Many new investors seem unprepared for this reality, but the fact is that the types of investments that small investors get into are, by their very natures, hands-on. Unlike securities, CDs, and other investments with which most people are familiar, your real estate investments require your time and attention to continue to be profitable.

And while you can (and should) build a team of people to help you with the day-to­day tasks associated with owning properties, there are some jobs that you should NEVER delegate—they're too important to your success and your financial health. For instance:

You MUST research your purchases thoroughly. As you've already seen, buying properties at the right price is important. But in order to buy the right property at the right price, you have to know more than what other properties in the area sell for-and while your agent can be HELPFUL in evaluating some of these important factors, you should ALWAYS try to find out as much as possible on your own. Remember, you agent is a commissioned salesperson who's trained to close deals-which means it's in his or her best interest to paint the rosiest possible picture of a property. It's in YOUR best interest to find all of the possible downsides, so that, at worst, you go in with your eyes open.

Some examples of important additional data are as follows:

• The true condition of the property. Even if you're buying a brand-new
building-unusual, since it's tough to get great prices or terms on these highly desirable properties-there could be hidden defects, or things that could present problems in the future. This is why you should always hire a professional home inspector to go over the property with a fined-toothed comb. An experienced, well-trained home inspector (preferably with an engineering or construction background) can find problems that you probably don't have the tools or experience to locate-like carbon monoxide leaks from furnaces and water heaters. Like grading problems that could result in foundation and water issues in the future. Like structural issues caused by poor construction or settlement. The list goes on and on. And, no matter where you live in North America, always, always have a wood-destroying pest inspection. They're under $100, and often turn up termite, carpenter ant, and other expensive-to-repair infestations that you never would have guessed at-even in properties that are constructed of brick or stone.


• The nature of the neighborhood. Is it right for your particular strategy? For instance, if you plan to fix and sell the property, is it in an area of high demand among qualified buyers? How long to properties typically sit on the market before selling? Is the school system desirable? Are the property values steady, rising, or falling? Are there area-specific regulations that could affect your ability to renovate the property the way you plan to-for instance, is it in a historic district where you must conform to certain standards? Most of this information is readily available on the internet, or can be provided by your local city hall or by your agent via information in the Multiple listing service.


• The real potential cash flow. When listing rental properties, agents typically get a limited set of income and expenses from the owner-and, unfortunately, this information is not always completely accurate. For example, most sellers of rental properties will tell you that the rents are below market, and could be raised 10-20% (which begs the question, why hasn't the owner raised them?). Also, the expense data does not usually include the replacement reserves, accounting and bookkeeping costs, and many of the other true costs of owning a rental. This means that, to get a true picture of the potential cash flow, you'll need to do a market rent survey to discover what rents really are for a particular type of unit in a particular area. And you'll need to see a copy of the owner's last 2 years' "Schedule E", on which he reports the income and expense from the property to the IRS. And you'll need to check with the utility companies to get the "level billing"—that is, the average monthly bill—for heat, electricity, water, sewer, and garbage removal.


Again, all of this information is readily available if you're willing to do the legwork to track it down.

You MUST manage and maintain your properties. Many new investors are under the impression that good tenants are easy to find and to keep. In fact, most newbies seem to believe that rental properties are not much different than stock investments-you buy right, put tenants in, and the checks just roll in each month without further effort.

However, the reality of owning rentals is this: you MUST stay actively involved in them to keep them profitable! It's crucial that you carefully screen your potential tenants-and not just to see whether they have decent credit and income. You also need to know their eviction history, whether they've damaged previous units, how long they've been on the job, how long they've stayed in previous rentals, and so on. And once you have a good tenant, you need to be very responsive to any maintenance requests, problems or questions. You must physically inspect each unit you own at least once a quarter to look for unreported problems-like roof leaks-that could turn into expensive repairs. You must be unrelenting about on-time payment, and quick to file to appropriate paperwork with the court system to evict a late payer. You must keep the outside and common areas of the property looking good at all times to attract and keep good renters. And the list goes on and on.

And, even if you're buying larger multi-families that warrant on-site caretakers or outside management companies, you must keep careful tabs on what they are doing. When you are "cut off?from your tenants by a 3rd party manager, you can have major problems that you aren't even aware of until it's too late. Unresolved maintenance issues and pest problems, poor screening practices by your manager, and even discrimination and rent theft can go on unnoticed unless you remember the cardinal rule of owning rentals: always stay involved.

You MUST actively oversee your renovations. Another common fantasy of the inexperienced real estate investor is this: you'll be able to hire a competent contractor to do large renovations and small repairs quickly, inexpensively, and without any involvement on your part.

But ask any seasoned investor, and he'll tell you that the quickest, surest way to lose money in real estate is to turn a contractor loose on a property with no oversight. The horror stories are endless: you can be regaled by takes of contractors who left in the middle of a renovation to take another, more profitable job, leaving the investor months behind schedule in getting the property ready. Or contractors who substituted to quality materials you specified for shoddy, less expensive materials that fell apart just a few months or years later. Or contractors who left a property beautifully finished, but covered up the fact that they had NOT rewired the unit before hanging the dry wall. Or contractors who hired subcontractors and didn't pay them, leaving the owner with a huge lien against the property. Or contractors who didn't carry worker's compensation insurance, got hurt on the job, and sued the owner for his injuries. There are as many sagas like this as there are unknowing investors who didn't carefully watch and control their renovations.

The ONLY way to avoid these problems is to visit the job site every day without fail. This way, you'll know right away who's actually working in your property, whether the work is progressing in a timely fashion, whether any "new" problems have turned up with the property (and they will, believe me), whether the "internal" work like wiring, plumbing, floor leveling, and ductwork is being completed before the finish work covers them up, etc. If you don't have time to spend 30 minutes a day examining the contractor's work, don't do rehabs. It's as simple and that.

You MUST keep an eye on your income and expenses, and be prepared to cull your properties or change your strategies if necessary. Even experienced investors fall into the trap of assuming that, since there's money in the bank, everything must be going well. But it's a good practice to examine the cash flow from each property on a quarterly basis to see if there are problems that need to be resolved. For instance, a sudden increase in the water bill for a particular property could indicate a leak, or could be a sign that one of your tenants has purchased a washing machine and is taking in laundry. An unusually high heating bill could indicate that a tenant with access to the thermostat (always a bad thing when you're paying for the heat) is cranking the furnace up to 90 degrees, then opening the windows when it gets too hot. And an upward trend in vacancies could mean that the building is not being kept in good repair, or that your tenant screening practices need revision, or that the market has changed in such a way that you need to reevaluate your strategy.

For example, in 1996 I noticed that my lease/option properties were staying vacant an average of 3 months-a significant increase from the 2 weeks I'd seen in the past. The reason? The ready availability of mortgage loans for people with B and C credit. The folks who were my best prospects in prior years were suddenly able to BUY homes with little or nothing down-which meant that I had to make my lease/options more attractive than buying. I lowered the up-front money required to get in, added "rent credits" to help the tenant/buyer save up for down payments and closing costs, and changed my marketing to show my customers that waiting a year until their credit scores increased actually saved them tens of thousands of dollars in interest payments over the life of the loan. I changed my strategy to meet the realities of the new lending market-and, of coursed, revised them again when the bottom fell out of the B/C credit market in 2000. Otherwise, my income would have taken a significant hit during this 5-year period.

And, by the way, don't be afraid to sell off a property that loses money year after year, or that is not performing as well as the rest of your portfolio. It's often better to free up the equity in that property to invest in a more profitable building, rather than expend an unreasonable amount of effort bringing it up to par with your other investments.

You MUST have systems and policies in place to run your real estate business.
Winging it, or making decisions on a case-by-case basis, is a mistake for a number of reasons.

First, it's too easy to make a decision based on emotion rather than on business sense on the spur of the moment. If you don't have a policy in place that says that all rental payments must be made by the 4th of the month, and your tenant calls with a sad story about how her sister stole her paycheck, or there wasn't enough money for the kid's Christmas presents AND rent this month, or the bank closed her account without telling her, how will you react? The softie in you will let her slide this month-which will soon become next month, which will quickly become a consistent practice.

Second, without policies that are both written and followed, you could open yourself to lawsuits that you can't win. A great example of this is in the Fair Housing arena. Fair Housing-that is, discrimination suits-are expensive, lengthy, and embarrassing, and are often won or lost based on policies and documentation. Let's say that an applicant whom you rejected based on an abysmally low credit score later claims that you didn't want him because he has children. If you have a written policy that applicants who don't have a certain minimum credit score, and if you document the disposition of each application you've received and why you accepted or rejected it based on these criteria, your opponent will have a hard time proving that you turned him down due to his children or any other "protected" reason. If you don't have these policies and documentation, it's your word against his.

Finally, systems and policies make your life easier. When your policy is that every tenant who hasn't paid by the 4th of the month gets a late notice and pays a late fee, you know what your job is on the 4th. When your policy says, "No one who's been evicted in the last year gets to move into my property", you won't waffle over a accepting a bad tenant just because he's the only applicant you have. When your system is to record every contact with a tenant, whether in person, on the phone, or in writing, you'll have no problem remembering what you promised to whom, and when.

Again, the real estate business is a BUSINESS. Run it like one, and it can be endlessly profitable. Treat it like a passive investment, and it will be more trouble than it's worth.

Source: www.regoddess.com

 

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