Hunting Happiness

I have written a couple posts about our first foray into real estate investment. The first post details the reasons we did it and will continue to, and gives some hard numbers.  The second post details some of the gotchas and surprises.  Overall the results are very positive, increasing our net worth by $25-30K. For those considering doing the same, this is a step-by-step guide based on our research and real-life experience with Property #1.

Education & Preparation — Before you Buy

• Read “Buy Low, Rent Smart and Sell High” by Scott Frank and Andy Heller.
• Check out my posts on the positives and negatives of our first property. The positives post also contains more details of property #1.
• Spend several months watching the market in your proposed area. Watch the rental and the sale markets. When a new property comes on the market and you can read the MLS listing and immediately know if it is a good deal and what kind of rent it could fetch then you are ready. Also, find a good real estate agent if possible.
• Set up an LLC (or Corporation) including an Operating Agreement and separate bank accounts to provide some isolation of your personal assets. These are very important because if you are involved in a legal dispute the opposition will likely look to pierce the “corporate veil” to get at your personal assets. Doing these things will NOT prevent you from having to pledge personal liability on loans and other financial obligations, however.
• Prepare your lease application form.
• Prepare your lease contract and purchase option contract. I recommend making these two separate documents. This makes it easy if you decide to the go the rent/lease only route, and if you go the lease-option route it makes it clearer and easier for the tenants. Most folks will be very familiar with a lease/rental contract, but the option contract will be completely foreign. Having it separate makes it less intimidating and easier to digest. Also, have an attorney review or even write these documents! Housing laws vary (significantly sometimes) by state and if you ever need to go to court and you’ve pulled contracts that are written for another state you are going to have major problems. In the purchase option contract push as many duties and responsibilities onto the tenant as the state law allows. Again, an attorney will be invaluable here.
• Order professional yard signs. See more below but this is critical and it can take several weeks from starting the process to receiving your signs. We used Realty Sign Xpress and were pleased with the them.

Getting Started — Finding a Property

• I highly recommend starting out with single family homes in a nice working/middle-class neighborhood. We also found that in our area, if the fixed up value of the home is under $100K the profit margin becomes very thin and the ability to be cash flow positive diminishes. Obviously if you can pick up a home worth $90K for $40K you will still have no problem.
• Do NOT force the process. A really good deal will come up in time; do not settle for an mediocre deal because you feel rushed or impatient.
• Buying your first property will be nerve-wracking. You will have fears and doubts. If you have done your homework, you will be fine. At some point like Nike used to say “Just Do It“.
• Make sure you insure your property even while renovations are taking place.  See Item #1 in my gotchas post about this.  If the property is unoccupied your insurance will be 3-4 times the norm.

Finding a Tenant

• As soon as you own the property, get a yard sign out. We advertised via many channels but over 90% of our calls came from drive by callers who saw the yard sign. We also believe the professional yard sign deterred “vultures” — agents pestering investors to help sell or lease properties.
• Get a dedicated phone number for the LLC, if not for each property. Even if you just forward it to your personal cell phone, this presents a more professional face. It also provides some protection from an unsavory potential tenant having your personal cell phone. There are many services out there but we ended up going with Vonage. We like the ability to receive voicemail messages as WAV files attached to emails.
• Do not overprice the rent. Most of your profit comes from selling the house so do not be overly concerned about making a huge positive cash flow. If the property sits for two months because the rent is too high, that is equivalent to a 15% lower rent price on a 12-month term! If you factor in other hold costs the real percentage is more like 30%.
• Keep a list of names and phone numbers of prospects.  Make notes of any info you can.  At first, I was hesitant to ask some questions but later found it was generally not an issue.  Ask the caller what their comfort range for rent is and record it in your list.  Ask about kids.    Ask if they are currently renting and when they are able to leave.  Ask for their email address and send them a brochure and pictures of the home.  Even if your current home is out of the running for one reason or another, another property you acquire in the near future may meet their needs.
• Remember that many of the tenants will be primarily drawn in by your flexible lease-option program, even more than the home itself.
• Don’t put too much time into chasing bad prospects.  This was a mistake we made earlier on and it cost us time and hassle.  If someone is wishy-washy, or won’t return calls, we found it’s better to just let them go.  If someone is really interested, they will generally answer your calls or return them promptly.

Sealing the Deal & Being a Landlord

• Make sure both sides understand expectations.  Trust me, it is much better to have it out over some term or stipulation now than later on.
• Get the contract(s) signed.  Get a check.  We required the first month’s rent and one month’s rent as a security deposit up front.  Until the tenant actually moves in, keep up advertising efforts and returning calls.  If they back out you don’t want to have to start all over.
• We have decided not to use a property management company.  Their cost was 6-10% of the monthly rent and we think lease-option tenants will be fairly low maintenance.  If that turns out to be a mistake, we can always bring the PM company in later.

I will add more to this or add new posts as we progress. We are quite pleased at this point and looking for properties #2 and #3 now.