19 Fatal Investor Mistakes – Part 3

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Click the links before proceeding to Part 3 of Common Investment Mistakes.

13) Do you charge application fees to potential tenants?

You can’t allow this question to be a deal breaker when you’re shopping; unfortunately, the overwhelming majority of turnkey outfits are going to answer “yes” because application fees are a huge profit center for management companies. If you’re lucky enough to stumble across a management company that absorbs the cost of applications, you’ve found a good one.

A management company that absorbs the costs of screening applicants ensures that the maximum number of individuals will apply to rent your property. This is the hallmark of an owner focused management style. Having a larger pool of applicants to choose from allows them to select the best tenant for your property. This type of management team is focused on finding the best quality tenant, (the lifeblood of all real estate investments) not making money on application fees.

14) I see that 123 Elm Street is rented for $725 per month. Is $725 at, above, or below market rent?

The best answer you can receive is that the property is rented at slightly below market rates. Keeping rents slightly below market increases the likelihood of a long term tenant. Vacancy, not slightly reduced rent, is the biggest killer of return on investment for rental property.

For example, if market rent for a property is $725 month, it is wise to market and rent that property for $675-$700 per month. Although $25- $50 per month is not a lot of money to us investors, it is a lot of money to the tenant. When combined with a rental that is in top condition, this small difference encourages lease renewals and will keep your property occupied and cash flowing for years to come. Utilizing this strategy will increase the return on your investment well above the additional $25-$50 per month you would have received in rent.

15) Is the property currently occupied?

When shopping for turnkey real estate, don’t compare vacant properties with occupied, cash flowing investments. They’re not apples to apples investments and  should be valued accordingly.

If you’re considering purchasing a vacant property you should be aware of the many potential problems associated with this type of purchase. Some of the problems that accompany the purchase of vacant property are:

A) Vacancies are the biggest killer of return on investment in real estate, and it’s impossible to know how long the property will sit vacant before becoming occupied. It’s a bummer to start your investment off with several months of vacancy, putting your ROI in the hole right from the start.

B) One of the biggest “gotcha’s” of purchasing vacant rental property is finding out market rental rates are significantly less than you were led to believe. Your decision to purchase was based on a cash flow that was unattainable. Regardless of whether or not the property you’re about to purchase is vacant, you should check market rents to make sure the proposed rent of the subject property is on par for the area (or preferably slightly below. See question 14). For market rents, visit www.rentstalker.com or websites that offer a similar service.

It’s absolutely possible to rent a property at above market rates but the potential for lease renewal will be slight, drastically increasing your likelihood of vacancy and simultaneously reducing your return on investment.

Typically, the only reason a tenant will pay above market rent is because they are not able to rent elsewhere. Most tenants paying above market rent have worse than average credit, often times with multiple evictions. These are not the types of tenants you want in your home.

C) The potential for vandalism and theft increases exponentially when the property is vacant, regardless of the quality of the neighborhood.

D) Most Landlord insurance policies have a 30-day vacancy clause. Unless you have a specific vacant property insurance policy, your property will be exposed to liability for fire, theft, vandalism, acts of God, etc.

If you’re going to buy a vacant property, don’t close unless you have a vacant insurance policy. Get ready for sticker shock. Vacant insurance policies cost up to four times as much as a regular landlord policy.

A true turnkey investment will provide cash flow within a very short time of closing and be free of the potential pitfalls associated with vacant property.

16) What is your occupancy rate?

Occupancy rate is one of the biggest indicators of how well a property management company is performing.

A good turnkey seller manager will be able to tell you how many vacancies they currently have on their books without flinching, and more importantly, their percentage of occupancy. Regardless of the answer, probe as to how they market, average length of vacancy, what their criteria is for occupancy, etc…

SOAPBOX

A turn-key seller manager who truly endeavors to provide high quality investments that stand the test of time will have adopted this philosophy: Performing a top notch renovation and renting property at slightly below market rates attracts a higher quality long-term tenant ultimately increasing the return on investment.

17) What is the longest vacancy currently on your books?

If they can’t tell you, this should be a red flag. If a property has been vacant longer than 45 days, there is a potential problem. You’re trying to find out what the problem is. Is it a two bedroom and the market is for three bedrooms? Is it in an undesirable part of town? Find out what the problem is and make sure to avoid purchasing similar properties. Sometimes a property that has a special price also has a special problem.

18) When my property has a major repair or turn over, will you send me a video of the repairs needed?

If a picture is worth a thousand words, then a video is worth a million. There’s nothing like a detailed video explanation to give you confidence and understanding of the work to be performed on your property. As the saying goes, locks keep honest people honest and video doesn’t lie. Insist on it.

This is an especially important question for out of town investors and you should expect nothing less. Handheld HD camcorders are now available for under $150 and any property management company worth its salt should offer this service to its investors.

19) Do you accept aggressive breed dogs?

In the opinion of the author, proper due diligence would include asking to see the lease the management company uses. If specific breeds aren’t permitted, it will be stated in the lease. This is a sticky liability issue, and we are in no way real estate attorneys; however, do a little research and you’ll find that other investors have had legal trouble over this issue.

 

About the Author…

terry kerr

In addition to being a husband and father of two, Terry Kerr is a full time real estate investor and the president and founder of Mid South Home Buyers. He owns 60+ investment properties and has provided premier turnkey investments to repeat buyers around the world since 2002.

He is also the owner and founder of Absolute Property Management, one of the most sought after management companies in the Memphis area and a key component of his turnkey investment business.

He loves to discuss all components of real estate investing with both seasoned and new investors. He genuinely welcomes your thoughts and questions, or if you have opposing points of view, your comments.

Please contact at 901-859-4520 or Terry@midsouthhomebuyers.com

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