A quality home valuation is essential in guaranteeing that your next acquisition is a solid investment. The valuation process begin with the numbers on paper, but in order to justify the numbers, a thorough property inspection (walk through) must be done. If you can correctly evaluate these 7 areas of any structure you will be able to nail your rehab cost, but I know you will miss the final one.
The 7 Elements Essential to Your Inspection
When conducting a walk through, cosmetics should not be the focal point or the deciding factor on how much you will pay for a property. Each house has 7 essential elements that must be meticulously inspected to ensure you minimize overages on the renovation budget. When conducting a walk through these areas should help justify your position:
These elements are what keep the house functioning as designed. I normally refer to a home as having 3 levels: Mind (electrical), Body (foundation/roof), Soul (plumbing/heating/windows), by focusing on these areas will normally save you thousands.
Related: The Value of Presale Home Inspections for Real Estate Investors
3 “Levels” of a Home
Mind– prior to entering the property, check the electrical panel box. Look to see if there is a circuit breaker box or a fuse box, this is very important because fuse boxes normally will not pass inspection in most cities, and insurance companies will not insure the property. Also if the exit strategy for the property is to find a retail buyer a fuse box is not acceptable according to FHA standards, thus limiting the buyer pool. Knob-and-tube wiring in houses that pre-date 1950 will be another source of concern. This form of electrical wiring is dangerous and very expensive to replace. If this type of electrical wiring is throughout the property it will need to be replaced. Many insurance companies will not insure a property with this wiring either. Knob-and-tube wiring is hazardous for 2 reasons: the wiring pre-dates 1950, and the wiring becomes brittle and breaks down which can result in electrical currents not being channeled correctly. In traditional electrical wiring the ground wire will channel that energy but because of the absence of the ground wiring in knob-and-tube wiring the current may cause a fire. Check the electrical circuitry thoroughly during the inspection period. If there are any doubts consult a licensed electrician.
Body– Structural issues with a property can result in blown timelines. Many times I have witnessed investors not carefully checking the roof or the foundation. As you approach the property, the roof line should be what is being evaluated. Look for turned up or missing shingles, if this is evident be aware that there may be rotted wood or mold within the property. Dealing with a roof that is at the end of its life is very noticeable and if it is addressed immediately can save the budget and the timeline on a project. Foundation problems, on the other hand, can quickly scare any buyer; this is the most feared word when dealing with a rehab. If the resources to fix a damaged foundation are available, then getting deeply discounted properties with this issue will not be a problem. Signs to look for in damaged/faulty foundations: stress cracks in the garage slab, cracks in the walls and around doors and windows,. and doors that do not close properly can be found in properties with foundation problems. Often owners will say “the house is 30 years old the house is just settling,” this may be true but deep cracks mean something more major than settling.
Soul– the soul is the heart of the home and this is the HVAC and windows. Windows are easily identifiable if replacing is needed. Windows add value to the property in 2 aspects; windows add to the appeal of the property or the lack there of, and the energy efficiency of the property. There is an ancient proverb that says “eyes are the window of the soul.” I like to say windows are the eyes of the house. If the windows are in good condition you can expect to have an efficient property. This is especially important for landlords, and mid-grade to luxury flips. Windows can save landlords money, and make a flipper lots of money.
The HVAC systems are the lungs of the property, but I encompass this system with the soul. HVAC is important because it coincides with the energy rating and efficiency of the property. Always be aware of the the functionality of the furnace. First, try and find the manufacture date to see how old the unit(s) is. Secondly, see if it was maintained correctly, normally you can find this information by dates of inspection labeled on the units. If this is not visible, pull out the furnace filter, this will give an indication of how the unit were maintained. Following similar steps with the water heater (except checking the filter) is normally a good practice to follow.
Related: 5 Tips for Installing an HVAC System
Infestations– Many investors overlook this step because it is not as easily identifiable as the others. This is an issue with properties that are in wooded areas, but it occurs in many residential neighborhoods as well. Infestations can be dormant at the time of inspection, but once demo is underway it can pose serious problems. Infestations can be: mice, rats, raccoon, squirrels, scorpions, bees, roaches, mites, termites, and many others. These hidden critters can be a pain to get rid of but most of all the damage done by these varmints can affect the other main systems of the property. Things to look for when doing the inspection for infestations are: dirt tubes around the base of the property for termites, shredded pieces of paper or droppings in cabinets for mice and rats. Nut shells or borrows in the attic for squirrels and raccoon. With scorpions a different approach is needed; if you are in …read more
There’s an almost universal misperception that the every day American family simply can’t arrive at retirement with more money than they ever made on the job. I’m here to tell you that is a fallacy, at least in my experience. Don’t get me wrong, the lower the income the longer it takes and the lower the ultimate income in retirement. Still, though most folks give impressive lip service to what can be done with solid self discipline, a solid plan, a real purpose, and the flexibility to adjust when necessary, they generally aren’t walkin’ their talk. In other words, they don’t really believe what they want to believe.
Let me sprint to the bottom line here. If you have long enough, and you have enough capital, which doesn’t hafta get within shoutin’ distance of being impressive, you can indeed retire with more after tax income than you made in your best year on the job.
Jim is a young (30) engineer makin’ roughly $60,000. His wife, Melisa, (29) is in retail sales, makin’ roughly $35,000. They don’t have kids yet, but that’s likely to change in the very near future. They don’t live super cheaply, but are relatively wise with their money, saving while still enjoying life. Let’s lay out a short outline of what’s possible for ‘em. We’ll assume they retire sometime in their 60s, 30-35 years from now.
A Broad Brush Look at What’s Possible
An EIUL policy with an inflation based monthly premium of about $500 will, in 30 years produce a tax free income of roughly $4,000. That’s a rough estimate, but done by a pro in the industry. Then there’s Melisa’s income, which doesn’t come with a company sponsored 401k plan. She and Jim decide to start Roth IRAs, one for each of ‘em. Jim long ago eschewed any participation in his employer’s 401k plan. In fact, years ago while still in college, he followed my advice to gut his small 401k with the big box store employing him, and paid off all his outstanding debt.
Now, before too many years go by they’ve accumulated enough to each buy one modest discounted note, secured by real estate. We’ll say this began when Jim was about 35 or so. By the time they’re both 60 they’ll have grown their note portfolios to the point of a combined potential tax free monthly income exceeding $10,000. For you Doubting Thomas types out there, they’d get about half that much if they NEVER bought a note for 30 years, just each contributed the annual allowed amount each year for that long, THEN bought notes. However, doin’ it for 30 years or more, allowing the payments to build up, reinvesting them too, plus reinvesting paid off notes, adds up hugely over what would then have been approximately half their lifetimes.
So far, Jim and Melisa have arranged to generate somewhere around $150,000 a year at retirement, all of which is defined by the Internal Revenue Code as TAX FREE. Even if we’re gonna be cartoonish about …read more
Let me tell you how much I despise one-on-one showings with perspective tenants.
Okay, “despise” is a strong word. It’s meant for dramatic effect.
But I’m a busy person. And driving to my property to show a vacant unit to one person is a massive waste of time.
Yes, I pre-qualify the tenants over the phone. I’ll ask them a series of questions to make sure that they have the proper credit history, they can move in at the proper time, and they are generally serious about looking for a place to live.
Regardless of how much time I spend trying to prequalify a tenant over the phone, though, I still lose far too much of my precious time conducting showings that will obviously go nowhere.
Sometimes a potential tenant will very clearly dislike the unit. Their disappointment with the house is evident — it’s written all over their face.
I’ll see them glance at some aspect of the home that I can’t control, such as the square footage of the kitchen, and I know immediately that the 15 minutes I spent driving to the unit, the 10 minutes I spent waiting for the potential tenant to show up, the 10 more that I will spend showing them the place, and the 15 minutes that I’ll spend driving back home are just a total write-off. Bye-bye, one hour of my life.
Other times the potential tenant will no-show, which is even more frustrating.
But don’t worry — there are two awesome solutions.
The first and most obvious fix: Hire a property manager. That’s a different conversation for a different day.
But here’s a second, less-obvious fix: Hold an Open House.
The Awesomeness of the Open House
I took a page from the real estate sales playbook and started hosting open houses.
When I list a vacant unit, I plan two Open Houses: the first on a weekday evening, and the second on a weekend.
For example; I’ll state that I’m hosting an Open House on Wednesday from 6 p.m. to 8 p.m. and on Saturday from 11 a.m. to 1 p.m. (Note: Don’t plan the Open House too early in the morning. People like to sleep in, myself included.)
When potential tenants call to ask me about a vacant unit, I’ll tell them that if they want to see the unit, they can come at one of those two times. I’m clear that I’m not doing any private showings.
The vast majority of potential tenants are okay with this. Every now and again, someone will protest: “Oh, I can’t make it during one of those times!,” at which point my reaction is — basically — “Tough. If you really want to rent this unit, you’ll find a way to make it happen.”
(Note: I once rented a unit to someone who couldn’t come to either of the …read more
I really can’t tell you how many times I’ve been asked the question: Is this a good note deal? So, first, let’s consider why people ask this question. I think it’s because they want to hear your response or opinion of what a good note deal actually is. Although I’m honored that those who ask me value my opinion, I don’t want to do them a disservice by giving them a simple “yes” or “no” answer. Besides, what’s a good note deal for me isn’t necessarily a good note deal for someone else. When a real estate investor, who’s getting started in notes, asks me about a note deal, I try to explain my take on it by relating it to a real estate deal.
So, What Makes a Good Real Estate Deal?
At first, sometimes it is hard to tell, or to know, if you have a good deal until you get some experience. Let’s look at real estate, for example, there are several areas of a deal where you can make money:
- The buy – When I first started in Real Estate, I paid close to retail like most people, who are just starting out. Today, I would usually only buy properties from motivated, or distressed, sellers. Another way to find a good deal on the buy, is finding a discrepancy in fair market value or a property in lesser conditions.
- Rehabbing the property – Although heavy rehabs tend to be more profitable, sometimes you can find properties that don’t need as much done and that can be turned around quickly. If you have experience rehabbing, you may also have more knowledge of what everything costs. Another skill set that can give you an advantage, besides creativity and the ability to rehab a property, involves managing contractors.
- Management –Were your estimates accurate? Did you come in under budget? Did you finish the rehab in a timely manner? If you’re using private money, the longer the deal takes, the more it will cost you.
- Shopping for financing – The time and effort it takes to find financing, as well as the type of financing you find, can affect the profitability of your deal. For example, private money is usually cheaper than hard money. Also, people with good credit get better terms.
- Foresight – Your level of foresight can go a long way. For example, there was a property I paid retail for ($65,000), but I saw potential to build a commercial garage on an adjacent lot. Now, the property is worth over $200,000.
- Marketing – If you’re skilled at marketing, you will get the property rented or sold quicker than someone, who’s not skilled at marketing.
Any of these things can turn an okay deal into a really good deal.
I remember when my cousin and I were investing in similar types of properties; he always had to get a great deal on the buy side because he can’t change a light bulb. I, on the other hand, I had a few advantages. For one, I was a …read more
Some architects don’t like to draw inside the lines and some homeowners don’t like to live like everyone else. Have you ever gotten bored with the same old “cookie-cutter” designs that home builders have been using for centuries on end?
If you’ve ever wanted to try something different with your next home or building project, perhaps these unique houses around the world will offer you some inspiration (and good luck getting approval from your Home Owners Association)…
Related: 20 Of The Weirdest Things Documented During Property Inspections (Some Of These Will Blow Your Mind, Especially #2)
1. Tiny House, United States
2. Transparent House, Japan
Source: sou-fujimoto.net (via boredpanda.com)
3. Skinny House, Poland
Source: domkereta.pl (via boredpanda.com)
4. Flintstones House, United States
5. Seashell House, Mexico
6. The Simpsons Replica House, United States
7. Skateboard House, United States
8. Cat Heaven, United States
9. School Bus / Mobile Home, United States
Source: hankboughtabus.com | Photos: Justin Evidon (via)
10. Vintage Boeing 727, Costa Rica
The post 10 Of The Strangest (And Coolest) Houses You’ve Ever Seen is property of The BiggerPockets Blog. and is Copyright
Meeting with clients this time of the year is great for my Bigger Pockets writing….it creates lots of real life situations that I can share with you guys on things to look out for and mistakes to stay away from. Today I wanted to talk about legal entity mistakes. I am not an attorney so I do not have the credentials to provide you with legal advice. In fact, my legal opinion is probably worth about a dollar, if that. Nonetheless I would still like to share these common errors that I see with you and I would love to also hear some comments from attorneys in our Bigger Pockets community as well.
Here is the Common Scenario:
A client walks in with their tax information and tells me they have formed a few legal entities. Company A was formed to hold rental property on Main Street. Company B was formed to hold property on Harbor Street. Company C was formed for some fix and flip that they were planning on doing. And last but not least Company D was formed to be the holding company of all of these entities. My first question is generally: Great, tell me how the new entities have been working out for you?
Inevitably, there will be the client who turns red and then tell me that they have actually not used any of these entities that were created. Rental properties are still held by their personal names, rent checks still being made to their personal accounts. What about the game plan for that lucrative fix and flip business? Well, it was hard to get a property under contract so no deals have actually been done in the entity just yet.
Related: C Corporation: The Active Real Estate Investor’s Preferred Choice of Entity
This means that I, as the tax advisor, have to be the bearer of bad news and give them a reality check. Essentially, what has happened is that the client has incurred a lot of costs (i.e.: legal fees, state fees, etc.) and time to form these legal entities that they are not getting any benefit for. Why would someone go through all the trouble of forming entities for asset protection and tax write offs but then never actually use the entities? I can’t answer that question myself….but I can say that this scenario applies to a lot of people that I meet with. So, if what I described above sounds eerily like you, don’t feel too bad because you are not alone.
My guess as to why this happens is that I think maybe some investors have a false sense of security in that they think by simply paying an attorney to form a legal entity that somehow they magically get asset protection. Well….this is definitely not the case. Based on my experience, owning a legal entity alone provides you with no real asset protection. You actually need to be utilizing the entity correctly and in the way that you attorney intended for you to use it before you get any real asset protection.
The minimum to be done is to at least transfer your property into the entity. Title should definitely be transferred out of your personal name if you want to protect your personal assets from potential lawsuits.
You will also want to makes sure you set up a company bank account for your entity so that the account can be used to receive income and pay expenses with. This way you can show that the entity is distinct and separate from you. Another great benefit of having an entity bank account is that it makes things a heck of a lot easier for you at tax time. If you have ever paid your real estate expenses from your personal bank accounts, you know what I am referring to when I talk about the pain and time needed for you to break out the real estate expenses from your personal bank account at tax time. This is something that can easily be avoided if you have an entity bank account to pay for all your real estate related expenses.
Related: What Type of Legal Entity Should I Hold my Real Estate In?
Having separate bank accounts can help you tremendously for audit protection purposes. IRS generally puts more weight to something being a business expense if it is paid out of a legitimate operating legal entity rather than out of your personal bank account.
Now what about that entity you formed last year for your planned fix and flip business? Well, I would definitely ask yourself the question: Do I plan on flipping properties this year? If the answer is yes, then start using that entity for all your flip related income and expenses. If the answer is no, then now is a good time to visit with your CPA to strategize on what the best thing is to do with that entity. For example, are there other ways we can use this entity to save taxes or minimize liability exposure? Or is it simply better to just dissolve the entity and minimize costs of an entity that is no longer needed.
Another common myth that I see is that people often think that because a legal entity was not used, there are no taxes to be filed. That is definitely incorrect. Yes, it is possible that in certain instances, you would not be required to file a tax return if no business was done in the entity. However, most of the time tax returns are required even for entities with no activities. Whether a tax return needs to be filed for an entity or not will depend on the state you live in, the state the entity is formed in, as well as who the owners are. The IRS imposes hefty penalties for entities that don’t file the required …read more
I was sitting down for dinner with a friend the other night and he said to me “Brandon, I want to buy my first property but there is so much information out there. I just want to see the whole process, neatly outlined, so I know my step by step plan.”
And I thought “Isn’t’ that we all want when learning something new?
We want to see the whole picture, not just broken up parts.
Today I want to help you do just that – learn the step by step process for getting your first rental property in the next 90 days. For those of you who like something tangible to look at, at the end of this post I’ll show you where you can download a free 1-page PDF summary of this process- neat and clean, just like my buddy ordered.
Alright, let’s get started.
Step One: Get Pre-Approved.
Unless you plan on paying cash (which would be great) you are going to need a pre-approval letter from the bank or other lender.
We start with this step because I don’t want you wasting time only to find out you can’t afford it. Your lender will help you know exactly how much cash you’ll need.
Step Two: Get in Touch With a Real Estate Agent.
Don’t just call the name on the park bench by your house.
Look for an agent who is willing to spend the time needed to help you get the perfect deal.
Get recommendations from others and pick someone you get along great with.
The best part is, a real estate agent is paid by the seller- so it’s free for you to use one!
Step Three: Define What You are Looking For.
Let your agent know exactly what kind of property you are interested in. If it’s a duplex, you don’t want to waste time looking at single family homes. And vise versa.
Step Four: Start Looking
Yes, you’ll actually need to spend some afternoons with your real estate agent looking at potential properties. And like dating, the more you look at, the better you’ll recognize “The right one” when it comes along.
Don’t be afraid of looking at properties that might need a little TLC, but don’t get in over your head either. Once you find the right one, you’ll need to do Step Five, which is
Step Five: Do The Math
A rental property is only as strong as it’s math. (yes, you should Tweet that)
Run the numbers and make sure it pencils out. Be conservative, and be sure to plan for property management, vacancy, repairs, and more.
I’d recommend running the numbers through a good property analysis tool, like The BiggerPockets Rental Property Calculator to make sure you are looking at all the facts and figures.
Step Six: Make an Offer
Okay repeat after me:
I WILL NOT OVERPAY
Negotiate with the seller and stick to your math from step 5.
You might go back and forth a few times, and you might even lose the deal and have to start over. But whatever you do …
Do Not Overpay.
Soon enough you’ll get an offer accepted and you’ll be ready to move on to
Step Seven: Do Your Due Diligence
At this point, you want to make sure there are no hidden surprises at the property.
Hire a property inspector to walk through every inch of the property looking for potential problems.
If you find any, either :
- suck it up if it’s not too bad,
- ask the seller to fix it if it is bad,
- and if it’s really bad – walk away.
During this time your agent will help you shuffle the correct paperwork between them, your lender, and your title company.
Step 8: Close on the Property
It’s been a journey, but finally you are ready to close.
You’ll show up to the Title Company (or attorney) and they’ll take care of the rest. You might even get some chocolate at the front desk! Once the title and deed are recorded at the county, you’ll get the keys and be the proud owner of your very own rental property!
Now comes the fun part – managing your properties. And for tips on that, you’ll have to wait for another blog post!
As promised above, I created a simple 1-page PDF of these steps so you can print it out and hang it on your wall or just keep in your files. To get it, simply click the photo on the right and head over the BiggerPockets FilePlace and download it for free!
Finally, if you could do me two quick favors:
The post How to Buy a Rental Property in the Next 90 Days (With Bonus PDF!) is property of The BiggerPockets Blog. and is Copyright