Income Ideas | New Star Realty and Investment

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Welcome back to the three-part series: A Beginner’s Guide to Multifamily Investing. If you haven’t already, read Part 1: How to Buy a Multifamily Rental Property.

Why would you want to increase the value of your small multifamily investment property after you emptied your pockets just to purchase it?

First and foremost, you may be able to increase the rent and/or your property value, either of which will further increase your total borrowing power. With value-add investment, you have the option to implement any of the following strategies at a leisurely pace to improve your property incrementally over time. The associated expense is simply the cost of opportunity.

1. Make Repairs and Improvements

If you have an outdated property that needs cosmetic work or modernization, if you revive the property, it is likely that you could dramatically increase the rent. The rental income from outdated units will land somewhere between modern rates and those from its original era. But an upgraded unit can fetch market rates.

My own strategy is predicated largely on acquiring historic rental properties that need to be improved and then bringing them to the top tier of my local market rents.

2. Increase the Rentable Square Footage

If there are common areas in your property, it is very difficult to capture their true value in rent. Whether you give the key to the hallway closet to a tenant or open that space directly into one of the units, increasing the square footage of personal area will also allow you to increase your rentable square footage and total rental income.

3. Subdivide or Combine Units

This strategy can add value if a property is not the right size or configuration to suit the demographic makeup of its market.

If you have a 3,000 sq ft unit, you might consider splitting it into two 1,500 sq ft units. They will be easier to rent because the total monthly cost will be significantly lower to each tenant and will subsequently reach a larger segment of the population. This will decrease vacancy and may also increase your Gross Scheduled Income.

4. Decrease Expenses

Accounting, advertising, insurance, lawn maintenance, legal fees, licenses, property management, repairs, and maintenance all add up. Anything that you can do to decrease any of these expenses without sacrificing the quality of the property is all money in your pocket.

5. Pass Expenses to the Tenants

Because gas, water, and electricity are all consumable resources that can be used variably by tenants, it is appropriate to have them pay as much of their utility expense as the market will bear in your area.

If the infrastructure of your property is not already metered separately, consider doing so. There is an entire industry built around sub-metering behind your master meter to help allocate expenses to your tenants fairly.

6. Decrease Property Taxes

Property taxes fuel the public improvements that make your market a desirable place to live; you want to pay your taxes to keep this cycle flowing, but you don’t want to pay more than your share. If you are able to convince your local appraisal district to lower its book value of your property on the tax rolls, it will noticeably decrease your overall property tax expense.

Evaluate the properties surrounding your house that are similar to craft an argument that illustrates to the authorities how they have over-assessed your property in relation to your neighbors’ properties.

7. Tap Additional Sources of Income

There are a number of strategies to develop secondary sources of income from your rental property. Premium paid parking is an excellent example, as one of your tenants will certainly want to reserve the lone carport in your fourplex for their most treasured automobile. Invariably, shared resources in small multifamily properties are underused or abused if they are not valued fairly.

8. Raise Rent

If your rental rates are significantly below the rest of the market, you may be able to simply increase the rent at the next available opportunity. Even a 3% annual inflationary increase will add up over the years.

In the upcoming and final article of A Beginner’s Guide to Multifamily Investing, we will explore how you can multiply your rental property income over time by recycling equity and leverage.

Credit to Ben Bowman

Ben Bowman is an Architect, real estate agent, investor, and author at AssetsandArchitects

homes for rent, homes for sale, newstarrealty.com

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Written by Jimmy Moncrief

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Most people want to invest in real estate and own rental property to increase their passive income and net worth.

What holds people back is that they feel as if they don’t have enough money to get started investing in real estate.

Most people have heard of the old saying “It takes money to make money”, but I challenge you to reconsider that belief.

Here are seven strategies to help you get started the rental property business.

1. “War Zones”

You can buy houses in Detroit all day for between $25,000 and $35,000. These properties generally rent somewhere between $600 and $800 a month.

The downside: These properties generally have maintenance issues.

I know, however, at least five investors who started with less than $20,000 and now own over 100 rental properties after buying in “war zones.”

2. Tax Liens

When you don’t pay property taxes for a year, your house can get foreclosed on by the local county government (or whoever is in charge of collecting property taxes). Generally speaking, counties don’t foreclose unless there is at least three years of unpaid taxes.

You buy the lien in this investment strategy (not the property). If the owner pays the lien, you get the money you paid for the lien back plus interest. If they don’t pay, you own the property after a year.

Sound too good to be true? It’s not. I know several people who have done this and have made some decent money.

The downside: There’s a lot of time involved with analyzing the liens and going through the process of taking ownership of the land. You also need to make sure you’re researching any title issues with the property. Most properties are tear-downs or land that is not build-able.

If you pursue tax liens, you might have better luck in rural areas. Major investors focus on large metropolitan areas and bid up the price to make the returns uneconomical.

3. Tax-Delinquent List

This strategy has you finding motivated sellers by searching your county property’s website for delinquent taxes. Here, you can even focus on high-end properties.

Every county is different, and some counties don’t even have a website, but here is typically how you’d go about your search:

Find several streets in an area where you want to live.
Search the county’s assessor of property website for those specific streets.
Put in a spreadsheet of properties that were over two years behind on taxes.
Write a letter to all the owners.

The downside: People who live in million dollar houses might be dismissive of you. Many might call you back, but it’s probably unlikely that most will want to address the property tax issue directly with you.

4. HUD Homes for Sale

You can search foreclosed homes on HUD’s website.

But how are you supposed to buy these homes with $10,000?

Here are two ways:

Get a private loan for the rehab and the purchase. You can get private loans from a variety of sources, such as people you know and/or people who lend on individual real estate properties.
Use bank financing and order the appraisal subject to completion. If the appraisal shows that you will build a significant amount of sweat equity, then the $10,000 down will probably be enough at closing. This depends on the purchase price and the lender.

The downside: There is a fair amount of paperwork and a lot of technical paperwork when buying a HUD foreclosure. And there is generally a lot of repairs to be made on these properties.

5. Eviction List

This is an underused source for deals. Going to eviction court is a great way to meet landlords who have had enough of the rental business. They are likely to sell using seller-financing. There are a lot of benefits with this strategy, as you can craft your own financing terms. Additionally, you likely have a very motivated seller, so you can purchase the property at a discounted price.

6. Property Management Companies

Property management companies are another source of deals. The property managers know owners’ intentions and whether they plan on selling. Additionally, they generally know how “motivated” sellers are.

Look on property management company websites. If they have a vacant property, particularly one that’s been vacant for a long time, look up who the owner is and call the owner or call the property manager to ask about the property.

7. Partners

This strategy allows you to go big early on. Maybe you know four people who can contribute $22,500, which gets you $90,000.

You contribute $10,000 for a grand total of $100,000.

Put the money in a LLC. Each person will own 20% of the company. The reason you didn’t have to contribute as much as the investors is that is you charged a deal fee for finding the deal and structuring all the work on the front end (finding the property, doing due diligence, financing with banks, and setting up a legal organization).

Many large multifamily investors use this strategy and charge the LLC a property management fee.

You can now buy a $500,000 apartment building with the $100,000 you raised by getting a $400,000 bank loan. Structure the bank loan so the property is able to cash flow with you being able to pay the loan to zero within 10 years.

Assuming zero appreciation and cash flow, in year 10, you will turn that $10,000 into a value of $50,000. Plus, you will have passive income from the apartments.

Credit to Jimmy Moncrief

Jimmy is a multifamily real estate investor and bank credit officer. He has written a complimentary bank negotiating guide on how to get around the 80% LTV rule

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