September 7, 2007: Income properties, a few basics, part two

Picture: somewhere near Tempe, AZ


I continue with some random thoughts on real estate investing.

Most authors who have written bestselling books on real estate investing neglect to tell readers how to evaluate their local economy. Investor's had better study a city's economic base prior to shaping their investment strategy. Without a growing local economy, demand for rentals will typically sag. With a growing local economy, your potential tenants will multiply and their paychecks will continuously show increased earnings. The economic pie serves up bigger slices for nearly everyone.

That said, there are exceptions. No growth, slow growth and far left wing Democratic-run cities OVER-CORRECT and present, for a limited time, fantastic deals on real estate - especially single family homes. Section 8 or other subsidy programs fill in the income gap from a declining growth situation. Many of my Section 8 (government subsidized housing) tenants have honorary doctorates in milking the system. Many work for cash, thus avoiding the income test. Many others spend hours per week applying for freebies or cash grants from gullible social welfare groups.

For example, one tenant of mine works for cash as a "dancer". making about $1500.00 week. She drives a 2006 Miata. She dresses very well and has attended college (quit..making too much money doing her act). She has two small children who receive free first-rate day care at the university. Her rent is 100% subsidized, direct check to me by the Section 8 program - which is paying above market rates, imo. Catholic Charities pays her gas heating bill. the county community action council pays her electric bill. Water, sewer and trash are included in her rent. She also receives substantial food aid from the State. This damsel in distress has been a wonderful tenant for over five years (never complains and the interior is spotless). And in this rust belt city, there are thousands more like her. AND THERE WILL ALWAYS BE MORE OF THEM. Count on it. I almost forgot, I received a city commendation and a cash grant for fixing up this and other properties, even though I would have done so without their cash or the commendation.


I used to report violations of contract, but I soon realized that the more people on subsidized housing, the safer the bureaucrat's job. No one EVER investigated my complaints, so I quit. I learned an important lesson. In subsidized housing, let those who are being paid to find fraud find it themselves. I am providing a service, and being a detective is not in my job description. And apparently in no one else's either.

Money can be made anywhere in any rental market if you buy right,do your personal homework diligently and be somewhat skeptical and brutally honest with yourself (see Part 1).


Buying into Seller's data:

When contemplating buying a property, most sellers give you some sort of rent roll (multi-unit) that is supposed to confirm the rents they are collecting from their rental units. To negotiate with power and confidence, you must NEVER, ever rely on rental income or expense figures that sellers or their agents hand you. You must work up your own figures based upon firsthand knowledge of the rental market. You gain this knowledge only by actually looking at a broad sampling of "for rent" properties, detailing their characteristics and rental rates, and keeping tabs to see how various types of units "lease up".

Pay for the present, not the future. Many sellers will show you their present "below-market" rents and then add: "But I deserve a much higher price because after you take over the property you can easily raise the rents." Reject this ploy.

Tell the seller that you're paying for the current operations of the property. You are looking for an investment, not a speculation. If rents can be raised, consider it a bonus - not part of the price you pay for the property.