Owning Rental Properties - Part 2

In yesterday's blog, we talked about rentals as retirement income.  In this post, we’ll take another step and review what you need to know before buying an investment property.

First Rental Property Resources

Neil Uttamsingh has a website focused only on helping you get your first rental property. His message is that you should manage the property yourself and make sure you do your due diligence with home inspections.

A recent blog discussed that you should not rush the process or you will miss out on some important decision points:

• Buying a property that doesn’t cash flow
• Buying a property in the wrong area
• Buying a property with the wrong tenant profile
• Losing Money
• Wanting to sell the property after a short period of time
• Becoming discouraged
• Going to court with your tenant due to mismanagement of the property

One of the fastest ways of learning these skills is by finding a real estate workshop to understand how to analyze the value of the property, where it’s located, and what kind of tenants you could anticipate i that location.

Making certain that the property will provide a positive cash flow is the number one question you have to answer. The second is what monthly expenses can you expect?

The next step is to figure out how you will finance it. A good loan officer will help you crunch the numbers to find out what you can afford to invest. You will find out your options with how much money you can put down, whether you should get fixed or variable rate, what length of term you should use, and most importantly, you should get pre-approved so when the right property shows up, you can grab it.

Landlord Resources

Nolo Press has some of the best books that explain the law in plain English as well as useful forms. As we mentioned in the prior post, having a valid contract will protect you from a bad tenant.

In their Legal Encyclopedia, they have numerous questions and answers (FAQs) on signing leases and rental agreements such as how to enforce a ‘no pets’ policy, how to divide damages between departing cotenants, and how to handle a tenant wanting to break a lease due to noise.

Cautions

Once you’ve gotten your first rental property up and running smoothly, then start to look for additional properties. Don’t try to invest in too many properties too quickly until you’ve established procedures for analyzing a property as well as systems for finding good tenants.

Always keep a separate checking account dedicated to your rental properties. Deduct the mortgage payments, insurance payments, and maintenance work from this account. At the end of the year, your tax accountant will have a much easier job. Additionally, you can regularly check your cash flow to see if it stays positive. Also, if you personally have a large expense, it will be more difficult for you to borrow from your investment property cash, and you will have peace of mind that your properties are taking care of themselves.

Remember, looking at a house from the eyes of a homeowner is very different then looking at the house through the eyes of the investor.

What would you want in an investment property that you wouldn’t want in your home?

Rental Property As Retirement Income

Is now a good time to invest in property for passive income when you retire? And is it even a good idea for you?

Look before you leap

The Chicago Tribune had an interesting analysis back in May that counseled that loan requirements have changed dramatically over the last 5 years, and that the investor must have realistic expectations with the focus on long-term rather then flipping.  Purchasing an investment property as a rental can provide you with a steady stream of income.  There are still tax benefits with real estate investments, and you should talk to a professional to find out how it would impact your situation.

Real estate investments also mean that you will be a landlord, and either you need to handle finding tenants and repairs, or you need to hire a management company which will reduce your profits.  But you get to sleep through the night if a pipe bursts or the tenant gets locked out.

How much income?

Rents are set by where you live.  Usually, rents will go up, but the costs involved with owning the rental property will stay fairly flat especially if you choose a fixed rate mortgage.  Some investors clear $200-1000/month for one rental home.

Some landlords will increase rents every year or two, while others increase only when changing tenants.  If your mortgage stays the same, your income will increase over the years.

There will always be people looking for rentals.  If you have a clean home in a safe neighborhood, people will pay to rent it providing you with a passive income stream.

What should I be aware of?

Renters can leave with two weeks notice, and in some cycles, it’s difficult to replace them.  Always keep six months of expenses on hand per property so you’re not caught needing to sell the investment in a down market.

Always hire an inspector to rule out any large repairs such as foundation, roof or structure of the home.

Research monthly costs.

Talk to your Realtor® about comparable home sale prices in that area to have a good understanding of your investment.

Investopedia has a great article on Tips for the Prospective Landlord. One of the best tips is to ensure your leases are legal as this could have a long term impact if you end up with a bad tenant.  Also, the tip to join the Landlord’s Association in your area is helpful as you will learn a lot from seasoned investors.

What should I look for?

Look for a larger property in case you want to renovate or add on.

Single-family homes in a good school district rent more easily.

Look for properties that can generate positive cash flow of at least 6% above costs.

If you’re new to investing, consider purchasing properties close to where you live to keep tabs on the investment even if you use a property management company.  When you’re comfortable, consider looking into purchasing properties where you wish to retire.

So, to sum up…

Talk to a tax advisor to understand any tax implications rental property will have.  Find a reputable Realtor® and call your mortgage broker to find the best options for you.

To read more about things to look for and how to plan, read The income property: Your late-in-life retirement plan on Yahoo. The more knowledge you  have, the easier the process will be.

Have you purchased an income generating property or are you looking into one?

Staying Warm In The Winter

Welcome to part 4 of 4 on the preparing your home for winter series.  I hope you’ve enjoyed it and have gotten your weekend task lists completed.

The mornings are a lot chillier now, and you’re probably thinking about turning on your heater, if you haven’t already.  There are some tasks you should do before you really start using your heaters.

Furnace

Whether you have oil heat or gas heat, remove and replace your filters.  You may want to have a service technician out who will replace the filter, make adjustments for the burner, test the regulators, controls, motor and blower.  But otherwise, if you still have the manual for the furnace, you can look up the filter size.
If you measure it yourself, open up the furnace, and take out the filter.  Some will be horizontal, and some will be vertical.  Look on the filter itself for markings that indicate the size in inches.  If you can’t find it, pull out your measuring tape and measure the width and height including the frame of the filter.  Then measure the thickness. 

If the filter is missing (and these things just happen sometimes), measure the filter slot.  You will also want to know the height, length and width knowing that it may be off a little bit.  When you get to your hardware store, let them know, and they’ll be able to help you find a standard sized filter.  Remember, it’s better to buy one a little smaller than a little larger.

Heating System

Change the batteries in your thermostats.  Change to winter settings. Clean the registers and returns.

Remove the grills and vacuum out as much as you can.  Remove any legos or cat toys that might have fallen through.  You may want to consider hiring someone to professional clean your ducts if it hasn’t been done in awhile as dust can build up.

Fireplace

Before starting up the fireplace, the flue pipe should be inspected for nests or blockages.  Open the damper slowly until you’re certain nothing is going to fall in.  Leave the damper open, and using a hair dryer, blast hot air up in the flue line for 2-3 minutes to start an upward draft.  Then light a piece of newspaper and hold it up to see if the smoke goes up the flue.

If you haven’t cleaned all of the ash from last season, now is a good time to sweep it up.  You can put the ash in your compost bin.  If you want to put it directly around your plants, be prepared to dig it into the soil or else you’ll have ash blowing all over your yard causing a mess.

Pellet or Wood Burning Stove

To get your stove ready for winter, remove all ash and creosote from the stove.  Test the blowers.  You will probably need to vacuum and use a soft brush for both the combustion blower and convection blower on the pellet stove.  For both, the vent system should be cleaned by running a brush through it.  Inspect for creosote buildup or any wear or corrosion.

For pellet, wood burning stoves, and fireplaces, you may wish to have a chimney sweep come out to get your chimney clean of soot and creosote before the season gets underway especially if you use this as one of your primary sources of heat.

While You’re In There

Since you’re doing the winterizing anyway, here are some other quick maintenance tasks that you may need to do:

Basement sump pump

If you have a basement and a sump pump, verify that it’s operating properly by using a pail of water.  Visually inspect and check the valve for leaks.  You don’t want to find out that it’s not working when you need it.

Snow blower and shovel

Service and test your snow blower or the snowblower attachment for your lawn tractors.  Keep fresh fuel stored in a safe place outside.  Replace broken snow shovels, brooms and sidewalk ice scrapers.  Also find your snow brush and ice scraper for your car.

Hot Water Heater

You don’t want to be stuck with a cold shower, now do you?  Check and lubricate circulating pumps, clean the baseboard units, and test the system.

Air Conditioner

Yes, believe it or not, you should clean the unit of any leaves and debris.  You may want to consider covering it up.

Did you miss any of our others in this series:

part 1: Fall Maintenance from Top to Bottom

part 2: Storing your outdoor items for Winter

part 3: Preparing Your Yard for Winter

Preparing Your Yard for Winter - Part 3 in a 4 Part Series

Preparing Your Yard for Winter

Welcome to part 3 of our 4 part series on preparing your home for winter. Here in Northern California, we’re fortunate in that we don’t get snow. But we do need to prepare for frost and heavy rains. Some meteorologists are predicting that we’ll be getting an El Nino year. So the good news is it will be a warmer winter (unless you enjoy snow sports), but the bad news is that we will get more rain which could also be considered good news since we would be filling up our reservoirs and aquifers.

So here’s what you can do to get your yard ready for frost and heavy rains:

Remove Debris

First things first, you need to remove the debris before winter arrives including leaves, rocks, sticks, trash, and dead flowers. This will keep your yard and flowerbeds looking nice throughout the fall and winter months, as well as reducing the amount of yard work you will need to do in the spring.

Bushes

Roses, azaleas, and hibiscus will need to be protected against the cold weather. You can get creative with cardboard or garbage bags if you know there is a frost warning. Make certain you hold the cover down in place with stakes, bricks or heavy rocks.

Add mulch around the roots, but make sure it doesn’t touch the base of the plant. Give the plants a good watering before you turn off your sprinklers.

Trees

While the weather is still pleasant, put mulch around the base of the trees to help the tree retain water in the roots, and keep the soil at a steady temperature. This also cuts down on the weeds you will have to pull in the spring.

Mulch can be bark chippings, straw, pine needles, or a mixture of things. You can get free chippings by contacting your local tree removers and asking if they’ll drop off some mulch. But be aware that they may have a minimum amount that they drop off.

In a few weeks, you will want to trim your trees, bushes and roses. But, don’t prune now because the buds that will open in the spring have already formed, and you might clip them off accidentally. So what should you trim? Snip off unhealthy or dead sections, and trim off dead flowers.

Also, check to see if branches are close to your house. If they are, trim them back as you don’t want them banging against the house during strong winds.

Garden

If you have strawberry plants, they should be covered with layers of straw to keep them protected from getting frostbitten. Plant those bulbs now before the ground gets too hard to dig. You will be well rewarded in the Spring.

You can pull out your summer vegetable garden, or you can leave it to overwinter and see what pops up in the spring.

Consider planting a few cold weather flowers to brighten up your garden.

Sprinklers

If you know you’re not going to turn on your sprinklers at all during the winter, then drain them of any water. You would turn off the water supply going to the sprinklers, and then open the drains including the backflow to get all of the water out. Leave the drains open for several hours to ensure it’s completely drained. You can remove the sprinkler heads to allow the water to drain more easily, and you can hook up an air compressor to blow air through the system. Make certain that you’ve set the controller to Off or Rain.

If you’d like more detailed information, check out Irrigation Tutorials’s winterizing directions. There are detailed instructions for both temperate and cold weather.

Hoses

Make sure your hoses are drained completely, roll them up, and store them away in a shed or garage. Keeping them out of the elements will also prolong the life of the hose.

When do you expect the frost to hit in your area?

If you missed the other two blogs in our series, you can find them here:

Part 1: Fall Maintenance, Top to Bottom

Part 2: Storing Your Outdoor Items for Winter

Storing Your Outdoor Items for Winter - 2nd in a 4-Part Series

Storing Your Outdoor Items for Winter

Here in Northern California, we can get some pretty strong winds with our rain. To take good care of our patio furniture and our barbecues, we need to prepare and to store them properly so we don’t have to buy new furniture and grills in the Spring.

Barbecues and Grills

We won’t get into the debate over gas versus charcoal (or smokers, for that matter). We’ll save that for the Spring. Whatever you have, let’s get it safe and secure before the big Northern California rains in November.

If you have a portable charcoal kettle or gas grill, you may want to find room in your garage or car port to store it over the winter where it will be protected from rust. If you live in an apartment and have covered parking, you might be able to fit yours in between the wall and where your car bumper normally stops. Don’t use it here, though, as there’s a potential for fire or carbon monoxide poisoning.
To prepare your portable grill:

1. Clean completely. Get some oven cleaner and really spray down the grill part. While it’s doing its job, clean out any ash if charcoal, or clean the burners if you have gas. Throw out lava rocks for a gas grill and plan to buying new ones in the Spring. Grease can get stuck in the rocks which you’re never going to get cleaned out. And clean rocks reduce flare ups which provides a better flavor. Hose off the grill, and enjoy it’s bright shiny look.
2. Dry your grill completely to ensure there’s no rust. If there is rust, use steel wool or a wire brush to get it off, and then look if you need to re-coat the surface. You can polish the surface with a simple paste of baking soda and water.
3. Repair anything needing repairing. Nothing is worse then the first sunny day in April, pulling out the grill, and finding out that you needed to fix a burner.
4. Detach propane tanks if you have a gas grill. Make certain to store them safely in an upright position.
5. Read your manual to see if the manufacturer recommends anything specifically. If you can’t find your manual, many companies now put them online. Usually you can find this in Support.

Now put your grill buddy in a safe place. As we mentioned, if it can fit in the garage or carport, that’s the best place. If you can’t, look for an area where there’s an overhang to protect it as much as possible. And invest in a good cover. Make sure you tie down the cover so it doesn’t blow away.
If you have a built in grill, or a large island grill, barbecue or smoker, spend just as much time cleaning, reviewing your manual, and use the covers.

Some of you are able to grill almost all year round (Carmel, Monterey, Silicon Valley…). That doesn’t mean you can get out of doing a little cleaning and maintenance twice a year. Your grill will be so happy if you do. Leave a note in the comments where you are and if you can grill, barbecue or smoke all year.

Patio furniture

Some people have sheds for their patio furniture since they don’t want to spare the room in their garage. If you invested good money in chairs, tables, heaters, canopies and outdoor fireplaces, you will want to take care of them for the long term. Similar to grills, the steps are:

1. Clean off the pillows and umbrellas. Then store indoors. Some people like to put the pillows into large garbage bags to prevent dust from accumulating.
2. Clean all the dirt and grime off of the furniture. If you have wood furniture, consider using some wood soap, or a coating of water sealant.
3. Inspect for any repairs needed on all the parts. If you need a new cord on your umbrellas, order them now so you can repair it before you put it away.
4. Stack lightweight chairs on top of one another. If you can store them indoors like a garage, carport or shed, that’s your best bet. Otherwise the additional weight will keep them in place if a strong wind storm starts to blow. Find a cover to go over them to protect the chairs from the elements.
5. Store lightweight tables indoors. Again if this is not possible, put a cover over, and try to store in an overhang or an area where the wind won’t blow the stacks over.
6. Tie down all covers so they don’t blow away.

No matter how you store your outdoor items, make sure you keep your eyes peeled for spiders when you pull them out in the Spring.

When will you hold your final outdoor party before you put everything away for the season?

Here are the other articles in case you missed them:
Part 1: Fall maintenance from top to bottom