Investors, Do You Really Want The Highest Possible Rent? – Part 2

Modern Home for Rent

In Part 1 we discussed how rental price impacts occupancy rate and the impact that can have on annual cash flow. In Part 2, we’re going to explore how rental price impacts the quality of applicants.

Let’s say you have a rental property where the fair market rent is $1500 a month. If you list the property at $1600 a month, not only will you receive fewer applications, we’ll argue that those applications will be of lower quality.

Applicants with good credit and clean backgrounds do not have to overpay for a rental home. Since they can easily qualify, they will spend the time to not only find a well-maintained rental home, they will not pay more “just to get in.”

At $1600 a month, you’ll likely find that your applicants have credit or background issues. They want a decent place to live, understand they have issues, and are willing to pay more. It’s no different than a mortgage applicant who is willing to accept a higher interest rate because they have credit issues.

In some cases the extra cash flow may be worth the risk. That’s a call you have to make based on the total application.

Our recommendation is to price the home at market value to attract the largest number of quality applicants. One bad tenant can eat up lots of time and destroy a property. That little bit of extra cash flow just isn’t worth it in the long run.

Have questions or want to work with an experienced real estate team on purchasing or managing investment properties? Contact us at 214-227-6626.

Photo licensed from iStockPhoto

Investors – IRS Issues New Rules on Deducting Repair Costs

IRS Tax Returns

The Internal Revenue Service has issued a 255-page guide in the Federal Register. The new rules, which went into effect on January 1, change the way investors can deduct repair and improvement expenses.

In the past, most investors took the one-time deduction of the repair or improvement expense during the tax year in which it was done. The new rules clarify what is a repair and what is an improvement.

An ordinary business repair of an asset is generally tax-deductible in the current tax year. An improvement is usually classified as a capital expenditure and gets depreciated over time.

Eric Lucas, a principal at KPMG LLP and a former Treasury Department tax counsel, said in an interview that this one of the more significant changes” from current accounting policy and could be troublesome for businesses that took “an aggressive view” in deducting repairs.

Investors should discuss these changes with their CPAs or Tax preparers now in order to make preparing their 2012 tax returns easier next year.

Photo Licensed from iStock Photo | Blog based upon a story published in Inman News

Investors, Do You Really Want The Highest Possible Rent? – Part 1

Modern Home for Rent

As a property manager I often have this conversation with my investor clients. I understand trying to get the most possible cash flow out of a property but this has to be tempered by two issues–occupancy rate and quality of tenants.

You might ask, “How are they related?”

In part one, I’ll discuss occupancy rate.

Occupancy Rate is defined as the amount of time a property is rented over a period of time. If your rental is vacant for one month out of the year you have an occupancy rate of 91.6 percent. You arrive at the occupancy rate by taking the time the rental is occupied and dividing it by the total time available.

As an investor you should never plan on a 100 percent occupancy rate. We typically use 85 or 90 percent just to be conservative in our approach.

If your rental list price is set too high the property will sit vacant for a longer period of time. Let’s assume you have a rental unit that would quickly rent for $1500 but you list it at $1600. If it takes you an additional 30 days to find a tenant willing to pay $1600, you actually lost $400. What?

While the $1600 rent generates an additional $100 in monthly revenue, you lost $1500 for the month the property could have been rented at the lower price. So, over the course of a year you generated $1100 in additional revenue but lost $1500 due to the vacant month. This results in a loss of $400 during the year!

A higher rental price is usually only profitable if you can rent the property in a similar amount of time. Otherwise you typically wind up losing money.

In part two, I’ll discuss how rental price also impacts the quality of tenants.

Have questions or want to work with an experienced real estate team on purchasing or managing investment properties? Contact us at 214-227-6626.

Photo licensed from iStockPhoto

Basic Real Estate Investing Terminology

Real Estate Investing Terminology

With real estate leasing going strong in many parts of the nation, you may be considering getting into Real Estate Investing. In this blog, I’ll describe some of the basic terminology.

All examples will be based upon a $100,000 purchase price, $1,000 a month rent, $300 a month operating expenses, and a $450 a month mortgage.

Gross Rent Multiplier

GRM is used to describe a ratio between the cost of a property and the anticipated rental rate. It calculated by dividing the purchase price of the property by the monthly rent. In our example, we would use $100,000 / 1,000 to arrive at a GRM of 10. The higher the number is the better.

Net Operating Income

Net Operating Income is the total cost of the property excluding any mortgage. It’s calculated by adding up all the operating expenses including taxes, insurance, management fees, leasing fees, maintenance, and HOA dues.  The total monthly costs are $300 and the monthly rent is $1,000. We would use $1,000 –  $300 to arrive at a Net Operating Income of $700. Use $700 * 12 to arrive at an Annual Net Operating Income of $8,400

Capitalization Rate

The Capitalization rate is a ratio between the Net Operating Income and either the original or current market value of a property. We would use $8,400 / $100,000 to arrive at an annual Capitalization Rate of 8.4 percent. 

Cash Flow

Cash Flow is the movement of cash in and out of the property. Positive cash flow is usually the goal. It is calculated by subtracting the Net Operating Income and any existing debt from the Gross Income.  We would use $1000 – ($300 + $450) to arrive at a monthly Cash Flow of $250.

Occupancy Rate

Occupancy Rate is the ratio between the amount of time a property is rented and the amount of time is vacant.  If there is no actual data, I usually use 90 percent as a starting point for analyzing a property.

Knowing the basic terminology and how to calculate them is essential to evaluating any real estate investment purchase.

Looking to purchase investment properties in the North Dallas area? Contact us! We have the experience and knowledge to find good investment properties, lease them to suitable tenants, and provide on-going property management if needed.

Tom Branch, Broker, CDPE, SFR

It is a Landlord’s Market in Dallas Texas

For Rent Sign in Front of Home

I’ve been watching the rental market in the greater Dallas area for a number of years. It’s finally a landlord’s market again.

Since 2008 we have seen a steady increase in capitalization and occupancy rates. We’re to the point today that any decent rental property is leased in less than a week.

There’s nothing magic about the increase. It’s simple economics. As the availability of easy money dried-up in 2008, those would-be buyers went back to leasing homes. This allowed the glut of inventory we once had to slowly decrease.  This stabilized occupancy rates and prevented the downward spiral of capitalization rates we saw during the market boom.

Come forward to 2010 and there are a couple of other factors that are driving the need for rental and lease homes in DFW.  As homes went into foreclosure or were short-sold, those homeowners had no choice but to look for rental homes. While the Texas economy is stable, many of the people who could still qualify for a mortgage decided to sit it out and continue to rent. These two factors have basically drained the rental market in the area.

Currently I have almost 50 people looking for rentals and there are so few available. As soon as they come on the market, there are lots of showings and multiple lease applications.

I listed a large home in Frisco on a Friday. I had four applications on Monday. These were solid applicants with high credit scores, little debt, and substantial incomes.

We recently purchased a property for a local investor and leased it for him in less than a week. The Gross Rent Multiplier exceeded 10 with a Capitalization Rate of about 6.5 percent. This is prior to taxes and does not factor in appreciation over time.

It’s a great time to purchase investment property! Prices are low and the need for rental homes continues to climb.

Are you looking to purchase investment properties? Contact us! We have the experience and knowledge to find good investment properties, lease them to suitable tenants, and provide on-going property management if needed.

Tom Branch, Broker, CDPE, SFR

WSBA Interview – Rental Revival: Census Shows Shift Away From Home Ownership

For Rent Sign in Front of Home

I did an interview with Gary Sutton with WSBA in York, PA on June 1st.

It was a follow-up piece to an article published in USA Today titled, “More Than 500 Cities See More Homes Become Rentals.” The authors wrote, “In the aftermath of the nation’s housing-market collapse and recession, more than 500 midsize and large cities have seen a rise in the share of homes that are rented rather than owned”

Most of the cities with the higher changes towards renters were same cities hit hard by the mortgage meltdown and subsequent foreclosures. I saw another news story showing that home ownership peaked at 69 percent and had dropped to 66 percent .

Clearly this should not be a big surprise. Not only did we have a housing bubble, but a home ownership bubble as well. Further, the people who lost their homes to foreclosure still need a place to live and will likely be tenants for a number of years.

The good news is that investors are buying homes in these areas and rather than flipping them as they did in years past, they are converting them into income-producing rental properties1.  It’s a great time to purchase income-producing properties as prices have dropped, interest rates are low, and the demand for rental homes is up.

Contact us for more information on investing in income-producing real estate.

Tom Branch, Broker, CDPE, SFR

1. See “Flipping Versus Income Producing Real Estate Investing

Flipping Versus Income Producing Real Estate Investing

Modern Home for Rent

I did an interview with Bonnie Petrie on KRLD Radio last week. It was an interesting conversation. She wanted to talk about the shift away from flipping homes to buying homes to use as income producing investments. We’ve been talking about this shift for the past several years yet the emphasis has remained on flipping houses.

Why the shift? The primary reason is the lack of “easy” money that once fueled the flipping engine. Investors were able to purchase properties, rehab them, and then get them back on the market. Buyers were able to take advantage of the “easy” money, securing a mortgage and becoming homeowners.

The lending market softened with mortgage meltdown. Underwriting guidelines tightened on both borrowers and the properties. This left fewer buyers able to purchase and lenders began asking lots of questions about why a property that sold for $100k two months ago is now worth $150k.

The conditions that have made flipping properties much harder are what make investing in income-producing properties the thing to do now.

Investors can purchase properties at a discount, rehab them, and then lease them to produce a steady stream of income. I find investors with cash have a much easier time of it but money is available. Investors need to be prepared to put 20 to 30 percent down and carry the costs of rehabbing the property.

Investors need to carefully select properties. Not only is initial price important, but the cost of rehabbing the property has a huge impact on the long-term capitalization rate. This is where working with a seasoned real estate professional and having a solid pool of trusted contractors is critical.

Property management has lots of pitfalls, so investors need to outsource the management of their properties or become very familiar with state and local laws.

Looking to invest in real estate in the Dallas area? Contact us!

Lease and Rental Homes in the DFW Metroplex

Tom Branch, Broker, CDPE, SFR