Property ownership

flyingcheesehead

flyingcheesehead

Taxi to Parking
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Feb 23, 2005
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iMooniac
Hey everyone,

I seem to have a burning desire to spend a big pile of money. As much as I'd like to buy an airplane, I think at this point in my life I need to be a wee bit more sensible and buy something that will make me money so that I can afford to own all the airplanes I want later on in life. :D :yes:

My bright idea of the moment is to purchase a duplex (or maybe even a small apartment complex) near the UWM campus in Milwaukee. Make some dough off it, and then live in one half of it when I go back to school. (I think I should be able to make enough rent off of one half to make the payments and pay the property taxes.)

There are numerous such buildings in the area. They look like houses and are split top/bottom, ie one unit is the first floor and the other unit is the second floor. Generally the units are either two or three bedrooms. Most are rented out to students, some to younger couples.

So... As someone who's never even purchased a house before, what do I need to learn, and where should I go to find info? Any advice? I need as much info as possible both on buying property and being a landlord.

Once I've overfed my brain with info, then I'll start actually doing something about it. :yes:
 
First, you need to do a market study to find out what this property's fair market value. Ths is typically done with comparable sales and adjustments based on property characteristics. You also need to know what this type of peroperty rents for so you can build a Pro Forma. A good realtor can help you with an opinion of value and ideas of rental rates. The key to buying real estate, especially in a soft market is buying it right, which means at a fair or lower value. Are you handy? Being a landlord means you have to fix stuff when it breaks or pay someone $$$ when it does.

Go to your library or buy a book on investment real estate. There are tax advantages in financing and also tax advantages depending on how you own the property. You may want to seek the advice of a CPA who specializes in real estate to determine how you want to treat this property from a tax perspective.

I think its a great ideas. The rent on the 1/2 of the duplex may offset part or all of your mortgage payment and if its in a good area, the property should appreciate in value over time.
 
Anthony said:
You also need to know what this type of peroperty rents for so you can build a Pro Forma.
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In order to do that, you need to know the expenses, too. Just be aware that students are generally pretty rough on property.

-Skip
 
Skip Miller said:
In order to do that, you need to know the expenses, too. Just be aware that students are generally pretty rough on property.

-Skip
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Ewww. Didn't see the student part. Think maintenance, lots of it. Typically these type of properties are rented triple net, meaning the tenant pays all utilities, trash, etc. However, there are other operting, occupancy and landlord expenses you should be aware of like taxes, insurance, maintenance, capital improvements (roof, HVAC replacement).
 
Kent, Skip and Anthony have given you good advice to add to that,

1) The realtor should be local and with experience in that particular market
2) Realtors only get paid commission if the deal is completed so beware of some subtle and not so subtle sales techniques ie you better make an offer today b/c another realtor is bringing in an offer at 5pm .. that kind of thing.
3) Nothing abosolutly nothing the seller or realtors tell you about the property matter the only thing that matters and that you can rely on is whats in writing.
4) Get an attorney to represent you in the transaction
5) As far as student rentals SCREEN THE APPLICANTS VERY CAREFULY (and if they are cute co-eds post photos) Make sure that the parents of every student renter co-signs the lease
5) Femals and Grad students do less damage but of course you cannont discriminate on the usual factors sex, race, religion, pilot , non pilot etc.

Best of luck. Like my dad says about realestate " They don't make more dirt"
 
You are getting some good advice. I won't address buying real estate at the moment, just remember, when you are a landlord, you are running a business.
1. Be prepared in advance to record all financial matters. IRS wants to help you: http://www.irs.gov/publications/p583/index.html and http://www.irs.gov/publications/p527/index.html.
2. Go to the local Kinkos and buy copies of lease agreements. Choose the best for you, alter it to your needs, and use it. Don't give out the keys until it is signed. For students, get a parent to sign, too. Specify annual rent adjustments (raises) and when you raise the rent, don't accept less.
3. You cannot discriminate. Record everyone who inquires and carefully record why you turned them down. Reasons you cannot use are : gender, sexual orientation, age, ancestry, blind, deaf, handicapped, children, subsidized housing, religion, military service. You can turn down people who cannot afford to pay the rent or who have a bad credit history.
4. If your tenant is disabled, you may be required to provide accommodation.
5. Run a credit check on potential tenants. For students, check out the parents, too.
6. Get a security deposit, first month, and last month rent if possible in your area. Always expect the tenant will skip without paying. Rejoice if they leave the house in a reasonable state and refund generously.
7. Expect utility bills to run about twice what they should. If you are not paying the bills, make certain it says so very clearly in the agreement. Specify who mows landscapes, etc.
8. Make sure the house has no hazards, such as lead paint, pests, unsafe structures, insecure premises. Ignorance is no excuse. If the hazard exists, it is your responsibility to repair and pay damages.
9. Expect to make at least one (or more) major repair every year such as new carpeting, roof, HVAC, plumbing, appliances, paint -or- remodelling all of them about every five years.
10. If you rent furnished, expect to completely replace the furniture every three years.
11. Notify insurance carrier and increase liability.
12. You cannot enter the premises without tenant permission.
13. If you suspect drug activity, go to the Police. Evict your tenant immediately if drugs actually are involved. Otherwise, your house can be confiscated. Other illegal activities must be addressed immediately, too.
14. Evictions can only be ordered by a judge. You can issue a Notice to Quit which the tenant can contest.
 
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Take a look at commercial properties as well, I just made some good change from a sell of a commercial storefront. Here in AZ seems people are buying up storefronts to use as storage. Prices have leveled with residential, but continue to climb with commercial. You could look at storefronts in a complex or even storage units, lease them out for income and sit on the property while it grows.
 
Excellent points so far. Building a Pro Forma and tracking your financial health closely will let you understand how your investment is behaving compared to the market and to your personal metrics. With well done financial documentation, it could assist selling the property later (clearly documented financial health and performance for the property). It can also help you understand, very quickly, in what areas you are losing money and not realizing all potential gains. (Repeat the mantra: Know where your cash is and what it is doing!)

I'm not privvy to WI rental law, but one thing is for certain: know the P&P's of the eviction process through and through. Many landlords don't really know it very well, and the first time it happens...

Many states have local firms which provide rental data. In MA, we have a few firms which do credit checks, past rental history, landlord notes, and similar available to a paying customer. A "professional tennant" (someone who games the system to pay little to no rent while making your life a living hell in the process) can be one of the worst things to happen to you - a FOAF got stuck with a PT and ended up with cement in his plumbing (plumbing violations are instant "landlord in hot water" issues, so while it took him about $10k to find what was causing the problem, the tennant had skipped town with 4 months back rent due).

Understanding trust, corporate, and various interest-protecting entities in your state is imperative. You'll want to protect your investment and your standing while ensuring that the property recieves the most advantageous tax treatment.

Good luck Kent! A number of my friends do the rental property thing - 8 of them in total - and most are pretty happy. It's hard work, but it can help someone leverage their cash into doing something positive for them, and if done right, you can do this for a large portion of your life, creating alternative streams of income.

Cheers,

-Andrew
 
Somene else mentioned that being a landlord is a business. Heed the advice. A local, young engineer owns ~40 properties and has become a rental property tycoon. The rental contracts he uses specifiy rent due on the 1st, penalty if not paid by the 6th, in default and subject to eviction of not paid by the 10th. If a tenant shows up on the 11th with the rent check the landlord thanks the tenant for paying the rent and offers the tenant a ride to court for the eviction hearing. If you want to be a successful landlord you need to develop that detached mentality.
 
Thanks for all the excellent advice so far! :yes:

One question: What the heck is a "Pro Forma?"

One thing that worries me is that after an eviction it would be pretty difficult to find new renters in this particular area, I think. Since it's predominantly student housing, almost all of the leases terminate in either May or August.
 
flyingcheesehead said:
Thanks for all the excellent advice so far! :yes:

One question: What the heck is a "Pro Forma?"

One thing that worries me is that after an eviction it would be pretty difficult to find new renters in this particular area, I think. Since it's predominantly student housing, almost all of the leases terminate in either May or August.
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"Pro forma" is short for a "pro-forma statement of income and expenses". More serious than the back of an envelope estimate, it is a very-best estimate of what you will get for rent and what you expect to pay for expenses. Each and every item on it is an estimate, but you should be able to justify each estimate based on comparable information, fuel costs, tax bills, etc.

Don't worry about re-renting after an eviction. Worry about actually getting the dead-beats to leave. In some jurisdictions, the legal system is very one sided in favor of the tenant.

-Skip
 
flyingcheesehead said:
Thanks for all the excellent advice so far! :yes:

One question: What the heck is a "Pro Forma?"

One thing that worries me is that after an eviction it would be pretty difficult to find new renters in this particular area, I think. Since it's predominantly student housing, almost all of the leases terminate in either May or August.
Click to expand...

Different people use the term "pro-forma" slightly differently. Basically it mean plan, financial model, or budget. To me, it best describes the financial model, including projections based on past performance.

As for the eviction issue, you really need to have a way to deal with that. Hopefully, there will be no evictions, but unless you have contingencies for dealing with the issue, you are asking for trouble.

BTW, I think student housing is great, but you'll need to be careful that you don't get deadbeats.
 
I haven't seen it mentioned anywhere else, so I will add this bit of wisdom:

* Many college towns (and urban areas) have their own Landlord-Tenant ordinance. Often, they are more detailed, restrictive (and tenant-leaning) than state law (which controls the "eviction", usually now called forcible entry and or detainer). You should call the City Clerk for the municipality and ask if they have such a law. If you do, get it and read it.

* If you are going to rent to students, also understand that you might have to cater payment timing to the availability of financial aid; Most students do not get their full awards until after the semester has started (and thus, after the time they would need to move in), but you definitely don't want to collect month to month. So you may take a large deposit payment and then have the bulk of the semster's worth of rent due, say, 30 days after the semester starts. Check and see if the university has a law school (I think it does, as well as a vet school and some other professional schools). You would probably be better off renting to those students than an undergrad. Every professional school I've been in has a student lounge somewhere with a bulletin board for you to post on.

* Make sure you use a state-specific form lease, and try not to change it too much. In Wisconsin, one illegal term can void an entire residential lease. Your chances of having an illegal term go way down if you stick to the form (your best bet is to have a lawyer draft the lease, but that won't happen).
 
Kent - great idea and good luck with it.

Why not consider pilots? They would be at least grad student age and already professionals. One downside I could possibly see is that since they aren't all there at the same time there may be less accountability for keeping the place clean - but never having seen a crash pad I couldn't tell you for sure.

the beauty of real estate is that someone else is paying for your (hopefully appreciating) investment...
 
ps. you should be able to put into the lease language to the effect that if any provision is found illegal/unenforceable, its invalidity won't affect other provisions within the agreement.
 
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