Be careful when buying rental property. We stayed at a motel for a week one winter. The bill showed twice what it should have, but since I already paid the correct amount in cash, I thought nothing of it. When we noticed that the lobby and swimming pool were unheated, we thought it was frugality. Only a year later, when I read a news story about a new owner struggling to make the motel work, did I realize what was going on.
The owner had been planning to sell. To prepare, she was using the two most basic ways to inflate the appraised value: decrease expenses and increase reported income. By stopping repairs and quietly adding $100 in income every day, she may have shown $45,000 more net income for the year. At a .08 capitalization rate, that means the appraisal would come in $562,000 higher than it should have. Oops! The poor guy who overpaid!
Do you want to avoid a mistake like that when buying rental property? You need to watch for tricks like these. You also have to understand the basics of appraising income property.
It starts with the capitalization rate, or "cap rate." If investors in an area expect a return of 8% on assets, the cap rate is .08. Net income before debt service is divided by this to arrive at the value of a property. I explain this further in another article, but the primary point here is to remember that every dollar of extra income shown will increase the appraised value by $12.50 with a cap rate of .08, or by $10, if the cap rate is .10.
Sellers Dirty Tricks
If sellers of rental properties increase the net by honest means, then the property should sell for more. Unfortunately, there are many dishonest ways, both legal and fraudulent, that are sometimes used. Unlike sellers of houses, who may cover foundation cracks with plaster, the tricks used by sellers of income properties aren't about appearance. They are about income and expenses.
Income can be inflated by showing you the "pro forma," or projected income, instead of the actual rents collected. Ask for the actual figures, and check to see that none of the apartments listed as occupied are actually vacant. Also, be sure that none of the income is from one time events, like the sale of something.
Income from vending machines is a gray area. Smart investors subtract this from the net income before applying the cap rate, then add back the value of the machines themselves. If laundry machines make $6,000, for example, that would add $75,000 to the appraised value (.08 cap rate), if included. Since they are easily replaceable, adding the $10,000 replacement cost instead makes more sense.
Hiding expenses is the most common of seller's tricks. Paying for repairs off the books, or just avoiding necessary repairs for a year, can dramatically increase the net income. Demand an accounting of all expenditures. If a number in an expense category is suspicious, replace it with your own best guess.
Analyse each of the following, verifying the figures as much as possible, and substituting your own guesses if they are too suspect: vacancy rates, advertising, cleaning, maintenance, repairs, management fees, supplies, taxes, insurance, utilities, commissions, legal fees and any other expenses. This is how you make buying rental property safe.
Steve Gillman has invested real estate for years. To learn more, and to see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com
Real estate investing has become popularized today because of real... Read More
It is no secret that the current real estate market... Read More
You've decided to prepare your home for sale. Whether you... Read More
1. Time is money when selling your homeAfter you've made... Read More
With the recent release from the UK's biggest mortgage lender,... Read More
Sometimes when we are very busy professionals and very rich... Read More
There are mobile homes for sale, for much less than... Read More
Real estate stories radiate from the water cooler and cocktail... Read More
Have you ever noticed that despite the massive number of... Read More
I start my marketing with obituaries followed with probate filings... Read More
The real estate cycle, like the business cycle, refers to... Read More
The phone range and Peter was on the other end... Read More
San Diego county has always been known for its Luxury... Read More
As you continue to read about real estate investing, you... Read More
If you are in the home buying or selling market,... Read More
I have done so many appraisals where I saw obvious... Read More
Are we in a housing bubble? To answer that question... Read More
When trying to sell a home, silence isn't always golden... Read More
Lease Purchasing affords the tenant/buyer a wonderful opportunity to get... Read More
These real questions on 'How To' build are answered by... Read More
"The first step toward change is awareness. The second step... Read More
There has been a lot of talk lately about the... Read More
One of the most important considerations you will need to... Read More
Do you want to build wealth through real estate? You... Read More
Books on real estate are a dime a dozen-and most... Read More
Consider these parameters for a real estate deal:Property Value: $250,000... Read More
There are a great many books and web sites devoted... Read More
Aloha! If you are interested in choosing a Maui income... Read More
Today's real estate consumer has a lot to consider during... Read More
Being a real estate investor is not really that hard,... Read More
Building your dream home is a process that takes some... Read More
Most people buy one or two properties. One is their... Read More
Buying a beach house in New Zealand offers many possibilities.New... Read More
Real Estate: Reasons and Priorities for Purchasing Property. It's not... Read More
If you're looking for the 'real' Spain where the culture,... Read More
How the heck do you find a "motivated seller?"The motivated... Read More
When you bought your home, you offered less than you... Read More
People sometimes confuse a home inspection and an appraisal when... Read More
The Rental Experience in South FloridaReaders: This is based on... Read More
Questions Sellers Should Ask in Agent Interviews:1. Is your license... Read More
Are you a realtor with curb appeal or are you... Read More
Today's residential real estate market for investors has become very... Read More
A Realtor has just talked to you and said, "I... Read More
When real estate note brokers purchase partially paid notes, they... Read More
Take me Back to the Black HillsLocated in Western South... Read More
This is not an article about tricks for 100% (no... Read More
BuyersLooking for a home-Use Internet for overview of properties, communities,... Read More
The Echo Boomers or Generation Y currently make up about... Read More
For most of my adult life I had thought about... Read More
Do all the creative financing techniques you hear about really... Read More
For decades, the real estate world turned in a predictable... Read More
If you want to become a real estate investor, find... Read More
Development, it's bound to happen.Simply because there is a large... Read More
What if two people pooled their resources and began investing... Read More
Real estate values rise and fall in cycles. Currently home... Read More
Successful real estate investing depends largely on a correct assessment... Read More
There are three important questions that you must understand and... Read More
Las Vegas is known for it's over the top hotels... Read More
Searching for just the right home can be very exciting.... Read More
I am a total geek.A few weeks ago, late at... Read More
Turn the Television on any Sunday morning and you'll find... Read More
As the second largest city geographically in Florida, this beautiful... Read More
Florida is known as the "Sun Shine" state, and the... Read More
What is a "distressed" property? What is "bargain" real estate?A... Read More
It is possible to save £1,000s selling your home privately... Read More
When it comes to home buying, the ideal situation would... Read More
Real Estate |