Now the only problem with close friends is you can only go so far with them. If you are serious about building a business, then investing in a coach could be worthwhile. You will have someone dedicated to you and your problems, if you pick the right coach (and that is the point) you will often get someone of good quality that has walked the walks and faced the same or similar problems than you are encountering. A good coach is worth every penny if utilized properly and of course it must be the right coach that can work with you and your learning styles and personality.
Depending on the type of real estate business you are building will focus on the types of field partners you need. Some will be universal but we are focusing on an investment real estate business which means you will be looking for real estate investments and potential buy fix and resell (also known as flips) as well. This means members of your team that you will need will vary but one of the essentials will be a good contractor. Now keep in mind you will be looking at a lot of properties and if you send your contractor out to look at each and every one they will become very tired of this and you will burn them out. So, I suggest you spend a little time with this one and learn how they estimate on a basic level. Explain what you are doing and keep in touch with them on pricing for things in between jobs. Tell them you want to go out and preview properties and do a “high level” bid (basically “X” amount to paint a room, “X” amount for flooring, “X” amount for windows etc.). This way if you can make sense of the numbers and they appear to be doable then you and send your contractor to give a better number for you to see if the property works. They will be important to you not only during your due diligence (basically when you doing all your research on comparable sale values, work needed etc.) but also when the time comes to get the work completed. So, depend on them when it counts but also use them as a learning too or resource so you can send them out to only deals that have real potential instead of your personal secretary as you will burn the bridge and good contractor team members are hard to find.
Let’s assume that you are not a licensed real estate agent; however, I am a firm believer that having a license is far more beneficial of having one than not for building this type of business. You will need access to properties for sale and access to information to run comparable sales data on potential investment opportunities. Because of the mundane work involved with this I suggest getting a license but it is always important, even if you have a said license, to enlist another agent or two to work with you. They don’t have to work exclusively with you but if you forge alliances and allow them to bring you properties that you may not have found without them then you let them represent you and earn money on the transaction acting as an agent. After all you are focusing on the investment and not the commissions so what’s it matters if it’s a good deal and makes sense. Plus, it’s always good to talk to other agents on a regular basis to bounce ideas off, get their feedback and take on the market overall and sub markets you may not be entirely too familiar with.
The last type of team member I’m going to talk about is a good administrator. Before I go on I’m not saying that these are all the team members you need, no I’m saying that these are some of the key ones you need but there are others that you will need as you go on. A good admin will not only keep you legally compliant but will help you remain efficient and not let things “slip through the cracks.” Inefficiency and details sliding by do nothing but cost you money, and trust me it can become a great deal of money. So, keeping a good admin on board will help prevent that and help maximize your work flow and transactions.
As I said there are more key team members that you will need a various time and the roles of these team members varies based on how big and active your business may be. Just remember that it’s very hard to do it all on your own and be successful with it for a long period. As you grown and become more successful remember the team that helped you get there and continue to take care of them just as they are you.
Real estate Broker, Author and Investor.
I know a lot of investors that look for apartment buildings that are distressed in some form or fashion, or the property is a “value add” opportunity. Before I get into the content of this blog let me first explain what I mean. “Value Add” opportunity is just what it sounds like. It is an opportunity for an investor to purchase a property that is “distressed”, meaning there is something wrong with it such as it has a lot of vacancy, been poorly managed, something is physically wrong with it and it needs a lot of work or a combination of the three. So, when an investor purchases a “value add” opportunity they are purchasing a property with these problems, which is usually all three or sometimes even more, and they are going to put in the money, time and resources to cure these problems and increase the value of the property.
So now that we have defined what a value add opportunity is I’m going to talk about the reposition of the value add project itself. Repositioning is the actual process you go through as an investor to take the property from its distressed state to its market value state. This is the act of getting rid of bad tenants, doing renovations to bring the property condition up and then putting new tenants in. Often in that order or something very similar. If the property is a larger multifamily property, then chances are you will start to work on some of the property while leaving some existing tenants in for cash flow reasons. These tenants that you inherit are the real subject matter for the “double dip” theory I’m about to expand upon.
Depending on the time of year and the geographic location your value add property is in will determine how much of the “double dip” effect you will experience. The warmer it is outside the less of an impact, or rather the quicker you will get through the dips. But if it’s colder outside and you take over a property in say late fall going into the winter months then you can experience “tenant hibernation” and the double dip may take a few extra months to fully work itself through the cycle.
The first dip in occupancy you will experience is the easy one to spot. This “first wave” is tenants that simply do not pay their rent. You will find these people out within the first 30-90 days of operation. They will at first have an excuse as to why they didn’t pay. If it’s in the first month it will be something along the lines of they were confused and didn’t know where to send it or they paid the old owner, doing this is a stall tactic while you give the benefit of the doubt etc., or they will simply avoid you. Some of these will pay a partial or even full month the first month or two but you will have identified these wonderful human beings within the first ninety days of operation.
The second dip, or second wave of deadbeat tenants is a little harder to spot and depending on the time of year you are taking over the property it could be prolonged. These tenants are the problem tenants. The ones that pay their rent but they are a nuisance to the property. They have junk all over, they piss in the hallways, they are fighting with neighbors or they have a spouse they are always arguing with or something. These tenants make it hard to get good new tenants in. Now if you are taking over in the summer or spring months and it’s warm outside you will find this tenant relatively quick. They like to frequent the property outside by drinking and carrying on so it’s not hard to spot; however, if you take over when it’s cold or in the fall going into cold months you may not spot them for quite some time since you are initially dealing with the non-payers and these tenants will pay initially then slip into hibernation on you and not emerge until spring.
The problem with this happening is during the winter months if you are doing your job right and repositioning the building then you have new tenants moving in. So, you will take your initial dip in occupancy with the non-payers, start to come back up then you will have the second dip of asshole tenants and then you will dip back down again and then after that you will start to steadily climb back up with a better tenant base.
Unfortunately, there isn’t a cure for this. The only known cure is to buy a property completely vacant and not everyone is able to do that or those opportunities are not always available. The best you can do is ask the landlord during your due diligence for bank deposit records of paying vs. nonpaying tenants. Make sure the deposits match up to the what the rent roll they are providing you. If the rent roll says $10,000 per month and they are showing you consistent deposits in the $7,000 - $8,000 per month then you know you need to ask questions. Did new tenants move in? Why the discrepancy? For the second dip this is harder. You must make multiple trips to the property before you buy it and when you first take over. You need to interview tenants and ask them who the problems are. Call the local police before you purchase the property and ask about police runs to the property. Trust me if there is a tenant that is always getting the police or fire called on them you will find out soon enough and chances are they will be part of the second dip of tenants you must evict.
The three dirtiest words I can ever hear when purchasing a property are “Long-term tenants.” No other phrase sends shutters and disgust through my body during my initial due diligence on a property. It makes me feel like saying “oh thanks I appreciate the trash you are leaving behind but telling me it’s grade A merchandise.” Like it’s some sort of benefit to
me. Now I know what you are thinking, if you are like most investors that are entering the market you are probably thinking that this sounds great. You automatically think that these tenants must be good because this seller has left them there for quite some time and you are going to enjoy success with them. Well I can’t tell you just how wrong that line of thought is.
There are no formal eviction statistics kept on eviction rates of tenants you inherit with a property vs. tenants you place yourself, none that I could find anyways, and if they were kept they would be skewed an inaccurate as the courts do not track that sort of thing so the data would be unreliable. Therefore, for this blog post I am going to be writing purely based on my own experiences with inherited tenants and the experiences of clients that I have represented in the past on property transactions that have also inherited tenants. There are three types of problems that often occur with inherited tenants that you as a landlord will deal with. One will be the tenant that pays his rents but causes problems, the “asshole effect” as I like to call it. The other will be the tenant with an “arrangement” that the landlord failed to disclose, or the “landlord family act” as I refer. Then you have the scammer tenant who is trying to get one over on you, which is the “asshole effect 2.0” and lastly you have the “scum bag” landlord problem tenant that I’ll explain.
The first one I will go into detail on is the “asshole effect.” These are the tenants that pay their rent but are a real pain in the ass to deal with. They are always pushing the rules and trying to see what they can get away with. They store stuff in the basement they shouldn’t, they are drinking and arguing with their spouse or other neighbors, rent is paid but it’s usually late, their apartments are nasty and usually they have more than their fair share of broken down vehicles left around the property. These types of tenants are dangerous because you may not be able to detect their scumbag trashiness right away and they are like mold, the longer you ignore them and they go untreated the worse they become.
The second type of tenant I will talk about the “landlord tenant act” tenant. This is the tenant that always has some sort of deal or special payment arrangement worked out with the landlord that was conveniently never fully disclosed to you. For example, this tenant would be the one that cleans the hallways for free rent or takes the trash out for some obscene amount of a rental discount. Better yet the landlord “always lets me pay on the 20th of the month” is something you would likely hear from them. Be aware of these types of tenants as the deals they will tell you they have are usually grossly inflated and they are trying to take advantage of the transition of the property.
The “asshole effect 2.0” is much worse than the standard “asshole effect” tenant. Much like the “asshole effect” this tenant will cause you problems and bend the rules but to take it further they will likely not only stiff you for the rent but they will exploit anything they can to make it harder on you to evict them. Rest assured this tenant will not go away quietly or easily and they will exhaust all means possible to prolong their stay and torture of you. Then when you do get them out their apartment will be packed to the gills with trash and other nastiness that you get to deal with.
The last types of tenants are nothing more than mere deadbeats that the “scum bag” landlord has so kindly left behind. This is like a landlord covering up a defect in the building with a nice painting or plant but only with paying tenants. These tenants do not pay their rent and probably haven’t for quite some time, at least not in full anyways. The reason they are left behind is because the landlord felt it would be easier to sell the building with “long term tenants” in there so he lied to you, the buyer, and told you they paid their rent to get you and the bank to finance the purchase and have it go through. You will be evicting these pretty quick once you realize the tenants are not paying.
Depending on the size of the property you are buying (by size I mean number of units) is often a determining factor if you are going to inherit tenants or not. If you are buying a property with several units then it may not be advantageous to have it all vacant; however, if you are buying a property with small unit counts (say under five) then it may be worthwhile to have it completely vacant so you can place your own tenants. But assuming you are inheriting tenants then you must be cautious about what you are getting.
. Sometimes bad tenants will slip through the cracks and you will be inadvertently stuck with them but you can do some additional due diligence to reduce your risk. For example, if you are purchasing a larger property (or smaller one for that matter) instead of taking the landlord at his word that tenants pay their rent ask to see the bank deposit records. Anyone can fabricate a receipt but it will be hard to fabricate bank records. Another thing you can do is to interview the neighbors and ask them about the neighborhood and if there are any problem tenants in the building. Given the chance most people will gossip and will be glad to tell you all they know, all you must do is ask. Make a night visit to the property and see what goes on at night. Is anyone outside drinking excessively? Do you hear screaming and yelling going on? These are all things you can find out on a short visit to the property a couple times prior to close. As I said before sometimes bad tenants will slip through the cracks but you can take a few extra steps to help reduce the risk of getting the previous owners trash handed over to you and having them call it dinner!
Over the past several years of being in business I’ve met a lot of different people at various stages of their real estate investing careers. Whenever I would deal with a newer, or uneducated investor (Note: by uneducated I’m referring to their lack of real estate education, not traditional school education) I noticed that a lot of them do not accurately know how to assess an investment property for cash flow and expenses. Most sellers feel that if they do not experience the expense on their end that they should not have to account for it such as a property management expense or if they are currently fully occupied they will not factor in an expense for vacancy even though historically the property does experience vacancy. So, in this blog I’m going to break down the basic areas needed to properly assess a property whether you are a buyer or a seller so that you can help make accurate investment decisions.
Before we can get into analyzing a property I’m going first go into what areas are needed. A property has what are called fixed expenses and then it has variable expenses. Fixed expenses are items that are fixed in cost such as management fees, taxes, insurance and trash. Then you have variable expenses such as water and sewer cost, common area utilities, landscaping, maintenance, vacancy, turnover cost, reserves for capital improvements (this is like a savings plan) and misc. cost such as evicting a tenant or running an ad for a vacant apartment etc. All these expenses are called operating cost which are separate in and of itself from debt servicing, which is also the known as loan or mortgage payments. I’m going to go into each type of expense and how to account for it so that you can make a property analysis. For the example of this blog I’m going to use a $100,000 property that is a three-unit building that has a gross rent of $1,500 per month, or in this case $500 per month per apartment so that you can see how I calculate the cost and make a proper underwriting analysis.
First we are going to start with the fixed expenses and we are going to go into management fees. Now most owner operators (Note: owner operator is a person who owns the building and manages it themselves) do not factor in any type of management fee expense when selling the building. The problem with this is that if you are getting a loan on it most banks will factor in the same expense in underwriting the loan. The key thing to remember when evaluating a property is to consider now how the seller operates it but how are you going to operate it. Even if you are going to self-manage you should consider something for this line item as your time is worth something. For a building this size in my opinion I would factor in nothing less than eight percent (8%) of the gross collected rents. (NOTE: Gross collected means actual rents received before paying other expenses). While most banks are going to factor in five (5%) percent it will be hard to find a company to manage a building like this for that amount. So, if you factor in eight (8%) of $1,500 you get a management fee of $120 per month, because remember our example we are using a $100,000 property that grosses $1,500 per month in rents.
Taxes is another thing you must consider. While most sellers factor in something for taxes since they pay them; however, they usually factor in what they pay which is far less than what you will pay as the new buyer. Reason being is when the purchased the property some time ago it was probably for considerably less money and their value they are assessed at is much lower than what you will be since most municipalities will reassess the property on the new value. So, if the seller originally bought the property for let’s say $50,000, and we will assume the tax rate for this example is 1.5%, then he would be paying $750 per year in taxes but since you are purchasing the property for $100,000 the amount of taxes you pay will double, since the taxing arm of the local government will reassess it on the new sale amount, making your taxes for this property $1,500 per year, or monthly $125 per month.
Insurance is another tricky one that you cannot take the seller’s word on. One of the main reasons is the seller may have the property insured for a lot less of an amount than you would give what they purchased it for. Other factors to consider are if you own more properties then you may be subject to other discounts that the seller may not be entitled to or vice versa. If you guys have different companies, then the rates can vary big time for investment property. There are a lot of insurance carriers out there that do not even want to insure investment property for some reason or another so this is something you are going to constantly be paying attention to and shopping for. In my market a property like this would cost about seven hundred dollars per year to properly insure, or if you break it down monthly it’s about $58 dollars per month.
I listed trash as a fixed expense because typically you pay a set fee for it, unlike other utility expenses such as electric, gas, water and sewer. For a small property like this the trash may more than likely be included in your property taxes, and if it is that is great. If it is not however you need to factor in something and a property this small would be relatively inexpensive. I would suggest about $10 dollars per month, or $120 per year would be a fair an adequate number to factor in for such an expense based on our above example. Now if you are in a market and these prices seem low you can figure out what these costs are, this is to simply inform you of the different categories to factor in when deciding to invest in cash flow rental property.
Now that we have covered our fixed expenses to operate a property we will go into our variable ones. This is where you need to learn how to use a “proforma”, which is a fancy word for “best guess” on these expenses. If you are a newer investor it will be important for you to seek council in your buying process and decision making from someone experienced in this arena. This is where “not all real estate agents are created equal” mindset needs to come to play. I know a lot of real estate agents who think they can sell rental investment property and while some do a decent job at it most unfortunately do not. Most agents do not own property themselves and have little experience with it therefore cannot accurately help you calculate or project these expenses and if the seller is not doing it for you, because most of them do not, then you are missing the mark on the true operating cost and value of a property.
The first variable expense I’m going to talk about is maintenance. This is one where the seller’s numbers will always be different from yours, especially if they are an owner – operator of the property. Remember even if they do it themselves to keep cost down your time is still worth something and if you are taking a loan on a property the bank will factor something in their underwriting. This is where you must remember “it’s not how they run the property, but how you will run the property” school of thought comes into play. For our example, I will use eight (8%) percent as the number. Why eight? Because that is a common number to use for properties of this size. Basically, what I’m saying is that you take the gross rents on any one given month and factor in 8% of them to be spent on basic maintenance, this is not turnover cost of big items but the basics. The basics would be leaky faucets or sinks, doors off track, something wrong with smoke detectors or the stove element burnt out etc. So, if our property is grossing $1,500 per month and we factor in 8% for basic maintenance cost we are allocating $120 per month for basic maintenance services to be completed. Now you will have some months that you spend more than this and you will have some months that you spend less but overall this would be a monthly average if you look at it over the course of an entire year. Now other things to consider are age and condition of the building. If you have an older building that has never been updated before with all original plumbing and what not, then this expense could be higher but if you have a new building then it could be lower. We are considering for our example of a building in decent condition. On a 1-10 scale, it’s about 7.25 give or take so therefore we can assume that most of it is ok but this is something that you will need to look at during your due diligence before investing in a property.
The next variable expense I am going to discuss is vacancy. Now the argument can be made that vacancy is not an expense and it technically isn’t; however, when you are building a proforma on a property you typically will figure out what the gross rent potential is, which means how much money will the building rent for if it were fully occupied for an entire year, then back out a certain figure for vacancy. If you are getting a loan a bank will surely factor this in. Given the current market we are in for rentals and the demand being high a five (5%) percent vacancy rate Is about right. Now a lot of sellers will say since they have been fully occupied for a couple years that they shouldn’t factor in that and I could not tell you how full of shit they are with that theory. Chances are tenants will move or they will not pay their rent once you take over and when someone moves on unless you have someone the very next day waiting to move in you are going to experience some vacancy. So, if you take five (5%) percent of our $, 1,500 rent roll model you get a vacancy of $75 per month, or $900 per year.
Now we are going to go into the water, sewer and common utilities. I’m doing these together since they are so closely related. Water and sewer, I put as a variable because it is tied to the usage of what the tenants consume. Now if your property has separate meters then that is a bonus to you and the building could have more value; however, keep in mind that if the tenants are paying that cost then you need to consider the impact it will have on the rents as you need to look at it as a balance scale. Meaning that if the rent is $500 with water included then if you make them pay their own water, and that is say $25 per month, then chances are the rent will need to be $475-480 per month. Not an exact dollar for dollar trade by any sense of the word but you need to factor that in. A lot of land lords make the mistake of thinking they will achieve market high rents and make their tenants pay their own utilities so do the due diligence on the market you are purchasing in before making that decision to invest. For our example, we will assume that the water and sewer cost are $60 per month, this is an allotment of $20 per month per apartment and that is a fair cost to use given the market I invest and work in, and since I’m writing this post that is the number we will use J. I also lumped in utilities here. This would cover any utilities for vacant apartments while you are getting them ready to rent out, if there is light on the outside of the building or in a common hallway etc. If it’s just lights for electric it can be cheap. I always like to factor $5 per month per unit. This usually puts me close on a yearly basis if my vacancy numbers hold true to form. So, for this example we will factor in $15 per month, or $180 per year.
The cost to turnover apartments and set aside for capital reserves are often the most overlooked by sellers and buyers alike. Often investors do not consider these expenses because they did not occur recently or they lump it into maintenance cost and never go back and do a full accounting of their expenses to realize that the 8% maintenance cost we set aside is nowhere near enough when you include these. So, for these expenses I have a couple formulas that I’ve come up with over the years of my experience. Now keep in mind this may vary a bit and there is no way to pinpoint an exact number but this will give you a pretty close number to plug in. For apartment turnover, this is to make one rent ready again, I take half of the units and multiple it by $350 for the yearly budget. So, for our example here I have 3 units so take $350 and multiple by 1.5 and get $525. When you put that monthly for cash flow you come up with $525 divided by 12 months, which equals out to $43.75 per month, which then I’ll round up to $44 per month. This is for normal wear and tear on a property and if the turnover expense is high you will have a tenant’s security deposit to also add to the expense.
Now when it comes for capital reserves, or as we refer in the industry “Cap X” this is a different formula. Before I tell you how I compute this let me explain what Cap X is. Cap X is a savings account of funds you put away for that big-ticket item that may occur. Such as a new water heater, new furnace or roof. Chances are you will only do any of these things one time during the duration of your property. Banks will often refer to these as “one-time expenses” meaning they do not expect you to do them each year. The way I factor cap x savings on my proforma is like the way I do my turnover. I take $150 per unit per year. For our example, here since we have a 3-unit building that comes out to $450, or broken down into months is $37.50, rounded up to $38. The idea is you will not experience cap x expenses every year so if you can save this money up over the course of a couple years or so then you put the money in when needed.
With these variable expenses, it is good to know the condition of the property you are buying as much as you possibly can before be making the investment. The age and condition of the roof, mechanicals (which would be plumbing, electrical, heating and air conditioning) are very important in forecasting these numbers. IF you need a bunch of cap x up front then these projects are nowhere near enough. If you are a newer investor it is best to seek the advice and council of someone who is an expert in investment property, and frankly if you can find an agent that has sold but more importantly owns investment property themselves then honestly that is the way to go to help get you the best advice in making the decision to make an investment.
Now that you have factored in a more realistic picture of expenses let’s look and see how our example investment property shook out and if It’s a worthwhile investment or not. On our gross $1,500 per month cash flow we have operating cost of approximately $665 per month, leaving us a net operating income (often referred to as NOI) of $835 per month. Keep in mind this is before we have taken a loan out and put debt on it and must pay a mortgage, this is what you would refer to as “NOI before debt service” in the investment real estate industry. If you put that on an annualized basis, meaning multiply it out by 12 months to figure out the annual income, you get $10,200 of annual revenue per year, before you pay a mortgage. In all honesty on a $100,000 investment that is a return on investment (called ROI) of just over 10%. I will not go into calculating returns on investment and using loan to leverage in this blog, but I did do that in my blog titled “utilizing debt.”
Hopefully by now you can see that there are a lot of things to factor in when making an investment property purchase. These percentages and numbers are not an exact guide as each property is a little different given its age, size, location and tenant profile of renters but hopefully now you have enough information to know that there are a lot more categories of expenses you need to consider and why you need to consider them. Of course, if you want to purchase any property in the Cincinnati Ohio or Northern Kentucky markets you refer yourself to the author of this blog for expert advice and opinions I was referencing above.
Being a business owner / entrepreneur is not for the weak, lazy and feeble minded. It takes a lot to own your own business, and be successful at it. You must have patience, vision, self-perseverance, a good support system and network and a list of several other traits and qualities I could go on and on about separating them by commas but I think overall you get what I’m saying and for this article I’m going to talk about the four things needed and why they are important. You still can own a business if you lack any of these qualities but your success will be short lived if you do not acquire these traits and skills.
These by no means are in any order of importance because at any one given time one of these can be more important than the other. The first trait I’m going to discuss is patience. To be a success in any start up business or entrepreneurial venture you must be patient. You know the old saying “Rome wasn’t built in a day?” Well besides being a catchy phrase there is a lot of wisdom in that statement. Rome was one of the greatest, if not the greatest, empire ever to be on this planet in all recorded history. Centuries of work into building this classical empire that dominated for many more years to follow. While it won’t take you centuries to build a business it does take time. Success does not come overnight when building a business and you need to be patient and put the work in. You must have meetings with potential clients and investors, you must do research on the business and venture and become a student of it so that you can learn it inside and out. You need to put work into pouring over cost of product, investments, operations and any other factor that can come up so that you can prepare. You must be patient with people and meet with them multiple times to convince them why they should invest with you either as a capital partner or as a potential client. Remember it does not happen overnight (most of the time) and the work you put in at the beginning starts to lay the foundation of what could be the tower of your success.
The next trait I’m going to discuss, which is typically the first one you need, is vision. You must have a vision of what it is you want to accomplish and do. Not only do you need an initial vision for your business or venture but you need to continue to have vision as you develop and grow. Entrepreneurial visions are constantly changing and growing. Ever hear of a five- year business plan? Well what you may not know is that every year business owners are redoing their five-year plans! Why is that? If they did one last year what is the need to change? Because as your business grows and takes on new life and direction what was in your planning for next year may change. Very few business owners and entrepreneurs I have met have had the same five-year plan for more than one consecutive year. So, while you need the initial vision, or plan, such as “you want to own ten apartment communities” or “you want to own five locations of a particular chain” you need to also need to continue to have that vision evolve and grow as your business grows. You may decide that after your first couple years in that you do not want to own 10 apartment complexes but instead own two or three extremely large ones or instead of five locations of a chain that you now want ten – fifteen because they are profitable and easy for you to run. Bottom line is you do not know what growth you are going to go through or how fast you will experience it but you need to have constant vision of where you are going and where you want to go to be truly successful.
Self-preservation is the third trait I’m going to go into. When you are building a business or a new entrepreneurial venture you will come up short at time. You will be faced with road blocks and challenges such as not enough capital, or no cliental, or the deal that you need just isn’t there and often you will be told no by people you need to say yes. You cannot let this stop you. A lot of times you only need one yes to make it all worth it so if the first ten to fifteen people say no to your service or investment offering you need to keep going and keep searching for the one person that understands the opportunity and wants to make that investment. But self-preservation does not stop there. When you are building a business, you will often face road blocks and negativity with your family, friends and other people close to you, therefore a good support network is important but I’ll go into that one next. When the negativity starts make its way into your mind you must have the self-perseverance to push it out, keep focused on your vision and goals and move forward. You need to be your own biggest cheerleader, fan and believer or you will not be successful in the venture.
The last trait I’m going to discuss isn’t a trait but it’s a “thing.” It’s called a good support network, your inner circle of people you trust and believe in you. More importantly it’s people you can go to for advice that have walked the same walk you are trying to walk. Who have been there and overcome the same challenges you are currently (or will) face. A good mentor and coach is worth one hundred times their cost and value if utilized fully. They say you are the average sum of the five people you associate with the most. So, when you are starting your own business or other entrepreneurial venture you need to look at those whom you associate with the most and ask yourself the hard question “will these people push me forward or hold me back?” If they are holding you back and filling your head with doubts, negativity and telling you that you will never be a success or your plan or idea is stupid then it may be time to evaluate how much or how often you associate with them. On the contrary if the trusted mentors and coaches you surround yourself with give you advice that you may be going about something the wrong way you need to take that into consideration and come up with an alternative plan or strategy, so don’t confuse “constructive criticism” with negativity because they are totally opposite things.
As I said in the introduction there are several qualities, things and traits one person needs and I could go on and on and write a book about them, hey there is my own vision kicking in as I’m wrapping up this blog post, and through the course of any business venture they will always be changing and evolving. One of the biggest things you can do to not only help yourself grow as you become successful but to help others that were once in your shoes in the beginning is to mentor, coach and help be part of a support network for someone else. Because once you’ve “made it” in terms of being a successful business startup operator or entrepreneur you will need to constantly breathe fresh life back into your own and remind yourself that you need to maintain your constant vision and own determination to remain a success.