Investing Strategies

Buying in downtrodden areas, with the intent to renovate and resell has always been the trail marked by flippers. And in most cases, it’s probably best that it stays that way. Long term rental investors and multi-dwelling managers usually get hammered in these areas if they march in, build or repair, and then see the property taxes skyrocket at a speed that far outpaces that of rising rental rates.

They get cash squeezed.

The Crossland Team blog brings up this point in a recent post. The area in question is in Austin, and I’m very familiar with it. I almost purchased property in its center. So I believe I understand all the pieces in play. It's a large section of central Austin that is mere minutes (if not walking distance) to downtown. From an outsider’s point of view, there’s no reason why it took so long to be developed considering how far the city has been built up on all other sides of downtown. But from an insider’s pov, there has ALWAYS been a stigma against that side of the city. “The other side of the tracks,� as it were.

Now, after a few brave investors headed the wave several years ago, investors took notice, started doing their homework, and they want to buy up lots of property fast, for quick high-end development. The frenzied dealing and bidding put upward pressure on property values, and those who have lived there for generations are now taking arms to battle the onslaught of “evil� gentrification. Continue reading "Anti-Gentrification Measures a Potential Boon for Landlords"

There are a host of web-based real estate tools out there for anyone looking to acquire, revalue, or manage their properties. What I see out there is that because of the last few years being dominated by moving of single family homes, almost all of these tools are geared for the buyers with that intention.

However, there has to have been some thought put into these online services that allows for them to be easily used by those of us who are in the business of finding, acquiring, and reassessing rental housing. What about us? Hm.

Trulia.

The apparent point of Trulia is to become a more user-friendly version of an average MLS database, free for buyers. Just as with Zillow, you can hit the “advanced search� where after you specify State, all sorts of pick menus blink up. You can go by county, city, or school district (NO zip code). If you pick a particular city that is supported by Trulia’s database, a list of neighborhoods pops up for inclusion into the search! And then you can further break it down by price range, square footage, and fifteen varieties of “Property type�.

I chose a neighborhood that I own property in, curious to see what was available for sale nearby. While I'm not currently "in" in the market, it's always good to keep tabs. Besides, if there are some nearby deals out there, I just might bite.

The pros:

The interface is pretty slick, with all the presented information on one page: pricing, rooms, footage, map, a photo, links to source website, etc. Then there’s the “Property Indicators� which tell you how the price per sq ft of a property compares to others in the same area, which is great. Furthermore, there are “Market Indicators� listed, which intend to display general market data, along with census and school district overviews for the general area you’re looking in.

The cons:

Unfortunately, the “advanced search� won’t allow you to do so within a particular zip code (you can search by zc off the main search, but not in advanced). It simply isn’t an option, and this is rather obnoxious if you know your markets are mainly divided along zip code lines. They don’t have near the number of properties in their system as I KNOW are available in the area. In fact, it only produced one property, when I know there are three other properties currently for sale on that same street. So, the inventory is rather lacking when compared to the joe-shmoe local MLS route, which is strange considering the stuffing of this data is supposed to come from web scraping. Also, there is not indication of contract interest, so I’m not sure if any of these properties are in the final throes of a soon-to-end bidding war. Additionally, there is no indication of lot size, which is an EXTREMELY important piece of information for any property buyer. And finally, the “similar homes for sale� section is stacked with comparably priced single-family homes when I’m looking at multi-unit dwellings, and that isn’t very helpful.

It will be interesting to see whether or not services such as Trulia bump out the traditional MLS groups.

There are a host of web-based real estate tools out there for anyone looking to acquire, revalue, or manage their properties. What I see out there is that because of the last few years being dominated by moving of single family homes, almost all of these tools are geared for the buyers with that intention.

However, there has to have been some thought put into these online services that allows for them to be easily used by those of us who are in the business of finding, acquiring, and reassessing rental housing. What about us? Hm.

Zillow.

The point of Zillow is to help you value property you already own, or value property you’re looking into. According to the site, their pricing matrix is based on County/Municipal data, which in most areas the taxed values do not coincide with actual market pricing, but they augment that information with “zillions of [other] data points�.

Whatever that means.

Curious to rate the results, I ran some of my own properties through the system and was rather impressed. It recognized which properties were multi and which were single family, along with some other pertinent details. And except for the properties which I know are oddballs (weird shaped lots, deep speculation plots), the valuations were reasonable. For research purposes: through the “advanced search� you can choose “multi-family� by zip code and then sort by “Home Type�. If you’re looking to help value a potential purchase, or if you’re dubious about an offer, this is a decent resource for ballparking some figures.

Side notes: Back in early 2006, Zillow wasn’t yet up to snuff, as evidenced by The Rage Diaries, where one can see an example of being “zillowed� by the software. You’ll also notice that their mapping interface is a mashup, which is pretty cool. And on their own blog, they break-down the creation of a custom property “Zestimate�.

The first step in deciding how much to raise the rent for my tenant involved some simple math. Knowing that I was renting below market, and that I really wasn’t intending on stacking a 25% increase on the Tenant all at once, because again, I really like this tenant, I made some back-of-the-envelope calculations involving the total increase in property taxes.

The total hit I’m taking from the tax-man is an extra $600 per year on the duplex. So that’s $300 per side, per year. Boiling down to $25 per month, which should be pretty easy to swallow, and I’ll leave it at that. But obviously, I could have taken this opportunity and treated it like the proverbial bandaid-ripping by stacking some other accrued/planned costs into this rent hike.

Other possible reasons for bumps in rent that could be similarly calculated:

1. adding to or starting (!!!?) the maintenance contingency fund
2. beginning savings for a beautification project like landscaping
3. put toward paying off an uninsured disaster of some sort
4. put toward a new amenity such as washer/dryer, screen doors, or skylights.

Although, with that last one, I’d recommend buying and installing the amenity first, and then using their use of the thing to justify the rate hike, accepting the risk that they may choose to leave as a result.

Set with the $25 bump in rent, I composed the following letter to be sent via email AND by hand delivery. I coincided the increase with the renewal of the lease, as it wouldn’t make much sense to try and renegotiate a loaded lease in mid-stride. File the letter along with whatever documentation of acceptance you receive (new rental agreement, amendment, spit-shake). Best to get as long a paper trail as possible with these things.

I hand delivered the letter in order to garner an immediate response from the tenant. Otherwise, I would have to requested some other form of written acceptance.

Begin Letter------------

DATE <-- EXTREMELY IMPORTANT TO DATE IT

TENANT NAME and CONTACT INFORMATION

Dear (use all tenants’ complete names here for professionalism):

This letter is being forwarded to you as a notification that as of October 2006 (by the 5th of the October), your monthly rent will be increasing an additional $25.00 per month, to help keep up with the recent rise(s) in property taxes. It will move from the current rate of $XX00.XX per month to $XX25.XX per month.

For clarification, August and September rent will remain at $XX00.XX..

In the most unfortunate event that you do not wish to continue living on the premises by these terms, I will understand. But please notify me as soon as possible concerning when you would like to move so that we can make the proper arrangements.

If you choose to accept this increase in rent, this letter will be followed by an amended lease renewal agreement.

Best regards,

YOUR NAME and CONTACT INFO - SIGN IT!!!

------------------ End Letter

Next will be their reaction to the increase.