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Defensive Real Estate Investing

Defensive Real Estate Investing

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Published by: gl7178 on Apr 20, 2010
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There’s no magic formula you can use to determine how much you
should keep in reserve in the real estate business.When we rent prop-
erties,the four key factors to consider are strength of the local rental
market,eviction time line and cost,the age of the property,and the
type of neighborhood.

Strength of the Local Rental Market

The lower the vacancy rates in your area,the fewer reserves you’ll
need for vacancies.Your local newspaper or your city’s housing de-
partment may have articles or statistics on vacancy rates.You should,
at a minimum,have enough cash reserves to pay for one month of va-
cancy per unit,which is only an 8 percent vacancy rate.
Even in a good market,you’ll deal with problem tenants who may
stop paying rent and require an eviction.Good tenant screening will
help solve this problem.If you plan to rent properties,you should al-
ways,without exception,do a rigorous background check on tenants.
This includes reviewing credit reports,employment verification,refer-
ences,and calling current and previous landlords.(You’ll find a list of
resources for tenant screening in Appendix 4.)

Eviction Time Line and Cost

The length of time it takes to evict a tenant is relative to your cash
reserves.In pro-tenant states like New York and Massachusetts,it could
take months and thousands of dollars in legal fees to evict a tenant—
all while you’re paying the mortgage.In addition,in our experience,
collecting back rents or damages from tenants who’ve been evicted
can be futile.

chapter06_FINAL.qxp 3/15/07 3:46 PM Page 83

Age of the Property

With newer and recently renovated properties,you won’t need to an-
ticipate many repairs in the first few years.As noted earlier,we recom-
mend that you always hire a professional property inspector before you
buy.Inspectors will go through the property with a fine-tooth comb,
which helps ensure you’ll have no surprises later on.Another thing to
keep in mind is that many utility companies offer a fixed monthly pay-
ment option so you don’t experience payment swings each season if
you’re paying for heating,water,or other utilities as the landlord.

84

DEFENSIVE

REALESTATE

INVESTING

Gary’s Advice:Homebuyer’s
Warranty Is a Good Bet

When you buy rental property,purchase a homebuyer’s warranty to

cover everything from the furnace and air conditioner to appliances.These

warranties are available from many reputable insurance companies and often

cost less than $500 a year.

I know of an investor who buys properties in South Carolina and lives in

California.He instructs his tenants to call a toll-free number when a repair

that’s covered by the insurance plan is required.I purchased a home war-

ranty for approximately $300 and later discovered that the home needed a

new furnace and hot water heater at a combined cost of nearly $2,400.Was

the warranty a good investment? You bet!

Type of Neighborhood

If you’re renting properties in low-income neighborhoods,you can
expect the turnover to be much higher than in high-income areas.In ad-
dition,multiunit buildings with small units and one-bedroom condos will
attract more single people who tend to move more often than families.

chapter06_FINAL.qxp 3/15/07 3:46 PM Page 84

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