Investor Services
Examples of Forced Appreciation
By Paul Branton, Director of Investor Services for Home Rental Services
It’s been another productive summer here at HRS! We’ve leased 80 homes to new tenants so far in 2019 and over half of those (43 to be exact) were leased in the months of May, June and July. With a total of only 64 business days in those months, that means we leased a home every other business day! Wow! (If we also included summer lease renewals, that 43 figure would jump to over 100!!) Double Wow!
So as this summer is winding down, I’m reminded of my post from about this same time last year where I wrote about ‘Real Estate Investing Lingo Defined – Part 2’ and referenced the term “forced appreciation.”
We put the principle of forced appreciation into practice this summer and I wanted to share three examples of how we helped our clients increase the return on their investments.
Forced Appreciation Examples
Example #1 (Haskins)
Kitchen Before and After
New updated countertops and a new vent hood
- Prior Rent Amount – $1,050
- New Rent Amount – $1,199
- Forced Appreciation = $149/m
Example #2 (Gallery)
Kitchen Before and After
Basement Before and After
LVP Flooring, New Granite, Backsplash New Stove
- Prior Rent Amount – $1,625
- New Rent Amount – $1,745
- Forced Appreciation – $120/m
Example #3 (Goodman)
Kitchen Before and After
Entry Before and After
Living Room Before and After
LVP, Carpet, Painting
- Prior Rent Amount – $1,299
- New Rent Amount – $1,399
- Forced Appreciation = $100/m
I don’t know about you, but I much prefer the ‘after’ photos. Wait, who cares what I think! It’s all about the renter… and the current market of renters is willing to pay the higher monthly rate for an updated property.
So, the lesson to learn here is… If you make the right improvements, you can increase the return on your investment properties!
Happy Investing!
Question: How much will my house rent for?
By Paul Branton, Director of Investor Services for Home Rental Services
Owners wondering what their house will rent for is an important question that comes up constantly. I’m certain that if we compiled a list of FAQs, this one would be in the top five. Scratch that, it would definitely be in the top three. Yep, top three for sure.
When I say it comes up constantly… I mean that there isn’t a day that passes by where I don’t price between one and twelve houses. I price homes for new client inquiries. I price homes for investors looking to buy. I price homes for renewals. I price homes going back up for rent. I price homes “as-is” or “improved”.
It’s a lot of fun but also a fair amount of work. I want to find the “sweet-spot” where we are not going to leave money on the table, but also not be too aggressive.
So how exactly do I determine rental rates?
These are the four things I’m looking at when pricing a property for rent. (In no specific order)
1) Zillow Estimate and Current Rental Comparison.
I pull up the property on Zillow and look at the home as compared to the surrounding homes available for rent. Zillow also provides their own “rental Zestimate” which has improved in recent years, but isn’t always accurate. It’s based more on price per square foot in comparison to current available rentals. That’s not the full picture.
2) Our Portfolio Comps: On Market and Recently Leased.
I’ve been working at HRS for nearly a decade, so I’m familiar with our portfolio. This allows me to look at a property and quickly know that we have a few that are similar. I can use those for comparison. I am also actively involved in the marketing process so I’m “in the know” on what is getting leased, how quickly and at what rate. This is really helpful insight.
3) Rental Analysis: Provides Recently Leased Comps.
When there are times that I want to double check my number, or times where we don’t have as many comps to pull from, I pull a rental analysis. In fact, just last week I pulled one for an investor looking to buy a property. The rental analysis report was helpful because we didn’t have any “portfolio comps” and the “Zillow comps” weren’t in similar condition.
4) Historical Rent.
Of course, this is only applicable for properties that have previously been rented. I find that it’s helpful to see the historical data for some context.
For example, if you know that the property leased for X in a strong year, and Y in a weaker year, then it should land around Z in the current market.
Once I’ve reviewed as much of this data as possible, I put the property in a $100 +/- range. i.e. $1,550-$1,650.
That’s it. That’s how to determine the rental rate for your property. It’s really fairly simple…. once you’ve done it a few hundred times. :)
Whether it’s an interview, date or marketing a home: First impressions are important.
By Paul Branton, Director of Investor Services for Home Rental Services
I’m guessing you’ve heard the phrase, “You only get one chance at a first impression.” It’s true. It doesn’t matter if it’s for an interview, a date or marketing a home, you’re likely going to get one shot to achieve your goal. (The goal is to win them over by way of a good first impression.)
So, if it’s for that first date, what are you going to do to prepare? I imagine that most of us would likely get a haircut, take a shower, put on a new outfit and wear some perfume or cologne, right? You should view marketing your home in the same light. If you expect your date (the new tenant) to like the property, it needs to look clean and be well put together.
Here are my recommendations for preparing your property so that the prospective new tenant says, “where do I sign?”
- Give your property a haircut… Clean up the landscaping.
- Give your property a shower… Freshen up the paint.
- Buy a new outfit… Update the lighting, appliances, hardware, faucets, flooring, etc.
- Wear perfume or cologne… Clean the house really well, especially the carpets.
With spring officially starting soon, now is a great time to determine your plans for making that great first impression! I’ve included some before and after photos below for one of our recent projects. I wanted to share an example of the difference these updates can make.
If you need help figuring out what to do or where to start, please don’t hesitate to reach out. We would be happy to help!
Front of House – Before/After
Front Porch and Door – Before/After
Kitchen – Before/After
Deck – Before/After
Show your personality at the office with socks and ties.
By Paul Branton, Director of Investor Services for Home Rental Services
I know this is stepping back into the time machine to refer to a post from two years ago but here we go… The day was January 17, 2017.
In this post, I shared my appreciation for estate sales. I also included some photos of various purchases I’ve made over the years like a golf putter, some neckties, a kitchen island and a vintage globe.
Today I thought I would tell you about my growing collection of socks. (No, my socks are not purchased from estate sales.)
The Sock Collection
The majority of my sock collection comes from a company called “The School of Sock.” (Formerly Sock101.) I really like the name, but what I like the most is that they are based “locally” out of Lee’s Summit, Missouri! You can opt for a subscription, or do what I do and order a pair or five whenever you get the urge.
Outside of my socks from “TSOS” I’ve picked up a few good pairs from Marshalls. I was also recently able to add to what I call my “Sockfolio” at our work Christmas party by way of this awesome set of pizza socks! (I now have socks of my favorite food!!!)
Tie Tuesday
Over the course of my career, I’ve had jobs that required me to wear a suit every day, and I’ve had jobs in which I could wear jeans and a hoodie. In every workplace situation, I’ve chosen to wear a tie every Tuesday of the week. In my inner-circle, this has become affectionately known as “Tie-Tuesdays.”
Some friends ask me why I would wear a tie if I’m not required to do so. My answer to them is: I do this for a multitude of reasons. For starters, I enjoy it! It’s fun for me because it provides the opportunity to express my appreciation for fashion and design. As another benefit, I believe the way you dress and how you feel about your appearance can and does impact the way that you work. If you don’t believe me, give it a try!
As I close out this post, I would invite you to let me know if you have your own “sockfolio” actual or otherwise. Perhaps your thing isn’t socks but maybe watches, coins, LEGO or artwork. I would love to hear about your guilty pleasure!
Incentives? Here are three ways to generate interest in your rental property.
By Paul Branton, Director of Investor Services for Home Rental Services
In a marketing cycle that’s experiencing fewer qualified applicants than you would like to see, what are some ways to spur new interest and activity for your rental? There are actually a number of things you can do, but for the sake of this conversation, lets focus on just a few of my favorite INCENTIVE options.
Incentive for the LEASE START DATE
In this scenario, you offer a concession on rent for a lease that starts on a certain date. This creates a sense of urgency for the prospect to sign a lease in order to secure the lower price. For example, you might be advertising your property for rent at a rate of $1,750 but advertise that you’ll drop the price to $1,650 for a lease that starts by a certain date. Another option is to offer two weeks or one month of free rent.
Incentive for the LEASE END DATE
This scenario is basically the opposite of the one above. In this situation, you’re wanting the prospect to sign a lease that will end in a better time of year based on renewals. (Typically this means May, June or July.) In this example, if you have the property listed at $1,750, you would offer a lower rate with a lease that ends in your preferred month. (Generally only offered as an option to secure a lease that is longer than 12 months.)
Incentive to provide a PROPERTY IMPROVEMENT
With this promotion, you can combine the timing scenarios above (lease start and/or end date) and instead of a lesser rent, you offer to provide an upgrade or amenity to the property. For example, with a lease that starts by _____ or ends _____ we will install a WiFi thermostat or WiFi doorbell, you pick! This is a great incentive option as the improvement becomes an added value to the property in the future.
The first two of the above incentives are geared more toward securing a new tenant. While the third option can also be utilized to secure a new tenant, we have found it’s also a great way to motivate a current tenant to renew their lease.
If you haven’t tried using a leasing incentive, I encourage you to do so. These have all proven to be quite effective for our investor clients!
“Revert to Owner” Option with Utility Companies
Did you know about the “Revert to Owner” option with utility companies?
Electric companies and gas companies offer a free service called “Revert to Owner.” This is very helpful when you own an investment property.
What happens is that any time a renter calls the utility company and asks for the electric or gas to be turned off, the utility will automatically be switched to your name (the owner) so that there’s no interruption in service.
Think about that. Your renter is moving out in December and you’re on a skiing trip with your family. You don’t want to sit on the phone with KCP&L while you’re on vacation, making sure the utilities don’t get shut off when the current renter moves out.
Even worse, if your power or gas are shut off in the heat of the summer or the cold of the winter, you might have thousands of dollars in damages due to freezing pipes or mold depending on the time of year.
All you have to do to get this set up is fill out a form with your utility company.
In an effort to get you started in the right direction, here’s a link to the utility sheets that we have for most major cities in the Kansas City metro:
Utility Sheets in Kansas and Missouri
If you own an investment property, we recommend that you get this set up as soon as possible!
Home improvements for renting? Material choices matter.
By Paul Branton, Director of Investor Services for Home Rental Services
When it comes to making home improvements with renting in mind, there are certain choices that can help reduce your maintenance costs. One of the important choices is the type of materials to use. The most common are found in the flooring department. The initial costs for “upgrading” may not be attractive at first glance. But if you run the numbers on how much longer it should last, that is where you see the value.
Here are a few areas where material choices matter:
Carpet vs. LVP (Luxury Vinyl Plank)
- Life Expectancy of Carpet = 5-10 years
- Life Expectancy of LVP = 15-25 years
Treated Lumber vs. Composite Decking
- Life Expectancy of Deck = 10-15 years
- Life Expectancy of Composite Deck = 20-25 years
Carpet vs. High Traffic Carpet
- Life Expectancy of Carpet = 5-10 years
- Life Expectancy of High Traffic Carpet = 15-20 years
While most of the “upgrade” options should last nearly twice as long, they generally don’t cost twice as much… which means you come out ahead!
Replacing a deck with a concrete patio
Another area that we’ve been helping investors reduce maintenance costs over the long haul is by way of replacing decks with concrete patios. If the deck is low enough to the ground that it wouldn’t require a long flight of stairs to reach the patio, we recommend tearing off the deck and installing a concrete patio. As I’m sure you know, wood decks require annual maintenance and deteriorate much more quickly than concrete patios. Surprisingly, they cost about the same to install.
What other areas of home improvement do you consider “upgraded” or “alternative” material choices to reduce your maintenance costs?
If you have any questions about making a property rent-ready, please feel free to give us a shout. We would love to help!
The Laws of Attraction in Investment Properties
By Paul Branton, Director of Investor Services for Home Rental Services
Over the years, I’ve been involved in hundreds of leases. It’s interesting to see how varied the outcomes are between how quickly a home is leased and the quality of tenants you attract, when compared to the state of the property. Also, it’s obvious that the condition of the property has a direct impact on the monthly rate that can be charged.
I believe in the “laws of attraction” theory when it comes to marketing your property.
In other words, updating an investment property to current standards when you turn a renter will determine:
- How quickly you lease to a new tenant
- The quality of the tenant (in terms of paying on time and taking care of the home while they are living there)
- The amount you will be able to charge each month
Here’s a more technical explanation about how these mechanics work:
- Improved Market Rate Properties attract Higher Credit, Higher Income, Lower Risk Tenants who will want the property properly maintained (higher standards) and will generally do their part to help maintain the property. (They will maintain, or even improve, the overall condition of the property either at their expense or the owners.)
- Quality Market Rate Properties attract Quality-Marginal Credit, Qualifying Income, generally low risk tenants who will not expect “perfection” but will want the property to be well maintained and may do a little bit themselves to help but just enough to keep it in the same condition.
- Under Improved Below Market Properties attract Marginal Credit, Just enough income to qualify, somewhat risky tenants. These folks typically don’t want to do much in the way of taking care of the property, but will have relatively high expectations of the landlord since they’re paying a high percentage of their income to rent the property.
- Unimproved Below Market Properties attract Marginal-Lower Credit, Qualifying Income, somewhat risky tenants who will not worry about the property as much since it appears the landlord doesn’t. This negatively impacts the property from performing well as a rental. This ends up costing the landlord more than if they had been willing to do ongoing maintenance and improvements.
With that in mind, I would suggest taking time to think about how you’re maintaining and marketing your properties. Keeping your investment property in good condition will allow you to stay in the Improved Market Rate and Quality Market Rate brackets, attracting the caliber of tenants you desire. A+B doesn’t always equal C, but the general trend is there.
If this all seems a bit overwhelming and you would like help evaluating your rental portfolio, please feel free to reach out! We would love to help!
Real Estate Investing Lingo Defined – Part 2
By Paul Branton, Director of Investor Services for Home Rental Services
Welcome back! It was about a month ago when I introduced you to some terms used in real estate investing. To get you caught up, here’s a link to that post:
Real Estate Investing Lingo Defined – Part 1
As you saw at the end of that post, I said we would be breaking down this sentence:
Hey Suzy, check out this turn-key deal! I can get a cap rate of 8%, maybe 9% if I do a few things to force appreciation; would you be open to doing a JV with me on this deal?
Let’s jump right in!
Turn-Key: A “turn-key” property is basically what it sounds like… everything has been done for you. All you have to do is purchase it. This generally includes everything from the full scale renovation of the property to placing the tenant. With a “turn-key” property, you should be able to close on the property and have it be a performing asset. The advantage of “turn-key” is it removes you from holding the property during the renovation and marketing/tenant placement time.
Cap Rate: Cap Rate is short for Capitalization Rate. This is a common measure for evaluating the value of a real estate investment. The way you calculate the cap rate is by taking the net operating income and divide by the current market value of the asset. (Cap Rate = NOI/Market Value) For example, if you have a property with a NOI of $16,000 that is worth $200,000 then your cap rate is 8%. ($16,000 / $200,000 = .08 = 8%)
Forced Appreciation: Forced Appreciation is an increase in the value of the asset due to the intentional actions of the owner. (Not natural/market appreciation.) You can force appreciation in numerous ways. The most common being increasing rents and decreasing expenses… both of which will increase your NOI.
Joint Venture (JV): In its simplest form, a joint venture is a business arrangement where two or more parties pool resources for the purpose of accomplishing a specific goal. In a joint venture, each of the parties is responsible for profits, losses, and costs associated with the investment.
This is another example of industry specific lingo that can be intimidating to people getting into real estate investing. My hope is that these four terms make more sense to you after reading the definitions. If you have any questions, just give us a call! Home Rental Services has been helping real estate investors since 1989.
Real Estate Investing Lingo Defined – Part 1
By Paul Branton, Director of Investor Services for Home Rental Services
You know how in most professions there’s a “language” that those inside the profession tend to know? Well, that certainly is the case in real estate investing.
To make this experience a bit more fun, lets breakdown this sentence:
Hey Bill, Do you remember that time I used $100k in OPM to do a BRRR, hit the 1% rule and make an 18% Cash-on-Cash return? Wow, that sure was a great deal!
Okay, so clearly there were a few words/phrases in there that are unfamiliar to those outside of the world of real estate investing. Here are some definitions for these commonly used terms.
“OPM” or “Other People’s Money”
This is pretty much what it sounds like. The concept of using borrowing opportunities to leverage capital for investing. In other words, borrow money to use as investment capital. This works well when interest rates are low, like they’ve been for the past few years.
See the difference between using cash or leveraging OPM in the cash on the cash return example below.
“BRRR” or “Buy-Renovate-Rent-Refinance”
This is a method that is commonly practiced in “Buy/Hold” investing where you BUY a property with cash, RENOVATE the property to increase its value, RENT the home to a tenant and REFINANCE to get back all of your purchase and renovation funds.
The “1% Rule”
This is an often used “target” for the ratio of money invested vs. the rental rate. For example, if I purchase and renovate a property with a total cost of $150,000, the 1% rule would say that I should look to get $1,500/month in rent.
It will depend on the market and asset class that you are investing in, as to how easy or difficult this ratio is to achieve. The percentage will usually be lower for investments in a better market or asset class. (Lower risk = Lower rate of return.)
“Cash-on-Cash Return”
This is a percentage that is calculated based on the annual before tax cash flow or Net Operating Income (NOI) as compared to the total amount of capital invested.
As an example, if you were to invest $150,000 in cash to purchase a property that produces $18,000/year after expenses, the Cash on Cash return would be 12%. ($18,000 / $150,000) In this same example, if you leveraged “OPM” and only put 20% down, you would be investing $30,000 with the potential for a greater “CoC” return.
That being said, you must factor in the added expense of the debt service payment on the $120,000 you financed. To do this, you would take the $18,000 and reduce it by the annual mortgage payments of lets say, $10,000. This leaves you with a NOI of $8,000 and gives you a return of 26%. ($8,000 / $30,000)
If you’ve made it this far, I hope that you’ve learned something new! Or at least understand some of the abbreviations that get thrown around. If you want to learn more, look for my next post where we will break down the following sentence:
Hey Suzy, check out this turn-key deal! I can get a cap rate of 8%, maybe 9% if I do a few things to force appreciation; would you be open to doing a JV with me on this deal?
Continue reading: Real Estate Investing Lingo Defined – Part 2
