On-Site Rental Housing Journal - July 2015

Rental Housing Journal On-Site

July 2015 - Vol. 9 Issue 07

3. Why Invest in Real Estate?

10. Dear Maintenance Men 11. Don’t Look Now – But Here Comes Budget Season!

7. Successful Property Managers Guard Key Relationships

13. Ask the Secret Shopper

8. 9 Tips for Getting Started in Real Estate Investing

17. Property Managers Buy Smarter and Smaller

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Puget Sound Apartment Owners, Property Managers & Maintenance Personnel

Published in association with: Washington Apartment Association, IREM & Washington Multifamily Housing Association

Apartment Security, What Can You Do?

Five Real Estate Investing Fundamentals By : Jeff Watson, The Jeffery S. Watson Law Firm LTD, General Counsel National REIA

O

ne of my favorite movie moments is when Ernest Borgnine, portraying the legendary football coach Vince Lombardi, stood in front of the world champion Green Bay Packers at the beginning of training camp and held aloft an oblong object proclaiming, “Gentlemen, this is a football.” What Vince Lombardi taught the Green Bay Packers then applies to real estate investing today.

1. Master the basics.

Practice them over and over again.

Consistently do the fundamental things that make you a successful real estate investor.

By Cliff Hockley and Heather Hill, Bluestone & Hockley Real Estate Services

P

roperty security is an aspect of property management operations often overlooked and not budgeted for. Properties typically need security for: transient removal, trespassing, illegal dumping, vandalism, theft, alarm response, illegal camping, and criminal issues on site (like drug dealing for example).

Property owners and managers can choose to implement a variety of strategies to improve property security.

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2. Repeat your successes and keep repeating them.

The vast majority of “investors” today suffer from what I call continued on page 6

I

Why Real Estate Investors are Vital to the Housing Market

nvestors are vital to the housing market and to the communities we serve. In 2007 – 2010 during the worst of the crash and when the value of housing plummeted and conventional financing had all but disappeared investors were the only ones keeping communities alive, preventing entire neighborhoods from being vacant and falling into disrepair.

Housing choices are important to the economic vitality of the larger com-

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Screening Property owners assume that onsite managers are responsible for property security. Many years ago we took over management of a low end mobile home park which had many drug dealers onsite (something we did not know when we agreed to manage the property.) The onsite manager and his wife were exceptionally large and had used their size to discourage obvious crime and keep the tenants in line. We were fortunate that the FBI and DEA arrested the worst tenants. In any case, once we took over management of continued on page 18

munity.

Cities, counties, and states are in increasingly heated competition to attract companies to their areas.

Good paying jobs, increased property and income taxes, and an improved quality of life for local residents are the expected paybacks local governments hope to receive when a major employer decides to locate in their area. In the past, economic development officials would offer tax exemptions or abatements as incentives to convince companies to

choose their location. Today, although taxes and the general business to a large and diverse labor pool has become the most important factor in making corporate decisions on location. And the number one problem facing the labor pool today is housing affordability.Accessible jobs and affordable housing are, therefore, inextricably related. A recent survey by the New York businesses surveyed cited housing costs as a serious deterrent to continued on page 4

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Why Invest in Real Estate?

By Rebecca McLean, Executive Director of the National Real Estate Investors Association

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eal estate investment is, and always has been, one of the best ways of investing available to individuals. Real estate investing works. Real estate investing is the surest and safest road to financial freedom. In a recent article in Fortune Magazine it states that 97 out of 100 self-made millionaires have made their money today through real estate investing.

In the long term, historically, Real Estate has shown a consistent growth in value, even when some other investment choices were less stable.

If there is an increase in value and you are paying down your mortgage balance, it’s pretty simple: You increase your equity in the property and add to your net worth. The nice thing about investing in real estate is if you have purchased the property right – for the right price and under the correct deal structure - and maintained it properly, your residents, in effect, make your payments for you!

In addition, there may be tax advantages available to you when you deal in a long term Real Estate Investment.

Although there are definite limits to

these potential tax advantages, they can be substantial. There are many other short term real estate strategies that have been incredibly successful over the last five years that have their own advantages. (Consult a tax or legal professional to see how your situation would be affected.) In general real estate investing allows you to: • Become financially independent or at a minimum vastly supplement your current income • Use the power of leverage - create income even when you aren’t “on the job” • Take advantage of great tax benefits • Real estate investing works no matter what the condition of the market • Appreciation of your asset • Create a constant stream of income • Be your own boss • Work on your own schedule

because the numbers are so large. It is not like buying a $200 collectible and reselling it for $250. Yes, the return percentage will be high, but you still only made $50. With Real Estate, a decent rate of return can mean big profit dollars. If you buy a house at $25,000, put $5,000 into repairs and upgrades and add some sweat equity, you can often sell that same house for $40,000! That’s a much larger dollar return on your investment.

One of the golden benefits of real estate investing is the opportunity to avoid the onerous taxes. Every time you exempt yourself from a tax it is like earning an extra percentage on your investment. That alone can have a powerful effect on your wealth building, but it doesn’t stop there. You have more profit to roll into another property, so you keep every one of your investment dollars compounding and building your financial net worth.

Best of all, real estate investing works no matter what the condition of the market. Your strategy might change or need to be tweaked but the underlying principles are the same.

In the short term, Real Estate makes a great investment simply

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Vital to the Housing Market ...continued from page 1

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attracting firms to New York.

Additional surveys in the suburbs of Chicago and LA have found similar results. Housing offered by real estate investors, therefore represents a major economic development tool for cities, counties, and states.

Most companies employ workers with a wide range of skills and pay them a wide range of salaries.

Companies seek business locations that can provide attractive housing opportunities for all of their employees, from administrative staff to executive management. Many communities, however, have failed to provide affordable housing options to low- and middle-income workers.

When communities fail to provide a balanced range of attractive housing options to households in all income groups, the region becomes less appealing to businesses. A lack of adequate housing for low- middleincome workers drives up land and housing prices, further exacerbating housing affordability issues for workers with higher incomes. Such shortsighted and self-centered policies result in de facto segregation based on household income and type.

Local officials who fail to plan for or permit housing options offered by investors and who enact restrictive local regulations that work against

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investors cripple their communities in the long term. A recent report from the Harvard Institute of Economic Research posits that homes are expensive in high-cost areas primarily because of government regulation, that is zoning. Though such planning and regulations often are deliberate, the combined unintentional consequences can be detrimental to the overall community’s economic vitality in the long term.

Where alternatives to expensive single-family homes are not available, many households are forced to move farther away from employment centers to find affordable housing. The quality of life and worker morale suffer. While the effect of the problem used to be limited to low-wage workers, today many middle-income workers, such as teachers, firefighters, and nurses, cannot afford housing near their work. If the lack of affordable housing near employment centers becomes severe, a labor shortage will result that then will require employers to pay higher wages to attract scarce workers. Higher wage scales ultimately will drive up the costs of many goods and seriveces.

Businesses eventually may be forced to relocate to areas with less expensive housing markets. Such relocation decisions often have a continued on page 5

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Vital to the Housing Market ...continued from page 4 negative impact on the regional economy.

If workers are forced to commute long distances because of a lack of affordable housing near their jobs, they contribute to increases area wide traffic congestion. As more cars crisscross the community from distant homes to work, everyone’s commute becomes more difficult, more fuel is consumed, air pollution problems are exacerbated, a feeling of crowding and frustration is created, and the overall quality of life for a region declines.

Housing options allow more people to live in housing they can afford that is near their work.

Real estate investors enable communities to provide housing that is affordable to a wider range of incomes.

This is due to not only housing options but the ability to offer creative purchasing and financing options. The problem of housing affordability worsened. In parts of the country where economic growth was the strongest, the labor force critical to sustaining the economy either could not find housing that was reasonably priced or could not locate within an appropriate commuting distance of their jobs.

The rapid appreciation of home prices in many major metropolitan areas has shut many low- and

middle-income workers out of the market.

Families who pay more than 30% of their income for housing are considered cost burdened. The center for Housing Policy confirms that working families are being squeezed.

Recently, the number of working families with a critical housing need—defined as having to spend more than half their income on housing or living in substandard housing—has i n c re a s e d tremendously. The Department of Housing and Urban Development states that an estimated 12 million renter and homeowner households now pay more than 50% of their annual incomes for housing.

Households depending on a single salary such as that of a teacher or a police officer cannot afford to buy a median-priced home in two-thirds of the metropolitan areas in America.

Nurses, for example, are priced out of all but the lowest cost-to-income markets, while janitors and retail salespersons cannot afford to purchase a home across the board.

These households are an integral part of the community and provide essential government, retail, and business services that are associated with a high quality of life for everyone.

Housing options offered by investors are often are more affordable housing option, providing

housing opportunities to wide range of incomes. In addition minorities and immigrants – tend to have larger households – will almost certainly account for a growing share of these new, young, households. This diversity will boost demand for a greater variety of rental housing.

(JCHS study) Trends in homeownership rates are another wild card. With the ongoing foreclosure crisis and stubbornly high unemployment rates, homeownership rates have steadily declined.

Tighter underwriting and income verification standards have also made it much more difficult for potential home buyers to qualify for loans. This is how investors help with single family homes as rental properties or that are available with a rent to own option. Not only can they provide often more suitable properties within traditional rental arrangements but they can also provide more creative terms for financing or other creative ways to own a property.

Real estate investors were providing “workforce housing” long before the term was coined. When affordable options are not available, households are forced either to move farther out, enduring long commutes that aggravate existing traffic problems, or to double up and endure crowded housing conditions.

If the situation is bad enough, they move to a more affordable community, leaving behind a labor shortage and all of the problems associated with it.

We look forward to welcoming you to our real estate investing community where you too can attain personal success and financial freedom while contributing to the economy and supporting the neighborhoods you invest in.

Nearly three years ago as we entered our relationship with our lobbyists and political advisors I was forced to truly evaluate our industry in the light of “big” politics and the “hot” issues that surround real estate. It was then that I saw how very important we are to the nation’s economy and the population in general. Real estate investors, not large apartment owners, not real estate investment trusts, not HUD based projects, are the backbone of housing. National REIA members as a whole address all the issues that are vital to today’s housing market – affordable housing, first time buyers, community rehabilitation, etc.

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Five Fundamentals ...continued from page 1 “squirrel or shiny-object syndrome.”

They have a little success in one area, but then they are suddenly distracted by something else and go to another area, and then another, and then another. The bottom line is they lose their focus and intensity, and they don’t continue to practice the same thing over and over again. Let me remind you, slow and steady wins the race!

return you want from your cash and/or time in each of your investments? When I say “rate of return,” I’m not just talking about an interest rate.

• Do you want your investments to result in your receiving monthly income payments, either interest only or something else, so each investment is generating a monthly cash flow to you?

3. Establish your parameters.

In addition to becoming good at the basics, I urge real estate investors to establish their investment parameters.

• What kind of investments or deals do you want to do? Are you going to do loans? Are you going to use options? Are you going to buy rentals or tax liens? Are you going to invest in commercial properties?

Pick two or three (no more than that) of these things and get very good at doing them. Do them over and over again.

• Determine what you are looking for in each of your potential investments.

• How much capital per investment are you willing to put at risk?

• How much time will you put into this investment?

• What is the length of time you want your capital to be out working?

• What is the projected rate of return you are seeking?

• What is the minimum rate of

These are just some of the parameters you need to establish for yourself. There is no one book, manual or class where you can learn all this information. No, it requires your spending some time working on what you think is best for you.

That means you may have to do one of those activities in which investors should engage on a regular basis but often don’t – think and plan. As you think and plan, you will be able to clearly define your investment parameters in a way that you can clearly communicate with others who may want to do business with you.

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4. Do your essential due diligence.

Another key component of real estate investing involves your due diligence process. There are two very crucial questions to be asked at the beginning: • 1. Who is involved?

• 2. How are they involved?

Allow me to explain why these questions are so important. It doesn’t matter how papered-up or how careful your lawyer is when drafting the agreements. If the person on the other side is a person of weak or poor character whom you know has a tendency not to honor their word, it will not be a good deal.

You want to be in a situation where someone you know who has very high character and is a capable investor is involved in the transaction.

You still need to know HOW they are involved. Are they going to be involved in a way that will make sure the deal goes well, or are they just on the periphery and their name is just being “borrowed” for

marketing or window-dressing purposes?

Once those key questions have been answered and you understand who is involved and how, and you have done some basic due diligence on them, then you are able to determine if you want to proceed with further due diligence on the deal or investment.

Even though you may have a long, successful track record of doing multiple deals with individuals, it never hurts to check up on them again to see if things have been going well in other aspects of their lives. Allow me to share a brief story to illustrate this point.

A client of mine indicated that he had made a series of large-dollar, hard-money loans to a rehabber who always got the properties finished in great condition, and they sold for top dollar. After doing several of these deals, he began to feel very comfortable with this borrower.

Unbeknownst to him, this borrower was having marital problems. Once those problems grew to the point where domestic relations court and lawyers became involved, this individual’s rehabbing business fell apart, and one of my client’s loans was put in a great deal of jeopardy. Fortunately, things worked out and full payment was made, but it was late and destroyed my client’s belief that this rehabber could be counted on to perform and pay on time.

Make sure you develop the type of relationship with the individual with whom you are doing business that allows you to look them in the eye and ask them how they are doing and what else is going on in their life so you can pick up on what issues may be on the horizon that could affect the way you are doing business with them.

5. Organize your deal paperwork.

There is one last fundamental principle that investors need to understand that I want to share with you. You need to organize your paperwork. You need to have all your baseline transactional

documents saved in Word format so you can easily do your own word processing and create nearlycompleted drafts of your documents to be reviewed by the appropriate outside professionals and other parties to the transaction (yes, get a professional review each time).

By always working from a baseline document, you have a template in place so you aren’t reinventing the wheel every time.

You are also able to maintain a greater degree of privacy and security over what you’ve done with other deals. I often see individuals who grab the last document they used (last lease, last trust agreement, last operating agreement, etc.), and they begin making edits to that one for the next deal, not realizing that there may be holdovers, both digitally and facially, in that document. Has that ever happened to me? Embarrassingly, yes. I have taken steps, however, to prevent it from happening again in the future.

That’s why I’m sharing this concept with you.

Whatever the type of document, whether promissory note, mortgage, deed of trust, option agreement, due diligence checklist, or borrower questionnaire and loan application, have them saved in a baseline format that you can quickly modify it for the particular deal on which you are working. This will allow you to be much more organized as you prepare these documents on your own to be sent to your lawyer or other licensed professional for review and then used in the transaction.

Remember, it’s all about getting good at the basics. Make sure you master the basics of real estate investing, establish your parameters, do thorough due diligence regarding those with whom you are working, and work from the same, consistent set of documents so you can continue to repeat your successes.

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Successful Property Managers ON-SITE-NW SEATTLE Guard Key Relationships VALLEY, METRO, ARIZONA APT. NEWS

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comes from 20% of your clients. The equipment. Because we were tied people will forget what you said, 20% are your key relationships that together by strong ropes none of us people will forget what you did, but ften in life, it’s not only what you can’t afford to neglect. When were lost down a deadly crevasse. people will never forget how you you know but who you was the last time you had coffee or This experience emphasized the made them feel.”

If the key people in your lives, know that can make all the breakfast with these sources of ongo- importance of “staying connected” difference. Knowledge is powerful, ing business? Do you communicate to the dependable, competent people including family and friends, feel I relied on and who relied on me. It appreciated, understood and respectwith them but relationships are Apr, the bedrock Feb, Jun,ofAug, Oct,regularly?

Dec The other 80% of your book of also reminds me today of a motto ed they are much more likely to the property management business.

It all begins with the people we work clients are important, too. Make sure that I learned: “Do what you can to respond in kind. with, the folks we depend upon, and you have an outstanding client man- leave people a little better than you PropertyManager.com a Service of the personnel that help keep the agement system (CMS) that won’t let found them.”

AppFolio Even if all you do is send emails you forget them. A good CMS keeps wheels of progress turning.

Are you staying connected, in people from falling through the or a text with a few appreciative touch with your V.I.P.s? Group meet- cracks, which might make them easy words, do it. The late Maya Angelou ings can be useful in this regard. But pickings for your competition. had some powerful things to say on there’s nothing like one-on-one time Loyalty must be earned and then this topic. One of her most memorawith your key people to really get maintained through caring contact. ble quotes was “I’ve learned that the feel about what they’re thinking As you climb the ladder of success and what ideas they may be willing you’re likely to slip from time to time. If you have others on that same to share.

One of my clients has lunch each ladder with whom you’re loyally connected you’ll keep from falling APT. NEWS month with a rotating selection of VALLEY, METRO, ARIZONA the people she relies on the most. too far.

The few mountain-climbing expeShe’s a big advocate for having a “garden filled with allies” and she riences I’ve had taught me to be tethkeeps that “garden” nourished well. ered to my group. Once, years before Next, if I were to ask you for a list the eruption of Mt. St. Helens, I www.rentalhousingjournal.com of your most important clients, ascended its icy surface all the way would you have it memorized? If to the summit. Several times I, or Jan, Mar, May, Sep, Nov,of the climbing another member you think about it, 80% of your busi- Jul, East usually 62nd Street, Losslipped Angeles, 90001-1598 party, in CA spite of our quality ness as a property 1010 manager

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9 Tips for Getting Started in Real Estate Investing ticular technique works. The downside of being so narrowly focused is that it limits the new investor’s opportunities. If you believe that your investing strategy is the only strategy worth pursing, to the exclusion of all others, you will have a narrow viewpoint of what a “good” deal is, and pass up a lot of opportunities to profit with another strategy.

Don’t get so stuck in a mindset that you can’t even see good deals if they are out of your comfort zone.

That being said. You can’t try to participate in a dozen strategies at once…see number

By JC Underwood, Crown Properties

1. Treat This As A Business One of the biggest mistakes I see new investors make is to treat real estate investing as a hobby instead of a profession. If you’re counting on real estate investing to provide income now and retirement income later you must treat it like a business.

Real estate investing is now your profession. Treat it like one.

By that I mean you have to advertise, devote time to it, show up for appointments on time, act professionally, do your paperwork properly and treat your clients professionally.

Most real estate investing isn’t passive. Unless you are a private lender most investing takes real work. Even a landlord using a property manager has work at the outset and should continue to remain active in oversight.

This is not a get-rich-quick scheme. It takes time to build client lists, credibility, partnerships and associations. A well-grounded business is built over time unlike “overnight sensations.” It will take you 3 to 5 years to become a real success in this field.

coming in their community that will majorly effect their profits, put themselves in a position of huge liability, or miss out on time and money saving tips because they just didn’t take time to stay informed.

In the real estate business, like everywhere else, knowledge is power and for investors it’s profit too.

2. Learn About The Business and Stay Informed “If you think education is expensive, try ignorance.” Derek Bok You can lose more money with a mistake than you can learning how to avoid one. Even if you have been at this business for years, you need to keep up with current trends and laws. You never get to the point where you know it all or even know “enough”. Some investors honestly believe that there is nothing else that they really need to know to be successful, then a law changes, the market turns, or a new strategy begins to be used. They either miss changes

3. There Are Many Profitable Strategies In Real Estate Most new investors get into real estate investing after hearing about one specific strategy. They have a friend or family member that has participated in real estate, they saw a TV show or infomercial or they went to their first REIA meeting and heard a charismatic speaker that made them want to pursue a specific investing strategy. They begin to invest using that strategy because they are drawn to the certainty and proven success of the individual that is in front of them. After the new investor has any success with

one strategy they often develop the idea that other strategies are less profitable, more difficult to execute, and generally inferior to the one they are using. Suddenly they develop a certainty that their particular strategy is the supreme strategy so there is no earthly reason to even consider anything else.

Following a one particular strategy as a beginning investor can be extremely valuable for the overwhelmed new investor since it allows him to really, really learn how a par-

4. Have A Plan All businesses need a game plan.

You can’t just wander aimlessly hoping to find a deal. You also can’t rent an office, decorate it and then sit behind your desk waiting for the phone to ring. It just doesn’t happen that way. You need to decide upon a strategy, learn what you need to do, set your goals and make it happen!

Have a plan. Pass out 50 business card a week (or whatever goal you decide is appropriate for the amount of business you want to generate).

Talk to 50 people by phone. Make 10 offers a week, spend $100 a month on advertising – whatever your goal is, make it happen every single week – day in and day out – work the market. Eventually you will start to see continued on page 22

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Dear Maintenance Men: Dear Maintenance Men: We have been in drought conditions for a long time here in the West, however I keep hearing about the wet weather condition called “El Nino”. What is “El Nino” and how should I prepare my apartment building for its coming?

John Dear John: An El Niño is a weather pattern

produced by unusually warm ocean temperatures in the Equatorial Pacific. The El Niño phenomenon is associated with extreme weather around the globe and in California it typically means a wet winter with higher than normal rain levels. The National Oceanic and Atmospheric Administration (NOAA) is predicting a 60 percent change that the El Niño conditions will continue all year.

So how do you prepare for El Niño? Inspect your building’s roofs, gutters, drains, flashing and trim overhanging trees. In other words, don’t wait for the wet season to find out your roof is in poor condition.

Get the work done now while it is dry and the roofing companies are not busy. Don’t forget about large trees that hang over your roofs. In wet windy weather, they can cause a lot of damage to a roof if a limb breaks or a tree falls because of soggy soil.

Flat roofs are especially vulnerable to blocked scuppers and roof drains.

The backed up water will find the slightest weakness in any roof system and even cause a roof collapse.

Dear Maintenance Men: Pigeons are driving me crazy! I have tried everything to get rid of the pigeons that have taken over eaves and patios at my complex. I have used fake owls, high pitch sound devices, goop to give the pigeons sticky feet and spikes everywhere.

They just laugh at the spikes and walk and nest over them. Any advice will be welcome!

Jennifer Dear Jennifer: Although your situation is be-

yond this; the first line of defense is not letting pigeons get a foot hold at your property in the first place.

Talk to your residents and make sure no one is feeding the pigeons! It sounds like you have tried most of the common antidotes for getting rid of established unwanted pigeon flocks. Getting rid of pigeons is a war of wills. If you give up, they will return. The key is to make them as uncomfortable as possible and not stopping until they are gone. First thing to do is clean the area with bleach to remove any pigeon nesting smells and spraying any stubborn pigeons with a water hose over and over. If the area lends itself to be closed off, put up netting to keep the birds from entering the area. If the spikes are broken, replace with stronger ones.

Check at your local farm supply or the internet for stronger better quality spike strips. The area must be monitored constantly until the birds have found a new nesting area away from your building and remember, this is a daily battle if the campaign is to be successful.

Dear Maintenance Men: Drought or no drought, I have decided continued on page 20

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Rental Housing Journal On-Site • July 2015

RENTAL HOUSING JOURNAL ON-SITE 18300 Cascade Ave. S., Suite 130 Tukwila, WA 98188 425 656-9077 • 425 656 9087 (fax) admin@wmfha.org

B

• Executive Director – Jim Wiard • President – Kris Buker – Vice President – Brett Stevens • Secretary – Heidi Daniel • Treasurer – Becky Sanders • Vice President of Suppliers Council – Rob Pendleton • Immediate Past President – Gail Duke

Don’t Look Now – But Here Comes Budget Season!

udget season is fast approaching! I can hear the collective groans already.

Many property business managers and Regional Managers will soon be working together to prepare their property budgets for 2016.

Companies will be dusting off their budget procedures manuals and begin planning for group trainings or one-on-one consultations with site managerial staff to gather the information needed to begin the budgeting process.

This budgeting process is one of the most important efforts a property manager will undertake in their jobs. The more time spend understanding a property’s financial makeup, the better that property’s budget will be and the better financial success that property will achieve.

The Operating Budget is a management tool used for planning and control of a property’s financial operations. The budget is the basis for establishing measurable goals as well as planning for their accomplishment and evaluation of their achievement.

In budgeting, financial and managerial issues are intertwined. The Property Manager is the front line person at the property. The manager is the information source for most items found in the operating budget.

The manager administers policies and procedures, many of which pertain to financial operations. Most often, it’s the manager who makes the purchasing decisions on a day to day basis for the property. The site manager is perhaps the most influential person to the entire financial success of a property.

A property budget is not entirely dissimilar to our own household budget. Most of us have limited income and regular bills to pay.

Property budgets make estimates of income and allocate money to appropriate expense accounts to pay the company’s anticipated bills. The operating budget lists planned income and expense amounts for each month and for each account category. Budgets determine the financial position of a property for a future time period.

The budget is not just a guess of

what someone thinks will happen. It is a management tool, a plan of action, a guide to achieve a desired financial performance. The budget sets goals, outlines the plan to accomplish those goals and assesses how well those goals have been achieved.

The budget can be used to direct daily operations and to control costs and expenditures. The budget serves as guidelines, can indicate the level of management efficiency, forms the foundation for improved performance, measures performance of the manager or the management company, sets a cash flow schedule and monitors cash flow, and provides a forecast of future performance. The budget should match the owner’s investment goals.

Most often, the budget is aimed at big picture and long range goals such as to increase cash flow, raise NOI, improve the physical product, pay down financing, provide pride of ownership or enhance property value.

What do owners want from their property management firm? They want positive cash flow from a stabi-

lized, well maintained property that provides a decent rate of return on their financial investment. The budget works to outline the accomplishment of this goal.

The Budgeting Process Budgeting is a systematic approach to financial management.

Step-by-step procedures should be used to ensure the most accurate budget possible.

Budgeting is an evaluation process, a thought process. Budgeting begins with information gathering: • Account by account entries are considered.

• A review of historical actual information is performed.

• Variances between actual performance and past budgets are reviewed.

• Income goals are re-determined.

• Market knowledge is essential.

• Economic trends are evaluated.

• Management programs and policy assessments are continued on page 15

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Why Invest

...continued from page 3

Real estate investing has become attractive to everyone in the last decade. Average individuals, not just high income earners looking for supplemental retirement income or those looking for freedom from corporate America. In 2005, investors accounted for nearly 10% of the new mortgage loans- up from 6% in 2001.

And that number does not even account for investments using creative financing, a term real estate investors use to mean investing via creative strategies for acquisition.

The number of conventional loans was significantly reduced after 2009

and then investors began to use cash and private money to participate in the market. Bankrate.com, in its April 22, 2005 article, said that it estimates that nearly a quarter of home buyers were purchasing property as an investment. After the overall market cooled that number remained high as only investors with access to alternative funding could freely participate in the market. Many areas that recovered more quickly were only able to do so because of investor participation. During some months in 2010 and 2011 NAR reported that over 30% of the pur-

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chases were by investors.

Those who chose real estate as a career have much more flexibility than in the past. You can even be a real estate investor and never have tenants! Many strategies such as wholesaling and private money don’t have tenants or physical labor.

There is one thing about real estate investing that has remained unchanged through the years – the smart investor is making his money (or time, or talents, etc.) work harder so he doesn’t have to.

The biggest plus to becoming a real estate investor is your ability to invest on your terms: • Seller financing that means little upfront investment vs all cash deals • Working from home vs using an office and staff • Normal office hours vs by appointment only • Gaining education from books, informal meetings, or in exotic places on a cruise

For more information on how to get started in Real Estate, I can recommend no better resource than your local Real Estate Investors Association. These associations feature great benefits such as discounts from product and service providers, special programs for everyone from beginners to advanced investors, and unbeatable networking opportunities. Your local REIA group can be an invaluable partner on your road to financial independence! For information about REIA Chapters and affiliates around the country, visit www. nationalreia.com.

It all depends on your style of investing and the lifestyle you are pursuing. That is what makes real estate investing the perfect business for everyone. You can build your business on your own terms.

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sk the Secret Shopper

ach apartment community has certain features and benefits, which are the selling points of that particular community. It could be its location, friendly staff, spacious floor plans, beautiful landscaping or affordable price; just to name a few. Yet even with the most fabulous features, there will be times when the apartments you have available won’t seem to meet the needs of your prospective renters. The following question from a leasing consultant addresses this issue: Q: We have several vacant apartments right now and I know I’m supposed to try and rent all of them, but how can I rent to someone when it doesn’t seem like the apartment will really meet their needs?

A: Things are not always what they “seem.” Many times you may have the tendency to make an assumption about what you think someone needs based upon your limited perspective, frame of reference or belief system. For example, you might have 2 bedrooms available right now that are all located on upper floors. If a family with small children comes in, you might automatically assume that they are not going to be interested because you think they won’t want to deal with the stairs. On the other hand, you

could have all first floor openings and your prospective renter could be a single woman. You might think women living alone only want upper level apartments because you believe they feel safer off the ground.

Therefore, when you have a single woman seeking a new home, you may not try to sell her on a first floor location because you don’t think it will meet her needs.

Until you truly get to know your prospective renters and determine what is most important to them, you really don’t know what they need.

You are merely making “assumptions.” It could be that the husband of the family mentioned above travels a lot. The wife may prefer an upper level apartment as she is frequently home alone with their small children, and would feel safer living upstairs. The single woman might have a lot of equipment that she has to bring home from work each day, and does not want to deal with constantly lugging it up and down the stairs.

It’s important to remember that every person who walks through your door is as unique and special as each one of your available apartments. The term “one size fits all” may work when you are buying a stretchy article of clothing.

However, when it comes to helping people find a new home, no apartment will fit the same two people in the same way. For those times when you have prospective renters with needs you just cannot meet, send them to a sister community and/or offer to pay them a referral fee for anyone they refer who rents. Since things are not always what they seem, you never know when a prospective renter who does not end up leasing could be a source of referrals for months, or even years to come.

If you are interested in leasing

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Budget Season! ...continued from page 11 conducted.

• Staff feedback is solicited.

• Bids are obtained.

• Contracts are evaluated or re-negotiated.

• A physical inspection is performed and a capital improvement plan is developed.

• Overall ownership goals are revisited.

• NOI and the bottom line are judged against overall owner goals.

Don’t forget to incorporate capital budgeting into your budget process.

A Capital Improvement Budget plans and evaluates large physical expenditures along with useful life projections and assumptions. A capital reserve account is generally formed where regular additions are made to a separate bank account in anticipation of large outlays at a later date.

These reserves are funds set aside to pay for a future major renovation, improvement or purchase to replace or restore the building’s features. A capital improvement projection is a schedule which includes additions and subtractions to this account. A typical capital improvement budget forecasts ahead five to ten years. The purpose of this kind of budget is to plan for adding or maintaining value to the building. These large capital costs generally can’t be paid for out of a property’s available cash flow.

Budgets have the two components described previously: income and expenses. Strong management and growth enhancement of income needs constant attention by management and operations staff.

Maximizing income is a critical way to ensure acceptable NOI and cash flow.

The budget needs to stretch the manager’s creativity and attentiveness on the income side. Proper management of assets can produce

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optimum results. Collection of cash receipts means money to spend on needed items. An effective financial manager has a system for collecting rent efficiently, maximizing rental rates and minimizing vacancy loss, collection loss and concessions.

Expense control is a management skill. Working within the guidelines of an operating budget is a major responsibility of a Property Manager.

Techniques to manage expenses are a measure of manager ability.

The budget becomes the management plan for the coming year and directs staffing and decision-making efforts at all levels.

The first step to budgeting your Revenue is to determine your Revenue assumptions. To help with this step, understand what is happening in your immediate sub market with regard to occupancy, rents, new development, job creation and unemployment.

Preparing Budget Assumptions Trying to operate a property without a good budget is like trying to reach your destination without a complete roadmap – it is very difficult to get where you want to go. To begin to review budgeted expense categories and develop good budget numbers, you first need to have good budget assumptions which illustrate the thinking and methodology used

to develop your budget figures.

Living With Your Budget Your budget is a collaboration of work from several different positions, all with one common goal: to meet the fiduciary responsibilities for the investors / owners within your organization. It will be modified from the original draft, and those modifications are the direct result of meeting a strategic plan developed by the executives within your organization. No matter what it looks like when you have the final draft in hand, it is YOUR budget.

Own it, and achieve it!

Embrace budget season as an opportunity to make a positive impact upon the operations of your property, the residents of your community, your employees and your owner/investor’s overall satisfaction.

The Washington Multi-Family Housing Association presents budget and financial management training as part of its ongoing educational programs. Visit our website at www. wmfha.org to learn how to join with us and get connected to the best in training opportunities for your employees.

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Property Managers Buy Smarter and Smaller

By Marc Courtenay

A

s we go about our routine responsibilities of serving our owner-clients we often find good deals on residential income properties. That’s true today in smaller markets filled with plentiful opportunities.

Bigger cities are the primary markets many investors are focusing on to increase their holdings of income housing. That’s why some of the smaller, out-of-the-spotlight markets may offer better results.

Often the deciding factors about purchasing rental income properties revolve around location, the condi-

tion of the buildings and the return on investment (ROI). We also look for a fair market price.

Besides these critical points that contribute to buying smarter, adroit property shoppers focus on the allimportant “cap rate”. This term is familiar to most but needs to be carefully defined.

Capitalization rate, aka cap rate, defines the percentage number used to determine the current value of a property based on estimated future operating income. It’s a vital percentage to determine a fair market value.

It involves taking the net operating income from a rental income

property and dividing it by the cap rate which equals the approximate current selling price of the complex.

How is the cap rate determined?

It’s usually calculated based on an appraisal and/or the cap rates of similar properties that have sold recently. Another angle is to look at a comparable rental property’s net operating income (NOI), then divide the income by the selling price of that property.

The process of coming up with

the cap rate is a natural outcome of doing your due diligence on the history of the rental units as well as the “comps” in the area. Know the most recent years’ occupancy rates too.

According to data I’ve tracked for the year ending in March 2015 the average cap rate for multifamily properties can be as high as 7.1% in areas like Buffalo, N.Y. and around 4.9% in cities such as New York.

Smart buyers aren’t afraid to look continued on page 20

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Apartment Security ...continued from page 1 the property, we were able to use improved tenant screening techniques to select better tenants and create a safer environment. More importantly, we were able to reposition the property (over a period of seven years) to enable the ownership group to sell the property for a profit.

Community Building Community organizing is an important tool for crime prevention.

Onsite managers can work with neighborhood police officers to foster positive relationships with law enforcement at the property. Events such as the National Night Out draw attention to police partnerships that can get communities aware of their role in making neighborhoods safer.

This is not an easy task. It will take a lot of work to get community mem-

bers involved. A good onsite manager who understands the benefits of community building will put the extra effort into this and help tenants get to know each other, through monthly parties, events and newsletters.

Lighting and Landscaping Issues Crime rarely takes place in open areas under spotlights. Make sure the property has adequate lighting and that all lamps work at night, especially in the parking areas to discourage car theft or break-ins. To save energy, motion sensors can be installed that illuminate a space only when a large moving object is present. This has a dual benefit of scaring away trespassers and relieving tenants who might find constant lights too bright in their windows at night.

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Overgrown landscaping can provide easy cover for criminals. Make sure that bushes or trees don’t obscure property windows, entries, and/or lighting systems. When planting bushes near access points like windows, choose thorny yet ornamental bushes such as holly, hawthorn, or roses as these are more difficult to climb over. These plants can also serve as a natural fence. If the property has a problem with passthrough traffic, for example, corner properties or those adjacent to a retail area where pedestrians might choose to cut through the property to shorten the walk to another street, you can plant thorny bushes to discourage this practice. Criminals find properties with only one in and out point of access less desirable than those with multiple escape routes.

These steps require the cooperation of the owners, the managers and the landscape team.

Cameras As the cost of technology has plummeted, it has become easier to install security cameras and DVRs to track the data. Many commercial and some residential buildings have cameras to observe access and help security personnel and property managers track activity at their properties twenty-four hours

a day on their smart phones.

At one of our commercial properties we were having a problem with transients sleeping in the entryway of a vacant space. We installed a camera with remote access. This enabled the property manager to catch the transients in the act and call local police to arrest them. We did press charges. The security camera worked.

Like good lighting, even the very presence of security cameras can deter crime, however owners and managers should keep in mind that they have limited capabilities when it comes to helping convict criminals after a crime has taken place. The quality of camera images vary greatly, and without adequate lighting, some are virtually useless for night imaging. Most exterior cameras are effective for collecting evidence such as a car make and model and a general height, clothing, build or sex of a perpetrator, but fail to capture essential details such as license plates and facial features.

Also, external cameras must be maintained like any other structure on the property that weathers the elements. Water, dirt, dust and insects can find their way into the camera housing, obscuring the view. Make sure any external cameras are clean to maximize their value. Again, just as

Rental Housing Journal On-Site • July 2015

RENTAL HOUSING JOURNAL ON-SITE

Apartment Security ...continued from page 18 issued to the new tenant. By using this practice you have a general idea of how many fobs are needed for the building. If you find you are buying more fobs without retiring them, you may have an undeclared loss issue. Like computer systems, access Access Controls Some buildings are designed with systems have a limited amount of common area central access, which memory. Adding new codes without allows for the use of access controls. retiring any may cause the system Typically, tenants are issued cards, to reach the limit requiring the purfobs, special keys or codes that make chase of added memory, which can it hard for non-tenants to access be expensive. buildings. Tenants can then allow access to their guests through the use The Police We encourage our property manof audio or video communication to agers and tenants to call the police their front or back door entries.

Like camera systems, access con- when faced with a security problem. trol systems require some upkeep to We do not want anyone to get injured sustain their effectiveness. Property by an angry tenant or a criminal. Unmanagers should understand their like the strategies previously covrole and responsibilities to control ac- ered, the police not only discourage cess in their buildings. First, cards/ crime, they also document it on the fobs, like keys, should be tracked and public record through police reports accounted for. Order new cards or and can help draw the local police fobs from the same vendor to make department’s attention to the issues sure they are not duplicated. Miss- at the properties. Police presence ing cards/fobs should be immediate- can be very helpful in discouraging ly removed from the system, and al- crime.

Sometimes, when budgets are ways either collect the card/fob from the tenant upon move-out or retire tight or crime is rampant, the pothe card/fob from the system upon lice departments don’t have time or staff to respond to suspicious acmove out.

Though it takes more time and tivity. When all else fails, you may work, the most secure option is to need to hire private security patrol make sure that cards/fobs are re- services. turned upon move-out and then rethe resolution differs from camera to camera, the quality of the housing differs as well. Vendors who specialize in electronic security can advise you on the best options for your situation.

Private Security Patrol Services Security patrol services deliver uniformed visibility to discourage criminal behavior when police departments are not available.

The best security patrol companies staff trained and armed officers who wear body cameras to track the audio and video of every incident.

Their patrol vehicles are equipped with GPS and computer systems that allow them to take active notes for all properties, map locations of failed lighting systems, track parking violations, and collect evidence that can be used in court if the property owner chooses to pursue legal proceedings.

Physical security companies offer services that include driving through properties and stationing overnight guards. These security patrol services typically check doors to make sure they are locked up, and respond to calls from on-site managers who request them to roust transients or help break up fights. Like the other strategies discussed, security patrol services deter criminal activity by being visible. Managers and owners can also post their signage at the property to deter criminals from cruising the property.

If you have an active drug dealing problem, onsite security can help protect the onsite manager. At a difficult property it might be almost impossible to recruit and hire a prop-

erty manager without twenty-four hour armed and uniformed security.

Many years ago we were hired to manage a property that the city threatened to take over due to the numerous police calls there. We hired onsite security for two months, identified and evicted the problem tenants, and were able to turn the property around.

Summary Property security should never be overlooked by owners of investment properties. There are many strategies used to improve property security including thorough tenant screening, community building activities, adequate lighting, trim and effective landscaping, camera systems, access control systems, cooperation with the police and the hiring of private security patrols.

When properties have a pattern of crime, it makes sense for owners and property managers to review all of the resources that can help create a safer environment for all. Safer properties equate to lower tenant turnover and more profit for property owners. Safety should always be a component of a property operations plan.

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RENTAL HOUSING JOURNAL ON-SITE

Dear Maintenance Men ...continued from page 10 to ditch my lawn! I figure in the long term, getting rid of the grass will save me time and money with less watering and maintenance. What recommendation do you have to help me achieve my plan?

Dorothy Dear Dorothy: Creating a drought tolerant landscape is a great idea. As you mentioned, the drought tolerant landscape will cost you less money in water and will be easier to maintain.

The single greatest consumer of wa-

ter in your landscape is the turf. Reduce the grass area to ease the burden on water. Xeriscaping is a term for a water conserving landscape.

Some of the benefits of Xeriscaping is water saving, low maintenance, pesticide free, pollution free (no lawnmowers) and use of local native plants. You might want to consider using Ornamental grasses, as they are drought tolerant, look great and give your landscape a bit of vertical dimension. Succulents of course are great at conserving water. Flax and Delphiniums Iris are a few perenni-

als to use. Marigolds, Mexican Sunflowers, Phlox and Vinca Passion are Annuals that will work well. As for shrubs, look at Japanese Black Pine, Mountain Currant, Sassafras, Honeysuckles etc. A good choice in trees are Acacia, Gray Birch, Monterey Cypress, Eucalyptus, Fig, Juniper Amur Maple to name a few. Check with your local nursery for what best suits your area as or climate. Be sure to provide good drainage and using plants native to your area are best.

Call Buffalo Maintenance, Inc for maintenance work or consultation.

JLE Property Management, Inc for management service or consultation Frankie Alvarez at 714 956-8371 Jerry L’Ecuyer at 714 778-0480 CA contractor lic: #797645, EPA Real Estate lic. #: 01460075 Certified Renovation Company Websites: www.BuffaloMaintenance.com & www.ContactJLE.com www.Facebook.com/BuffaloMaintenance

Smarter and Smaller ...continued from page 17 at smaller complexes either.

Sometimes a smaller number of units are cost effective from a maintenance perspective.

Yet the cumulative maintenance costs of large complexes are often considered a management hazard.

Maintenance is a very important operating expense for both owners and property managers.

By the way, what are you doing to streamline your maintenance procedures? Do you have the latest maintenance tracking software that not only looks at your properties’ history but also anticipates which mainte-

nance procedures need to be regularly scheduled?

When it comes to buying smarter keep your eyes and ears peeled for special situations. Are your clients interested in 1031 exchanges or finding motivated sellers who may consider creative financing?

It may be worthwhile to ask employees, friends and family to be on the lookout in specific areas. Ask them to monitor both printed and online advertising to find easily overlooked “diamonds in the ruff”.

Attend local association meetings and sharpen your networking skills

to extend your matrix of contacts.

The more people you know in the property management industry the better your odds of learning about exceptional opportunities.

Strive to be the #1 source for good ideas, smart buys and timely market insights in your area. By all means make certain your clients look to you first. Stay in touch regularly and build your reputation for excellence, especially in smaller markets where cap rates are higher.

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Our Investigative Team will take you further than any automated screening platform. We verify the accuracy of information provided by your potential resident before beginning their background check.

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For insight into the screening industry, rental market, and your and your options, calloptions, or visit: visit: (800) 628-6414

www.eRentalServicesInc.com 20

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9 Tips ...continued from page 8 results.

5. Surround Yourself With LikeMinded People Real estate investing can be “creative” and a bit non-traditional, which means that this profession won’t appear on the Forbes top 100 professions. Because those participating in real estate often do so by working for a corporation or as a realtor, investing as an independent isn’t a main stream career choice.

Thus, most people you speak with will tell you it won’t work. Some of your friends might even ask if you bought a course from a late-night television “guru.” They may even laugh and call you “gullible.”

Attorneys and other professionals may denounce it because it sounds unusual. Keep in mind that these people are either threatened by their own lack of success or are looking to

22

protect their own butts.

The first thing you should do is join a local real estate association connected to National REIA. These associations will help you keep your thoughts in the right place and prove to you that investing with a plan really does work. You will be connected to investors that have had great successes, those that can share what they learned from their not so successful deals, and to those who are just starting in the business just like you.

6. Be Persistant Anyone who’s ever been in sales will tell you that being persistent is the key to success. Just because a person says “No” to an offer the first time doesn’t mean that’s the final answer. Waiting a couple of weeks and checking back to see if the situation has changed can make all the difference, or changing the terms of

the offer slightly to accommodate the seller can jump start negotiations.

Have a good follow-up system for tracking contacts, leads and conversations you’ve had with both buyers and sellers. You’ll get to the point where you’re so busy you can’t possibly remember all the conversations you’ve had with everyone – it’s important to be able to pull up that information so you know where you are in the negotiation process.

Anyone who has ever been in sales will tell you that few deals are ever made on the first try. Use a system that allows you to schedule follow ups and keep a running history of calls and conversations. One of the National REIA benefits is a huge discount on Realeflow, but you could also use ACT by Sage, an Outlook or Gmail plug-in or one of hundreds of apps for your phone or iPad. It doesn’t matter what software you use as long as you actually use it.

7. Have a Team On Your Side Don’t wait until you have a big deal pending and need to ask questions before assembling a team you can turn to. You need to go out and cultivate relationships with reliable professionals you can depend on.

Here’s who you need on your team: • Attorney – preferably someone who’s familiar with the needs of a real estate professional. Make sure they understand the specific real estate strategy that you are using and that they’ve had some experience in that specific strategy.

You don’t need to know all of the real estate laws that will affect your business but you need an advisor who does.

• Insurance agent – you need one that also understands your strategy and investors in general.

Make sure the insurance products

Rental Housing Journal On-Site • July 2015

RENTAL HOUSING JOURNAL ON-SITE

9 Tips ...continued from page 22 they sell are right for investors.

We have needs that are far different than your average home owner.

• CPA or Accountant – find one that’s a real estate investor – they’ll know the ins and outs of the business and when to be aggressive. You can lose $1,000s in deductions and tax breaks without a professional that knows the most up to date tax law as it applies specifically for investors.

• Contractor – you need a reliable professional that shows up on time, completes the job within budget and knows how to make suggestions that will save you money. Free estimates don’t hurt either.

• Mortgage broker, private money lender, hard money lender or other money professional – find one that’s experienced with investors, knowledgeable and creative. You can never have too many people who are willing to fund your deals.

• Mentor – someone who’s been there and done that.

• Title or Escrow Company – find one that caters to investors. Make sure they understand double closings, land contracts, etc.

Your local REIA group has local and national providers to use to build your team. These professionals

work daily with investors and understand their special needs and requirements. It is a beautiful day when you realize that you can find people to add to your team that can do all of the things in your business that you hate.

8. Don’t Waste Time With Unmotivated Sellers This is possibly the most common mistake new investors make. Some beginning investors waste time talking to sellers who are only marginally motivated. Even worse, they drive by the house and look for comps without even talking to the seller first. There’s a difference between being persistent with a seller or buyer who hasn’t yet made up their mind about what they want to do and dealing with a seller who really has no intention of selling anytime in the near future. Don’t waste your time if the seller falls into the latter group.

9. Never Forget That Real Estate Is Really About People In the end real estate isn’t about the land, the house, or even the money. On a practical note and an altruistic note, it really is all about the people.

Many people go through their first years of real estate investing

making all their offers based on the properties. This is a huge mistake.

These investors worry about making really low offers because they are concerned that it will make them a “bad” person to “take advantage” of a seller, especially one in a tough situation. What they don’t understand is that many people will happily forgo profits if other benefits are more important to them. Some people need speed, some need ease of exit, some need someone else to blame. I’ve heard more than one investor tell a story about a seller who happily sold below market because their son, sister, nephew – pick a relation – wouldn’t pay rent or move and they honestly just wanted to sell the house and let you deal with the situation!

There is a scale of client motivations, the Hustead Scale, that concisely describes the level of motivation a seller has. The most motivated sellers will pay to get out of a house.

Something in their life makes being out of that property so important that they will pay you to take the property.

Many investors make offer after offer, receiving rejection after rejection, never bothering to ask the seller what they want, assuming they already know. Making offers on the properties because you think you

understand the value is far less effective and far less profitable than making an offer that provides the seller an option they didn’t know existed, a solution to their problem.

The moral of the story here is that if you listen, and I mean REALLY listen, and try to solve the seller’s problem you will always make more money than if you try to just apply your cookie cutter approach. Zig Ziglar used to say “You will get all you want in life, if you help enough other people get what they want.”

He’s right. This business, at its core, is about people. We provide housing, we provide solutions, and sometimes most importantly, we provide options they didn’t know were available.

There you have it. Follow these nine simple steps and before you know it, you’ll be an outstanding real estate investor.

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