Full-time jobs can be helpful:
- The benefits such as health care are much cheaper than buying it on your own
- W-2 income is preferred by lenders for financing your real estate project
- Regular monthly cash flow can carry you through the lean times in real estate
Secrets of Long-Distance Investing
The thought of managing rental properties a long distance from your home scares a lot of investors. The truth is far different. You may live in a market that is not worth investing in. Local laws may be very hostile to landlords, or property values are so high compared to market rents, that all your cash flow goes to mortgage payments.
There are basically three types of markets for rental properties in the United States:
1. Cyclical—Subject to wild price fluctuations (think California, the Pacific Northwest or Northeast)
2. Linear—Small but predictable price changes averaging 4-6% per year (the Midwest and much of the South)
3. Hybrid—A combination of the first two types depending on different sections of the area (think Phoenix)
People who live in Los Angeles (Cyclical) for example, may want to invest in Minneapolis (Linear) or Kansas City for good cash flow and predictable market prices.
Two of the Biggest Problems Investors Face
Overcoming the following two problems will help accelerate your real estate success:
1. The need to control your emotions.
Controlling your emotions is the hardest part of any investment. Take into consideration the people in the stock market for example. They say the stock market operates on two emotions – fear and greed. Many people exhibit a knee-jerk reaction when stocks are falling (or rising) and they sometimes make bad decisions when it comes to investing.
The same goes for real estate people. You have to learn to control your emotions. It’s inevitable that every investor experiences a little bump on the road. During those times it’s important to maintain your perspective and still make wise decisions; not to be myopic, but always look at the bigger picture.
Even though these ‘little bumps’ feel like a big deal at the moment, always remember your ultimate goal. In no time, the bumps on the road will turn into a valuable learning experiences for you.
When you are investing locally, you may tend to be more caught up in your emotions. Investing long distance means you are more separated from your properties and won’t feel as attached.
2. Property Management
Another big challenge investors need to overcome usually pertains to the property management side. Property management is where the rubber meets the road. It is important to know both how to self-manage your property and how to manage your managers. You never know when your manager leaves – either through his choice or yours. Sometimes, life happens and you find yourself without a manager.
How to Find The Right Management Company For Your Investments
Finding the right company for your investments involves the following:
- Go online and read reviews
- Get a referral from someone you trust
Even though you’ve got the most reputable property manager/company, you still have to oversee them because there is a tendency that they will become complacent. So, you have to pay attention to your statements. You have to make sure that you get receipts or quotes from the vendors themselves – not from your property manager.
How to Self-Manage Your Investments
The level to which you could effectively self-manage a property remotely is directly impacted by the quality of the neighborhood where the property is located; it doesn’t matter whether it’s an A (properties with the highest qualities in their market and area), B (properties that are generally older than Class A; lower income tenants), or C (properties that are over 20 years old and located in less than desirable locations) type of property.
Here are some possible scenarios:
Let’s create three hypothetical properties:
1. You’re able to buy a property for as little as $30,000 to $35,000, or
2. You could buy a semi-respectable property for $65,000 or $70,000, or
3. You can spend for more than $100,000 to $130,000.
The $30,000 to $35,000 property is probably in the C-Class range (unless you scored one heck of a deal). You will probably end up with a C-class tenant for the property but of course, it varies. Sometimes you find an A-class tenant for a C-class property or a C-class tenant for an A-class property. C-class tenants in C-class properties require lots of hands-on management. Not what you want when you invest out of state.
If you stick with the $100,000 to $130,000 range in your rentals, you will most likely have good tenants. And these properties are likely to be located in good school districts. There is a huge possibility that you will have a good, long-term relationship with your tenant and they are fairly easy to manage. A much better way to keep the hours you spend managing down.
Most people you encounter are decent. They value maintaining a relationship. But when you hire a property management company and your tenants only have to send checks every month, they usually don’t feel any pressure to maintain a relationship.
On the other hand, if your tenants pay you directly – the owner – they feel the need to maintain a good, business relationship with you. And when they have certain complaints, they are more likely to take care of it themselves if they can. Property management companies on the other hand make them feel like they are dealing with a big bureaucracy and will phone in many more problems to let the company take care of the problem.
For some people, they find it easier to self-manage since they have one less party to deal with. You, yourself, will deal directly with the tenant – and a lot of times, that’s simpler than managing a manager. However, it ultimately boils down to your preference.
Evicting a Tenant While Self-Managing
Evicting a non-paying tenant or finding a new quality tenant can cause a massive headache for the investor. Plus, it can be really expensive as well. You may be wondering how you can put up with these situations remotely, without a property management involved.
If you have to evict a tenant without a property management company, you don’t necessarily have to go over there yourself or run down to the courthouse to evict them. All you have to do is to hire one of the eviction services, pay them a couple of hundred bucks, and they’ll do the job for you.
On the other hand, when it comes to finding a tenant and screening them, you can hire a property management company and do a one-time lease up or have a traditional real estate agent to do it for you.
Hartman Risk Evaluator for Purchasing Rental Properties
The Hartman Risk Evaluator (HRE) invented by our good friend and real estate investor Jason Hartman, can lessen or even totally eliminate the downside risk of your investment. It is based on the LTI (Land-To-Improvement) Ratio. To determine the LTI of your property, you have to know that you can segment a property into two parts:
- The Land Component
- The Improvement Component (the Building, the House, the Apartment… whatever)
Let’s take a look at Jason Hartman’s example. A few years ago, he wanted to buy a property in Georgia that costs around $159,000. He checked out several insurance companies and found one that said they can insure the house for $135,000.
So, you don’t have to be a math wizard to calculate the breakdown:
Value of improvement ($135,000) + Value of land ($24,000) = Total Value ($159,000)
The majority of this property’s value was found in the improvement. In the event that the overall real estate values decline, most of the loss is found in the actual land value.
The concept of HRE is that you should invest in properties that have good LTI ratios. Which means the land component is either free or very small because volatility is in the land, not in improvements. It’s not in the commodities, it’s mostly in the land.
Being busy doesn’t have to be a hindrance when it comes to investing. The key is to educate yourself, manage your time, and organize your to-dos.
- Invest despite your busy schedule. I get it, you’re busy. But make time to invest in real estate properties. You’ll reap the benefits in no time.
- Don’t hesitate to evict a non-paying tenant. If you’ve given your tenants more than a handful of chances but still hasn’t paid their monthly dues, it’s time to kick them out. Because it’s easier to evict a tenant than to put up with a non-payer.
- Ask around for referrals. Should you opt to hire a property management company, make sure to look for the best. Ask for referrals from your friends, family, and your colleagues.
Share your BIG lessons with us!
Got any hard-learned lessons, falters, or good ‘ol fashioned mistakes to warn others about? Share below! We’ll take the best ones and write about them in a future post.