Thursday, December 16, 2010

The Ups and Downs of being a Landlord

So, things have gone well this year.  I refinanced a couple places, my adjustable rate mortgages have adjusted down, I am actually cash flow positive on some of the houses, I am paying down about $3k/month in debt.  I'm about to close on 8 more units in Buffalo.  Overall, it has been a good year.

(that's the ups).  Now for the downs.  I got a call from the property manager last night (while I'm in London for  business) that the rain in Seattle flooded the basement of one of the houses.  She said that we'll have to replace the carpet, and even some of the drywall.  The tenant, who has been in the house for over 3 years, moved out and isn't coming back.  This will be an expensive week.

The good news is that they have paid for december, so we have two weeks to get the house in shape before the new year.  We are also going to try to raise the rent 10%, since we have not changed it for the last three years, and the market seems to be picking up a bit.  That would be +$1800 cash flow for the year (although that will all probably be spent on replacing carpet and drywall, and the remortgage fee.

Oh well.  We will continue to plug along and roll with the punches.

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Tuesday, December 14, 2010

Increasing Net Operating Income

I've talked a bunch about buying property in previous posts...the logistics of financing, the cap rates on some of my properties, finding properties in different markets.  Once you've bought the property, what do you do then?  Since commercial properties are valued based on the Net Operating Income (NOI), one of the best ways to increase value is to increase NOI.  There are multiple ways to this, and you should do all of them.

The most obvious is to raise the rent! Keeping operating expenses equal, if you raise the rent, you will raise NOI - which affects both cash flow in the short term and property value/sales price in the long term, as property value is a multiple of the NOI.  Some of the things you can do which may allow you to raise the rent:

Rehab the inside of the property.  You have to do some of this when a tenant moves out anyway -- clean or replace carpets, paint the interior.  Other things which I did were to install bathroom fans in all of my units.  When I toured the apartment before buying, I could see and smell the moisture in the units.  By installing bathroom fans, it significantly dried out the places and improved the smell.  One hint if you do this: wire the fan into the light switch so it comes on any time the tenant turns the light on.  This will help keep moisture down. 

Install nice countertops.  Ideally one could install corian, but that could be expensive.  You can get nice (or at least nicer) formica countertops.  These make a difference and will help you land better tenants, which in turn reduces wear and tear and tenant turnover, again increasing NOI. 

Clean up the exterior.  I try to stop by my apartment building at least once a month and the first thing that strikes me is how the place looks.  The last time I went by, I saw some of the shrubs were overgrown, the leaves from the local tree were piling up around the place, and the stairs up to two of the apartments were very dirty, despite the painting they got this summer.  I asked the property manager to have these things cleaned up.  Hopefully, if we treat the property well, the tenants will too. 

In addition to raising rents, the other way to increase NOI is to reduce expenses.  There are several expenses that you can reduce, some of which are easier than others. 

Interest expense
Principal
Taxes
Utilities
Maintenance

The first two, principal and interest, are not always in your control.  Although with this economy and interest rates low, it is worthwhile to investigate whether a refinance pays for itself.  I recently refinanced from 5.375% 30 year fixed to a 3.875% 5 year arm.  This reduced my payment by about two hundred dollars/month and turned that property from negative to positive cash flow.  The interest savings pays for the closing costs in about two years.  After that, the interest savings is incremental $ in my pocket. 
Reducing your principal expense can be done by moving to an interest-only loan, although these are much harder to get then they were a few years ago, especially for investment properties. 

You should keep an eye on your property tax assessments and bills.  Most counties have a process for appealing the valuation if you feel that the property has been assessed unfairly.  I haven't been successful getting my taxes reduced, but some people make a business out of helping people appeal to the county.

Utilities is an expense you should be pretty aggressive about.  Ideally, you want tenants to pay all of the utilities.  That way it doesn't cost you anything if they take a long shower or leave the lights on, or the door open.  In my building, the tenants pay electricity and there is no gas.  Unfortunately, the water/sewer/garbage is billed as a package by the city, rather than individual units.  I charge the tenants a "utility fee" of $35 per person on top of their base rent, to cover w/s/g. this comes to about $350/month total.  Recently I looked at my w/s/g bill and found that it was $500/month.  I sent the property manager to investigate, and she found that one of the bathtubs had a leaky faucet.  We replaced that and also installed low flow showerheads and aerators on all of the taps (The city provided these for free, and would've given us free toilets too if ours were older).  I am considering "submetering" each apartment for water, which would allow us to bill each tenant separately for this, and align their incentives with mine -- ie keeping water usage low.  Studies have shown that submetering can reduce water usage costs by 35% because the tenants are responsible for their own usage.  I investigated with one company, and they estimate submetering my seven unit building would cost about $5k including installation.  I haven't decided if it's worth it yet.  If I could save $50/month, the ROI would be about 4 years to earn back my money, which seems like a long time.  But I also have to consider how much value this would add to the sales price.  $50x12 = $600.  With a cap rate of 5%, which is not unreasonable in Seattle, the $600 saved per year would turn into $600/.05=$12,000 in additional property value.  With 6% cap rate, it would be about $10k.  This makes it look like a good investment -- if I can really save the $50 or more. 

The garbage bill is another frustration point.  I pay $215/month for a 1.5 cubic yard dumpster with once a week pickup. I pay $0/month for the same size dumpster for recycling.  My tenants fill up the garbage dumpster, but I only saw about four pieces of cardboard in the recycling 75dumpsters.  One of my goals for 2011 is to reduce the garbage produced by half, and move that to recycling, and thus reduce my cost for garbage pickup.  If you want more suggestions on how to reduce your garbage bill, I found a company called Waste Auditing Consultants.  Their business model is to help companies reduce their garbage bill, and then they split the savings with the owner.  The owner is a guy named Trip Topken, and they work with folks with garbage bills from $400/month to $375,000.  Trip gave me some other tips on using a compacting dumpster, talking with the city about alternative carriers and reducing my expense through negotiating my rate with the city.  

If anyone else has suggestions, please feel free to post a comment in response to this post!

Tuesday, November 23, 2010

How did I ever choose Buffalo/Western NY as a place to invest?

After my last post, I had a comment from a realtor in Buffalo who wanted more details on how I decided that Buffalo is a good place to buy property.  So here's the (perhaps convoluted) logic that brought me to Buffalo.

I have purchased several properties in Seattle over the last six years (4 single family residences, and most recently a 7-unit apartment, all within a few miles of my house.  (98117 zip code if people are interested in seeing the area.)  I also have a day job which funds these acquisitions, so I need to keep my time investment per property at a minimum.  The problem with Seattle is that the cap rate is very low.  For Single Family/duplexes, it's around 4%.  For the apartment, I got what I think is a great deal at around 8%, although I had to put about $40k into it once I had purchased it.  So including that, the cap rate is about 7-7.5%.  The <4 unit properties are cash flow negative to start and for the foreseeable future with 30-35% down payment.

So one night I couldn't sleep, so I did a search for "turnkey investment property" in Google.  One of the results that came up was http://www.cashflowwithequity.com/. This is a firm which buys properties in Buffalo, rehabs it, puts a Section 8 renter into the property and sells it to you.  When you do the calculation, these end up being about $200/month cash flow positive on a purchase price of $60k or so.  This is much better than -$400/month on an investment of $350k in Seattle.  I was wary of finding a company like this on the internet and investing sight-unseen.  So I did a search for Commercial Real Estate in Google, and found http://www.loopnet.com.  I did a search for multifamily properties in Buffalo and Rochester and found many properties for similar prices (a duplex for $60k or less, with cap rates of 10-12%).  I then decided that maybe this is real, and property really is cheaper outside Seattle!

I discussed with my realtor in Seattle, David Sligar, who has worked with me to purchase the 11 units in Seattle.  I asked him to join me for a trip out to Western NY for a few days to look at properties.  He couldn't make it, but did find me realtors in Buffalo and Rochester, through a nationwide referral service.  He interviewed the guys and set up first conversations with them.  He will get a referral fee on any properties I buy through them.

Next, serendipity intervened.  I knew I wouldn't buy any properties remotely without at least getting to know the cities and the people I would be working with.  So I had been thinking about taking a trip to Western NY.  It turned out that in September, my company was sponsoring a recruiting trip for our team to Toronto.  I volunteered and the company covered the expense of getting me to Toronto.  After our recruiting was done, I rented a car and drove down to Buffalo and Rochester.  I met with the agents there, Mark Hiscock in Rochester and Corey Rossi in Buffalo. They each had found 4-5 properties for me to walk through, and we also drove by some of the properties that I had found on Loopnet. The Loopnet properties were in somewhat dicey neighborhoods, and Mark and Corey warned me away from these.  I also met with the guys from "cashflowwithequity.com" and they showed me around their duplexes for sale. Corey warned me away from them with a set of reports from ripoffreports.com, where people had complained about shoddy work from these guys.

Anyway, we didn't find anything on that trip that resonated with me.  Corey and Mark both set up automated searches for me which sent me properties which fit my parameters.  Corey also followed up a few weeks later, pointing out a set of four duplexes next to each other which were for sale. Assuming we close, the potential cap rate is 10-12% and the cash-on-cash return in the first year will be 16-18%.  Not too bad...And as an added bonus, they're on a commercial lot so I will have the option to build something else in the future if the opportunity presents itself.

Corey also introduced me to a Property Management company, Superior Management Services, in the Buffalo area.  They walked through the properties with him, and gave me suggestions for areas for improvement (although they're in pretty good shape now).  I am headed out there in December to do my own walk through before we close.

If you're interested in investing in multifamily real estate, I recommend Investing in Apartment Buildings: Create a Reliable Stream of Income and Build Long-Term Wealth, available on Amazon in paperback or Investing in Real Estate which you can get on your Kindle Wireless Reading Device, Wi-Fi, 6" Display - with New E Ink (Pearl) Technology or in paperback..

Wednesday, October 27, 2010

Property in Buffalo!

Hi all, it's been a long time since I posted on the blog.  I'm a Seattle native and have been buying properties in Seattle for the past few years.  The one house I wrote about earlier, along with three other single family homes.  Earlier this summer I bought a seven unit apartment down the street from me, and this actually is cash flow positive in months where there are no discretionary expenses (above taxes, utilities, insurance and property management).  The single family houses are starting to break even after several years of losing money. 

So, I started looking at other areas of the country for places which are "cheaper."  How is "cheaper" defined?  One measure of cheaper is the Cap Rate, short for Capitalization Rate.  The capitalization rate is the Net Operating Income (NOI) divided by the purchase price.  In Seattle, the apartment I bought was a bargain at 8% (I bought it for $612.5k and the NOI was around $49k.  After I put about 40-50k into the place to upgrade electrical, pour a new sidewalk, rehab four units, put in new awnings, the cap rate including that expense was closer to 7%.
In buffalo, I am finding properties with 10-12% cap rates.  I just bought four duplexes (8 units) for $334k (roughly half what I paid for the seven units in Seattle) with about the same NOI.  Well, I haven't closed yet but I'm under contract.  My realtor in Seattle found me a realtor in Buffalo, my realtor in Buffalo found me a property management company, so I don't have to fly out there so often.  Looking forward to clearing $1500-2k/month on an initial investment of around $100k.  We'll see if it pans out I guess!