We have been niched within the investment property arena since our first duplex sale. Since then a growing number of our clients have seen the myriad of benefits to ownership of the income property. We would like to highlight some sticking points regarding the evaluation and qualifying of an income property.
As the markets appreciate and rental rates accelerate, the acquisition cost has faced a necessary adjustment following the financial collapse. This has created the need to be more discerning, with the evaluation of each investment.
Our focus is on income properties that are nestled into 'owner occupant' neighborhoods for the following reasons:
- Owner occupant areas offer increased long term appreciation vs the 'cash flow' or 'rent roll' analysis common in more commercially zoned areas
- avg. tenancy is 2x term length, lowering the management cost, as time is money
- as area homes improve, it is accustom to follow suit as the tax code allows: we either set the tone or follow suit in keeping up our income properties, as constant improving becomes necessary to offset earnings in April.
- future development potential is greatest in owner occupant neighborhoods: sample- as Baby Boomers retire, the desire to have a "condo" within walking distance of 'Patisserie 46' will grow dramatically, thus creating condo conversion demand for those suited to flawless restoration and legal positioning via our legal team at Saliterman.
Owning and running an income property, is strikingly similar to operating a small business, thus the evaluation of the efficiency of your target becomes critical to finding a value in the marketplace. Once establishing a target, it is paramount to evaluate the following criterion:
- what is the present landlord doing wrong with regards to rents- are they at market, above or below?
- what renovation opportunities are apparent that would have a sound long term return in rental increases, demand alteration, and overall tenant satisfaction?
- evaluating the numbers- buildings are technically only worth the income they can generate (outside of being located in a blue chip area of town) the rent multiplier commonly used is 1:1 for if a fourplex generates $4400 per month in rent, its worth 440,000. We attempt to apply that argument all over town, with mixed levels of success and owner reactions ;)
- it is our experience that operating your investment property from the mindset of the owner occupant is best approach, ask yourself: "If I was planning on living here for 5 years, how would I want things to be around here." This equates to completing value added items that cheap landlords would never consider: Green spaces, Privacy fencing, heated tile, motion sensing light switches, modern appliances and HE laundry machines. Setting yourself up for success in running your investment property is directly contingent on how thorough you are in its preparation from curb to back alley.
Our lending partner Paris has been beating the streets with us this winter on his personal investment property quest. This one in particlar on Pillsbury has great upside, however at 380k, it will be difficult to earn a return based on some layout hurdles. We set a target price on this building at 320k, that would allow for 30k in bath/kitchen updates, while securing some of the privacy layout issues that hamper many duplex conversion properties. The best multi units for current demand and long term return are those with original craftsman features. This allows the blend of modern baths and kitchens, with the priceless touches of 20's era lighting, and millwork that is unmatched in modern architecture. The above and below samples are from a massive duplex near 40th and Pillsbury in Kingfield. The Upside here is tremendous, with a chart topping walkability score, surrounding restaurants and attractions, proximity to parks and the eras of 1918-1935 offering tremendous character. As the streets fill with dumpsters of owner occupant remodels, we urge our investor clients to pass on a little cash flow in trade for the appreciation upside in Kingfield. The above original light fixtures and untouched millwork provide a perfect canvas for creating a high end space. Millwork is easily revived with some light sanding and two coats of quick dry varnish in either gloss or satin. Original lighting always appears tired in a neglected space, however once the spaces are clean and modernized, the original fixtures will add a pop of class not found anywhere within the home depot lighting section.
The fourplex below is a bank-owned REO property near Powderhorn Park. This style of property represents the long term cash flow approach to investing- this building will carry a large return in monthly cash flow, in exchange for an immense renovation cost up front and typically more difficult tenancy and turnover ratios. The fourplex is typically not for the rookie investor, as they require an increased level of capital and management time.
Adding radiators to a system offers a dynamic way to rearrange a dated kitchen or bath layout. This was from a kitchen where the original radiators where located underneath the farm sink, moving them to the outer wall allowed for modern layout with dishwasher and custom cabinetry. One of the biggest keys to operation costs in a multi-unit property are the state of the mechanicals. The most important level of the building to comb upon first showing is the basement, as condition of plumbing, electrical panels, heating plants, and soundness of the foundation area all hidden costs you want to avoid, or build into the purchase price with the seller. Seasoned investor Mick below is showing his excitement over this clean original boiler in a Lake Nokomis duplex near Busters on 28th.
Adding radiators to a system offers a dynamic way to rearrange a dated kitchen or bath layout. This was from a kitchen where the original radiators where located underneath the farm sink, moving them to the outer wall allowed for modern layout with dishwasher and custom cabinetry. Referring to the "owner occupant" blocks, below is a photo from the porch of a duplex that is surrounded by single families and owners, blocks with this demographic will have great long term appreciation upside, and typically lower cash flow as the acquisition cost is typically much higher.
Referring to the "owner occupant" blocks, below is a photo from the porch of a duplex that is surrounded by single families and owners, blocks with this demographic will have great long term appreciation upside, and typically lower cash flow as the acquisition cost is typically much higher.
Below is a sample of "peeling" paint as defined by FHA. This is important to evaluate as FHA is the only government backed mortgage medium available for the buyer with less than 20 percent down payment. When approaching an FHA funded investment property, you must be prepared to repair or escrow for conditional items that the appraiser deems as below FHA lending standards. This is a hassle, however a small hurdle to overcome when getting the benefits of 96.5% Loan to Value!One of many "original" baths with 20's vintage tile. Take due care in demolishing a vintage bath, it is our experience to have your design professional look at the space first, as often times the addition of modern lighting and the perfect paint color can make a vintage chic bath shine. Having the right team behind you is critical. Below is a photo of the downtown office our esteemed legal team at Saliterman. Your investment property family of white and blue collar partners are imperative to creating a successful operation.
Lending is a clear competitive edge in the commercial world, as lenders are the gatekeepers to making a deal work or having it fall apart. We have had great experiences with local banks that delivery unparalleled service and terms that are nearing of Fannie and Freddie. That being said, for your first 1-2 investment properties the government is always nearly irrational with its lending practices. We advise using a conventional mortgage broker for the first couple investments, as the rates are unbelievably low and term of 30 years cannot be matched.
Whether its your first or your tenth, closing on an investment property is pure excitement. Ensuring clean and clear title and proper transfer of prorated rents and deposits is another final checklist item. For more discussion on the process of investment properties, follow our facebook page and email steve@rareformproperties, as I would gladly meet your for a beer and chat all things multi-unit!As conventional lending at Fannie and Freddie step away from lending on investment properties, it becomes critical to align yourself with local commercial lenders. We have a network of excellent local banks that lend competitively on 10 year terms with 30 year amortization. This is crucial for those that seek to increase their holdings beyond 2-3 properties.