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Southern Oregon this Appraiser's perspective

As I said in my previous post, not even your BFF will ask you how much you need to set aside for vacancy and collection reserves. Why? Because most folks think that if you keep your rents low enough you will never have to worry about keeping renters.....NOT! 

Setting your rents below market rent accomplishes two things:

    1) You make less money.

    2) You send a message to prospective tenants

        that says either: "I'm clueless" OR "I'm desperate"

I didn't start renting my properties because I wanted to, I became a landlord because I wanted to move and it wasn't a good time to sell my house. 

I decided upon the rent amount by figuring out how much monthly income I needed to cover my mortgage. I thought that I could "catch" a renter quick with low rent, and then raise the rent over time to eventually make more money than I was paying monthly on my mortgage. 

My first tenant stayed for a year and a half. Unfortunately I didn't "visit" them while they were living there because I didn't want to "bother" them. When they left I discovered that they had poured a 15' x 20' concrete pad in the back yard for a dog kennel, dug up the back yard to install a sprinkler system that never worked properly, painted the living room wall deep burgundy, and allowed their children to create wall murals with permanent markers. 

I set out with vigor to "clean up a little" so that I could "quickly" get it rented to someone else. A week later I was still sleeping on the living room floor in my sleeping bag amid paint and ammonia fumes.

Pop quiz: How many coats of primer and white paint does it take to cover DEEP BURGUNDY? If you said 1 coat of primer and one coat of paint you would be wrong. That first time I used 1 coat of latex primer and three coats of latex paint. It was also winter and it took fore-v-e-r for the paint to dry.

Let's take a moment now to add up the cost of "cleaning up" the house to rent again. I'll use a minimum of 8 hours a day for 7 days even though I was up at 6 am and didn't go to sleep until 9-10 pm every night. At minimum wage - I think it was $6 at the time - it cost me $336 in labor. I spent a minimum of $350 on supplies and repairs which means that to "clean up a little" cost a total of $690 rounded. REMEMBER at this point it was still vacant!!!

Let's pretend that it only took me two more weeks to advertise the rental, interview the prospective tenants, followup on their credit references (don't skip this part), and find a qualified tenant. I think I was renting the unit for $1,100 per month, so by the time I found a tenant I'd lost about $900 in rent. 

After all was said and done I'd accumulated $1,250 in expenses due to the vacancy of my rental unit......about 9.5% of my annual income from this property. 

Let's for a moment imagine that I had been smart and set aside 5% every month for vacancy and collections. After a year and a half I would have $990 to help offset the cost of vacancy. Let's keep imagining, and pretend that I had not discounted the rent and received ONLY $50 more every month for the 18 months that it was rented. After a year and a half I would have accumulated $1,035 toward vacancy and collection expenses and I'm only out of pocket $215. Cha-Ching!  

The moral to this story is, take time to find out what the "market rent" is for your rental unit, there are plenty of qualified Real Estate professionals in your area who can help you figure this out. Then set aside a minimum of 5% of the actual rent you receive each month for inevitable vacancy and collection expenses.   


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Posted by MARGARET NELSON-QUIN on March 18th, 2011 12:29 AMLeave a Comment

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If you're reading this and think that managing your own rental properties is going to save you 5 - 10% per month you would be mistaken. Read this and learn from my mistakes.

It's exciting to say "My mortgage is going to be $1,400 per month and my Real Estate agent said I could probably rent my property for $1,600 per month...YIPPEE!! I'm going to be making $200 per month!!!

There is no one - except maybe your BFF - who will ask you how much per month you will be setting aside for property taxes, and insurance. Probably not even your BFF will ask you how much you need to set aside for vacancy and replacement reserves. And no one, except your local Real Estate Appraiser, will mention that if you're managing your own rental property you should probably set aside 5-10% for management costs. 

If you want to make money on income property don't underestimate your expenses, because they like so many other onerous things in life, come in groups of three. 

This fund covers things like gas to and from the rental, meals and lodging if you don't live close, hours you spend cleaning up after your tenants, and incentives you spend money on - gift certificates to the local ice cream shop, maid service, swim club membership -  to keep your good tenants in your properties.

Just today I agreed to hire maid service for a tenant who stayed in one of our properties through the time we were making repairs. Her windows are now grimy, and there is a fine layer of dust all over her belongings after the construction.

Remember what I said in my first post in this series on rentals, some rental income every month is better than no rental income when it comes time to pay the mortgage.

Fortunately for me the construction was primarily limited to one bedroom of the house, so we agreed to deduct the "rent" for that room during the time the construction was going on. We calculated this by taking the rent and dividing it by the number of rooms the tenant uses during the month or $1,300 / 6 rooms (3 bedrooms, 1 bath, kitchen-living, laundry) = $216.67 per room.

PAY ATTENTION, over the last nine months I have discounted my rental income from this rental 12.3% to keep the tenant in the rental. If I was only setting aside 5% to cover the cost of management....I would be in the hole now.

Was it worth it? OF COURSE! If the tenant leaves, I will spend ALL of that and more to clean and rent the property again. I have found that with few exceptions it's less expensive to keep a tenant than it is to find a new one.


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Posted by MARGARET NELSON-QUIN on February 19th, 2011 1:50 PMLeave a Comment

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January 31st, 2011 11:25 PM

When I was  learning the appraisal ropes, I figured out that many of my peers didn't want to analyze market rent. I had experience figuring out market rents for my own investment properties, and thought it couldn't be much different. The research involved in finding out who is paying what rent for different kinds of properties isn't really that much different than how I used to compute how much rent I would charge. What is different today is the way I report my findings. In 1987 I reported my findings by advertising my rentals in the newspaper. Today I report my findings to my clients who are interested in a thorough analysis of what the current market rent is for their investment property or loan collateral.

After the US economy tumbled, property owners who found themselves managing long-term rentals often offered rentals at whatever rent amount the market would bear. Believe me when I tell you that almost any rent is better than paying the whole mortgage on an investment property. I say that cautiously because I have discovered a direct link between the anxiety of paying the whole mortgage on an investment property and the selection of a renter who for one reason or another does not turn out to be "long-term". That is a topic for another blog, suffice it to say that if you don't know where your bottom line is, you may very well be paying people to live in your investment properties. 

That's where I come in as an appraiser. I do the research to figure out what people are paying for renting properties similar to yours. The emphasis here is "what people ARE PAYING". When you look in the newspaper, or on Craig's List, you are looking at "what people ARE ASKING". Depending on the rental market forces, this might be very different. Here is an example. In early 2009 I advertised a property expecting to rent it for $1,900/mo or the equivalent of $0.80/sf. After 2 months of marketing it I took $0.67/sf. 

So an appraiser figures out what renters are paying for rent at the time that the property sells. This is important because if the property is producing rental income at the time it sells, there is a good chance that the buyer as well as the lender is basing their purchase decision on the income from that rent. In the case of a purchase the lender has probably compared the home's Gross Rent Multiplier with recent sales of other income properties to see if the rent amount is supported in the market area. 

After I've figured out what the market will bear for rent, my client usually asks me to draw up an Operating Income Statement. This report allows the landlord, or investor to easily see how much money they will make in a given year after typical expenses. I research vacancy rates, utilities, taxes. The cost of typical annual repairs, management fees (even if the landowner manages the rental themselves), and replacement reserves (to cover things like leaky roofs, broken dishwashers and microwaves, and carpet replacement) is calculated, and finally a Net Cash Flow is concluded.

You might wonder why a landlord would go to all this trouble. This is the good part. If you, as a prospective income property buyer/landlord, go through ALL these steps before you sign on the dotted line, you will know how low you can really afford to go when it comes to renting your income property.

It's exciting to say "My mortgage is going to be $1,400 per month and my Real Estate agent said I could probably rent my property for $1,600 per month...YIPPEE!! I'm going to be making $200 per month!!!

There is no one - except maybe your BFF - who will ask you how much per month you will be setting aside for property taxes, and insurance. Probably not even your BFF will ask you how much you need to set aside for vacancy and replacement reserves. 

If you want to make money on income property don't underestimate your expenses, because they like so many other onerous things in life, come in groups of three.

 


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Posted by MARGARET NELSON-QUIN on January 31st, 2011 11:25 PMLeave a Comment

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May 19th, 2010 12:02 AM
As you can tell from my blogs I've been spending a fair amount of time in the Cave Junction area. I love how the history of Oregon is brought forward in the names of things. Takilma is one of those things. I've been on Takilma road driving comparables, but didn't realize until I had a job on Takilma road that there is a small community in Takilma, Oregon. If you've never lived away from a city, you might even miss the signs that there is a community there. One sign you can't miss as you drive down Takilma road is the one for Out 'n' About Treesort. After I finished inspecting the little 1940's cabin built on big flat river rocks, I drove down to see what a Treesort was.

What I found was a delicious blend of Peter Pan and Robin Hood. Multistory walk ways connecting both small and large treehouses centered around a Lodge.

If you're looking for a great place for the annual family vacation, you probably should start well in advance. There are plenty of activities for youngsters and oldsters alike. Whatever your height tolerance is you'll find treehouses closer to the ground,

and those you will have to crane your neck to look up at. My favorite part - I reserve the right to change my mind once I've actually stayed in a tree house - was the mural background

on the north wall of the Lodge which looks as though it might serve as the background for some kind of theatrical production during the height of visitor season.

If you get a chance to stop in for a visit tell them the appraiser who asked if she could take some photos for her blog sent you. The receptionist's only caution when I asked her permission to photograph the treesort was "Please stay on the ground".......

After snapping my fill of photos, I wandered away leaving the Rope Swings, Ropes Course, Zip line, Horseback Riding, and Wooden Pirate Ship behind me, I noticed this reminder on the front bumper of a charging electric cart.

 

 


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Posted by MARGARET NELSON-QUIN on May 19th, 2010 12:02 AMLeave a Comment

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April 16th, 2010 6:02 PM

Halfway up the hill to Hayes Summit I could see the snow at the side of the road and here and there the little piles of slush that get left on the road until they melt or freeze. I was surprised, when I left my office in Ashland (1,890 elev.) there had been snow in the foothills (about 2,500 elev.) but nothing on the valley floor. Hayes Summit is only 1,560 ft, I wondered what the other side of the summit would have in store for me.

I was going to inspect a property on Lake Shore, in Selma. I love appraising in Selma because it usually means driving around Lake Selmac, or by the lake at least once as I inspect my comparable sales and listings.

 There had been a sale on Reeves Creek Road so on my way back toward Lake Shore Drive I took this. Often this time of year the ground has warmed up enough that by 11:30 am or so if snow has accumulated on the ground over night it has generally melted. This is what the ground about 2 miles south of this spot looked like at 10:30 am.

You can tell something about the quality of a destination by what is going on there when it isn't "the season". Last Monday the road crews were out making sure the roads were all patched up in readiness for the regulars come Summer. I say the regulars because Lake Selmac is close enough you can be there in 1 hour and 20 minutes if you live in Ashland.

You guessed it there's boating, camping, the requisite Camp Store.

 

AND it's pretty inexpensive if you just want to come and enjoy the cool lake water on a hot summer day.

The Illinois Valley - O'Brien, Cave Junction, Kerby, and Selma - gets its share of visitors because Highway 199 runs right through it. As you come inland from the Oregon/California Coastal cities of Brookings, and Crescent City, Cave Junction is the first real town you run into.

If you're there around lunch time you can stop at Wild River Brew Pub and Pizza for your fill of Pizza, Salad and whatever else they happen to have in the warming tray. If you're driving and aren't drinking you should try some of the BEST ROOT BEER you'll find anywhere. I think they call it Jakes Root Beer(I'll have to go back now and see what the name really is), I asked and they only serve it in house....darn. If you are drinking they have a nice handle on flavorful beers. I'm not much of a connoisseur except when it comes to dark beer, but we'll leave that topic for another time.

 


Posted in:General
Posted by MARGARET NELSON-QUIN on April 16th, 2010 6:02 PMLeave a Comment

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