So you want to be in Real Estate – Part 2 ©
We left off last week on investing in real estate…You and your buddies are now investors and the first two or three deals worked out great…The market was red hot and everything was clicking…This was so easy, BUT then it happened…The market popped in what seemed just overnight…The stock market went to Hell, interest rates shot up and your credit cards, which you used to finance your day-to-day activities are maxed and locked down so you now can’t pay your personal bills and rent…
Now what? Well, what first occurs is each partner starts accusing the other of not doing their job, then the reserves quickly dry up and you have to come up with the cash to make the mortgage…Everyone starts fighting and one of your partners tells you that he doesn’t have the money to pay for anything further…Your personal rent payment is late and your parents have no coins to lend to you…All this has happened in two to three months…Desperation sets in and you all agree to sell for a huge loss…All the money you previously earned is gone, you end up hating each other, and worst of all, you owe on your taxes for the past two years and are fined 37% monthly by the government(s) until you pay it all off…
You think this would never happen to you, but it did happen to many in the 1986-1995 Savings and Loan Crisis and the Financial Crisis of 2005-2008…Many sophisticated investors lost their personal homes and all of their fortunes…You as a small investor can end up bankrupt, so make sure if and when you invest in real estate you know the bad that can go with the good…Get yourself prepared…
What I advise small investors is to buy small and live in that place for a minimum of two years, then sell…Later, buy something larger by using your profit, which gives you a larger down payment and keeps your monthly mortgage payment manageable and about the same as you had before…Maybe live at this property for three to five years and when you sell split the profit and purchase a place for yourself and one or two rentals for income and grow your investments…Keep this pattern and within less than ten to twelve years you will have quite a portfolio and you are on your way to a wealthy retirement…
However, like all real estate investment, you must be disciplined, which brings me to my seventh lesson…
Seven, Property Management…
Every state is different so you need to check your laws; however, in Hawaii, licensed real estate agents can manage their own personal properties, but only as owners and not as a business...Nonetheless, my recommendation is to always get an outside property manager for your real estate because you think it will take maybe 10% to 15% of your time, max, but you are so wrong…You have no clue…
Why…Because TENANTS ALWAYS LIE…No matter how good you think they are, they are not…They just can’t help themselves…It’s the nature of the beast, whether they are commercial or residential tenants…And when they tell you they don’t lie and they swear on their mother’s grave they will always tell you the truth…They definitely will lie more to you than anyone else…
They lie about everything…Like flushing Baby Wipes or tampons down the toilet and causing a $350 plumber’s bill on a Friday night…They shed crocodile tears…”I don’t know how that happened…I didn’t do it…I didn’t know”…But it’s on page 2 of the lease in bold and underline writing to never do this…They lie about drugs or smoking…They lie about unauthorized pets…
They will lie about friends who are “couch surfing”, but have been there for six months sharing their rent payment…”My friend is just staying for a few days and has a small dog”…When you show up a few days later to check on everything because you have received complaints from the neighbors about a dog constantly barking, you find the small dog is a 90 pound Boxer/Rottweiler/German Shepherd/Mastiff/Akita who wants to eat you for dinner…
They lie about hoarding…”I’m just keeping a few things for my Mom for a couple of weeks”…Really, that dead car in the driveway, which has been there for over three months and has weeds growing through its tires and the recycled cans packed on your balcony and take up the whole area is your Mom’s stuff…They HATE you when you tell them to remove their crap because of “fire, safety, and health Issues”…”Shoots, Why you have to be so Bossy!”…Page 5 of your lease…
They lie about pouring grease or food down the kitchen sink and clogging the drains…”I’m not gonna lie, you just have an old plumbing system that’s backing up…I swear we don’t throw food down the drain or in the toilet”…Ummm, the plumbing pipes were all redone three years ago and cooked rice and lima beans coming up from the shower drain are not part of the normal drainage system….”It wasn’t us…We didn’t know”…Page 4 of your lease…
They lie about breaking appliances or cracking countertops…”It was like that when I first rented”…No, the inventory video and pictures show everything was working and nothing broken…”I didn’t know”…They lie about paying the rent on time…”I posted it on Monday”…Really, then why does the stamp of the postage say it was sent on Friday, five days after your due date…
Then there are the ones who beg you to allow them to have a dog of their own and you say okay, but remember the lease says to clean-up of pee and poop daily and its mandatory…Two months later when you are there to repair something, there is so much dog poop around, you have to play hopscotch just to walk through the patio area…The smell makes your eyes water…And when you confront them about it they look at you accusingly and say, “I thought that was YOUR job as part of my lease and I have been wondering when you were coming to clean everything up…You know I’m busy working to pay my rent”…Page 1 of the Lease…Clean up after your dog, I am not your personal maid…”I don’t remember that, did you insert that afterwards”…No, I didn’t, you lying piece of crap…
The VERY worst tenants are college students who get a boyfriend or girlfriend who moves in within the first few months of occupancy because they are “nesting” on Daddy’s money…The lease says only two people, you and your roommate and no dog…”My boyfriend/girlfriend just spends the night here a couple of times a week and brings his/her dog over once in a while”…Really, then why is his/her bicycle, moped, and car, and 15 pounds of dog poop in the yard...”I don’t know”…Page 3 of the lease…
Bottomline is get a professional property management company to deal with tenants and live a longer and less stressful life…
I have many other lessons I can share and they will be in my next book, but here is my final lesson for these blogs and it is about Appraisers…
Eight, Your need for Appraisers…
BECAUSE, Appraisers are integral to value your clients’ and your own investments, especially when paying cash…You need to know value from an independent third party and not someone who is motivated by a commission…You may know what the market is doing for most properties, but until you know the actual value, every move you make is subjective and not objective…
Many folks think Appraisers do what real estate agents do, but they do more investigation, preparation, and inspection…
With government Appraisers do what is called Ad Valorem reports where they review large group of properties for tax purposes, then the properties are bundled and averaged out…Some individual valuations for a particular property may not be absolutely correct, but are now pretty close with the technology of today…And you always have the opportunity to appeal the tax value…
With lender and bank Appraisers, they are reviewed seven times from Underwriters, mortgage loan committees, quality control departments, government agencies like Fannie Mae, and Freddie Mac, etc.…If a loan is over $5 million, lenders require two appraisal reports by two different appraisers…There is NO pressure from anyone to “come to a value”…Value is what it is, no highs or lows to appease a loan officer…
Appraisers are scrutinized and work hard for their reputations…They are highly monitored by Lenders and the federal government to make sure everything is done correctly.…
Being an appraiser is often a difficult and thankless job, but without them…Remember, no money can be borrowed, which translates to; No money to pay for the honey of beautiful wives or husbands…
Hope you enjoyed Part 1 and 2 of So you want to be in Real Estate…AND again with shameless self-promotion intended, read my book, Untold Stories of a Real Estate Diva…Learn from experienced histories…And get ready for book two; The Doggies Chronicles – Life with a Real Estate Diva…from the view and aspect of my Three Pupperteers…