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Buying Rental Property - Avoid Sellers Tricks
Be careful when buying rental property. We stayed at a motel for a week one winter. The bill showed twice what it should have, but since I already paid the correct amount in cash, I thought nothing of it. When we noticed that the lobby and swimming pool were unheated, we thought it was frugality. Only a year later, when I read a news story about a new owner struggling to make the motel work, did I realize what was going on. The owner had been planning to sell. To prepare, she was using the two most basic ways to inflate the appraised value: decrease expenses and increase reported income. By stopping repairs and quietly adding $100 in income every day, she may have shown $45,000 more net income for the year. At a .08 capitalization rate, that means the appraisal would come in $562,000 higher than it should have. Oops! The poor guy who overpaid! Do you want to avoid a mistake like that when buying rental property? You need to watch for tricks like these. You also have to understand the basics of appraising income property. It starts with the capitalization rate, or "cap rate." If investors in an area expect a return of 8% on assets, the cap rate is .08. Net income before debt service is divided by this to arrive at the value of a property. I explain this further in another article, but the primary point here is to remember that every dollar of extra income shown will increase the appraised value by $12.50 with a cap rate of .08, or by $10, if the cap rate is .10. Sellers Dirty Tricks If sellers of rental properties increase the net by honest means, then the property should sell for more. Unfortunately, there are many dishonest ways, both legal and fraudulent, that are sometimes used. Unlike sellers of houses, who may cover foundation cracks with plaster, the tricks used by sellers of income properties aren't about appearance. They are about income and expenses. Income can be inflated by showing you the "pro forma," or projected income, instead of the actual rents collected. Ask for the actual figures, and check to see that none of the apartments listed as occupied are actually vacant. Also, be sure that none of the income is from one time events, like the sale of something. Income from vending machines is a gray area. Smart investors subtract this from the net income before applying the cap rate, then add back the value of the machines themselves. If laundry machines make $6,000, for example, that would add $75,000 to the appraised value (.08 cap rate), if included. Since they are easily replaceable, adding the $10,000 replacement cost instead makes more sense. Hiding expenses is the most common of seller's tricks. Paying for repairs off the books, or just avoiding necessary repairs for a year, can dramatically increase the net income. Demand an accounting of all expenditures. If a number in an expense category is suspicious, replace it with your own best guess. Analyse each of the following, verifying the figures as much as possible, and substituting your own guesses if they are too suspect: vacancy rates, advertising, cleaning, maintenance, repairs, management fees, supplies, taxes, insurance, utilities, commissions, legal fees and any other expenses. This is how you make buying rental property safe. Steve Gillman has invested real estate for years. To learn more, and to see a photo of a beautiful house he and his wife bought for $17,500, visit http://www.HousesUnderFiftyThousand.com
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MISSISSAUGA, ONTARIO-- - Chartwell Seniors Housing Real Estate Investment Trust announced today that Bristal Holdings, LLC, a company jointly owned by Chartwell and affiliates of ING Real Estate Australia Pty has entered into an agreement to sell a portfolio of five seniors living communities comprising ...
BTB Real Estate Investment Trust announces the acquisition of an office building in Ottawa, Ontario
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TORONTO , May 17, 2012 /CNW/ - The Ontario Real Estate Association (OREA) applauds proposed legislation introduced today at Queen's Park that, if passed, would facilitate the use of electronic agreements ...
TORONTO, ONTARIO-- - Calloway Real Estate Investment Trust is pleased to report strong results for the first quarter ended March 31, 2012.Highlights:--  Maintained portfolio occupancy rate at the 99.0% level for the ninth    sequential quarter. --  Funds from operations  increased by 14.4% to $54.6 million and    5.1% to $0.434 on a per unit basis compared to the same period in 2011 ...
TORONTO, ONTARIO-- - Allied Properties REIT today announced results for its first quarter ended March 31, 2012. The results are summarized below and compared to the same quarter in 2011:Â Q1 2012 Q1 2011 ...
TORONTO, ONTARIO-- - Allied Properties REIT announced today that the Trustees of the REIT have declared a distribution of $0.11 per unit for the month of May, 2012, representing $1.32 per unit on an annualized basis. The distribution will be payable on June 15, 2012, to unitholders of record as at May ...
TORONTO, ONTARIO-- - Allied Properties REIT announced today that it has entered into an agreement to purchase the following property for $61.75 million:  Address                               Total    Office   Retail   Parking                                            GLA       GLA      GLA    Spaces  ----------------------------------------------------------------------------  Lang Tannery ...
TORONTO, ONTARIO-- - InnVest Real Estate Investment Trust announced today that a distribution of $0.0333 per stapled unit, payable on June 15, 2012, has been declared to the holders of record as at the close of business May 31, 2012. The distribution is $0.0333 per unit of InnVest Real Estate Investment ...
TORONTO, ONTARIO-- - RioCan Real Estate Investment Trust today announced a distribution of 11.5 cents per unit for the month of May. The distribution will be payable on June 7, 2012 to unitholders of record ...
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