Sheehy Team - Multi-Tenant Investment Real Estate

The Importance of Walk-Through Inspection for Apartments

2009-10-16T19:00:00.000-05:00

The recent article in the Waco Tribune Herald (See below) started me to think about the importance of having a systematic and documented walk-through procedure with all tenants at move in and move out. In this case, a local apartment complex lost a suit against a tenant for damages to an apartment. No formal walk-through was conducted and the entire incident ended up in court with the complex paying nearly $12,000.00 in legal bills for the tenant. Yikes!

The walk-through is a critical part of the lease and it should not be avoided. It is sloppy management to allow tenants to move in without documenting the state of the apartment. I am reminded of the simple procedure that all of us encounter when we rent an automobile. They require you to initial a checklist of any damage to the car. You must take the time to note any scratches, stains or dents so that you're not liable later. This is meant to protect the renter but it also protects the owner.

When a landlord lets a tenant move in without a walk-through, they are starting the relationship on a flawed foundation that is likely to cause problems in the future. There is no "baseline" of the property condition that both parties have agreed upon that would allow you to determine abusive damage upon moving out. Any damage that shows up at move out would be characterized by the tenant as "That damage was there when we moved in". Conversely, the landlord looks at any damage at move out and characterizes it as "damage was caused by tenant during the lease". Hence, a disagreement and a problem that is nearly impossible to resolve, since it is left to a "he said / she said" dispute. The presence of an initial walk-through sheet completely removes this controversy by placing in writing any damages that are present in the property. It is imperative that this be done in writing since a verbal agreement is not enforceable.

The exit walk-through is just as important and is the critical second half of the process. This is where both the landlord and the tenant take the time to walk through the property and identify any new damages to the property, verify that everything is removed and that the apartment is cleaned properly. Our management uses a checklist that spells out the reductions in rental deposit that will happen and the tenant can either correct the problem and receive their entire deposit back or take a reduction in the deposit. IE -> If oven is not cleaned we charge $25.00.

This exit walk-through also needs to be done in writing to protect both the landlord and the tenant from any confusion.This can come back to you in a negative when a tenant leaves under bad terms. It is the proper way to conduct business since it avoids costly disagreements and sets a professional level of conduct.

The beginning and ending walk-through meetings are critical for a property owner's success since it sets a tone that will persist throughout the lease and after the tenant leaves the property. If the manager doesn't do a good job and tries to abuse the tenants with sloppy management and paperwork then the property's reputation is harmed. A good landlord sees the long term benefit of consistently doing a great job with documentation and runs their business as a professional. This is the kind of landlord that will be in business for the long run. Any ill-gotten profit has a way of corrupting the property and only benefiting the owner in the short term.

Highlights from the article is included here:
------------------------------

Source: Waco Tribune Herald (August 16, 2009) Buzz up! By Cindy V. Culp Tribune-Herald staff writer

2 Waco apartment complexes increasingly taking former tenants to court over damages

Two local apartment complexes have filed lawsuits against multiple former tenants, alleging they caused damage totaling hundreds or thousands of dollars.

Attorneys for the complexes, Saddlebrook and Saddlebrook West apartments in Waco, says the suits are justified. But some targeted tenants claim the apartments are acting unfairly.

During the past two years, the complexes have filed at least 34 suits against former tenants. A few are pending. Some have been dismissed, and others have resulted in judgments for the apartments, with amounts ranging from about $500 to nearly $10,000.

Last month, however, a former tenant prevailed at trial. Baylor University associate professor Sung Joon Jang and his wife had been sued by Saddlebrook West for alleged damage to the carpet and countertops.

The Jangs contend they left the apartment in better condition than when they moved in. Their attorney, Dan Tilly of Waco, tracked down the previous tenant, who testified in court that her family had either caused or inherited the problems for which the Jangs were charged.

The jury ordered the complex to pay the nearly $12,000 in legal fees the Jangs have incurred.

What most complexes do to recover unpaid damages, is send claims to a collection agency. The former tenants then get “harassed” without the benefit of a third-party arbitrator like a judge, he said. Plus, the complexes usually only recover a fraction of the money due, he said.

The Jangs’ experience with Saddlebrook West began two years ago, when the family moved to Waco from out of state. When they arrived, the carpet in their unit had multiple stains, Tilly said.

That was a special problem for the Jangs, since their custom is to remove shoes before coming indoors, Tilly said. They asked the management to replace the carpet but were denied, he said. Another anomaly the Jangs noticed after move-in was a cutting board glued into the kitchen countertop. When they asked a maintenance worker about it, they were told it was normal for the complex, Tilly said.

A year later, when the Jangs’ lease was about to be up, they contacted the apartment’s staff about doing a walk-through. The staff acted surprised that the Jangs wanted to be present for the walk-through, Tilly said, and stalled in setting a time. Because of that, the Jangs ended up vacating the apartment without a walk-through.

Not long after, the Jangs received a letter stating they owed damages totaling about $1,450. If they did not pay within five days, the letter said, they would be liable for more than $4,200 because of fees that would kick in for violating their lease agreement. When the Jangs went to the complex and asked to see the alleged damage, they were denied, Tilly said. The next day, all of the carpet from the apartment was removed, he said.

At trial, apartment staff presented photos they said were of carpet stains. But the photos are so close up, there is no way to know the true nature of the stains, what room they were in or even if they were in the Jangs’ apartment, Tilly said.

In preparing for the trial, Tilly learned the carpet in the Jangs’ apartment had not been replaced since the complex was built in 2001. “The day they moved in, the carpet was 6 years old,” Tilly said, noting that the complex has a six-year depreciation schedule for carpet.

The prior tenant also testified that the kitchen countertop had been damaged when someone in the family set a hot pot on it, Tilly said. She notified the apartment of the damage, she said. The complex chose to “fix” the damaged portion by gluing the cutting board over it, Tilly said. Photos of the burned area underneath the board were introduced at trial.

“What the apartments were doing was rather than pay that as maintenance costs was to charge Dr. and Mrs. Jang,” Tilly said. Tilly said his clients are pleased with the jury’s decision.

Sprigg emphatically denied that the complexes try to avoid doing walk-throughs with tenants. In fact, he said, the apartments’ staff encourage tenants to participate in walk-throughs so any potential issues can be quickly sorted out.

Opportunity Costs and the 1031 Exchange option

2009-08-19T12:13:00.000-05:00

Opportunity Costs: The unexpected costs of property ownership!

You've done quite well with your property...perhaps now is the time to cash in your midsize property for a larger one. Holding on to a property can actually limit your ability to go after a bigger property.

The occupancy is high, the debt service is low, maintenance is stable...did you know there's an opportunity costs associated with owning an apartment property?

There’s a phenomenal tax incentive available in a 1031 Exchange, which allows you to take the gain from the sale of a property and roll it over, tax-deferred, into another property.

When you sell the property, the original deferred gain, plus any additional gain since the purchase of the replacement, is subject to tax. Unless, that is, you opt to roll-over that gain into another like-kind property.

One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. Be careful! You, nor anyone who has worked for you (attorney, broker, etc) in these capacities (for the past 3 years), can act as your facilitator!

“Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free." (Source: IRS.gov FS-2008-18, February 2008)

Investing in Real Estate Tip - Leverage

2009-08-19T08:00:00.009-05:00

I believe that people have an innate desire to own something solid and substantial that they can actually touch.[.1] Real estate is great for this type of investor.[.2] It is one of a small group of investments where an investor has the potential to impact the profitability through good management, hard work and smart negotiating. As you look at all of the types of real estate available for investment, I believe that Multi-Tenant investment real estate deserves a special look. It has the unique ability of allowing you to leverage a group of tenants with a single transaction. A single apartment complex may contain from as few as 4 units to several hundred apartments. Each one can be purchased with a single contract and is treated as a single transaction.

Leverage, as a term used in real estate investment or in fact any investment, allows you to multiply the return on the money that you have invested to get even greater returns. "Give me a lever and a place to put it, and I can move the world". [.3] A great quote! This is truly the power of using leverage in real estate. You can invest a small amount of capital (say 20% of the total purchase price) and see huge effective returns on that capital on an annual basis. This is what we are talking about when we talk about leverage in a real estate transaction.[see my video below!]

[.1] There is plenty of competition, be ahead of others by having a good relationship with your local bank and an experienced realtor.

[.2] There are no "no risk" investments, even if you can touch this. Make sure you've done your homework.
[.3]Archimedes of Syracuse 

Getting Started in Investing with Confidence

2009-08-12T08:07:00.019-05:00

Confidence is the key critical factor to be successful because without it many investors would not move beyond their first initial property.

If that first property turns into an “alligator” and cost them a ton of money, they would have sold it at a loss and never purchased another property. It takes lots of courage to begin an investment and it is this that needs to also sustain you when things are tough. Courage to sustain you when you get calls for unplanned expenses. Courage needs to sustain you when you must evict tenants for non-payment of rent, illegal activities, etc. And finally, courage needs to sustain you to complete your business plan as well as facing the true expenses / income numbers that demonstrate how your property is performing.

Confidence keeps you making the tough phone calls when you would rather stick your head in the sand and hope that the problems go away. The confidence allows you to hold your head high and celebrate when things are going well and you know that you have faced every challenge head on.

This reminds me of a familiar passage: 1 Corinthians 9:24-27a.

"Don’t you realize that in a race everyone runs, but only one person gets the prize? So run to win! All athletes are disciplined in their training. They do it to win a prize that will fade away, but we do it for an eternal prize. So I run with purpose in every step. I am not just shadowboxing. I discipline my body like an athlete, training it to do what it should."

THE SHEEHY TEAM: Empowering Investors To Do More Deals!

Laying the Groundwork - Investing in Real Estate

2009-08-05T08:09:00.001-05:00

“It takes a bigger foundation for a courthouse than it does for an outhouse”. I can remember reciting this phrase when people would make fun of size of my feet. There is a similar principle: a large building needs a big foundation in order to support the structure, similarly you need to build a strong "investment" foundation as preparation to build a strong real estate investment portfolio.

Therefore, you must begin your investments by creating a strong financial foundation that will carry you through your investment deals.

Here are some of the basics:

The 80% rule. It is imperative that you maintain a good credit score and the easiest way I have found to do this is to live beneath your means. In general you should live on 80% (or less) of your take home pay. If you have overspent and are unable to live at that level, you have two options. One, begin spending less immediately (pay off debt, etc) or two you can make more money. Professionals in all fields who excel at the basics are successful in athletics and investing and in life. Being diligent with your finances and saving a portion of each paycheck is simply a pre-requisite to successful living--throughout your life.

Keep Your Day Job: In the initial stages of investing in real estate it is nearly impossible to live on the excess cash flow. Property expenses and debt service take up nearly everything that you have coming in every month. Additionally, if you take money out every month it is difficult to build up the cash needed for the occasions when capital repairs or improvements are needed on the property. The benefit in the early years is that you are building equity in your investment that will allow you to live on in the later years. Remember the child’s fable of the tortoise and the hare. The hare-type person wants to take money out of his investment immediately, while the tortoise-type person is content to wait and roll all of the cash into the property each month. The tortoise is the one that crosses the finish line first in the fable and the tortoise-type in real estate investing

Cash Is King: Banks love to see a borrower with cash on hand. My recommendation is that you build up $100K (or more) of cash as soon as possible and have it on hand with your local bank. It seems like a lot of money but it is a great way to rapidly get a banker working for you in completing your deals. In most of your deals you should not need to leverage this cash toward individual transactions.

Tax Deductible Land Donations

2009-07-29T16:42:00.000-05:00

"Without adversely affecting current enjoyment of real property, a land owner can achieve significant economic benefits (enhanced value of surrounding property and income tax savings) by dedicating an interest in land for conservation purposes."

Curtis L Brown suggests that dedicated the entire interest in land can result in great benefits than the what is more frequently used - the conservation easement. This is because donors favor being able to retain title and use. However, simply by executed a land lease with a related entity and donating the land to a land trust (subject to lease). Brown adds that you can "achieve the same rights of use of land for [himself] and successors".

Some Highlights:
1) House Bill (HR 1831) "The Conservation Easement Incentive Act" would make permanent the special tax rules applying to all qualified conservation contributions of entire interests and remainder interests, if passed.
2) A landowner with a conservation easement can give the title (with a lease back) of the land (in part or whole) to a Land Trust and generate a second deductible contribution for the same land.
3) The same can give an undivided interest, remainder interest, or a remainder interest in an undivided interest in land subject to a conservation easement and still qualify for another contribution deduction on the same land.
4) Land dedicated for conservation purposes enhances the value of surrounding land
5) a larger tax write-off for dedicated the entire interest in a smaller tract, than for an easement on a larger tract.

Qualified Purposes
1) outdoor recreation by, or the education of, the general public
2) the protection of a relatively natural habitat of fish, wildlife, or plants, or similar ecosystem
3) the preservation of historically important land are a or a certified historic structure.
4) the preservation of a historically important land area or a certified historic structure

HR 1831
-introduced in March 31, 2009
-limits on deductions for conservation contributions for farmers and ranchers was only 30% with a carryover of 5 years before 2006. These before mentioned benefits were signed into law by President Bush. The expiration on this benefit is Dec 31, 2009.

Court Case Precedent(Kiva Dunes Conservation, LLC vs Commr.)
- the Tax Court allowed a $30MM federal income tax charitable contribution for a conservation easement on a golf course.

Source: Curtis L Brown (contact him 254.829.0064 or Curtis@CurtisLBrown.com)
You can learn more at CurtisLBrown.com or SustainingLandTrust.org.

Curtis Brown has over 33 years of experience in tax, business and estate planning, litigation, and trust and estate administration. Curtis Brown was born in 1951 in Dallas, Texas. Mr. Brown received his B.B.A. in Accounting from Texas Tech University in 1972. He earned his JurisDoctor degree in 1976 from The University of Texas School of Law. He also studied international comparative law at the University of Oxford, Oxford, England.

TexaPlex - what you probably aren't hearing about Texas

2009-06-05T11:35:00.002-05:00

David Winans coined the term “Texaplex” to describe the triangular region of Texas that contains 75% of the state’s population. Watch the video and see why everyone is talking about the Texaplex.

This video is about 8 minutes long, but keeps your interest.

My only criticism, is that it doesn't talk much about Waco (or McLennan County for that matter). So to supplement, read below the video for information you may not know about Waco.

Source: texaplex.com

Some Interesting Waco TidBits

The Waco Indians

1) Waco is named after the Huaco Indians, the first inhabitants of this area. The Huacos (some sources spell it 'Huecos') were a branch of the Wichitas and were closely related to the Tawakonis. The tribe lived in beehive shaped huts, 20- to 25- feet high, made of poles, buffalo hides and rushes. The Huacos had approximately 400 acres of land under cultivation, planted in corn, beans, pumpkins, melons and peach trees.
Source: www.wacocvb.com

2) In 1886, Baylor University moved to Waco from Independence, Texas and merged with Waco University. Founded in 1845 under the Republic of Texas, Baylor is the oldest continually operated university in Texas.
Source: www.wacocvb.com

3) Waco Texas is home to the ALICO Building & Dr Pepper Museum. In 1885, the soft drink Dr Pepper was invented in Waco at Morrison's Old Corner Drug Store.
Source: http://en.wikipedia.org

4) I-35 is the major north-south highway for Waco. It directly connects the city with Dallas (I-35E), Fort Worth (I-35W), Austin and San Antonio. State Highway 6 runs northwest-southeast and connects Waco to Bryan/College Station and Houston.
Source: http://en.wikipedia.org

5) In 1845, Baylor University was founded in Independence, Texas, making it the oldest institution of higher learning in the state of Texas. It moved to Waco in 1886 and merged with Waco University, becoming an integral part of the city. The university's Strecker Museum was also the oldest continuously operating museum in the state until it closed in 2003, and the collections were moved to the new Mayborn Museum Complex (which opened in 2004).

Source: http://en.wikipedia.org

Investor Q & A - When a Friend Buys You Out

2009-05-30T10:31:00.002-05:00

Andy!

Could you give me some advice on a situation I have?

I own a home in Waco that I bought several years ago with a friend. Long story short, he bought me out of my share of the home in 2004, but he still owes me $3500 and my name is still on the note & the deed. He is now able to pay me the $3500 and he wants to get a special warranty deed drawn up to remove my name from the title. This sounds like I would still be holding the risk for the property without having any legal right in the property since my name would be on the note but not the deed. What would you recommend?

Hello. I would definitely be concerned if you are still on the note and not the deed. Effectively, you would still be responsible for the payments but have no ownership in the property. The house is still being used as the primary collateral for the loan, but if your friend defaults on the loan then it would affect your credit as well. You are essentially a cosigner on this note. I think that I would have him research getting you off of the note and placing both the house and the note in his name. If your friend is married that might complicate the matter even more. If he is unable to get you off of the note, I don’t see what the rush is to get you off of the deed as well.

Assuming that you are not both on the note, keep your name on the deed, until you can be released from the note. Best Case scenario: The lender may let you off the note if the other borrower is strong enough. Worst Case: Your friend needs to refinance the mortgage and pay you off completely, this would effectively be another closing (or property purchase). This of course, brings additional troubles ranging from title insurance to appraisals to lender fees, etc from anything up to 2% of the sale price in additional expenses. These expenses can be figured out at closing on the Settlement Statement.

In summary, this could have been foreseen and avoided if both parties had considered their Exit Strategy. By principle, I don't recommend anyone over-leverage themselves to make a deal happen. Smart financial principles could have prevented this regrettable outcome. A good deal is a one where your financing is fully collateralized by the property allowing you to have an easy exit.

--locations, property, address, and $$ amount changed to protect the innocent!--

The New SheehyTeam Website Is Now UP!

2009-05-28T12:24:00.000-05:00

Today is a special day as we launch our website, filled helpful helpful Multi-Tenant Investment Information as well as our "Scouting Report". The Property Scouting Report, is the middle tab at the top. This Report is a based on McLennan County tax information and some general property analysis based on that tax information.

We encourage you to browse and enjoy! And at anytime, contact us when you are ready to invest!

Upcoming Good News: Andy is putting the final touches an a new book that we'll be mailing to Multi-Tenant owners in McLennan County and will soon be posted on our website. So stay tuned!

Fixed or Adjustable Rate Mortgages ...YOU DECIDE!

2009-05-27T12:59:00.002-05:00

Fixed and Adjustable Rate Mortgages
The difference between an ARM and a fixed rate mortgage is essentially a question of the mortgage rate. An adjustable rate mortgage is usually beneficial because the interest rate is lower than a fixed rate mortgage. The rate is often lower because the bank/lender adjusts the interest rate as national interest rates changes (also known as prime lending), which will change your payment. This rate may be up to even a whole percentage lower than a fixed.

A brief on prime lending: prime lending is the rate of interest that a lender would give to it's best possible client...this relative standard is the basis on which lending across the country is established.

A fixed rate mortgage on the other hand is advantageous as it sets the rate a little higher (than an ARM), but this rate is locked-in despite where the interests may go. When interest rates are low, a good fixed rate is usually the best way to go, especially if interest rates go up in the near future.

Helpful thought about business and busyness

2009-05-21T05:32:00.002-05:00

Hello Friends,
Some of you may not know that I owned a computer business for several years before transitioning full-time into real estate. My experience from that time has taught me many important lessons about successful enterprise, entrepreneurship, business systems, etc. One short thought I wanted to share with you today is an computer problem which is analogous to life and business. Thrashing is what you experience when you are busy working hard, but not accomplishing your goals.

Focus on the tasks that are critical to your success and build your expertise with them.

Have a Great Day!

What is H.R. 1728, and why you should be concerned

2009-05-19T12:59:00.000-05:00

The National Apartment Association (NAA) recently issued this concerning notice:
Source: NAA/NMHC Joint Legislative Program, Monday 5/18/09

Pending Legislation Could Prematurely Force Apartments into Foreclosure, Enact Unnecessarily Alarming Renter Notification Requirements

On May 7, the U.S. House of Representatives approved mortgage reform legislation (H.R. 1728) that includes two amendments that are very onerous for apartment firms.

NAA/NMHC are actively opposing these provisions, and we need your help.

Background
The legislation would allow the government to intervene when an apartment property is delinquent, at risk of default, at risk of disinvestment or in foreclosure. Importantly, the bill does not target any specific level of mortgage distress, property condition or occupancy level, but gives the government latitude as to when it can intervene based on undefined circumstances.

Please take a moment to contact your Representative and your Senators to make your opposition known to this back-door effort to seize market-rate apartments and convert them to affordable housing. We also need you to inform them that the renter notification provisions in the legislation, which require resident notification any time a property is in default, even if it is a non-monetary default, are ill-advised, unnecessary given existing state laws protect renters in an apartment foreclosure and could actually trigger a foreclosure or create financial stress on a property by discouraging existing residents from renewing their leases and prospective residents from signing a lease.

Take Action
Additional information on the legislation and a sample letter you can send to your elected officials are available here.

We are also asking members schedule to a meeting with their Representative or Senators during the Memorial Day Recess scheduled from May 25-31 or as soon as possible in their district office to urge them to oppose these two amendments in any final legislation. We have also developed an Issue Fact Sheet that you can share with your elected officials.

If you have questions, please contact Lisa Blackwell, NAA/NMHC's Vice President of Housing Policy, at 202/974-2365 or lblackwell@nmhc.org.

Bank Foreclosures and Tax Foreclosures

2009-04-30T16:54:00.012-05:00

Looking to better understand what a foreclosure is? Stay tuned for future videos about my thoughts about the foreclosure real estate market. Good Luck!

Summary:
Tax Foreclosures:
1) a foreclosure that is based on not paying property taxes to the County taxing entity. The property will be sold then to satisfy the past-due taxes.
2) maintains first priority - must be satisfied before a banks debt on a property can be satisfied. Banks may then pay the past-due taxes on a property in order to foreclose and get satisfaction for their lien.

For Investors: a great way to pick up a property for just the amount of the unpaid taxes (a fraction of the property's value). However, if the bank hasn't already arranged to take possession of the property, there will be other investors interested in the property.

Bank Foreclosure:
1) a person/corporation defaults on loan. The bank repossess the property and sell it in order to recover some or all of their remaining debt, plus past-due taxes, and all accumulated interest (if possible).
2) has first priority before any mechanics liens (security interest in the title to benefit a vendor investment to improvements) on the property. A mechanics lien is an attempt to hold up the title in the case of a sale, but in a foreclosure mechanics liens are cleared.

For Investors: can be a benefit: if the investor has done their homework and knows the market. In many cases, the banks are there to purchase back their properties to do deals that were arranged beforehand. You can talk to a realtor to learn more about foreclosure arrangements.

Twelve Oaks Inn Hotel - call me!

2009-03-26T19:05:00.016-05:00

Newer Listing recently reduced in price FOR SALE.

Some details include:

14.04% CAP RATE

• Newly renovated as of 2008
• GE Zone line thermostat controlled A/C Units with controls at front desk
• Already approved with Howard Johnson (could be including as part of sale).
• All rooms also include free hi-speed internet access as well as wireless capability.
• New electrical, master room A/C switch, new sprinkler, completely updated

CHECK OUT THE LISTING WEBSITE FOR MORE INFORMATION.

http://cie.remax.com/listing/1934864

FEMA - new flood plain regulations can mean higher insurance premuims

2009-03-12T12:53:00.020-05:00

FEMA does more than respond poorly to natural disasters, they now also can to retroactively assign your property to a flood plain.

This can cause you a load of problems since you will be required by your lender to purchase flood insurance. I have seen properties that were built 100% out of the flood plain and have been existing for 50 years without any flooding be allocated as in the flood plain and requiring insurance purchased by the lender. This insurance is actually more expensive then the total property insurance and in reality does very little to protect the homeowner. In fact, it hurts the homeowner significantly through higher insurance fees and a lower property valuation. A lose/lose for the owner and a win/win for the insurance companies. What a croc!

Here is what they've done recently: The Federal Emergency Management Agency (FEMA), as part of it’s administration of the National Flood insurance Program published flood hazard maps (called FIRMs) that show properties that are “subject to flooding and the risk associated with these flood hazards”. These maps have recently been updated which can cause some unexpected insurance and financing hurdles in the purchasing and selling of property.

In order to know if your property is affected, you can simply go to the FEMA website and search for your property. (http://msc.fema.gov/)

Can you get your property re-allocated out of the flood plain? Yes / Maybe / No!

There is a procedure to petition FEMA to remove your property from the flood plain. The Letter of Map Amendment (or LOMA) is the process for submitted mapping and survey information to FEMA that removes the property from the Special Flood Hazard Area (or SFHA). It is expensive and you must hire a professional survey company to do the work at your own expense. At minimum you will need elevation surveys of the property ($750 each in Mclennan County) and the total could run into the multi-thousands.

A better course to remove your property is to do the following. 1) Get your banker to pull a flood certificate for your individual property. It generally costs $25 and if you are lucky it will show that your property is outside of the flood plain and you can stick it in your file and forget about purchasing flood insurance.

2) Get an elevation survey that shows where the Lowest Adjacent Grade of the property is at. If this number is above the flood plain for the property then your banker can remove the requirement that you have flood insurance on the property.

3) Pay off the property completely and do not cover it with flood insurance

4) If you have to keep debt on the property then you can increase the deductible of the flood insurance to as high as is possible, $10K, $20K - the higher the better at reducing your annual premium.

5) Only purchase enough flood insurance to cover the banks loan.

FEMA and the insurance agencies have a bulls-eye on us consumers and they are not afraid to twist the screws harder. Call your congressman and let them know that this is hurting you financially and they should get involved to facilitate change with this insurance scandal.

You can call a Map Specialist in the FEMA Map Assistance Center toll free, at 1-877-FEMA-MAP (1-877-336-2627).

Leveraging Cash in Real Estate Transactions

2009-03-02T12:54:00.005-06:00

Leverage is where you buy more property seeking a multiple return on your investment by purchasing more property.

You can't count on the bank to protect you when leveraging cash for a real estate, you must make sure you can pay your debt service (especially if property struggles).

Main question: Can you sustain the mortgage? if not you're putting your equity at risk.

How far can you leverage before you're in trouble:
1) However most banks want to see 10%-20% as a downpayment to protect both you as the investor and them.
2) A good leverage ratio 5 to 1 (if you have a $1MM, you can look into purchasing a property for $5MM)

Watch this video for more information.

Take a moment to offer your comments or questions below.

Real Estate Appraisals

2009-02-03T14:54:00.005-06:00

Why Appraisals are so important?

Real Estate Appraisals are an estimate of a property's value by a licensed, disinterested third-party professional using one of many approaches to establishing the worth of a property.

1) Income Approach - looking at the per forma numbers: number of units, gross rent, expected return for an investor at ~10% Cap Rate.
2) Replacement Approach - how much it would cost to build it from scratch today - then back in depreciation schedule based on how many years it's been in place.
3) Comparable Analysis Approach - aka COMPS - The selling price of comparable homes in the neighborhood or near the property, in order to establish the market value of the property.

Due Diligence Period - the investors safety net

2009-01-19T19:23:00.005-06:00

The Due Diligience or Option Period is key to any real estate transaction. This is a significant time to do your homework, some of which may cost money, will give you a sense that maybe some of your assumptions were correct. This time is written into the contract enabling you to verify your assumptions and risk. You get your Earnest money minus a small fee (called an option fee), in most cases, if you need to back out of the deal.

Learn more below!

See more helpful tips on YouTube at http://www.youtube.com/user/SheehyTeam

We need to purchase some video editing software LOL. Anyone have any good suggestions?

Have a great Week!

A Very Merry Re/Max Christmas

2009-01-02T13:28:00.004-06:00

Dear Friends,
I wanted to wish you all a Happy Holidays season and a Blessed and Prosperous New Year. This video below comes from pictures taken at the Re/Max Christmas Party on Dec 13th 2008. Enjoy the show!

Rental Management Software

2008-12-20T09:34:00.000-06:00

One of the biggest challenges for the rental property owner is tracking and keeping up with the expenses and income. The remifications of poorly tracking include out of control expenses, missed rental payments, tenants staying without paying and much, much more. It is imperative that you track what you do with your properties.

Recently, I began using a new product from Intuit called "Rental Rental Property Manager". It does a great job at tracking the "Cash Flow" from a property. I want to clarify, that this is not a replacement for an accounting system. What it provides is a simple system for tracking rental collections and property expenses.

First what it does not do. It does not setup a balance sheet for your properties. It does not run depreciation schedules for the capital improvements, etc.

Now what does it do for me? You have to understand that my wonderful wife manages all of our rental properties and she ROCKS at this job. Vacancies are under 10% in true vacancy numbers (total dollars collected in a month / total potential rent dollars). The tenants love her responsiveness to problems, our professional contractors that do the work and her attention to detail. The computer tracking of the expenses / rent income has always been a sticking point in our rental operations. In general, we were forced to implement a manual (pen and paper) tracking system and we updated the computer at the end of the month. With the new Quicken product we are able to use it on a daily basis to input and track all rents and expenses. The interface is incredibly simple to use and it allows us to have it up and running on the screen to update rent / expenses without a lot of computer skills or time invested.

Rental Manager:

Cash flow reports:

Tenant payment history:

A value of Excellence when serving customers

2008-12-17T17:53:00.003-06:00

Book Review by Andy Sheehy

Raving Fans (Author: Ken Blanchard)

A Revolutionary Approach To Customer Service is a book on providing excellent service in your business. It follows the career of an “Area Manager” and his fairy godmother Charlie. Charlie has a knack for mentoring business owners and managers to providing service so well that their fans become raving fans.
Charlie introduces the area manager to four companies that he uses as examples of service, and gives him three concepts to guide his decisions.

These concepts are:
1. Decide what you want
2. Discover what the customer wants
3. Deliver the vision plus one percent.

Success requires that we have raving fans and the concepts defined will help you create a company that creates raving fans.
In conveying the concept of “Decide what you want”, Charlie introduces the area manager to two service companies: a department store and a grocery store. The department store has a greeter at the door that pins a flower to your shirt, the book he wanted to purchase was out and the attendant went to another store to purchase it for him and was back within 15 minutes. The owner (Leo) has his office at the center of the store so that he can see down all aisles and is approachable by all the customers. The grocery store is owned by Sally and it has valet parking. A grocery consultant that will enter your list into a computer and organize it by the rows, give nutritional value and sales.

All of these enhancements that these companies implemented have been done by their managers/owners first “creating a vision of perfection centered on the customer”. This detailed vision encompasses every detail of the experience that you want the customer to have. It is the model that you can strive for, that will show you the changes needed in your organization, but this model is not static and must be adjusted as we combine it with the other concepts.

For illustrating the concept of “Discover what the customer wants”, Charlie introduces the area manager to one more company. A manufacturing company managed by Bill. “The key is to discover the customers vision for your company and then alter your vision if need be.” Your vision provides the framework for you to understand the customer’s vision, to fill in the gaps in the customer’s vision and to help you to know when to ignore the customer’s vision. It is challenging to get this information from customers for three reasons:

1. Customers say one thing and mean another
2. Customers are disappointed in your service but they do not want to go to the effort of telling you so they just say “fine”.
3. Customers are silent. To get this information you need to always be listening

Lastly, in conveying the concept of “Deliver the vision plus one percent”; Charlie introduces the area manager to two more companies. A Taxi Cab driver has one cab and a gas/service station. The gas station is a Full-Service station where the attendants pump gas, wash windows, check fluids and their gas price is the same as Self-Serve.

The key to delivering service is to do it consistently, every time! Consistency creates credibility in the eyes of the customer. As we implement changes do them in small increments. For example, he started by cleaning the windshield first even though his vision was to have all windows cleaned. It is better to find a smaller service that you can implement 100% of the time than to strive for too much and under-deliver. Meet the customer’s expectations first and then exceed their expectations.

*Meet first, Exceed second*

The only way to be consistent is to have systems and training in place. Systems are the core to a successful, consistent delivery. The purpose of systems is to ensure consistency. The rule of one percent reminds us that all we have to do is improve in one percent increments. This guides us to make small manageable changes that we can deliver consistently.

Cap Rate: What does it really represent?

2008-08-12T13:54:00.021-05:00

Hello. I wanted to write a short description on how "Cap Rate" applies to commercial, investment property. I like the cap rate number because it is easily understandable since people are used to paying interest on borrowed money and receiving interest on deposits. Cap rate strives to answer a simple question.

What is the effective interest rate that this investment yields?

I like to use the analogy of deposting money into a bank account. If you were to deposit an amount of money equal to the purchase price, the cap rate would equal the interest rate that the bank is willing to pay on your deposit.

For Example:

If you are purchasing a commercial apartment complex for one million dollars ($1,000,000.) and the listing agent represents that it has a 10% cap rate, then the property should net profit one hundred thousand dollars ($100,000.) annually. Ten percent of one million is one hundred thousand.

Simple, right... Well here is where the problems definitely start to come out in the details.

First: The cap rate is calculated on the net income of the property (IE gross rent, less vacancies, less utilities, property taxes, insurance, maintenance, advertising, management,... etc.). It does not include any debt service. This is as it should be, since a 10% cap rate property should return the same for an all cash buyer as it does for a 90% financed buyer. You do not want to confuse cap rate with cash flow.

Second: The expenses that the current owner is having may be lower or higher than you would experience. If you purchase this property and your expenses increase by sixty thousand dollars ($60,000) annually, then your cap rate is reduced to four percent (4%) and your annual profit would decrease to forty thousand dollars ($40,000.). You may have been better off keeping your money in the bank.

Third: Income is primarily generated from rent collected. If you have a significant increase in vacancies due to a transfer of ownership your cap rate is affected as well. You definately can maximize your profit by keeping a sharp eye on the occupancy. Most of the money that you end up keeping is from the last 15% of apartments and your ability to keep them rented.

Fourth: Your debt service is paid out of the proceeds after all expenses are taken out. You can easily end up with a property that makes money on paper but that you have to come up with money every month to pay the bills and the mortgage. This is what I affectionately call an "Alligator property" because every month it is taking a bite out of your available cash. Ouch.

There are many aspects to commercial investment property that can be a double edged sword to the owner. Each item that affects your "cap rate" can also be used to improve it. The key is to understand the terms that are presented in the property listing and knowing how that applies to your specific investment needs.

Removing Land Use Restriction Agreements (LURA)

2008-07-11T00:04:00.017-05:00

Removing Land Use Restriction Agreements (LURA)
You may come across a multi-tenant property that is under a government program called a Land Use Restriction Agreement (LURA). It is a program that in Texas is administered by the Texas Department of Housing & Community Affairs (TDHCA). In this blog, I will address the facet of the LURA that allows you to remove it from the property after 15 years (generally the half way point through the life of the contract). The benefit of removing it is that you can remove the property from the obligations required with the LURA (IE only renting to tenants that qualify at a percentage of the median income for the county). Additionally, I will use as an example a 90 unit apartment complex in Waco, Texas that is managed under the LURA. Finally, I will summarize the pros and cons to moving forward with trying to remove the LURA from the property.

The LURA has an procedure built in (Section 5b2 of my contract) that may provide for you to remove the LURA from the property at the halfway point. Essentially, this clause allows you to give notice to the managing authority (TDHCA in Texas) halfway through the term of the contract that you would like for them to find you a qualified buyer. They have one year to find a qualified buyer (as defined by IRS code). If they find a buyer for your property then you can either accept it or decide not to sell. If you decide to NOT sell then you cannot petition them under this clause ever again. It is a one time event in the life of the contract. If you accept the contract then you sell the property and move on to the next deal in your real estate investment life. If they cannot find a qualified buyer for your property, then the LURA is terminated and your property is free of the remainder of the LURA's terms.

In my case, I purchased a 90 unit apartment complex in Waco, TX that is bound by a 30 year LURA. The LURA began in November of 1993 and I am able to petition them on the 15 year anniversary date (November 2008) to find a buyer. They will have one year to find a buyer for the property.

Pros / Cons: There are several benefits that you gain by removing the LURA from the property. First, you do not have to pay the annual fee to the managing authority (In my case this saves approx $1400 annually). Second, your business is less expensive to run because you do not have to deal with the added paperwork and monitoring that is required under the LURA. Third, it improves the resale value of the property to have the LURA removed. Finally, you expand your pool of potential renters by removing the income requirements from new tenants. This allows you to rent to anyone and that helps your occupancy rate stay at the highest possible levels. The downside of going this course is that the process to get the LURA removed is cumbersome and it is a one time event.

In the end the decision to attempt the removal of the LURA will be based upon a ton of variables that are unique to each property and investor. In my case, the benefits of getting the LURA removed far outweigh any downside associated with the time / expense of working through the process.