All Forum Posts by: Corey Dutton

As prices continue to rise in most U.S. real estate markets, many buyers are starting to pay too much for investment properties. Because each sub market has unique forces that are driving it, it is crucial to understand each sub market that you are investing in. If you buy in a market that you don’t understand, you will likely pay too much for an investment property in that market. But if you already understand your sub market, how do you know if you are paying too much for an investment property?

Don’t get emotional. Stay all business when it comes to buying real estate and never allow yourself to get emotionally attached to a deal. Put together a detailed checklist for each investment property you look at. Some properties will be missing crucial items on your checklist. Checklists also help investors avoid emotional attachment, e.g. “This is such a killer deal if I don’t jump on it now I will lose it!!”

Don’t do what most investors do and look at 2-3 properties, make an offer on one, and then buy one.Follow the rule of 100/10/3/1. This rule is that you should look at 100 properties, you should make offers on 10 properties, and of those offers maybe 3 will be accepted, then go ahead and purchase 1 property.

Pay attention to the days on the market for similar listings in your sub market before making a purchase. Find comparables for your investment property that are listed. Are the comparables to your investment property sitting for a long time on the market? What prices did the properties on the market start at, and where are they now? If there are no comparables for your investment property close by, then look at the next closest comparables to your property type and see how long these properties are sitting on the market before they sell.

Also, be sure to look at the price history for the investment property you are buying. You may find out that the price history has been nothing short of a roller coaster ride, and that the incredible deal you think you’re getting on a property, may not be so incredible.

In many markets in the U.S., investment property prices are continuing upward. In your search for investment properties to buy, use a specific strategy to make sure you aren’t paying too much. Many of the Biggerpockets members on this forum understand this much better than myself. Please share any other tips on this topic that you feel will help other investors from paying too much for their next investment property.

Also, the reason I gave the high number of 30% for property management is because of the extensive list of potential fees related to property management. An extensive list can be found here: http://www.managemyproperty.com/articles/property-management-fees-part-ii-19

The vacancy rate was a typo. The vacancy rate on my post should be 10%. I was not able to edit the post on the forum for the percentage that I listed. 

Sudden life changes, the purchase of a new home, a job relocation, and other life events can make renting your home an option. Before you decide to rent your primary home, consider several things first.

1. Expenses: Besides your existing mortgage payment there are other expenses to consider, such as advertising and rental listing fees, property management fees, and ongoing maintenance. If you want a property manager to take care of all of the hassles, get ready to take 30% right off the top of your rents. Also, make sure you have enough money set aside to cover any unforeseen repairs or maintenance-related issues. If you have another home, now you will have 2 homes to maintain.
2. Damage to your home: Renters don't respect your home as much as you do, and will cause damages. Those new wood floors you installed last year will likely be destroyed after a year of renting. Carpet is also a common item that will need replacing after renting your home.
3. Vacancies or No Pay Renters: Factor a 20% vacancy rate into your numbers when calculating your rental revenues. Also, you may sign a lease with a renter that is a slow payer, or even a no payer. Depending on the eviction laws in your State, it could be hard to get a deadbeat renter out, and it may cost you money in both lost rents and legal fees.

There are other pros and cons of becoming a landlord. Before you decide to rent your home, consider all of the factors involved, and not just the 3 considerations listed above. Renting your primary home is not an easy task, and is a big commitment of time and energy, so make sure you have considered everything before you do.

There’s nothing worse than buying an investment property, only to find out that you can’t do what you want with it. Just because a piece of real estate may have a particular type of zoning, this does not mean a real estate investor is guaranteed to be able to do what he or she wants with a property. For real estate investors who have specific plans with regard to a piece of real estate, the zoning itself is only a starting point. Always start with the planning department for the City/County in which the property is located before you purchase real estate for profit to first determine if you can actually do what you want with it.

A good example is an investment property that I purchased for profit many years ago. It was a very large piece of land, located in a gated subdivision. It was a vacant, unimproved property with zoning which allowed the construction of a single family home. The purchase was very rushed and not enough due diligence had been performed on my side. If I had only gone into the County planning department and spent some time, I would have found out that the previous owner had attempted to apply for a building permit and was denied. But because it was a rushed purchase, I only called down to verify the zoning uses, rather than to go in to talk to someone in the planning department about the history of the property. I later found out, after making the purchase fo course, that the County was pushing hard to stem building in the area where the property is located. The investment ended up in a huge legal fight with the County and a lot of anguish on my part. After a ton of money and time spent on unexpected development costs, I finally jumped through the last hoop that the County put in front of me to obtain a building permit. This was after two, long years of jumping through one hoop after the other that the County put in front of me. All of this could have been avoided, had I just spent some time at the planning department before I purchased the investment property.

When purchasing a property for profit, do your due diligence completely, or just don’t buy it! And never assume that a property’s zoning will guarantee that you can do what you want with it, e.g. obtain a building permit. Just because a property has approved, permitted uses, does not mean that you will be able to get building permits for those purposes. Talk to the folks at the City and the County where the property is located and find out the history of the property. Tell them what you plan to do with the property, discuss the process with them, and ask them what potential pitfalls that they may see in your plan.

Posted by Corey Dutton, Private Money Lender

For real estate investors who are building up to do their first rehab projects, don’t forget to add up all of the costs before you calculate your profits. Too often, the classes that teach you how to make money “flipping properties,” neglect to tell you about ALL of the costs involved in a rehab project:

1. 1. Realtor Commissions: Because the seller typically pays the realtor commissions, this could be the largest chunk out of your profit on the backend of your transaction.
2. 2. Lender Interest and Fees: If you’re using a hard money lender to finance your rehab project, make sure you calculate all of the loan fees, also called points, any junk fees, and finally all of the possible interest you may pay. For example, if you think you’ll have a project out for 6 months from start to finish, calculate the interest payments you’ll pay to your hard money lender for those six months and take this amount out of the profit. Also subtract the total amount of your fees, including junk fees, such as government recording fees, document preparation, wire transfer fees, etc.
3. 3. Insurance: Don’t forget about paying for title insurance and for hazard insurance! On the front side of the transaction and on the backside, someone will be paying for Title insurance. Don’t forget to take this cost out of your final profit. Also consider the cost of hazard insurance for the time you’ll have the project out, and take that cost out of your final profit as well.

Many of you may be going into your first rehab projects with eyes wide open and are thus well aware of these additional costs. What else would you add to this list? Please share.

For real estate investors who are building up to do their first rehab projects, don’t forget to add up all of the costs before you calculate your profits. Too often, the classes that teach you how to make money “flipping properties,” neglect to tell you about ALL of the costs involved in a rehab project:

1. Realtor Commissions: Because the seller typically pays the realtor commissions, this could be the largest chunk out of your profit on the backend of your transaction.
2. Lender Interest and Fees: If you’re using a hard money lender to finance your rehab project, make sure you calculate all of the loan fees, also called points, any junk fees, and finally all of the possible interest you may pay. For example, if you think you’ll have a project out for 6 months from start to finish, calculate the interest payments you’ll pay to your hard money lender for those six months and take this amount out of the profit. Also subtract the total amount of your fees, including junk fees, such as government recording fees, document preparation, wire transfer fees, etc.
3. Insurance: Don’t forget about paying for title insurance and for hazard insurance! On the front side of the transaction and on the backside, someone will be paying for Title insurance. Don’t forget to take this cost out of your final profit. Also consider the cost of hazard insurance for the time you’ll have the project out, and take that cost out of your final profit as well.

Many of you may be going into your first rehab projects with eyes wide open and are thus well aware of these additional costs. What else would you add to this list? Please share.

From an article published on National Real Estate Investor (NREIOnline.com), growing interest in the Senior Housing Sector could be pushing prices close to peak levels. In fact, senior housing transaction volumes are currently at record levels, and some of the biggest developers in other property types are putting senior housing projects on the drawing board.

The interest in Senior Housing has grown for several reasons. Because more information about market fundamentals and conditions is now available from such sources as Real Capital Analytics (RCA) and NIC MAP, the availability of information has increased investor understanding of the sector. Investor interest in the sector has also been driven by demographic trends and of course, low interest rates. But is the pricing in Senior Housing Sector reaching peak levels? With a market contraction now overdue, many believe Senior Housing valuations will likely fall, while others believe the current pricing is sustainable. What is your opinion? Is Senior Housing on the edge of a bursting bubble or will it be able to ride out the upcoming storm or inevitable market contraction? Read the entire article at the link below.

(Source: http://nreionline.com/seniors-housing/seniors-housing-pricing-bubble-or-not)

Yes I agree that some of the actions taken by the CFPB have certainly been questionable, at least to date. I like the fact that crowdfunding has opened up alternatives in lending to consumers, and further that the emergence of lending platforms like Prosper.com are creating more liquidity in the area of consumer lending. And I'm not poking at the crowdfunding industry in any manner. Just asking the question, how does consumer financial protection factor in? There isn't a lot of information out there on the web yet to answer this question, since the concept has been only recently gaining a lot of momentum.

Consumer lending platforms, also known as crowdfunding, or peer-to-peer lenders, have inundated the consumer lending space since 2008. Although the Consumer Financial Protection Bureau (CFPB) has wreaked havoc on the mortgage industry since the onset of the financial crisis in 2008, they don’t seem to be taking notice of the wave of new consumer lending platforms that are popping up overnight. In fact, peer-to-peer lenders seem to be completely untouched by new consumer lending regulations. The good news is that the emergence of these new mediums for lending and borrowing have given consumers more options than they ever had before. But how are these online platforms regulated under the CFPB, and how will consumers be protected?

In order to start a consumer lending platform like Prosper.com for example, you need a registration from the SEC. Although the SEC regulates the raising of capital for such ventures, who is regulating the consumer lending side of it all to ensure that consumers are protected? What about personal identifying information? How will this be protected with so many fly-by-night lending platforms out there with no credibility or reputation to build on? It seems the CFPB has been so busy policing the mortgage industry that it has taken a blind eye. But maybe not? In August of this year Lending Club agreed to settle with the CFPB and will pay restitution to borrowers in the program to the tune of $700,000 for alleged “borrower confusion” about the terms of a deferred interest product. However they are not admitting any wrong doing in the said settlement with the CFPB.

With a new crowdfunding platform being launched every week in this Country, how will the CFPB keep up with protecting consumers and their financial information? Please share your own insights, experiences, and other thoughts on this topic. I’d like to see what other consumers have to say about this.