Robert Tyson

Article / Updated 06-06-2023

Many real estate investors pick inspectors as an afterthought or simply take the recommendation of their real estate agent. But inspect the property inspectors before you hire one. As with other service professionals, interview a few inspectors before making your selection. You may find that they don’t all share the same experience, qualifications, and ethical standards. For example, don’t hire an inspector who hesitates or refuses to allow you to be present during the inspection or won’t review the findings with you upon completion of the inspection. The inspection is actually a unique opportunity for most property owners and, because you’re paying, we strongly recommend that you join the inspector while he’s assessing your proposed purchase. What you learn can be invaluable and may pay dividends throughout your entire ownership. When an unscrupulous contractor later tries to tell you that you need to completely replumb your property, you can recall that your property inspection revealed only isolated problems that can be resolved inexpensively. (Of course, inspectors, especially ones who aren’t good, can make mistakes, so you should also dig into discrepancies raised by different real estate–related people. In other words, get a second opinion.) About half of the states now have a license or certification requirement, whereas a few only have trade practice guidelines. This regulation is all relatively new because in 2000 virtually no governmental licensing or supervision of inspectors existed. Regardless of whether your state has strict licensing or certification requirements, every real estate investor needs to look out for her own interests and look for telltale signs of potential problems. Red flags include inspectors who are affiliated with a contractor, offer a special discount if you call who they recommend, or credit their inspection fee toward work. Only consider full-time, professional inspectors. Hire an inspector who performs at least 100 comprehensive inspections per year and carries errors and omissions insurance. Such coverage isn’t cheap and is another key indicator that the person is working full-time in the field and is participating in ongoing continuing education. Many inspectors are licensed general contractors, but not all home inspectors have designations or credentials specifically relating to inspecting real estate. One of the best certifying trade associations for professional property inspectors is the American Society of Home Inspectors (ASHI), which was founded in 1976. In addition to home inspections, many ASHI members are qualified and experienced enough to assist you with your due diligence physical or structural exterior and interior inspection of multifamily residential properties and all types of commercial properties. You can find certified inspectors and more info about the inspection process including tips and checklists at the ASHI website. Some individuals or companies adopt names that at first glance may indicate adherence to certain professional practices. For example, a fictitious but potentially misleading name is “Professional Property Inspection Association.” Do some research to find the best state or regional association and one whose qualified members adopt a code of ethics. For example, in California, the California Real Estate Inspection Association is the group that offers education and designations for real estate inspectors. Review a copy of inspectors’ résumés to see what certifications and licenses they hold. A general contractor’s license and certification as a property inspector are important, but also find out whether they’ve had any specialized training and whether they hold any specific sublicenses in areas such as roofing, electrical, or plumbing. These can be particularly important if your proposed property has evidence of potential problems in any of these areas. For example, if a property has a history of roofing or moisture intrusion problems, an inspector who’s a general contractor and roofer is an extra plus. The inspection report must be written. To avoid surprises, request a sample of one of the recent inspection reports that has been prepared for a comparable property. This simple request may eliminate several potential inspectors but is essential so that you can see whether an inspector is qualified and how detailed a report he will prepare for you. Check out the following figures for a sample interior inspection checklist. Source: Robert S. Griswold Sample interior unit inspection checklist (page 2 of 2). The advent of digital photography is a boon to property inspectors and makes their sometimes mundane and difficult-to-understand reports come to life. Select a technologically savvy inspector and require her to electronically send you her report, including digital photos documenting all the conditions noted. Recently, some inspectors have begun using advanced, non-invasive technology via an infrared or thermal imaging camera to produce images of heat radiation and identify energy efficiency concerns and electrical issues, as well as moisture intrusion scans inside walls or around plumbing fixtures. With the report in the electronic realm, it’s a simple process to email this information as needed. Although the cost of the inspection should be set and determined in advance, the price should be a secondary concern because inspection fees often pay for themselves. Just like many other professional services, there is a direct correlation between the pricing of your inspection and the amount of time the inspector takes to conduct the inspection and then prepare the report. If the inspector only spends a couple of hours at your new 20-unit apartment building, the report will surely be insufficient and your money not well spent. Finally, require the finalists to provide the names and phone numbers of at least ten people who used the company’s services within the past six months. Randomly call and make sure that these clients were satisfied and that the inspector acted professionally and ethically.

Article / Updated 01-16-2020

Real estate investment trusts (REITs) are for-profit companies that own and generally operate different types of property. The options for REIT investments are extremely broad and cover virtually every type of real estate. You can choose your favorite REIT from the following property types: Office: Ranging from Class “A” urban skyscrapers to single-story or low-rise suburban Class “C” buildings Residential: Apartments, student housing, manufactured homes, single-family homes Retail: Regional malls, outlet centers, grocery-anchored shopping centers Industrial: Warehouses, distribution centers Lodging: Hotels, resorts Healthcare: Hospitals, medical/dental office buildings, senior living facilities, skilled nursing and memory care facilities Self-storage Cell towers Other rental income properties, even timberlands These property-holding REITs (see the following figure) are known as equity REITs. Some REITs, known as mortgage REITs (or mREITs), focus on the financing end of the business; they lend to real estate property owners and operators or provide credit indirectly through buying loans (mortgage-backed securities). Equity REIT managers typically identify and negotiate the purchase of properties that they believe are good investments and manage these properties directly or through an affiliated advisory and management company, including all tenant relations. Thus, REITs can be a good way to invest in real estate for people who don’t want the hassles and headaches that come with directly owning and managing rental property. You can also invest in different property type REITs to diversify your portfolio, but check their returns and expense ratios as not all REITs within the same property type field are equivalent. This is similar to the reality that while most mutual funds all invest in the same pool of NYSE listed stocks, not all have the same expenses or results. We recommend that investors not be shy about asking for full disclosure of the relationship between the REIT, its advisors, and the management companies. REITs often involve conflicts of interest that aren’t clearly disclosed or pay significant above-market fees to directly or indirectly related entities or affiliates that ultimately lower the cash flow and return on investment available for distribution. Public REITs are traded on the major stock exchanges and thus must meet strict SEC reporting requirements: Liquidity: Public REITs trade every business day on a stock exchange and thus offer investors the ability to buy and sell as they please. Of course, as with other similarly liquid investments (like stock in companies in a variety of industries), liquidity can have its downside. More-liquid real estate investments like REITs may inspire frequent trades caused by making emotional decisions or trying to time market movements. Independent board of directors: A public company must have directors, the majority of whom are independent of its management. Shareholders vote upon and elect these directors, but that is no guarantee of their competency. Financial reporting: Public REITs, like other public companies, must file comprehensive financial reports quarterly. We recommend that you stay away from private REITs unless you’re a sophisticated, experienced real estate investor willing to do plenty of extra research and digging. Because they’re not publicly traded, private REITs don’t have the same disclosure requirements as public REITs. This difference means an investor in a private REIT had better carefully scrutinize the prospectus and realize that the private REIT has the ability to make changes that may not be in the investor’s best interests but that reward the private REIT sponsors or their affiliates. Ask what commission is deducted from your gross investment to arrive at your net investment. You may be surprised at the “acceptable commission rates” for private REIT investments, especially when you compare your experience with most mutual funds with very low competitive fees and no commissions with no-load funds. Take a look at REIT performance So, what about performance? Over the long term, REITs have produced total returns comparable to stocks in general. In fact, REIT returns historically have been as good as or better than stock returns, whereas REITs have also generally been less volatile than stocks. In the context of an overall investment portfolio, REITs add diversification because their values don’t always move in tandem with other investments. One final attribute of REITs we want to highlight is the fairly substantial dividends that REITs usually pay. Because these dividends are generally fully taxable (and thus not subject to the lower stock dividend tax rate), you should generally avoid holding REITs outside of retirement accounts if you’re in a high tax bracket (for instance, during your working years). Investing in REIT funds You can research and purchase shares in individual REITs, which trade as securities on the major stock exchanges. An even better approach is to buy a mutual fund or exchange-traded fund that invests in a diversified mixture of REITs. Some of the best REIT mutual funds charge 1 percent per year or less in management fees, have long-term track records of success while taking modest risks. Vanguard’s Real Estate Index Fund charges just 0.12 percent per year in fees and has produced average annual returns of about 10.2 percent since its inception in 1996. Vanguard also offers a REIT ETF (exchange-traded fund) through most discount brokers and boasts a low management fee of 0.12 percent. (You can buy it without any brokerage fees through Vanguard.) In addition to providing you with a diversified, low-hassle real estate investment, REITs offer an additional advantage that traditional rental real estate doesn’t. You can easily invest in REITs through a retirement account such as an IRA or Keogh. As with traditional real estate investments, you can even buy REITs and mutual fund REITs with borrowed money (in nonretirement accounts). Although risky, you can buy with 50 percent down, known as buying on margin, when you purchase such investments through a brokerage account. The following contains a short list of the best REIT mutual funds and ETFs currently available. The Best REIT Funds Fund Toll-Free Number Cohen & Steers Realty Shares 800-437-9912 Fidelity Real Estate Investment 800-544-8888 TIAA-CREF Real Estate 800-223-1200 T. Rowe Price Real Estate 800-638-5660 Vanguard REIT ETF 800-662-7447 Vanguard Real Estate Index 800-662-7447 If you really have your heart set on becoming the next Warren Buffett and you enjoy the challenge of selecting your own stocks, you can research and choose your own REITs to invest in. Both of the investment research publications Morningstar and Value Line, which can be found at many local libraries as well as online, produce individual stock page summaries on various REITs. In addition to having a professional manager deciding what REITs to buy and when, the mutual fund REITs listed in the table also provide consolidated financial reporting. If you purchase individual REITs, you have to deal with tax statements for each and every REIT you’re invested in.

Article / Updated 12-14-2019

Many real estate infomercial and seminar gurus make it sound really easy for anyone to make a fortune in real estate overnight. Buying foreclosures or properties with no money down can provide handsome returns, and there’s no doubt that the acquisition of real estate below its intrinsic value enhances your chances of financial success. This is simply the traditional sage advice (buy low, sell high) applied to real estate. And if you can do it routinely and without problems with title, devastating physical problems, or the negative tax consequences of being declared a dealer by the IRS (whereby your gains are treated as ordinary income and taxable at the highest rates), this strategy can be quite fruitful. However, finding well-located, physically sound properties that are available at below-market prices isn’t simple. Our experience is that most sellers know property values and don’t simply give away their property. We often think that the old saying “You get what you pay for” was coined by a real estate investor who just bought a foreclosure only to find it has a large unrecorded tax lien, a large commercial tenant that filed bankruptcy and can thus void their lease, or a severely cracked slab foundation. In our experience, successful real estate investors tend to be savvy, hard-working, conscientious individuals who enthusiastically perform comprehensive due diligence before buying a property. They don’t reinvent the wheel with each deal, because they know their market niche, personal skills, and available resources. They have a vision and use their tried-and-true game plan for each property. If you develop these talents, you can uncover unique properties with value-added potential that are often missed by your competitors. Robert refers to this method of real estate investing as the “Get-Rich-Right” strategy. The best news of all for new real estate investors is that this plan can be undertaken anywhere and initially can be done part-time. We give you ten methods to achieve a real estate fortune by using the “Get-Rich-Right” method. Build up savings and clean up credit We disagree with some who imply that you can begin your real estate investment career without any cash. Our experience is that the best opportunities and the most options are available to the real estate investors who have both cash and good credit. So, don’t procrastinate — begin working on this step right now. Sellers aren’t likely to provide financing to a buyer with a poor credit history; because the purchase of real estate virtually always necessitates the borrowing of funds, make sure that your credit report is as accurate and as favorable as possible. Your credit score is a key element not only in qualifying for real estate loans, but also in getting the best terms to maximize your use of borrowed capital. Get a copy of your credit report and correct any errors — pronto! At the very least, ask the credit-reporting firm to add your comments in your file with your version of any disputes. If legitimate delinquent balances appear, formulate payment plans and send the credit reporting firm written updates showing the balance was paid or otherwise satisfactorily resolved. As a new real estate investor you should also develop additional sources of income while holding or preferably even cutting current expenses; even if you can find properties where the seller provides all the financing, you can’t escape certain out-of-pocket expenses or the opportunity cost of lost income as you expend your time and energy tracking down properties and performing the due diligence. We have yet to find a top-notch real estate inspector or escrow company that works for free. Most people generate wealth and achieve a higher standard of living through sacrifice and living below their means in the short term; some even do so after they have substantial real estate cash flows. For ideas on how to track and reduce your expenses, pick up a copy of the latest edition of Eric’s Personal Finance For Dummies (Wiley). Buy property in the path of progress Locate properties that are in the path of progress — areas that will continue to improve through new investment and economic activity. You can’t realistically physically relocate your property, so your analysis of the location and its future potential is critical. After you locate the best cities or neighborhoods, there are commonly two types of underachieving real estate assets to look for: Those income properties that are tired and worn and have extensive deferred maintenance Those that are physically sound but poorly managed Your preference will depend on your specific talents and resources. Robert favors well-located, physically sound properties that simply have underperformed due to poor management. He’s able to use his skills and expertise as a property manager to upgrade the properties, bring in new tenants, and increase the rents. Particularly attractive properties are those where the current owner or manager hasn’t kept rents at the market level or those that haven’t been properly maintained cosmetically. Buy the right property at the best price possible Always buy property for the best possible price. This strategy is simple and makes a lot of sense, but may be easier said than done. We suggest following certain guidelines. As a general rule, most of your real estate acquisitions should be in the fixer-upper category and priced accordingly. You want to buy those properties that offer specific challenges that match your personal talents so you can use your skills to upgrade and enhance the value of the property and increase the Net Operating Income over time. A real estate investor using the “Get-Rich-Right” method doesn’t buy a new or fully renovated property, unless it’s in the path of progress or a prime location, because the value-added or appreciation to date has already accrued to the current owner. These properties may be solid investments, but you’re limited to the market increases in rent and value only. However, in some special situations, buying a new or fully renovated property is a good investment alternative. For example, buying a residential rental property in the first phase of an oceanfront community or another unique location that’s difficult to replicate may be a great investment in the long run. The pricing in first phases of new developments is often favorable because the developer must presell a certain number of the units before his permanent loan kicks in. Two important characteristics of successful real estate investors are discipline and the ability to predetermine the maximum price they’ll pay for a property to ensure plenty of room for appreciation potential. You don’t want to simply lower your purchase price by the cost of the repairs, because the value you add to the property should be significantly higher than your out-of-pocket expenses, including the time and risk you take in handling this work yourself. Renovate property the right way The “Get-Rich-Right” strategy depends on finding properties that are well located in the path of progress and then renovating them to increase cash flow and value. But don’t overspend on physical improvements. You only want to make those renovations or upgrades that increase the desirability of the property to your target market. Your property is a rental unit, not your own home. You may want to put premium countertops and appliances in your home, but you can’t get a good return on your investment if you over improve your rental property. Pride of ownership is important, but you’re running a business, and overspending on one property will limit your ability to save up the next down payment and build your portfolio and achieve wealth. Improvements should allow you to increase the rent or add to the property value so that you receive a return of $2 for every $1 spent on the improvements. The best fixer-upper properties for most novice real estate investors are those with simple fixes: Painting, landscaping, and minor repairs generally offer excellent results for only minor costs. These simple repairs are also within the skill set of most real estate investors, who may have developed and perfected their talents by maintaining and upgrading their own homes. Although doing the work yourself is typically cheaper, don’t forget to look at the time and experience factors. It makes no sense to have a rental property off the market for three weeks while you spend evenings and weekends painting in a misguided attempt to save the $1,000 that a good contractor would charge for painting that would take him two days and allow you to rent it this weekend. (A good contractor will also likely do a better job than you can!) If you use contractors, get three comparable bids from licensed, competent professionals. However, if you already know you have a competitive bid, you can expedite the process by asking the contractor whether she can lower the price by 10 percent — then you don’t have to go out and get additional bids. Of course, your most commonly used contractors may know your routine and overprice their bid by 10 percent or more. With time you can establish a good understanding of what constitutes a fair bid for all types of work that you routinely bid out. Whether you do the work yourself or hire a contractor, make sure to obtain all required permits and meet the applicable building and occupancy codes for all improvements. The cost of the required permits and inspections will be yours, but make sure that your contract or agreement clearly states exactly who is responsible for obtaining the permits and arranging for all required inspections. Keep abreast of market rents One of the biggest challenges for most rental property owners is determining the proper rent to charge tenants for newly renovated rental units. This aspect of property ownership and management simply requires some homework and research. Every property is unique, but your best indications of the market value of your renovated property can be found through a market survey of comparable properties. After you’ve acquired and upgraded your new rental property, immediately test the new rental rate structure by offering your vacant rental units or space at the higher market rates you determined in your rental survey. The response you receive from prospects will let you know whether you’re asking too much or whether you still have some room to give on your rents. After you install new tenants paying the higher rents, you can then make similar improvements for existing tenants and increase their rents to similar levels. One strategy is to renovate units upon turnover and offer an excellent, financially well-qualified, and stable existing tenant an opportunity to transfer to the upgraded unit at the higher rent. You then can renovate the unit they vacate. You repeat this process until all rental units in your property are fully upgraded and you have maximized your rental income. We recommend that you keep the rent level slightly below the full market rent for existing long-term tenants to show your appreciation for their long-term tenancy and to encourage them to stay. The cost of losing a tenant is high — a vacancy results in rent loss that you’ll never get back, plus the added expense of advertising and preparing the rental property for the next tenant. For more on this topic, check out the latest edition of Robert’s Property Management Kit For Dummies (Wiley). Recover renovation dollars through refinancing One of the key elements of the “Get-Rich-Right” strategy is to keep your capital working and use leverage reasonably while maintaining sufficient equity to weather the ups and downs of real estate cycles and local economic challenges. Acquiring and renovating your rental property required cash, but you also have increased the income, which has created additional value. You can now use this increased value to refinance the property to cover your initial costs of acquisition and renovation. Although we’re always quick to advise against borrowing too much and overleveraging your real estate investments, you also don’t want to be too conservative and underestimate your cash needs. The cost of refinancing is such that you don’t want to refinance the property more than once every several years, and if you suddenly need cash to overcome some unanticipated problems, the costs of short-term funds can be high. Borrow extra money or have an untapped line of credit available (which some lenders offer at no carrying cost to their best customers) to allow for reserves. It can be extremely tempting in a strong real estate market to leverage over-aggressively, but don’t get carried away. Don’t borrow all the equity in your own personal residence to go out and buy investment real estate. These individuals are really real estate speculators (people who gamble on real estate) and not to be confused with real estate investors. You should always own your own home and have (and always maintain) a good cushion of equity before looking to acquire investment real estate. As has been evident in the late 2000s/early 2010s, the lessons of a falling real estate market are difficult for all investors but are totally devastating to those few investors who borrow too much against their own homes. Remember that real estate markets have and will continue to have cycles, and you don’t want to be too aggressive and find that your real estate empire collapses to the point that you yourself can’t even afford to rent one of the apartments you used to own! Reposition property with better tenants One of the best ways to increase the income and value of your newly renovated real estate investment is to reposition the property with new, more financially qualified tenants. So, look to upgrade your tenants by marketing to a new target tenant profile and re-leasing the property. Often your renovation efforts displace your current tenant anyway, but you probably don’t want to renew the current tenants’ leases even if you’re able to work around them. The current tenants may be the reason that the previous owner sold the property (and that it’s in need of a complete renovation)! Such tenants aren’t likely to suddenly change their ways and will continue to use and abuse the property without any regard for your investment. Robert advises not to renew the lease of an irresponsible tenant with a pet that destroyed the current flooring. You’re better off bringing in a new tenant if you’re going to have to invest in new flooring or especially carpeting in a rental unit. Likewise, you don’t want to continue the tenancy of a tenant who won’t be able to comfortably pay the higher rent that your fully renovated property is now worth. This is often one of the toughest challenges for rental property owners — having to stand up to the current marginal tenant and not renew his lease. Although you may find that the current tenants are financially qualified and will treat the property as their own, the reality is that some repositioned properties should start with some new tenants. At a minimum, require the current tenants to complete a rental application. Go over the lease renewal exactly as you would for a new tenant and use the same financial criteria. Another way to improve the stability of your cash flow and minimize the chance of problems with your tenants is to increase the security deposit as long as you stay within the legal maximum. However, remember that market conditions usually restrict the amount you can charge for the security deposit. (Robert co-authored Landlord’s Legal Kit For Dummies with Laurence Harmon [Wiley], which can help you with finding and retaining great tenants.) Become or hire a superior property manager Superior management makes the difference between average and excellent returns in the long run. After you renovate and reposition a property with new tenants at higher rents, you need to retain the tenants and minimize turnover. You can also further enhance net operating income by effectively and efficiently controlling expenses. Even if you have just acquired your new rental property, you need to consistently work your long-term investment strategy by operating and managing the property effectively to achieve maximum value as if you were going to refinance or were preparing the property for sale. Your target buyer is going to be someone that wants to buy a turnkey property (one that’s operating optimally and doesn’t require renovation or a change in tenants) for personal use or as a prime rental unit or coupon clipping investment (steady, highly predictable stream of income like bond investors receive). Real estate appraisers will determine a higher value for properties with a strong track record of solid Net Operating Income. Remember that to achieve maximum value, you need to have consistent income with rents at market rates, stable tenancy, and reasonable expenses. But don’t go for lower expenses at the risk of decreasing curb appeal due to deferred maintenance. Refinance or sell and defer again Notwithstanding the decline in property values in most areas in the late 2000s/early 2010s, many rental property owners find that they have a considerable amount of equity tied up in their property because of the appreciation that has occurred over the decades throughout much of the country. Having some equity in the property is good and keeps you from faltering should the local real estate economics take a hit, but too much equity just sitting in a property lowers your overall returns. Our “Get-Rich-Right” strategy recommends that you use the equity in your current properties to expand your real estate holdings by investing in additional properties with a view toward diversifying to reduce your overall risk. You can access that equity to generate the cash you need in one of two ways: Either conservatively refinance your rental property or look to sell the real estate investment in a tax-deferred exchange. The best option depends on market conditions. We suggest that you take advantage of favorable financing terms when available to refinance your stabilized long-term properties. You can use the proceeds to restock your capital account in order to invest in additional rental real estate or even make other investments. The best news of all is that you can pull the cash equity from your properties tax-free. Borrowing isn’t dangerous if done in moderation. Or you can sell the property and use the 1031 tax-deferred exchange to keep your equity working. Besides excess or lazy equity, some owners prefer the tax-deferred exchange option because they can enhance their use of depreciation to shelter their real estate income. A competent accountant or tax advisor can assist you in making the right choice between refinancing and a tax-deferred exchange. Consolidate holdings into larger properties Fortunately, many real estate investors are able to master the concepts of buying and renovating rental real estate. However, they often become so successful that their real estate empire begins to control their lives. Although owning a diversified portfolio of rental properties has some inherent advantages, the day will come when your extensive real estate holdings create management burdens. Most long-term real estate investors find that they reach the point where their management responsibilities and duties no longer conform to the lifestyle that they can afford. They often decide to simplify their lives and hire professional property managers so that a property manager can deal with the 4 Ts: tenants, turnover, toilets, and trash. But finding and paying for a qualified property manager for a diversified portfolio of small rental properties isn’t easy or cost-effective. The potential efficiencies of property management are diminished when you have a large number of single-family or condo and/or small rental properties dispersed over a wide geographic area. Instead, look to the tax-deferred exchange and consolidate your real estate holdings into one or a handful of larger properties that can be professionally managed. You will still enjoy the benefits of real estate ownership without having to deal with the day-to-day challenges of management.

Article / Updated 12-14-2019

You can receive a return on your real estate investments basically in four ways — cash flow, equity buildup from loan paydown, tax benefits, and property appreciation. A great aspect of real estate is that you can buy properties according to your particular financial and personal needs. Different properties are geared more toward achieving one of these types of return than another. For example, an investor with significant earned income may focus on properties with tax benefits and not worry as much about cash flow. Investors nearing retirement prefer properties with cash flow. And all investors who have financed their rental property acquisition benefit from equity buildup while looking forward to appreciation. Successful real estate investors continually ask themselves, “How can I improve the returns on my real estate investment in each category?” Her are more than ten of the best ways that you can enhance your return on investment with rental properties. Raise rents Although most rental properties have other sources of income, the largest source is almost always the rents. Real estate investors wisely begin with an understanding that rent increases lead to greater cash flow. However, setting the proper rent and maintaining the optimum market level rents upon turnover of tenants is one of the most common challenges faced by property owners. Many rental property owners are reluctant to raise rents because they’re concerned that their good tenants may leave. This is a valid concern, but it shouldn’t prevent you from getting rents to market level — one of the fastest and simplest ways to improve your cash flow. Of course, you should always look for cost-effective ways to improve the property and make sure that your rents are competitive and a fair value. We recommend raising the rental rate modestly each year rather than waiting for two or three years and then hitting your tenants with a major increase all at once. Tenants are less likely to move as a result of this consistent and predictable, but lower increase strategy; they understand that the costs of operation are rising slightly each year. Most commercial leases contain annual rent adjustments tied to a consumer price index or set rental rate increases. Use this effective strategy for all types of rental property. If your rents are already at market levels, look to make upgrades to the property to justify higher rents. Maybe adding a combination microwave/exhaust vent unit above the stove, granite countertops, mirrored closet doors, reserved parking, storage lockers, or a deck or awning can provide an improvement that justifies higher rent. Use your market analysis or rent survey of competitive properties, especially ones that have the rents you would like to achieve, to see what they are offering and at what rent level. Any improvements that enhance the quality of living or bring the property to a level similar to higher-priced properties in the area can lead to increased market rents. (Market analysis and rent surveys are discussed in Robert’s bestseller Property Management Kit for Dummies.) Reduce turnover The single most important factor in determining the expenses of most rental properties is turnover. In both residential and commercial properties, tenant turnover is simply bad for the bottom line. A tenant moving out almost certainly means a loss in rental income, plus you’re hit with the increased expenses (marketing, leasing commissions, tenant screening, maintenance and repairs, and often capital improvements) to make the rental unit or suite available to show prospective tenants. Having qualified tenants sign long-term leases (with built-in rent increases), continually maintaining the property in top condition, and being responsive to the tenants can help reduce tenant turnover, which directly improves the Net Operating Income and cash flow. Doing so also increases the value of your building, which is your goal if you refinance, decide to sell, or use the 1031 tax-deferred exchange to upgrade your investment to a larger income property. Another effective tool to reduce the loss of rent during tenant turnover is to prelease the rental unit or commercial tenant suite. If you can prelease the rental to a new tenant who takes possession only a few days or weeks after the current tenant vacates, you dramatically reduce your lost rent and increase your cash flow. After you receive a tenant’s notice to vacate, immediately seek permission to enter and determine what you need to do to make the property ready for the next tenant. Also begin advertising for a new tenant and gain the cooperation of the departing tenant to show the property. Preleasing is one of the simplest ways to increase your net income, but it requires some planning and a cooperative departing tenant, which you should have if you have been a diligent and conscientious landlord and have been responsive to your tenant’s needs. Consider lease options A lease option is an agreement that allows the tenant the right to purchase the leased property at a predetermined price for a certain period of time. Sellers typically use lease options in slow real estate markets to create additional interest in the property — even a potential buyer currently without a down payment has the opportunity to eventually become a homeowner. There are many other benefits to the rental property owner willing to offer a lease with an option to purchase the property. You can often sell the property for a value above the current market, and the lease option usually requires a one-time option fee that you can keep if the buyer doesn’t exercise the option. Also, the renter/buyer typically pays a higher monthly rental payment with a lease option because a portion of the payment is applied to the ultimate purchase price. The higher monthly payments can be beneficial to you if the cash flows for the property are currently negative. Develop a market niche Rental properties catering to seniors have always been popular, and the demographics clearly support continued attention to this dynamically growing market niche. Some senior properties are targeting those in need of special care and food services, and that is difficult for many landlords. But there is a growing need for properties with activities and social programs that appeal to active seniors and don’t require specialized skills or significant capital investments. Robert has had success in Las Vegas (of all places!) with smoke-free apartments. After a long day at work in a smoke-filled environment, a health-conscious nonsmoking resident doesn’t need to have smoke wafting into her rental unit from her neighbor’s. Although there are additional costs upfront in thoroughly cleaning, completely repainting, and installing all new flooring and window coverings, the demand (and thus the occupancy) for these units is high. This trend is catching on, and several states are even implementing laws that require landlords to offer smoke-free housing, so you may as well be ahead of the trend. You may even qualify for lower casualty and fire insurance rates. According to a study by the National Multi Housing Council (NMHC), student housing is also a potential opportunity. Some real estate investors find the market ripe for renovating rental units; college students nowadays would rather have a private rental unit with their own bathroom facilities and a high-speed internet connection than a traditional dorm. Figuring out how to handle the seasonality of student rentals can be a challenge, but this market will continue to offer more opportunities. Consider offering 12-month-minimum leases at a slightly lower average rent so that you can bridge those seasonal challenges. Better to get a slightly lower monthly rent for at least 12 months rather than a little more per month for only 8–9 months! Maintain and renovate The curb appeal or first impression that your property gives is critical to your overall success. Far and away the easiest way to increase cash flow and value is to simply clean up and address the deferred maintenance found in most properties. One of the fundamental rules of real estate is basic supply and demand. If your property really stands out and looks much better than comparable properties, you generate high demand; your rental will stay occupied at top market rents. That’s what cash flow is all about. Besides curing the simple deferred maintenance, another great way to increase cash flow (and value) is to renovate the property. The key here is to spend money only on items that enhance the property and provide a quick payback. Examples include submetering utilities, upgrading appliances, or adding new features that tenants desire. For residential rentals, the best return on investment inside the units is found in updating the baths and kitchens. Adding systems to limit access of nonresidents for parking and building entry can also be a positive enhancement in urban areas, because crime is a concern for many tenants. For commercial properties, upgrading dated interior common areas, including elevators and restrooms, with higher-quality materials and fixtures generally offers the greatest return. One of the most cost-effective ways to increase the aesthetics and curb appeal of any type of property is through landscaping improvements. Often you can simply replace declining or dead plantings. If you want to do more, have your landscaping maintenance firm make suggestions or contact a landscape architect. Community gardens are also very popular these days and also build a sense of pride and community involvement. With water becoming more expensive every day, be sure to look into the installation of an automated, water-conserving, drip irrigation system, or even recycled water if it’s available in your area. Cut back operating expenses One of the first steps to take after you purchase a rental property is to evaluate current operating expenses. See whether there’s room for improvement, particularly without negatively impacting your tenants. Asking the local utility companies to perform an energy audit can pinpoint ways for you to reduce expenses. New technology is making the use of LED lighting, solar energy, and hydronics heating systems attractive. Converting existing wasteful lighting to LEDs alone makes a real reduction in your energy usage, and it helps you offset the constant increased rates of your local electricity provider. Tracking your natural gas usage can also alert you (if you see an unexplained spike) to possible minor leaks that can be expensive (and dangerous). Robert recently had a property where the monthly natural gas bill literally doubled during the off-season, and a simple call to the gas company, which tracked down and repaired the leak at no cost, solved the problem. They even offered him a credit for the excess usage as they were so glad to avoid the potential liability of a natural gas leak! The rapidly increasing costs for water and sewer services in many areas of the country have made the installation of individual submeters cost effective for allocating and recouping the cost from each tenant based on her actual usage. Separate water meters for landscape areas only will eliminate your sewer charges if your local water utility offers them. The best way to achieve conservation of resources at your properties is to make your tenants directly responsible for their resource usage. This lets the tenants control their own costs and saves you money. For larger residential and commercial properties, ask each of the current contractors and service providers to present a proposal or bid. Find other comparable firms and ultimately give your business to those firms that are insured and offer the most for your dollar. As your real estate empire grows, you’ll know who the best value providers are, and you may find that contractors and service providers offer discounts based on volume. Another great way to reduce your operating costs without any reduction in types and extent of coverage and policy limits is to combine your various rental properties under one insurance policy. Contact your insurance broker for details. Scrutinize property tax assessments A review of the expenses for most rental properties indicates that the property tax expense is often one of the largest costs in owning real estate. In many parts of the country, property taxes are tied to the value of the real estate. If that’s true for your area and real estate values decline, contact your local assessor and inquire about getting a reassessment. A lower assessment leads to a direct reduction in your property tax bill and a corresponding increase in your cash flow. You may feel helpless against the bureaucracy, but remember that tax assessors have been known to make clerical errors or to fail to take all factors into account when valuing rental property. Some assessors don’t carefully determine the proper value of your property but seek to assess the property at the highest possible level that won’t trigger a request for reassessment. If there are no limitations, they may even raise the assessed value each year until you react. After all, the higher your property’s assessed value, the higher your property taxes and the more money for local governmental spending. Remember no one is going to look out for your best interests but you. If you feel that your assessment is too high, contact your assessor. She may be willing to make an adjustment if you back up your opinion with careful research and a good presentation. Or you may need to make a formal property tax protest. Protests are often first heard within the assessor’s office or a local board of appeal. If a dispute continues, appeals may be taken to court in many states and that is when you’re likely to want to retain a professional to present your case and support it with relevant data from the local market. Refinance and build equity quicker Although you may have little control over interest rates and are at the mercy of your lender unless you have a fixed-rate loan, don’t forget that refinancing to a lower rate can have a tremendous impact on your cash flow. Of course, going with an interest-only loan or a 40-year mortgage can also reduce your debt service payment and increase your cash flow, but these options are extremely risky and not advised. You can enhance your equity buildup through refinancing to a shorter-term loan. When you first purchase a rental property, your rental income to make your mortgage payments is typically very tight, and you need to use financing with 25-year or even 30-year amortization terms. But after you’ve owned the property for several years, you may find that the cash flow has improved to the point that the property can handle a higher mortgage payment. That is when you can consider refinancing your long-term mortgage to a shorter-term mortgage, so that the amount of principal reduction paid with each payment dramatically increases. Another way to achieve similar results is to arrange to make additional payments designated as principal reduction. This strategy can significantly reduce the total amount of interest paid over the remaining life of the loan and bring the loan payoff date much closer because the interest paid on the loan is a function of the outstanding principal balance. Robert routinely applies this strategy when refinancing properties that have improved fundamentals — increase in value and increased cash flow — so that he can go from a 20- or 30-year loan to a 15-year loan. If the interest rates have fallen, the monthly payment may not even have much of an increase. Before refinancing or making additional principal payments, make sure that your loan doesn’t have a prepayment penalty. Lenders count on a certain investment or financial rate of return on their money, and the early payoff of a loan results in additional costs, so they may include a penalty in the first few years of the loan. Also, some lenders waive prepayment penalties if they handle your refinance. Take advantage of tax benefits The tax benefits received from real estate vary from investor to investor, but most rental property owners find tax benefits to be a boost to their return. Even novice real estate investors can take advantage of the generous tax savings with the capital gains exclusion for their principal residences. This exclusion allows sellers to completely eliminate any income tax on their capital gain of up to $500,000 if they meet some simple requirements. For investors willing to live in the property during renovation, the serial home-selling investment strategy can be used every couple of years to produce tax-free profits. Real estate investors in large residential and commercial properties routinely use a simultaneous or tax-deferred exchange, which allows them to keep their money working rather than paying taxes. The more money you have invested in real estate, the better your cash flow and your accumulation of wealth. Depreciation or cost recovery allows the owner to take a noncash deduction that reduces the taxable income from the property. Land isn’t depreciable, so the amount of depreciation is determined by the value of the buildings. One way to maximize real estate’s potential tax shelter is to be aggressive in allocating the highest possible (yet acceptable to the IRS) percentage of the acquisition cost of the property to the buildings to generate a larger deduction for depreciation. Depreciation deductions are a noncash item, so they often result in a taxable loss even though the actual cash flow for the property is positive. Ask your CPA or tax advisor about cost segregation (determining separate and often accelerated depreciation schedules for various building components) to maximize your depreciation write-offs. Even if you can’t immediately use a taxable loss to offset other earned income, you can use it in years that you have passive income such as a profitable taxable sale of another rental investment property. Be prepared to move on When most people think about real estate, they correctly determine that appreciation is where the real money is made. Over time, real estate has proven to be an investment that retains and increases in value. Even an average annual rate of appreciation of 5 percent dramatically increases your net worth over time. However, appreciation can be heavily influenced by outside forces, such as the condition of the neighborhood and the local economy. That is why real estate investors need to perform a thorough due diligence review. But even after you buy a property, you can’t simply sit back and let the investment ride. If the neighborhood you’re in starts to take a downward turn, be prepared to sell and reinvest in a more dynamic area that offers more upside potential. During the major economic downturn of the late 2000s and early 2010s, Robert advised owners of stabilized and cash-flowing rental properties in slightly less desirable areas to look to find cash strapped and motivated sellers of properties with deferred maintenance and/or poor management in the best neighborhoods. Why? Because while all real estate values were down, if you had a well-managed, cash-flowing property in a “B” area, you could still get good value by selling and then using a 1031 deferred exchange to upgrade and buy a property that was not well-managed or maintained in an “A” area. You essentially are exchanging into a much better location. Then you apply your proven skill at improving the condition and cash flow. While always a great strategy, and more feasible in weak markets or economic downturns, this is one of the best ways to efficiently use your limited capital to gradually build up a portfolio of well-located properties without having to pay the often high prices you would encounter with simply purchasing in the best neighborhoods from the start. Improve management Management is the one aspect of owning real estate that offers owners an advantage over other types of investments. You can’t call the CEO of a large company and tell him to change his company’s product or pricing, but superior management of your own rental properties can and will have a direct impact on your results. The ability to control and immediately implement different management strategies can lead to more satisfied tenants and longer-term tenancies. Some owners are very hands-on with their properties, and others prefer to let a professional handle the day-to-day challenges, but a savvy investor knows that the best returns on investment go to owners that have top management. Robert has been a property manager managing all types of income properties for decades. He has seen and competed with some of the best and some of the worst management companies in the country. The idiom “You get what you pay for” means if you can find a service provider at a very low price, it is because they are not very good. That certainly holds true for property management companies that compete on offering the lowest possible management fees. The reality is that to properly manage a property using the techniques we describe throughout this book to obtain the best financial results takes a lot of time and effort and requires frequent visits to your rental properties. The low bidders for property management simply cannot offer the services you need unless they charge a reasonable fee. Of course, equally of concern to you, is that some property managers have compensation agreements that benefit them through hidden profit centers, such as mark-ups on maintenance, labor, and materials or undisclosed affiliated companies. Management companies, like all businesses, need to cover their costs and make a reasonable profit, but it is our opinion that you only should use a management company that clearly and openly generates their income through the property management fee that is negotiated upfront and fully disclosed. You need to determine if you are the best person to manage your income properties or if you are better off hiring a professional. The answer will depend on a variety of factors, but in the early days the right answer for many is to self-manage. And while your portfolio is small, there is no one who will be able to match your time commitment. However, for virtually all real estate investors, the day will come when you are best served using a professional property manager. The right property manager will take his broad and extensive hands-on experience of managing many properties combined with key industry education and credentials, and be able to quickly implement the management practices and policies and procedures that will lead to better management. Proper management really can make a major difference in your cash flow.