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5 Things To Consider Before You Manage Your Own Rental Properties

Are you considering buying rental properties and managing them yourself? Many people dream of owning rental properties but are not sure whether they are ready to manage the properties on their own. Before you take the leap to be a hands-on landlord, it is important to understand what is required beyond collecting the money at the beginning of each month.

If you are thinking about managing your own rentals, watch this video which covers five things you will need to consider

[2:16] #1: How will you handle tenant screening
[3:46] #2: Which lease will you use?
[5:02] #3: How will you handle maintenance issues?
[6:29] #4: Which local legal requirements do I need to worry about?
[7:39] #5: Do I have the right mindset for the rental business?

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Real Estate Wisdom Update-6-27-18

Wealth. Legacy. Lifestyle.

 

Action Inspiration

The dream is free. The hustle is sold separately Unknown

Landlording in a Renter-Friendly State

If you were curious about where Pennsylvania ranks on the spectrum from renter-friendly to landlord- friendly, the data shows that the state skews more in favor of the tenants. According to a RentCafé study, New Jersey (#17) and Pennsylvania (#18) rank neck and neck.

Our neighbors in Maryland (#32) and New York (#39) ranked as more landlord-friendly. The landlord is most king-like in Arkansas (#51) where tenants face criminal charges for not complying with vacate notice. See full rankings here.

With the pending “good cause” eviction legislation before Philadelphia’s City Council, some are questioning whether PA may be leaning more towards tenants. The proposed regulation is supposed to combat tenants getting displaced by overzealous developers.

The bill would limit “good cause” for eviction to the following reasons (note-this is not a complete list):

  • The tenant isn’t complying with a specific part of the lease
  • The tenant isn’t paying rent
  • The tenant has caused damage to the property
  • The landlord or their relative is moving into the unit

In 2016, Philadelphia ranked #4 among large cities in the number of evictions (10,264) per year according to the Eviction Lab at Princeton. The #1 spot for evictions in a medium-sized city within PA went to Reading (1,143), with Delaware County cities Chester (#12 rank, 125) and Drexel Hill (#20 rank, 35) falling within the top 20.

For buy and hold investors, the time to shore up your property management processes is now. It is only going to get more complex. You may need more systems in place to manage move-ins and move-outs. If you own properties in multiple counties, it also means keeping track of the regulations for each town. You will need to manage your portfolio more like a business to maintain returns.

May Key Market Statistics

(Statistics shown are for rolling 12 months ending in May)

(19143) West Philadelphia-Cobbs Creek/Cedar Park

 July 17 July 18% CHG
Total Sales44453220%
Lowest Sales $11K$14K24%
Highest Sales $1,545K $800K-48%
Average Sales $141K$154K9%
Days On Market 4637-20%

(19104) West Philadelphia-University City/Mantua

 July 17July 18 % Chg
Total Sales 15518117%
Lowest Sales $13K$14K8%
Highest Sales $2,400K$1,250K -48%
Average Sales $255K$253K-1%
Days On Market 4538-16%

(19139) West Philadelphia-Walnut Hill/Haddington/Mill Creek

 July 17 July 18% Chg
Total Sales 23227318%
Lowest Sales $5K$8K50%
Highest Sales $607K$585K-4%
Average Sales $89K
$109K22%
Days On Market 6041 -32%

Upper Darby

 July 17 July 18% Chg
Total Sales 1,0381,0925%
Lowest Sales $14K$21K50%
Highest Sales   $415K$435K5%
Average Sales $127K$139K9%
Days On Market 7156-21%

Chester

 July 17 July 18% Chg
Total Sales 2002105%
Lowest Sales $5K $5K0%
Highest Sales   $165K$255K55%
Average Sales $53K$57K7%
Days On Market 57 56-2%
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Why You Should Add a Multi-Family Property to Your Portfolio

Have you thought about adding a multi-family property to your portfolio? The property in the photo above is an example of a current opportunity (as of 5/8/18) of a 5-unit property for sale for $315K with over $4,300 in monthly cash flow.

If your goal is to build up your real estate income stream, multi-family investing is a good path to get there. This blog post covers some benefits of buying a small multi-family and shares some sales trends in the Philadelphia metro area.

Often, new investors equate multi-family investing to owning a large apartment building that requires a full-time maintenance staff. That is not always the case. The definition of a multi-family property is much broader. Real estate professionals break down the multi-family asset class into three general segments:

  • Plexes (2 to 4 units)– Most small investors get started here. These properties are considered as residential properties by the banks when evaluating financing options. Municipalities tend to impose similar rules for landlords of plexes and single-family rentals.
  • Small Apartments (5-50 units) – Some small investors (by themselves or with investment groups) move up to invest in small apartment buildings. These properties require commercial financing which require more detailed cash flow projections. Municipalities place more requirements on how these buildings are operated and where they can be built.
  • Large Apartment buildings (Over 50 units) – These properties are most often owned by larger real estate investment companies or institutional investors. The commercial financing and municipality requirements generally get more complex.

Since most small real estate investors start with 2-6 unit properties, we will cover some of the top benefits of investing in this smaller brand of multi-family property:

  1. More revenue opportunities  – Beyond rent, you can collect revenue from providing other services to tenants such as coin-operated laundry machines, storage units, private parking spaces, and other concierge services.
  2. Spread risk over more units – When your cash flow is dependent on one tenant paying their rent on-time, there is more risk that your property’s income. When you own a triplex, one bad tenant does not wreak havoc on your cash flow as long as you have two other good tenants.
  3. More favorable financing terms – One unique opportunity for investors with a duplex or triplex is get more favorable acquisition financing by agreeing to live in one unit for a period. Not only is your tenant helping you pay your mortgage but you are able to put less money down than the traditional non-owner occupied investment property.
  4. Economies of sale – Labor and material costs for maintenance items can be spread over more units. If you have three single-family properties with bad roofs it will be more expensive to repair than one triplex. It is also easier to get contractors to view problems at one address vs. single-family homes scattered across town.
  5. Less competition – In general, there are fewer people looking at multi-families in most markets. You are also less likely to get into a bidding war to acquire the property. Your competition is likely other investors who are equally-motivated to secure a good financial deal vs. a new homeowner who may bid using more emotional factors.

If you want to pick buy a multi-family property, you have to target the neighborhoods that have the most inventory (and favorable zoning). The tables below show the areas with the most transactions from 2017 in Delaware County and Philadelphia.

2017 Multi-Family Settled Transactions (Source Trend MLS)

2017 Delaware County, PA Multi-Family Sales

 Units Sold
Upper Darby26
Drexel Hill23
Clifton Heights17
Chester15
Lansdowne15
Collingdale12
Darby12
Media10
Ridley Park8
Glenolden7

2017 Philadelphia Multi-Family Sales

 Units Sold
19121 (Brewerytown)95
19111 (Northeast)81
19124 (Northeast)71
19139 (West Philadelphia)62
19144 (Germantown)58
19149 (Northeast)58
19104 (West Philadelphia)57
19143 (West Philadelphia)57
19135 (Northeast)51
19120 (North Philadelphia)50

Top Delco Multi-Family Sales Details

 # of Sales% DuplexesAverage Sale Px per UnitMin Sales Px per UnitMax Sales Px per Unit% Cash Sales
Upper Darby2685%$56,979$22,555$80,00046%
Clifton Heights1776%$51,719$23,750$87,50053%
Drexel Hill2396%$69,544$48,500$95,00026%

What about investing in single-family properties? Of course, there are plenty of reasons to invest in single-family homes, including 1) lower price entry point, 2) Multiple exit strategies, and 3) Better price appreciation. I am pro single-family investing, too.

However, I think more investors should consider BOTH single-family and multi-family investment opportunities on the quest for more financial freedom.

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4 Leasing Tips for Landlords Thinking of Selling

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Never try to teach a pig to sing; it wastes your time and it annoys the pig. Paul Dickson

When you are thinking about selling an occupied rental property, you are not only selling the building but also the strength of your leases. Rental contract terms that maximize cash flow and retain high-quality tenants add value.

If you know that you plan to sell within the next 12 months, consider these four tips:

1)    Use updated terms that comply with the latest federal, state and local ordinances. Many investors use leases shared from other investors. You can start there, but you need to make sure that your rental agreement complies with the latest landlord/tenant regulations in your area. A lease written even five years ago may not do so.

The best option is to use an agreement that has been recently reviewed by an attorney. You can either hire an attorney directly to review your custom lease or indirectly by working with a realtor who uses a lease approved by the legal gurus from the National Association of Realtors.

2)    Include a clause that covers what should happen with a potential sale. You want to deal with this upfront before you get to the closing table. Your lease should spell out how to manage the transfer of all your rights as a landlord and any held deposits.

Even if you think that you will never sell, think about your heirs. By taking care of this in your leases now, you avoid any later headaches for them.

3)    Consider not renewing residential leases that could potentially hurt your deal. If you have existing one-year agreements with a lot of time left, traditional home buyers will find your property less attractive. These buyers will likely not want to wait more than 90 days to take possession after closing.

Other investors, on the other hand, are okay with the existence of leases but are sizing up their quality.  Leases with below market rents (or tenants with lousy payment histories) will highlight issues. Investors will ask for a discount to cover the pain of managing getting your problem tenants to vacate sooner rather than later.

If you plan to sell soon (and fast), opt not to renew bad leases (or bad tenants) and leave the residential units vacant. You will more than make up the short-term cash flow that you lose with a higher sales price.

4)    Be careful of signing new leases with high-risk commercial tenants. If you have a commercial lease that is not on a multi-year contract, potential buyers will assume that the commercial tenant is a new business. A new business is a higher risk.

In addition to assuming more risk, you may also limit the financial returns for the new investor. The potential buyer may envision a different commercial use for the space (i.e. it’s now a hair salon but a coffee shop may be more profitable) or want a space for his own business.

If you can’t sign a stable business tenant, you will bring more risk to the sales transaction.

If you want advice on how to maximize the value from your rental properties, I would be happy to help. Feel free to contact me to set up a time to chat.

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