By Paul Branton, Director of Investor Services for Home Rental Services
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.)
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?
By Jennifer Hermon, Administrative Specialist for Home Rental Services
Investors have one goal in common… to make a decent return on investment with their rental properties. So one of the most common questions we hear as a professional property manager is “how?”
How do I make more money on my investment property?
One drastically overlooked area is renter retention. Sure, there’s location and making a house look good for showings. But once we’ve secured a good renter, a typical landlord forgets about it. They often count on the rental profit coming in from then on out. The mistake is that many owners don’t plan on keeping that renter to avoid costly turn over.
Renter retention starts the day the renter moves in and should never stop.
Typically, just after move in, a renter will find a few things that need to be checked or repaired. Maybe the wobbling ceiling fan didn’t bother the last renter, so it wasn’t reported. A toilet may have a slow leak that no one noticed before because that bathroom was rarely used. Whatever the case, we listen to the renters and do what is reasonable to make the home enjoyable for them. This also protects your investment.
Throughout the year, we keep renters informed with email and blog post reminders about removing hoses in the winter, reporting problems directly after large storms, etc. These are just a few of the things Home Rental Services does to promote renter retention.
So what can you, as an owner do? Listen to your renters. Be Proactive.
Ask your renter what could be done to the home to make them want to sign a new lease at renewal. Recently, we had a renter comment that they really love the home, but the old dishwasher makes a terrible racket. So they can’t really run it when someone is on the first floor. Sure, it works, but if spending a few hundred dollars on a new, quieter dishwasher makes them love the living space, replace it! That is so much less expensive and worrisome than vacancy or making constant repairs to a failing appliance. (Investor Insight: It is almost always a better ROI to replace a dishwasher vs. paying for repairs.)
Reinvest in your rental investment property.
This involves more than just planning ahead for exterior painting or new carpet in seven years. Plan for appliance replacement. Updating light fixtures and faucets can also go a long way. A freshly stained deck not only protects your investment, it reminds the renter of additional living space, giving more value to the home. If someone is proud of their home, whether they rent it or own it, they’re more likely to take better care of it.
In summary, don’t lose money to turnover and vacancy… Spend money on your occupied property to keep your tenants (people paying the mortgage) happy. Give them more reasons to love the home and stay year after year!
By Paul Branton, Director of Investor Services for Home Rental Services
What do you do when the same tenant stays in your property for nine years?
First, you should CELEBRATE!!! You’ve successfully avoided a ton of vacancy and extra turnover costs. These are generally the two things that quickly eat away at the potential profits for rental investors.
Second, you should BUDGET. Just because you might not need the funds this year, doesn’t mean you won’t need them when the time for turnover comes. You should be diligent and set aside an appropriate amount of money each year as if you were “turning” the property.
In our experience, a good rule of thumb would be to plan on one months’ rent as the amount to set aside each year.
This actually took place recently for one of our investors.
One of our clients has been with us since we opened our doors 29 years ago. Wow, that’s humbling to think about… I’m only 5 years older than his relationship with our company! (Thank you Bob. We sincerely appreciate the opportunity to work with you!)
In this example, the tenant moved into the property in 2009 at a rate of $1,070/month. When the tenant gave notice to vacate in 2018, his rate was $1,155/month. If you take the $1,155 and multiply it by nine, this gives you $10,395 which should be enough to cover all the turn costs, deferred updates/upgrades etc. to bring the property back to market ready condition.
As soon as we received the notice to vacate from this long-term tenant, we knew we needed to get our renovation plan ready.
Here’s what that process looked like:
- We reviewed the photos from our leasing agents pre-marketing walk through.
- We requested the bids from our trusted vendors.
- We spoke with the owner and presented the vendor bids.
- The owner gave his approval.
- We scheduled the vendors.
- We waited for the lease to end.
- We performed the formal “move-out” inspection.
- The work began (as scheduled) the day after the lease ended.
- The project manager performed periodic site visits for quality control and to keep things on schedule.
- Work was completed ahead of schedule. (8 business days.)
- New marketing photos were taken. (For future marketing to highlight new flooring.)
- Move In Inspection was done.
- New tenant takes possession only TWO WEEKS after the old tenant vacated.
Oh, did I mention that the new tenant is paying $1,400/month? We were marketing the property with the new market rate and advertising the improvement plans. Would you believe that renters really like new paint and flooring? I know, it’s crazy. :)
So you may be wondering if we kept this turn to the $10,395 estimated budget. Well, we didn’t. We spent about $12k. We could have been good with $10k but since this investor plans to continue holding the property long term, we opted to replace the flooring on the main level with a longer lasting LVP instead of carpet. (This decision will actually save money on future turn costs.)
The math works though, because the new rental rate of $1,400/month will allow the owner to make $3,000 more each year!
All things considered, this a great success story in the world of buy and hold rental real estate. If you would like more information on our Investor Services, be sure to visit our website or give us a call!
Living Room Before/After
Master Bedroom Before/After
Master Bath Before/After
By Paul Branton, Director of Investor Services for Home Rental Services
We recently had a client ask us if we were confident that we could place a new tenant at a rate that they had received three years ago. The amount they were asking for was 11% higher than what the current tenants were paying. To answer this question of pricing and confidence, we had to review the overall “health” of the property.
A couple of quick lessons to observe from this situation:
Just because your home leased previously for a certain amount, does not mean that it will lease at that same rate in today’s market.
The costs associated with turnover and vacancy can easily wipe out almost any rate increase.
DO NOT ignore your properties marketing/leasing history.
What to learn from the lessons above:
While it is true that the home leased at a higher rate three years ago… It’s not an accurate indicator of what the home will bring today. The market conditions and competition are constantly changing. We must always look at the math behind the risk/reward scenario.
In this example, the owner would need to lease his home with less than 30 days vacancy and NO turn costs in order for his 11% rate increase to get him ahead financially. Is that realistic? The answer for this property is: No. The answer might be yes in a different market or for a different property. However, we know the leasing history on this property and it typically takes over 30 days to place a qualified tenant.
In review of this homes leasing history and condition in relation to the comps, we advised the owner to renew his tenants at a 3% rate increase vs. taking the risks associated with the 11% higher rate.
Ultimately, the odds of the owner breaking even or losing money was more likely if he tried to obtain that higher rental rate. And our owner was really happy that we outlined all the details so that he could make a more informed decision.
By Paul Branton, Director of Investor Services at Home Rental Services
People buy or rent homes for lots of reasons. And I find myself being asked the question, “should I rent or own a home?” on a regular basis. Here are five reasons that it is still smart to rent instead of owning a home in Kansas City.
1) Housing Inventory
Inventory is low and it’s a very expensive time to buy. In just the past year, Kansas City has seen sales prices rise 11.6%. In contrast, rental housing inventory is stable and rental pricing has leveled off.
2) Maintenance and Repairs
Are you ready, willing and able to pony up extra money every year to cover general maintenance, repairs and improvements if you owned your home? Industry experts say that this will cost on average 1-2% of the property value. So, if you go out and buy a $200,000 house, you should anticipate and budget $2,000 – $4,000 per year to maintain your property.
Have you committed to living in Kansas City long term? If you put less than 10% down on the purchase of a home and need to sell within the first three (or so) years of ownership, you will likely not make anything when you sell. And hopefully you don’t actually lose money!
4) Down Payment
Are you ready to break open your piggy bank and lose access to those funds for the next (fill in the blank) years? Depending on your down payment, which varies by lender and loan type, you’ll need to put down anywhere between 3% and 20%. If you put less than 20% down, you will almost always be subject to paying what is called “PMI” or private mortgage insurance. This can easily add another $50-$200 per month to your mortgage payment.
5) Market Conditions
While we don’t expect a “bubble bursting” experience like we saw a decade ago, I still believe we’re in store for prices to start easing. You don’t want to put yourself in the position of buying at the top of the market, only to lose value shortly thereafter.
Don’t worry about rising interest rates. The difference between 4% and 4.5% on a 30-year mortgage (or even a 15-year mortgage) is about $10,000 – $20,000 more in interest over the life of the loan. This difference can be made up (in part or entirely) by buying the same house for less money when the market adjusts. It’s also quite unlikely that you will have the same loan the entire time you own the house. It’s likely you will either refinance or sell the house before you pay it off.
Those are just a few of the reasons why renting in Kansas City may be a better decision for you right now.
By Paul Branton, Director of Investor Services for Home Rental Services
When you go to the grocery store and apples are on your list, do you also look at oranges? Of course not! If you want oranges, you look at the oranges. If you want apples, you look at the apples. Unfortunately, too often when talking to folks looking for a property manager, they don’t realize that they are comparing apples to oranges.
While the monthly management fee, tenant placement fee and other recurring costs are important to consider, those may not be the expenses that will matter the most at the end of the year. When you call around and simply ask property management companies what they charge, there’s a good chance you aren’t getting the whole picture.
In addition to fruit, I also compare property management to insurance premiums and coverage. If one provider is less expensive, is it because they offer the same service or coverage for less? I doubt it. It’s more likely that they are cheaper because the deductible is higher and/or the coverage is weaker.
What questions should you be asking?
In addition to the commonly asked management fee and tenant placement questions, here are a few more important questions to ask when interviewing a property manager:
- How long has your company been doing property management?
- How many properties do you manage?
- If you charge a flat fee, what extras might get charged each month?
- What is your average vacancy between tenants?
- Do you market and show the home while it’s occupied?
- What is your tenant renewal rate?
- What is your annual eviction rate?
- What is the average amount charged to the tenants Security Deposit?
- Do you “up charge” vendor invoices? If so, by how much?
These questions are important because, when the year comes to an end, all of the above will impact your bottom line.
You should ask how long the company has been in the property management business to determine if they have a track record of success. If they’ve been in business less than five years, they’re probably still “learning the ropes.”
You want to know how many properties they manage (and types of property) to determine how well your portfolio will fit into their business model. If the majority of their management is multi-family and you have a single family portfolio, that is likely not the best fit.
You need to know the average vacancy between tenants, renewal rate and eviction rate as all of those will impact your cash flow. Avoiding turnover, vacancy and make-ready expenses is critical to the success of owning rental investments.
Finally, you should know if vendor invoices are being “up-charged” by the property manager. This one could cost you, and it’s not uncommon. For instance, let’s say you need a new hot water tank and the vendor bill is $900 but the PM gets a 10% “referral fee.” You are now paying $990. This up charge can easily add a 1-2% difference in the annual cost of management.
Just as you should not buy an orange when shopping for apples; you should not hire a property management company based solely on management and tenant placement fees. Be sure to ask more questions and get the whole picture.
By Paul Branton, Director of Investor Services at Home Rental Services.
When people ask me what I do for a living, I think that my new response will be…. “I help people play Real Life Monopoly.” We’ve said this inside the office for some time now, but after thinking about it more, it does seem like a reasonably accurate description.
If you look at the rules of “Classic Monopoly” you’ll see that the objective of the game is as follows: “Become the wealthiest player through buying, renting and selling property.”
Given those parameters and that objective, this is really quite similar to what I do here at Home Rental Services. My goal is to help our clients acquire, improve and maintain the best rental portfolios in Kansas City!
Here is a recent example:
A few weeks ago, I suggested to one of our investors that he sell his property that was struggling to rent and exchange it for another property. With the help of the great team at Group O’Dell, the home went under contract and sold in 40 days. The investor then took his equity by way of a 1031 exchange and was able to put about 25% down on the purchase of TWO rental properties.
In summary, here are the highlights of this transaction:
- His equity is no longer tied up in the form of 40% of one property. (Better Leverage)
- He now has ownership of two properties instead of one. (Better Diversification)
- He took his gross rent of $1,700/month and turned it into a gross rent of $2,650/month. (Increased Income Potential)
If that doesn’t resemble “real life monopoly” game play, then I’m not sure what does! If you ever find yourself wondering what you should do as a next step with your real estate investments, please give me a call!
By Paul Branton, Director of Investor Services for Home Rental Services talking about the recent trip to the NARPM® convention in Florida.
Just a few weeks ago, Caitlin, Kandy and I traveled to Florida to go to the 29th annual convention and trade show for the National Association of Residential Property Managers (NARPM®). The theme of the convention this year was “Engineered for your Success!” and it was held in Orlando at one of the largest hotels I’ve ever visited, the Rosen Shingle Creek.
We’re Committed to NARPM
This marks the second conference that I’ve attended, the sixth for Caitlin and the TWENTY-THIRD for Kandy.
Home Rental Services has been a member of NARPM since 1991. We continue to receive value nearly every day from the relationships, educational opportunities and member designations.
The biggest takeaways from the 2017 NARPM conference:
- We implemented additional screening criteria to ensure we remain compliant with Fair Housing Regulations.
- We added a feature to our website that allows prospective owners to receive a Free Rental Analysis report.
To see our Free Rental Analysis report system in action, click the screenshot below and enter a rental address. In less than an hour, you will receive a detailed rental report with comps in your inbox!
Quotable quotes from the keynote speakers:
- “If you’re not failing often, you aren’t trying enough.”
– Scott Steinberg
- “If you don’t have a crystal ball, perhaps it’s time to get some brass ones.”
– Troy Hazard
- “Do we want to be tools of our tools, or let our tools be our tools?”
– Curt Steinhorst
While we didn’t have quite enough time to make it to Disney World, I at least got to see this Topiary of Mickey Mouse!
In closing, we highly encourage you to make sure when selecting a property manager, that they are members of NARPM®. Why? NARPM promotes a high standard of business ethics, professionalism and fair housing practice. The Association also certifies its members in the standards and practices of the residential property management industry and promotes continuing professional education.
By Paul Branton, Director of Investor Services for Home Rental Services, talking about acquiring investment properties during football season.
As the weather changes and the temperature begins to drop, so begins the “off-season” for housing activity. While things are heating up between your favorite football rivalries, we usually see the demand for housing cooling down. That’s exactly why football season is a great time to buy!
Now you might be asking “Why would I want to buy when there is less of a demand?” Let me expand on this idea and give you a few reasons why:
- Not as much competition.
- With families settled into school and not wanting to relocate during colder months, this leaves sellers with fewer buyers.
- Lower Prices! With less competition, prices are lower than in the summer months.
- Summer is typically the most expensive time to buy real estate. When buying during the Fall (September through November) you can expect prices to be about 3% less than summer. If you wait to buy in the winter (December through February) prices in the KC metro are typically 6% lower than in the summer months.
- Inventory is lower. (Wait, how is that a good thing? Refer back to my first point about competition.)
- Ok, I realize it would not be a good thing to simply have less inventory. The GOOD NEWS is that while there are fewer homes on the market, there are even fewer buyers. In some markets during this time, there are nearly double the number of homes per buyer than in the summer.
- Banks want to get bad debts sold by the end of the year.
- In order to start off the New Year in a better position, banks tend to be open to offers in the fourth quarter that they might otherwise reject during the first three.
- Contractors are not as busy.
- This allows you the opportunity to negotiate better deals for the home improvements and probably get the job done sooner too!
Now that you know it’s a great time to buy, are you ready to get started?
Fortunately for us, not all property management companies are equal. Unfortunately for investors, having a bad management company can be expensive and very stressful. Here are some snippets of conversations we’ve had recently with clients leaving their current property management company and coming to Home Rental Services:
“I didn’t know my property was up for rent, let alone that renters weren’t renewing, until I saw it on a ‘For-Rent’ website!”
“My online account shows that I have money but they are not sending it to me!”
In the last month, Home Rental Services has taken over management of about a dozen properties because of these kinds of problems with the investor’s current management company.
This isn’t typical of our market.
Often, investors fear change. People will stick with mediocre service for a long time. But the unknown leads to desperation. We understand that. Not knowing why money is no longer coming in. Not knowing a renter is going to, or already has, moved out. Not ever being able to speak to an actual person for months. Don’t let yourself get to that desperation point!
If you find yourself in a similar situation, here are a few tips:
- If you have online access to your property rental information, log in right away to save/print every document and statement that you can find. Statements, leases, renter ledgers, etc.
- Check your old emails, especially those with attachments, for other documents you may have been sent. For example, copies of leases, owner statements and management contracts.
- Search for your property address on Google to find out if it’s been listed for rent on any websites.
- Send a written request (we recommend regular mail with proof-of-delivery) for any documents you cannot find. Be sure to find out who is holding the security deposit funds. Ultimately it’s your responsibility, as the owner, to account for and return the deposit to the renter.
Property management isn’t easy, and it’s not always perfect. But one thing we can promise is that during the business day, our phones are answered by a REAL person. Our owner clients receive a monthly statement and any disbursements available. Home Rental Services is not a one-man-show. We have property managers, leasing agents, listing agents, admin and support staff, and more. Renters can reach emergency maintenance personnel 24/7!
If we can help you protect your investment, or you want to learn more about Home Rental Services, please call or email us… we will answer!