Investor Page – General Information for Beginners

What would you do for $30k? Would you risk buying an ugly house, hiring an expensive crew of power-tool professionals, manage the progress while juggling a full-time office job, and then get snubbed by a real estate agent that puts a sign in the yard and never calls you back? Sounds like a lot of stress to me. Here are some observations to consider if you are a beginning investor.

Flip or Hold? First you have to decide what your purpose for the property is, preferably before you go shopping for a house.

Flipping a house usually means an investor purchases the property, does some repair and improvement work, then puts it back on the market within a few weeks. The ultimate goal is to sell it before any mortgage payments are due. Fast, sound decisions and a hard working group of designers and contractors are essential in maximizing profit. The more months go buy that you are responsible for making that mortgage payment, the lower your bottom line will be. Flipping is all about speed and profitability.

Holding a property, on the other hand, is about long term investment. If you are looking for an alternate way to invest excess funds, or to build a portfolio of properties that will one day be able to be sold to fund your retirement, consider buying and leasing (or renting) the house out. This type of house may be in a neighborhood that you think will greatly appreciate over 5-10 years, and it may not be a foreclosure (might be a short-sale, estate-owned, corporate owned, etc). The purpose here is to get it livable and rented in a very short amount of time. If the tenant is able to pay a monthly rent that is equal to the amount of the mortgage, then you basically ‘cash-flow’ the property for as long as you want to own it. The goal is to sell after several years and capitalize on the equity and the appreciated value of the property.

Buyer vs Renter

What a buyer wants: Most buyers in this market want a house that is move-in ready; already clean and updated with solid surface counter tops (ie granite), new neutral carpet and paint colors, and a charm factor. Whether it is a martini lamp above the built in wet bar, a unique towel rack in the master bedroom, or a window seat in the guest bedroom, they want something that they can ‘discover’ and immediately look forward to using. Most buyers are more concerned with this charm factor than they are about the age and condition of the roof, the a/c unit, the hot water heater, or the plumbing. Why?  They are hard to discover and are taken for granted until there is a problem. This does not mean that you should take advantage of this generality; it is in your best interest to repair or replace anything that is not working properly while you have a crew on-site, because if a buyer balks at the property due to a home inspector’s report, you will lose credibility.

Renters want a maintenance-free affordable place to live. It helps if there is a small garden area, or a yard for the kids or pets, or an attribute such as being within walking distance to work or school. They generally do not mind if the counters are granite vs tile, or if the floors are original heart pine vs new engineered hardwood. Renters, for the most part, want a safe and clean place to live while they concentrate on other things (traveling for work, finding a home to buy in the next 6 – 12 months, repairing credit etc.).

Landlord vs Property Management Company

As a landlord, you have legal responsibilities to the property and to the tenant. Depending on where the property is (which state, also which building or complex – if the property is not a single family residence), these responsibilities may differ. Prior to buying the property – if not a SFR – you need to review the association’s documents that pertain to investor-owned properties. Sometimes there are limits for how many units are able to be rented/leased at any given time (often a maximum rental rate of  20% - 30% of the total number of units), and sometimes the complex will offer to manage the rental property on your behalf for a fee. When managing your own property, you will be on-call all day, and if the washing machine overflows or the gate comes off the hinge, you will be the contact person as well as the monthly check collector. Also consider your opinions on confrontation; are you willing to evict a tenant if necessary? Pursue back-payments? Not all tenants are responsible so protect your interests as much as you can.

Property Management is a growing industry, where a licensed and insured group will advertise the property, qualify the tenant, and collect payments on your behalf. Some companies charge a flat fee for this service, others offer the services a la carte and charge for each portion. If you are considering hiring a property management company to handle your individual property or your entire portfolio of rentals, ask them about maintaining the property. Whose responsibility is it to make sure the hot water heater is working, and that the tenants aren’t damaging the premises? Negotiate the fees and terms whenever you can! You’ll be surprised to know how often you can get a discount if your property is in a desirable location, or in fantastic condition.

If you want to maintain as much contol over your property as possible, you can hire out parts of the management process, and retain the rest. For example, there are many local and on-line resources that will run a credit check on a tenant; respond to basic service requests for a nominal charge; clean and examine property between tenants, etc. It may be worth your time to investigate these service providers if do not want to outsource everything.