Real Estate Investing 101

Arizona Landlord Tenant Act... A Must Read For Real Estate Investors

Our greatest goal with this site is to keep real estate investors informed and safe. If you are investing in residential rental properties in Arizona, reading and fully comprehending the Arizona Landlord Tenant Act is a must. If you live in another State, similar laws may apply and you should study them well.

We can’t tell you the number of "oops" stories we’ve heard because landlords or tenants did not understand the law. Evictions have been postponed by months, rental income lost and stiff judgments awarded because a property owner didn’t understand the law. That old "ignorance of the law is not a defense" thing at work.

Let’s take a little test to see what answer you would give.

• How much can you charge a tenant as a security deposit?
• Can you lease your home with an “adults only” clause?
• What is a writ of restitution?
• How much notice to you have to give the tenant prior to entering the property?
• Can you keep or sell a tenant’s belongings if they fail to pay their rent?
• Your tenant’s husband has been given transfer orders by the Navy but they have 3 months left on their lease. Can they break their lease?
• When were the eviction laws last modified in Arizona?

These are just a few of the many questions that can or will arise in your new job as landlord.  Not knowing is a bad thing and frowned upon by the courts.

Your homework today is to download a copy of the Arizona Landlord Tenant Act. Now get out your highlighter pen, pad of paper and start studying. You will probably have lots of questions at the end.

Our first and most important suggestion is to pay a good landlord tenant attorney to review the laws with you and answer any questions you have. Consider this part of your "continuing education" for the job. You can contact the Arizona Bar Association for a referral. We like Andy Hull. He is the guru in the Greater Phoenix area.

In future posts we will be addressing some of the most common and maybe not so common questions connected to the Landlord Tenant Act. If you leave a comment with a specific question we will add it to our list of items to discuss. (use the comment button at the end of this post or send us an email)

Enjoy your reading.

Ron Urban & Gene Urban
The Urban Team at Realty Executives
602-234-5777
gene@UrbanTeamAZ.com

The information provided is not intended to be legal counsel... that's a barristers job.

Fannie Mae HomePath… Great for Real Estate Investors

We discussed Fannie Mae’s HomePath program on our downtown Phoenix blog, Urban Life, a few months ago. Now we’d like to talk about it for the real estate investor.

Basically, Fannie Mae is looking at ways to reduce their REO home inventory and the HomePath financing program is one way. HomePath lets both traditional buyers and real estate investors buy selected Fannie Mae REO properties for little money down and low transaction fees.

Here are some of the specifics:

• Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)
• You may qualify even if your credit is less than perfect
• Available to both owner occupiers and investors
• Down payment (at least 10% for investors) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or even an employer.
• No mortgage insurance*
• No appraisal fee

I bet we have your attention now. Ten percent down, as you know, is hard to get these days and when you add in no appraisal and not mortgage insurance you have significantly reduced your closing costs.

Fannie Mae is able to offer no appraisal because they get one before they put the home on the market. Most  banks and asset companies simply get 2-3 BPO’s, but not Fannie. They get an appraisal and a BPO to determine listing prices.

The program does have a couple requirements. You have to use an approved HomePath lender and there are only about 15 or so. We like Desert Heritage Mortgage for the Phoenix market or you can go to the HomePath web site to find other options.

The other condition of the HomePath program is that only certain Fannie Mea REO properties are in the program. I checked the inventory for Phoenix while writing this post and there were 1054 properties available. Scottsdale had about 80 and Glendale had 253. As you can see, there are a lot of possibilities.

If you toss us an email, the link is in the top-right of the site, we’ll be happy to run a search for you and find some good candidates or you can do it yourself by going to our real estate web site, click on the search for homes tab and use the HomePath search tool. 

If cash is a bit tight, or you simply like to get into your investment homes with little down, the Fannie Mae Homepath program may be the ticket.

As always, we are here to answer questions anytime… well maybe not at 2:00 am.

Best to you,

Ron Urban & Gene Urban
The Urban Team at Realty Executives
602-234-5777

We’re brothers, you’ll feel like family.

The Pros & Cons of Buying A Home Warranty Policy

One tool a real estate investor will want to explore is a home warranty policy. In this post we will discuss the pros, cons and cautions of home warranty policies.

A home warranty is simply an insurance policy that covers the repair or replacement of various items and appliances in your home. Most policies cover AC & heating systems, plumbing, electrical systems, and appliances such as garbage disposals, ranges, microwaves, dishwashers and more. Many policies offer coverage for refrigerators, washers, dryers and a swimming pool/spa for an extra fee. The exact coverage varies from company to company as well as the exact product you purchase. Below are links to a few of the many companies you may explore in the Arizona market:

American Home Shield
Fidelity National
First American Home Buyers Protection
Old Republic

There are pros and cons for  buying a home warranty policy. Below is an overview from our experience.

The Pros:

• For many, a home warranty buys ease and piece of mind. When a problem comes up you have a third party to call for diagnostics and repairs. Costly fixes such as an AC unit may be made for a small out of pocket expense.
• Many repairs are covered that may be beyond your capability.
• You call one number for just about everything. You don't have to keep a list of service providers.
• Many home sellers, including banks, will provide a policy for the first year of ownership as part of the contract. Don't be afraid to ask for one when you make your offer.

The Cons:

• The annual premium of a policy is generally in the $500.00 - $600.00 range.
• There is a trip charge for each item you call in for repair. Fees vary but are generally in the $60.00 range.
• Each repair requires a separate service call and fee. If your tenant tells you there is a plumbing leak and an electrical problem you are likely to be charged for each item.
• Home warranty companies are insurance companies and may try to reject your claim, especially if they find the problem was due to a lack of general maintenance.
• The home warranty company's service tech will generally try to repair rather than replace.

Cautions and Advice:

• Many people have trouble getting claims covered... a common issue with insurance providers. We recommend you find and keep the company's local representative name and number handy. They can often resolve problems and get claims covered.
• Make sure and have appliances such as AC systems and water heaters serviced on a regular basis. Keep copies of the service receipts handy so you can provide them if needed. Many claims are denied due to lack of maintenance.
• Read your service contract fully and know what is and isn't covered. Be tough and don't give in when your claim is denied. Notice, we said when, not if.
• If you are working with a Realtor, know that he or she may have a fair amount of pull with the warranty company. In our case, we have placed hundreds of policies on homes and the warranty companies want to keep our business. Call your real estate agent if you have a problem and ask for help. 
• Look at AC coverage carefully. Some companies do not cover crane fees if your AC unit is roof mounted. Others charge for freon disposal or if they have to bring the unit up to Federal standards such as the required 13 seer rating. Your real estate agent can help you through this mine field as well.

After reading this you may think a home warranty is too difficult. Personally, we always put them on homes over 8 years old unless the AC unit and hot water heater have been recently replaced. Those big ticket items can be a killer. Plus, we know how to get claims accepted and like the convenience.

As always, feel free to drop us an email or call us at if you have questions. We truly like to be of service.

Ron Urban & Gene Urban
The Urban Team
602-234-5777
gene@urbantamaz.com

The Best Rental Property May Not Be the Cheapest One

We see many Phoenix area investors come into the business thinking the cheapest priced home or multi-unit dwelling is the best. This is not necessarily true.

We believe the best rental properties are the ones most likely to appeal to quality tenants on an ongoing basis. A cheap home in an over saturated or bad rental area will yield you little or no income. However, a home in a desirable area, near good schools and employment can be profitable. The old axiom location, location, location applies to the rental market as well.

In our current market, you may find affordable homes with good CAP rates in areas you never thought possible. We've seen deals pop up in Scottsdale, The Biltmore and even Paradise Valley.

Naturally, price is important and we believe in strong negotiating and a willingness to walk away from properties where the numbers don't add up. At the same time, finding a property in a great area insures long term success through lower vacancy rates, higher long-term appreciation and tenants who traditionally take better care of the home.

We suggest looking at neighborhood amenities such as golf, shopping, good employers and popular schools in addition to price. In our current market, homes near hospitals may be a good choice since medicine is not as impacted during a recession as some market sectors. A location near the light rail may be important to a tenant as well. The important thing is to study the current market, talk to lots of people who rent and get a sense of what's important to them.

The bottom line is find properties in the best location possible and be wiling to pay a bit more to find a place where demand is high, good tenants abound and your investment property has what people want.

As always, we are happy answer your questions via email or by posting comments.

Welcome to Real Estate Investing 101

Welcome to a different kind of real estate investment site.  This is not a get-rich-quick site. We are not selling seminars, books, DVD's or webinars. You won't have some salesperson calling or emailing you. We don't even have a widget that will try to get into your wallet.

Our goal is to provide both new and experienced real estate investors with information and insights gained by our twenty-plus years in the acquisition, management and sale of rental property. We have pulled together a variety of essays, data and information designed to help you be a more intelligent and profitable real estate investor.

How To Determine The Rent For My Rental Property

One of the most common questions new and experienced real estate investors have is "how much rent do I charge?" Obviously, this is an important question. Price your units too high and you'll wait by a silent phone, price too low and you are leaving money on the table.

The simple answer is market research. This is the same process manufacturers, suppliers and retailers use to price their goods and services. Market research is simply the process of asking and answering important questions that pertain, in our case, to the rental property market.

Some experts say that you begin by looking in the Sunday paper, Craig's list and the variety of rental papers you find at the supermarket. We don't agree. We believe you start with formulating a series of questions that will provide helpful answers.

Since our blog deals with smaller rental properties (from single family homes to 4-plex) we will look at the analysis associated with these kind of properties. Let's start with making a list of the features of your property:

Number of bedrooms, baths, size, yard, quality of schools, included amenities (washer/dryer, refrigerator, cable, pool, ect.), location, nearby employers, transportation options, move-in incentives, condition of property (be very honest here) and other qualities that might be specific to your place.

I like to columize this list so I can rate my place against other properties. Make sure and put a place to record the asking and actual rental prices of the comparable properties you find while doing your research. 

Next make a list of questions that may assist you in determining your rental rates.

• Is there a lot of competition in the area right now?
• What and how many medium to large employers are in the area?
• What are people renting?
• Are there quality tenants renting in this area?
• How much are people paying for similar properties, larger properties, smaller properties?
• How much are landlords in the area charging for their similar places, larger places, smaller places.

Next is the research part of the project. There are a lot of sources of information. The problem is much of it has to do with what others are asking for their places verses what actual rents people are getting... a big difference.

We like to start with a variety of sources. Your real estate agent may have data, from his/her MLS, showing asking and actual rents on properties located near yours. Likewise, if you are using a property management firm, they will have access to this info.

Many investors use Craig's List to advertise their rentals. Look for both active rentals in your area and go back through the posts to try and find units that are now off the market. Although not always spot on, this info can suggest prices that at least got calls. Local classified sites like AZCenttral.com in the Phoenix market can give you info. A pretty fun tool is the Rent"O Meter. It is set up for apartments but may give you a good idea of what rates are in your area. You may also want to Google homes for rent "your city name" and check out the web sites that pop up.

There are a lot of investor clubs out there these days. Meetup.com is one way to find them. Other investors can be a great source of information. Remember, rental comps are geographically sensitive so don't expect information on Tempe rentals to help you determine the right price in Peoria.

Once you have gathered the necessary information you should have a good sense of where to price your rental. Be prepared to lower your price quickly if you do not get any interest. Time is money and having a vacant unit get expensive quickly. We are seeing a lot of competition out there right now so you may have to bite the bullet for the next year or two. However, if you have bought right, you can still be profitable.

Please feel free to toss us an email if you have any questions or use the comment area below. We try to respond to all questions within 24 hours.

How Much In Cash Reserves Does A Real Estate Investor Need.

Cash reserves are often overlooked when starting a real estate investment business. We all like to think our skills, knowledge and good looks will suffice. It won't. Every succesful investor we  know maintains a slush fund. They've learned that a lack of reserves equals restless nights, headaches and a generaly sucky mood.

Why might you need some reserves? There are a lot of variable you'll want to consider. We've listed the most common ones below:

• During vacancy periods.
• Property clean up between tenants?
• Fixing a broken AC unit or water heater.
• Rotten tenant tears up the place. (Sure you may get the costs back in small claims court or security deposit, but the former takes time and the latter may not cover all the costs.)
• Increase in operating costs: HOA, Taxes, Management Fees, Insurance

So, let's accept the fact that you really do need some cash (not credit cards) on hand for emergencies and those "Murphy" moments. Deal?

How much do you need to maintain in a reserve account?

• 4-6 Months of Mortgage Payments (This is very important as its hard to make money in real estate without the actual real estate.)
• $3000.00 per unit for repairs & mantainance.

The amount you hold for maintainance and repairs can vary greatly. A 2500 sq.ft. home would cost a lot more to repaint and carpet than a 1300 sq.ft. unit. Condos do not have the same associated expenses as single family homes or multi-unit properties. An experienced real estate agent or property manager should be able to help you crunch these numbers and we always recommend you pass these questions by your accountant.  

You may want to consider a buying a home warranty for each of your units as well. Home warranties cover many common maintainace repairs such as AC units, plumbing, appliances and electrical for an annual fee plus a small trip charge.

As always, we hope this info help you on your successful real estate investing journey.

Who Should Be On Your Real Estate Investment Team?

Growing up we played a lot of sports. Ron played football under John Madden at San Diego State and my sport was water polo at UCSB.

One thing we both learned was the value of putting together a great team.

You'll want to do the same when you decide to become a real estate investor... this is true if you plan on buying only one home or many. Below we've put together a list of the various people you'll want to consider.

BUYING/ACQUISITION TEAM:

MORTGAGE LENDER:
Unless you are paying cash for all your properties, a mortgage lender will be a crucial player. One thing we've learned in our 20 years in the business is that not all lenders are alike. There are a lot of amateurs out there that can get you in trouble. 

We recommend that you hire someone with a lot of experience with non-owner occupied real estate loans and a clear track record. We personally prefer mortgage bankers over brokers. We've simply found to many variables, especially in underwriting policies, when using a broker. 

REAL ESTATE AGENT/BROKER:
Let us say up front that we are Realtors. That said, most true investors do use a real estate agent or broker when buying investment property. A good agent will know the market conditions, have access to data and valuation tools most lay people simply do not have. We qualify a good agent as one who is:

• Full-time in the business with a minimum of 5 years, preferably over 10.
• Knowledgeable about the various markets.
• A strong negotiator
• Conversant in the math skills required to evaluate investment property
• Someone you feel you can trust
• Someone who shows you the best properties available, not just his or her own listings.
• We recommend you interview several agents to find the one who you find most competent.

HANDYMAN OR GENERAL CONTRACTOR:
There is a good chance, especially in the current foreclosure market, that a candidate home will need some work. You may have the skills and time to do some or all of the work yourself. If not, a good handyman or contractor will be essential.
A contractor or handyman will help you evaluate the costs and time line of bringing the home to rentable condition. His or her input will be important in determining CAP rate and thus the maximum purchase price you'll be willing to negotiate. Important criteria includes:

• Ability to provide an accurate cost analysis.
• Ability to perform the needed repairs on time and on budget.
• A background in investment housing and best materials to use in a rental application.

THE BUSINESS TEAM:

REAL ESTATE LAWYER:
The Boy Scout motto of Be Prepared is the focus here. At some point in time you will probably need to initiate eviction proceedings on a tenant… it comes with the job.

Pre-planning an action plan and having the necessary paperwork drawn up in advance is important. If and when the time comes, immediate action is your best course and can often help in actually training and retaining a tenant. When they learn that you don’t mess around, they are not as apt to either.

A lawyer can provide you with the necessary lease agreements and other paperwork to keep you safe and on course as well as advise you on specific issues. Some believe it is best to hire a real estate attorney who invests in rental properties him or her self as they will have working knowledge of the issues.

ACCOUNTANT:
An accountant/CPA will be invaluable. Understanding the tax consequences of rental property is tedious and usually beyond most investor’s abilities. In addition, a knowledgeable accountant can provide strategies and advise that will may you more profitable and keep the IRS off your back. Your accountant may help you determine and set up an LLC for your business if needed too.

PROPERTY MANAGER:
We can’t say whether or not you’ll need a property manager. We recommend you interview a few and find out exactly what services they provide. At the conclusion of the interview you have to ask yourself if you have the resources and skills to do the job yourself. (See our page on Property Management for more details.)

TENANT SCREENING SERVICE:
Finding a good tenant is of great importance. One of the tools you will use is a tenant screening service. Tenant screening provides you with a variety of important information about the quality and background of your future tenant. Services vary by company. We recommend at least the following information be gathered:

• SSN Validation
• OFAC/Patriot Act Search
• Evictions + Suits
• Liens + Judgments
• Bankruptcies
• Criminal Records Search
• Sex Offender Search

Tenant screening services may be offered ala carte by property management firms and can be found online by Googleing “tenant screening service". 

MISCELLANEOUS TEAM PLAYERS:
You may want to interview and have on hand some or all of the following service providers:

• Bookkeeper
• Insurance Agent
• Landscape Maintenance
• Plumber
• Painter

Real Estate Investing Terms Explained...Part 1

Real estate investors have their own language. The uninitiated may miss the pure delight of buying a sweet rental home with a 14% CAP rate or when the NOI is a positive number.

In this post we will take a look at some of the common terms used when evaluating the income potential of an investment home, condo, or multifamily unit. This is not a compete list of terms... we'd put you to sleep if we did that. However, you should come away with a bit more knowledge than the average person.  In future posts we will add to the list with transactional terms and more. Enjoy.

Gross Potential Income:
This is a relatively useless calculation but needs to be included. It is the expected income a property will produce without deductions for vacancy, collections losses, or miscellaneous income.

Gross Operating Income:
Same as above but adds in losses due to vacancy and non-payment by a tenant.

Net Operating Income:
Now we’re getting to the important stuff. The bottom line numbers. Are you making a profit or loss before taxes. Here we add in operating costs such as management, repairs, insurance, etc. 

CAP Rate (AKA Capitalization Rate)
You hear this term bantered around a lot in the world of real estate investing. It is a ratio used to estimate the value of income producing properties. The ratio is determined by dividing the net operating income by the sales price or value of the property.

If you are buying a rental home you want to see as high a CAP rate as possible and in a marketable area. In the Greater Phoenix area we like to see a CAP rate in the 6-8 range. However, you can find units with rates as high as 12. These are often in scary areas and/or poorly maintained. 

Cash Flow: Before and After Taxes
Obviously, cash flow is an important consideration to the real estate investor. It represents all the money coming is such as rent, interest on bank accounts, etc. minus outgoing expenses like operating costs, debt payment and capital expenditures.

Cash flow should be evaluated as a before tax figure and an after tax figure. Some investors actually lose money on the before tax figures but show a profit after taxes.  A good CPA is essential for evaluating this.

The key factor is evaluating cash flow is to be realistic. Don’t blue sky yourself with unrealistic rents and incomplete operating cost assessments.

Debt Service:
This a fancy name for a simple thing… the total you pay on loan for the property… make sure and include any second, third or HELOC’s assigned to the property.

Return on Equity:
This is a term used most commonly in the stock market and has some bearing on real estate as well. Essentially, ROE is the percentage return on your cash investment. It is generally evaluated on an annual basis and simply lets you know what kind of return your are getting on your money.

Residential Real Estate Property Manager... do I Need One?

A good question to ask is if you need to hire a property manager. We can't answer that question... that truth lies in your talents and abilities.

Below we've outlined some of the services a good property manager can supply. We'd advise you read through the list and determine, with great honesty, if you have the skills, personality and time to self manage.

Fundamentally, a property manager handles the day to day duties involved with owning a rental home or property. If you lack the time or expertise needed, an expert property manager can help you.

A property management company can help you:

• Market your rental property to potential tenants. A good property manager knows market conditions, understands how and where to find good renters and how to determine viable rental rates.
• Fill vacancies with the best possible tenants. A good property manager should evaluate your prospective tenants, run financial & criminal background checks, negotiate lease agreements, explain the rules, and collect deposits/upfront rent.
• Maintain and keep your rental property in good condition. A good manager will coordinate any necessary repairs and oversee ongoing services such as landscaping, pool maintenance and such.
• Property managers should provide monthly business reports. They may provide other financial services such as setting up escrow accounts for deposits, bank accounts for income and expenses as well as financial statements required by your CPA.  
• Collect rent.
• Execute eviction proceedings if tenants violate the conditions of their lease. Some have specialty lawyers on retainer who can help with this process.
• Comply with federal, state and local laws. See the Arizona Landlord Tenant Act.
• Respond to tenant requests and deal with problem tenants.

How did you do? Can you handle most or all the tasks outlined? If you feel pretty good, perhaps a few good books on skills and techniques may be all you need. If the list looked pretty daunting, a management person may be your best route.

Like with any industry, there are both good and bad property managers. We STRONGLY (notice we put that in all caps) advise you to interview several people. Get and follow-up on their references. Naturally, we've gotten to know a few people who are good at the job and we'd be happy to give you their contact info if needed.