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Comparing Investments in Single Family Residences versus Apartments

There are many real estate investors with experience investing in single family homes but it is a different ball game when it comes to investing in Apartment buildings.  If you are interested in learning some of the  pros and cons of investing in apartment buildings versus single houses - read on.

The following bullet points are not intended to be provide a complete list of all the pros and cons of investing apartment building and/or single family homes, but it is a good start.  While putting this list together we assumed a buy and hold strategy of at least five years.  It does not consider other investment tactics like flipping or wholesaling.

Pros of Investing in Apartment Buildings

• There is usually a Lower cost per unit (sometimes call cost per door) than single family homes.
• Apartment buildings usually offer a greater cash on cash return, return on investment, than single family homes.
• People need a place to live.  With all the Foreclosures going and difficulty for home buyers to get loans they end up in apartments.
• You can start make a positive cash flow instantly if you buy an apartment the correct way. You can benefit from positive cash flows from day one if you buy right.  For more information on how to evaluate apartments as investments check out this free ebook by clicking the link.
• Property management for apartments is typically lower per unit, especially if you get enough units to negotiate lower property management fees.  You can lower your property management expenses by hiring a company that specializes in apartment building management, plus you may never have to talk to a tenant again.
• It is often easier to get seller financing because apartment building owners are generally more financially savvy and are more willing to help you finance the property.  It is even possible, although hard, to buy an apartment with 100% financing.
• Apartment buildings can appreciate faster than houses; at least they don’t have wild price fluctuations like single family homes because they are valued differently.  Apartments are valued using an Income Approach whereas Homes are valued using a Market Comparison Approach.  If there is Strong housing demand in an area that has limited apartment vacancies, then the rents and the value of the apartment can rise rapidly.
• They are more conducive to 1031 exchanges in whereby you can expand your real estate portfolio using creative tax strategies.

Pros of Investing in Single Family Home

• Houses are less expensive than apartments.  The down payment for an investment house can be very low (but this changes with what the lenders are up to).  Some investors concentrate on buying discounted houses like foreclosures, short sales or Bank Owned.
• Loans for single family homes is available from a larger variety of sources.
• The acquisition costs are usually lower then an apartment building and you don’t have to do as much due diligence, like complicated inspections or pay out of a lot of money for surveys, inspections, etc.
• If you set your rents correctly and you take care of your renters it can be very easy to keep a house rented and your vacancy rates low.
• Many single family homes attract longer term tenants, such as families with kids that can be tenants for a long time.
• You can buy single family homes at a discount from desperate sellers or banks.

Cons of Apartment Building Investments

• Higher start up costs (down payments, inspections, etc.).
• Apartments have greater tenant turnover.  But, one empty apartment is less of a hit on your wallet than a 100% empty house.
• There can be High maintenance and management costs if you don’t buy the right kind of property or manage it correctly.
• Usually, you will have to put down a 20% down payment if you are looking for commercial bank financing.
• Having a great FICO score will not help you when qualifying for a loan because commercial loans are based on the debt coverage ratios (income versus expenses).
• The learning curve to be able to identify a profitable opportunity takes longer.  For a good start on learning how to evaluate apartments as investments check out this free ebook by clicking the link.
• There could be hidden nightmares with an apartment, such as maintenance you did not anticipate that could adversely affect your returns.
• Higher out of pocket fees and expenses are normally required when borrowing with a commercial lender.

Cons of Single Family Home Investments

• The cost per unit is usually much higher.
• If you lose your tenant then your occupancy goes to ZERO and your cash flow goes to ZERO.
• Home Prices in the residential market often fluctuate more with quicker ups and downs in value.
• You may be required to belong to a Home Owners Association that has rental restrictions or high HOA fees.  I have found that many HOAs are run like Police States and they use Gestapo like tactics.
• Because of the higher cost per unit your cash flow is usually lower.
• Maintenance costs can be higher compared to apartments.

To Your Success

Mark Schwartz

Real Estate Technology Blog
The Internet Real Estate Center
Submit Your Link Exchange Here

Lately, I have been seeing a lot of listings (either on the MLS or other miscellaneous listing sites) that discuss Cap rates on single family homes.  After seeing Cap rates advertised for single family homes, duplexes and four-plexes, I feel that I have to make a comment about Cap Rates and their application to single family investments. 

So here it goes… The use of Cap Rates is inappropriate for single family investment properties. Cap Rate is used for commercial properties in an equation to determine value based on a given commercial property’s net operating income.  Single family homes, duplexes, triplexes and four plexes are valued based on a market comparison approach, not income approach.

Here is the equation:

Net Operating Income / Cap Rate = Fair Market Value

Net Operating Income = Effective Gross Income (After Vacancy) - Operating Expenses (excluding debt service)

An appraiser will go to market researching comparable sales to make a determination of market cap rate. Comparable Sales will have known Net Operating Incomes and known purchase prices. The equation can be changed to find Cap Rate as such:

Net Operating Income / Fair Market Value = Cap Rate

He will then apply the market cap rate in the equation to the subject property’s Net Operating Income to obtain Value.

The key here is that Net Operating Income is tied directly to Vacancy. Increased vacancy produces decreased Net Operating Income which in turn can result in lower value at a constant cap rate. With single family properties you are either 100% occupied or 100% vacant. When you are 100% vacant the property still has value.

Valuation of Single Family homes is weighted toward comparable sales. Income is not included. In commercial real estate three approaches are used to value a property:

• Sales (Market) Approach
• Income Approach
• Cost (Replacement) Approach

The appraiser will weight the approach based on market conditions.  Cost Approach is not often considered in the appraisal.

That’s my two cents worth and I am sticking to it.

Go Here For more information on analyzing commercial properties.

To Your Success

Mark Schwartz

Real Estate Technology Blog
The Internet Real Estate Center
Submit Your Link Exchange Here

There are very few posts written about selling real estate on eBay, which surprises me, given the fact that eBay is an 800 pound gorilla in everything it does.  Here is a post on selling timeshares on eBay which is pretty good.

Timeshares are darn near impossible to sell and sometimes even hard to give away (because of the monthly maintenance fees, reserve assessments, etc.).  Today there are 1533 timeshares listed on eBay.  eBay could probably get a lot more timeshare listings if their listing fees weren’t so darn high.

Saturday, February 9, 2008
eBay is a Powerhouse; But Not When it Comes to Timeshare Resales
Author: Jason Tremblay

In a very short time, eBay has created a powerful, effective global marketplace that serves as yard sale, antique auction, real estate showcase, trading post, and memorabilia collectors paradise. Old, new, valuable, eclectic, or pure junk, you can find it all on eBay.

Beyond creating a worldwide flea market, eBay has also afforded a way for people to supplement their incomes or even build small (and sometimes not so small) businesses. eBay entrepreneurs are a whole new category of business people, so much so, that the eBay empire has also established eBay University to train aspiring merchants in their structure and business model.

When You Sell Timeshare or Buy Timeshare Through an Online Auction

Yes, you can even buy timeshare or sell timeshare on eBay. When you sell timeshare through eBay, you have the choice to handle the sale yourself or to go through an eBay store that resells timeshare. Selling your timeshare weeks this way may work for some people, but online auctions are truly a situation of both buyer beware and seller beware.

Online auctions may not be the best way to buy timeshare resales

For example, I just checked todays timeshare resort properties advertised on eBay and found timeshare weeks listed at a starting bid of one cent - thats right - one penny. Some have a reserve amount on them, meaning the timeshare will not be sold until a minimum price is met, but others are sold without the reserve.
This is potentially a one-penny selling price; received after you (the timeshare seller) pay a fee to advertise your timeshare resale on eBay. And as a timeshare buyer, dont assume that these rock bottom prices are actually the amount that you are required to come up with at the close of the auction. Instead, be sure you read all the fine print, because you are sure to be hit with closing costs, maybe advance or past maintenance fees, and other costs that turn your penny-priced property into a much larger expenditure.
Additionally, as a timeshare buyer, you may not be given the choice of which timeshare closing company you wish to use to finalize your transaction, giving you even less control of the final dollar amount your budget priced timeshare deal will cost.

A timeshare owner posting on the TUG website recently observed: “Did you see the auction on eBay, a small 1 br gold week so that was an original Starwood went for the whopping amount of $3.25. Yes the decimal point is in the right spot.

Another reason to be cautious in any online auction is that there is often nothing to standardize the information provided about the timeshare resale. If a timeshare seller knowingly or unknowingly, misrepresents the facts about the timeshare weeks he or she owns, the prospective buyer has no real way of sorting out fact from fiction. Important details about the timeshare weeks being advertised can be omitted or misstated. As a timeshare buyer, your risk can be great. As a timeshare owner who wants to sell timeshare, you will find the timeshare resort ad you credibly present is competing with ads that may promise amenities or terms they cannot deliver.

When you try to sell timeshare in an online auction, you are attempting to sell timeshare in a marketplace that contains timeshare properties owned by people who are apparently willing to pay to give them away! Combine that with how quickly eBay’s ads expire and you have a tough way to sell timeshare unless you too, are ready to pay someone to let you give them your vacation property.

In an interesting move this week, eBay announced that beginning in May, sellers will not be allowed to leave negative comments about their customers. They will still be permitted to leave positive ones. According to eBay spokesperson, Usher Lieberman, “The No. 1 reason buyers cited for decreasing or ceasing their activity on eBay was negative unwarranted retaliatory feedback they received from sellers.

Remember that no one solution is best for every person who wants to sell timeshare or buy timeshare. Your needs and your objectives are unique. But before you turn to any online auction to buy or sell timeshare, consider all your options. An online auction is truly a case of caveat emptor “buyer beware” and sometimes, it is “seller beware” as well.

To Your Success

Mark Schwartz

Real Estate Technology Blog
The Internet Real Estate Center
Submit Your Link Exchange Here

How do you Locate the Owner of a Property that is vacant or abandoned?

There are a lot of real estate investors that regularly look for vacant properties to invest in.  The main premise is that if the property is vacant, then the owner of the property is most likely to be a motivated seller.  If they find a motivated seller then the investors believe (correctly many times) they can purchase the property at a discount.

However, if you find a vacant or abandoned property, how do you locate the owner so you can make a purchase offer to them?

Here are your three simple steps to tracking down owners of vacant houses so that you can make purchase offers on them.

1. You need to find out who the owner is by going to the county records for where the property is located.  Counties sometimes vary as to which office you will need to contact in order to look up the records, but most often it is either the Tax Assessor’s Office or the County Recorder.  The great majority of counties have their records online so you can do your search via the Internet.

If you have a relationship with a Title company, you can also contact them and they will either provide you with the information you need, or they may even give you access to their databases so you can do your own searches.

To locate the Tax Assessor for any county you can go to http://internetrealestatecenter.com/county_tax_assessors.php or you can Click Here.

2. Once you find out who the owner is, you will need to search for the owner’s phone number.  By entering the owner’s name into a skip tracing engine can usually locate the owner’s phone number.  The reason I say usually is due to the fact that sometimes the owners of vacant properties never provided a phone number to the county.  Also, don’t be too surprised if the phone number you call has been disconnected because the motivated seller is out of money.

Here are some skip tracing engines that you can select from to try, or find your own by doing an Internet search for “Search Phone Numbers”:
# Address.com
# Anywho.com
# AOL Whitepages
# Infospace.com
# Intelius.com
# PeopleFinders.com
# People.Yahoo.com
# Privateeye.com
# Superpages.com
# Switchboard.com
# Ussearch.com
# Whitepages.com
# Worldpages.com
# Zabasearch.com

3. Once you have the owner’s phone number call them and ask them if they want to sell their house.  Another approach is to send them a letter if there is another address provided in the tax records or you can hope that your letter gets forwarded to them.

Happy Vacant House Hunting!

To Your Success

Mark Schwartz

Real Estate Technology Blog
The Internet Real Estate Center
Submit Your Link Exchange Here

Over the past few years I have sometimes struggled as a real estate investor.  I knew how to structure deals but I have often lacked one critical item…. LEADS …motivated sellers that I could talk to about buying their property. I knew that if I spoke with enough sellers I would finally have a chance to succeed.

During my real estate investing career (going on three years full time, plus two part time), I have bought dozens of real estate books and programs and studied every page looking for answers.

It was tough to buy the courses since I really didn’t have the money …but I figured that “next course” would have that final magical formula that would bring me the success that had eluded me for so long as a real estate investor. Actually, I am embarrased to tell you how much money I have wasted on real estate investing courses.

Many of the courses that I bought were just simply garbage! They had a bunch of letters or postcards that they swore would work and get the phone ringing off the hook with motivated sellers. They contained sample contracts that were unusable, strategies that worked three years ago but not today, and they were loaded with rehashed garbage.

Over the years I have found some problems with many of the courses you buy from real estate gurus.
Problem #1 - Most real estate courses are too general

Most of the real estate courses just don’t give real estate investors enough details. If you are a newbie and getting started in the business you get some general information that you need about how the business works and what you need to get started.

The problem that you have is that when it’s time to hit the road and try and make something happen you are left wondering what to do next.

One example is that many of the courses will tell you that you need to mail letters and postcards to landlords. They recommend you get a list of absentee owners and give you a few postcards to send out to them.

But there is a ton of information that is left out!

Who do you get your mailing list from? What do you need to request when getting the list? How do you prepare the list? What are the best records to market to? What should your marketing say? What is the response rate that you should get from your efforts?

Do you see what I’m getting at? So what ends up happening is one of two things. You either have to take action and you screw up, or you just don’t do anything at all since you are paralyzed because you lack the right information.

If you screw up and you are lucky to have some money set aside then you will try again and hopefully start making some money through trial and error.

But what if you don’t have a lot of room for error? If you don’t have a huge budget for marketing and your first efforts fail then you have one less shot at success.

And if you keep on getting crappy results eventually your marketing budget runs dry and you are SCREWED!!!
Problem #2 - Most real estate courses will bury you in dozens of techniques to find properties.

During the times that I have struggled the biggest problem I had was that I was going after every single known way to find deals. Confucius says “the fox that chases two rabbits catches neither”.

You see when you go after too many things then you end up doing nothing at all … or just simply not doing any one thing very well..

When I made the decision that I was going to focus on only one part of the business and take everything off my plate, that is when things finally took a turn for me. I eliminated everything else from my radar and that is when success started to flow my way.

Think about it. How can you effectively go after probate, foreclosures, code violations, direct mail, calling fsbo’s if you are chasing them all at the same time. You will go jumping from one thing to another and never really get good at anything.

This is one of the biggest causes of failure for real estate investors.
Problem # 3 - The minute you purchase a Real Estate course you are usually getting old information

Most of the time when you purchase a real estate course you will get a binder with some CD’s and DVD’s.  Most likely the course was put together by some self-professed guru that doesn’t even invest in real estate or is a hodgepodge of material that he has “borrowed” from other real estate gurus.  And, quite often, the material is 1-2 years old and the strategies won’t work in this tough market.

You see there is no incentive for these real estate gurus to continually update their course materials.  And when there is something new that has changed or information perhaps that may help you in your business there is no way for them to update you unless they re-ship you the course materials… and nobody is going to do that.  Of course, many of them will sell you a new course (upselling is rampant).

Think about it. How different is the real estate market today versus back in the 1990’s or even the early 2000’s. VERY DIFFERENT. Yet most of the courses that are being sold were created 3-5 years ago.

How are you going to succeed with information and material that is outdated?

Most of the marketing you get with real estate training courses out there is simply junk! It’s the same stuff passed around from guru to guru. You’ve seen the stuff… “We buy houses Cash” … We will buy your home in “9 days or less”.  I even have one of these web sites myself at www.msbuyshouses.com.
So What’s an Investor to do?

Well, there are quite a few things you can do.  Number one is don’t waste thousands of dollars on real estate investing courses and seminars.  There are plenty of free or very low cost seminars available, usually right in your home town so you don’t have to spend $$$ on travelling.

There are hundreds of inexpensive real estate investing books you can buy used on Amazon for only a few bucks.

There are also hundreds of real estate investing blogs, websites, article sites, forums, etc online where you can find out just about anything for free.

And finally, you need to focus on ONE strategy at a time.  And the strategy you should be focusing on now (in my opinion), because there’s little if no risk involved is being a real estate bird dog (property locator) or flipping (wholesaling) houses.

To Your Success

Mark Schwartz

Real Estate Technology Blog
The Internet Real Estate Center
Submit Your Link Exchange Here