Sure, learning how to become a rental house investor is easier to grasp than owning multifamily income producing properties. And, in most instances, buying multifamily real estate requires deeper pockets. But if you've been a homeowner, or even rented a http://www.weichert.com/NJ/ house or condominium unit to live in, it's no sweat learning how to buy and rent out few. But perfecting your real estate management skills, controlling operating expenses and constantly squeezing out profits is much more difficult for the neophyte.
For the purpose of our discussion, let's compare buying single-family rental houses to purchasing a small
apartment property with four units. I've chosen four units because the same single-family financing programs are available to purchase two to four-unit residential properties. What's more, if you live in one of the units, the down payment is lower. And notably, conforming conventional and government programs are available from traditional mortgage banks. Equally as important for novice real estate investors, owning a small multifamily investment is an excellent way to get the experience needed to own larger properties in the future.
You will pay less per unit for a multifamily property than for a comparable house commanding similar rent. In part it's because you're competing with purchasers who buy homes to live in and their emotions drive prices higher. Paying more for an investment property puts you at an immediate disadvantage. It reduces your cash flow and adversely impacts your profit when you sell.
Emotional homeowners are likely to quickly sell at lower prices for non-economic reasons such as divorce, job transfers or a growing family needing more space. By comparison, investors want to sell for economic reasons and try to time their exit during market highs for the most profit. But competing by with emotional homeowners, you are more likely to pay too much when you buy and sell too low.
When you invest in scattered houses, the operating expenses are higher and management is more intense than it would be for a multifamily rental property with all the units on one site. That's why management companies charge more for scattered houses. It is difficult to monitor for unruly parties, pet damage and illegal activities such as making and selling methamphetamines.
You've likely heard about rules of thumb to buy investment properties. But rules of thumb have no relevance for professional real estate investors to set the purchase price. Instead, they run the numbers on each property.
Their due diligence is performed before considering the effect of making mortgage payments. The reason is that comparing properties free and clear of debt is more accurate than adjusting for different mortgage amounts and payments on each property.
Even if the target property is currently rented, it is important to check out market rents for similar properties in the neighborhood. Also determine market vacancy rates and learn how much it typically costs to paint and make repairs after an existing tenant vacates. Subtract the market vacancy and tenant turnover cost from scheduled rents to get the gross effective income.
Next you need to estimate the fixed and variable operating expenses. For fixed expenses, get a copy of the seller's hazard insurance policy to learn the premium, a property tax bill and the last 12-months utilities from the utility companies. Check with management companies to learn how much third-party management will cost.
Variable expenses are more difficult to estimate. Start with the property's financial statements. Match the largest expense items to actual invoices. You can also compare the expenses to data collected by trade associations such as the National Apartment Association and the Institute for Real Estate Management. Consider your cost to eventually replace items such as roofs, heating and air conditioning units and worn out paving.
http://www.youtube.com/watch?v=m6F8kTt8gkM
Subtract the operating expenses and annual replacement cost allocations from gross effective income to arrive at net operating income. Use it, not rules of thumb, to compare your target to other properties.
The net operating income minus your mortgage payments is what you have left over to spend. If it's negative, your target property may be a bad investment. Keep on looking for a better one using the due diligence process that we discussed.
Jerry Chautin is a volunteer SCORE business mentor, business and real estate columnist, blogger and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender.
Copyright 2014 Jerry Chautin -- All rights reserved
Huffington Post readers are permitted to distribute with attribution to the author
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Building permits/total housing units: 0.15%
Decline in building permits 2005-2011: -60.29% (11th smallest)
Building permits 2011 YTD: 8,136
Total housing units: 5,567,315
At the beginning of 2011, a number of new, restrictive building codes went into effect in Pennsylvania. This caused a rush among builders to secure permits, with housing permits increasing a massive 117.8% between November and December 2010, according to the Philadelphia Federal Reserve. The state's housing market has not been doing well since. Permits issued from January to June 2011 fell 16% compared to the same six-month period one year earlier. The national average for permits issued in the first six months of 2011 compared to the first six months of 2011 is a decrease of 6%.
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Building permits/total housing units: 0.14%
Decline in building permits 2005-2011:
Building permits 2011 YTD: -77.09% (11th largest)
Total housing units: 721,830
Maine has seen one of the largest decreases in building permits in the past six years. This is unsurprising as home sales in general declined substantially. Home sales for June 2011 decreased 21.39% from June 2010, according to the Maine Association of Realtors. The state's median sales price also decreased 1.37% over this same period. According to numbers from the Census Bureau, Maine has the highest vacancy rate in the country, reaching 22.8% in 2010. However, this number also includes empty vacation houses.
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Building permits/total housing units: 0.14%
Decline in building permits 2005-2011: -61.85% (12th smallest)
Building permits 2011 YTD: 11,033
Total housing units: 8,108,103
New York State's housing market is among the largest in the country. As a result, the number of permits is minuscule when compared to the state's total housing units. Although new home sales decreased in the first half of 2011 from 2010, the number of permits actually increased slightly during that period, from 10,189 in 2010. This is significantly lower than 2005's 28,921 permits.
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Building permits/total housing units: 0.12%
Decline in building permits 2005-2011: 69.55% (24th smallest)
Building permits 2011 YTD: 3,402
Total housing units: 2,808,254
Despite having a healthy economy compared to much of the country, Massachusetts' housing market is beginning to face serious troubles. In June 2011, sales of single-family homes in the state decreased 23.5% from the year before, reaching the lowest level since 1991, according to the Warren Group, a New England real estate research firm. With so few home sales, it follows that not many new homes are being built. Year-to-date, building permits for 2011 are about one quarter of what they were in 2005.
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Building permits/total housing units: 0.12%
Decline in building permits 2005-2011: -76.61% (12th largest)
Building permits 2011 YTD: 6,184
Total housing units: 5,127,508
Ohio has suffered, and continues to suffer, greatly from the housing crisis. Over 8,000 homes were foreclosed in July 2011, the ninth-largest amount in the country, according to real estate company RealtyTrac. With such a high foreclosure rate, currently at one in every 608 housing units, housing is already too inexpensive for people to want to build. Ohio has therefore had one of the greatest decreases in building permits in the country over the past six years. Median existing home sales are also down in many areas of the state, according to data from the National Association of Realtors. In Toledo, prices are down 17% from one year ago, the third largest rate in the country.
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Building permits/total housing units: 0.09%
Decline in building permits 2005-2011: -74.06% (14th largest)
Building permits 2011 YTD: 1,403
Total housing units: 1,487,891
Connecticut has had one of the greatest declines in the number of new building permits in the country. This trend saw a small turnaround in June -- the first monthly year-over-year gain in 2011 in new construction, according to the Connecticut Department of Economic and Community Development. However, the Hartford Courant reports that for "the first six months of the year, residential construction http://realestate.cleveland.com/ was down 30 percent compared with the same period in 2010." June was also the first increase in home construction in five years.
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Building permits/total housing units: 0.09
Decline in building permits 2005-2011: -82.19% (7th largest)
Building permits 2011 YTD: 4,250
Total housing units: 4,532,233
Michigan is one of the states that has suffered the most from the recession. The state's unemployment rate peaked around 15% in 2010. It is now at 10.5%, which is still significantly higher than the national average of 9.2%. The state has a vacancy rate of just under 15%, which is one of the highest in the country. New building permits have also decreased by over 80% since 2005, also one of the highest rates in the country. The state may now be more focused on tearing down old buildings than building new ones.
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Building permits/total housing units: 0.09%
Decline in building permits 2005-2011: -84.18% (3rd largest)
Building permits 2011 YTD: 4,897
Total housing units: 5,296,715
Illinois has seen an almost 85% decrease in new housing permits since 2005. This is the third largest drop in the country. There are a number of initiatives being made across the state to improve the housing markets. In Chicago, for instance, Mayor Emanuel has made a number of changes to increase the speed with which building permits are issued. Additionally, a "Micro-Market Recovery Program" has been introduced to slow the city's foreclosure rate.
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Building permits/total housing units: 0.09%
Decline in building permits 2005-2011: -72.71% (17th largest)
Building permits 2011 YTD: 774
Total housing units: 881,917
West Virginia's decline in building permits has slowed to almost a crawl. In the first six months of 2005 the state issued almost 3,000 permits. For the first half of 2011, that amount decreased to 774. If every permit were to result in a new housing structure, those homes would represent less than 0.1% of the total housing units in the state. Despite all this, construction is one area that is benefiting the state. According to the organization WorkForce West Virginia, 700 construction jobs were added in-state this past July -- the largest amount of jobs added in the private sector.
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Building permits/total housing units: 0.07%
Decline in building permits 2005-2011: -70.81% (22nd largest)
Building permits 2011 YTD: 312
Total housing units: 463,388
Foreclosure filings increased 4% in Rhode Island from the first six months of 2010 to the first six realestateonlineforum months of 2011, according to RealtyTrac. Foreclosures dropped by 29% for that same period on the national level. Rhode Island home sales decreased 20% from one year ago in the second-quarter, according to the Rhode Island Association of Realtors. Additionally, median home prices have dropped 2%. These numbers indicate that Rhode Island's housing market is not recovering at the same pace as the majority of the country. For this first six months of this year, the state has issued a mere 312 building permits, the smallest number in the country.
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