Understanding Rental Operating Expenses.

 The truth is that the vast majority of new real estate investors fail and they fail in a relatively short period of time. The number one reason they fail is that they don't understand operating expenses. Let me say that again - THE VAST MAJORITY OF NEW INVESTORS FAIL BECAUSE THEY DON'T UNDERSTAND OPERATING EXPENSES! 

Before we continue, we need to define operating expenses. Operating expenses are very simply those expenses that are associated with operating your business. Now, before we go too far, let me tell you that THIS definition of operating expenses is not strictly in line with the way that many accountants would define operating expenses, but my definition is a practical definition that includes ALL of the real world expenses that rental property owners incur. So, basically, operating expenses include all the expenses that we incur EXCEPT DEBT. In other words, operating expenses are ALL of the expenses except the mortgage payment (the principal and interest only). 

Let me go a little farther and list most of the operating expenses that a typical landlord will have: property taxes, landlord insurance, management (even if you do it yourself), maintenance, advertising, vacancy expense, office supplies, utilities (even if only during vacancies), entity maintenance (LLC expenses), legal fees, evictions, set out

Now that you understand what operating expenses are, let's talk about the main thing that causes most new landlords to fail. Throughout the United States, operating expenses for rental properties run 45% to 50% of gross rents. To be conservative, let's just say 50%. This is whats call The 50% Rule! 

So, now that we know the little secret of rental properties (how high the operating expenses are in the real world), how do we apply that knowledge? This is the beautiful part of The 50% Rule - its simplicity! We know that the operating expenses take 50% (half) of the monthly rents. If we carry that logic one step farther, the remaining half of the gross rents minus the mortgage payment (principal and interest only) will give us the cash flow for the property. If the cash flow is positive, you should make money over time. If the cash flow is negative, you will lose money over time. 

Before we try a couple of examples, we need to define one more term: Net Operating Income. Net Operating Income, abbreviated as NOI, is the income from a property after the operating expenses are deducted but before any debt (mortgage payment) is paid. For instance, if we had a rental property that had a monthly rent of $1,000 and the operating expenses were $500 (from the 50% rule), then the NOI would be $500. SIMPLE!

Now that you understand the basics, let's take a look at a couple of rental properties to see if they will make money (cash flow). 

Example 1: 

This is a 3 bedroom, 1 bath, single-family house on a beautiful street. The house is located near a school and shopping center, and the area is generally considered to be a nice place to live. The purchase price for this property is $80,000 and the monthly rent is $800. Is this a good deal? Let's take a look: 

The gross rents are $800 per month. 
The operating expenses will be $400 per month (per the 50% rule). 
The NOI is therefore $400 per month (subtracting the operating expenses from the gross rents) 

The mortgage payment is found by entering the pertinent information into a mortgage calculator. Let's just assume that we are borrowing the entire $80,000 purchase price and that we get a loan for 30 years at 7% interest. With those terms, the mortgage payment (principal and interest only) is $532 per month. 

With this information, we can now find the monthly cash flow, which is determined by subtracting the mortgage payment from the NOI. Therefore, in our example, the cash flow would be $400 - $532 = - $132. In other words, we would LOSE $132 per month on this property! OUCH! 

Now, let's look at another example: 

Example 2: 

This is a also a 3 bedroom, 1 bath, single-family house. The house is located in a working class neighborhood that has many other rentals. The owner has lived in this house for more than 20 years, but lost his job about 6 months ago. He is DESPERATE to sell this house NOW and even though it has a market value of about $60,000, he is willing to sell it to you for $30,000, which is what he owes on his loan. He just wants OUT! The monthly rent is $600. Is this a good deal? Let's take a look: 

The gross rents are $600 per month. 
The operating expenses will be $300 per month (the 50% rule) 
The NOI is $300 per month (subtracting the operating expenses from the gross rents) 

Let's assume that we are borrowing the entire $30,000 purchase price and that we get a loan for 30 years at 7% interest. With those terms, the mortgage payment (principal and interest only) is $200 per month. 

With this information, we can now find the monthly cash flow, which is determined by subtracting the mortgage payment from the NOI. Therefore, in our example, the cash flow would be $300 - $200 = $100. In other words, we would MAKE $100 per month in positive cash flow on this property! That is good! 

To summarize: 

Throughout the United States, operating expenses run 45% to 50% of the gross rents. 

To determine the cash flow you'll get (over time) from a rental property, subtract the mortgage payment from one-half of the gross rents (the NOI). If that number is positive, you will make money. If that number is negative, you will lose money. 

Is It Time For A Property Manager

Renting a property requires a broad skill set to match an ever-changing set of challenges. What you might have been able to handle at one point in your career as a landlord may alter over time.

Read on for the aspects of property management that might inspire you to call in reinforcements to help you out.

Maintenance
If your stable of properties has grown, you feel like you’re losing money on repairs, or you’re just short on time, you might want help with property maintenance.  Consider how a landscaping service might do more work than you can comfortably, saving you hours that could be put to other use.

Interacting with residents
If you have a number of residents or have your properties scattered throughout the area, collecting rent and dealing with all the issues residents might have can become time-consuming. A reputable property management company can take the headaches away by collecting rent, keeping units rented, and dealing with resident problems. Property managers can also help you stay on top of maintenance, legal issues and affordable housing program paperwork. The peace of mind you get from the help will likely make the service worth every penny.

Keeping up with laws
Housing law is in constant flux. From rent control to changing codes, you need to be on top of it all to stay compliant. If you’re already feeling overwhelmed, a real estate lawyer might make your life easier by making sure you are up to date legally and that your property insurance provides adequate protection, for instance.

Taxes
If you’ve been brave enough to manage your taxes on your own, hats off to you. With a single rental property, there is a lot to keep track of in terms of deductions and how much tax you owe. With more than one property, the paperwork increases significantly.

Houses And Apartment Vacancies

U.S. Vacancies Rise

US apartment & Houses vacancies are at the highest level in 20 years. This may be good news for renters as they have a better selection to choose from and many property management firms are offering incentives such as paying the first month’s rent Or offering zero deposit. Landlords and property managers however need to be concerned that it may take much longer to rent their properties.

Here are a few tips to help you avoid vacancies:

1. Ask existing tenants a few months early if they plan to stay for the next year.
2. Get your tenants to sign a lease as soon as possible.
3. Collect a security deposit.
4. Advertise your vacancy several months before it is available.
5. Use every resource possible to advertise your vacancy.
6. Offer incentives to get tenants to sign a lease quickly.
7. Make your rental stand out from the millions of others with special features.

Manage your rental properties effectively and you can avoid vacancies and loss of valuable rental income.

Buying is Cheaper Than Renting, But Not in Omaha

CNN reports that a 2 bed home is cheaper to buy than rent in most cities. Omaha is one of the few cities, they say, that renting is a better option than buying. CNN reports that buying is 27 times annual rents.

The Best Way to Find a Rental Home or Homes for Sale in Omaha Nebraska? Landmark Group

What is the best way to find a rental home or homes for sale in Omaha Nebraska?

Landmark Group

There are hundreds of ways to find properties, and that's what brought Landmark Group into this business in the first place. We used to advertise in the newspaper, a popular place to find rental homes or homes for sale. People used to look for rental yard sign, or they heard from a neighbor about a rental that was coming available and took advantage of that.

Obviously, the world has changed significantly in the past 10 years. Now there are dozens of sites out there that provide rental listings online. You have Landmarkomaha.com, Craigslist, you have Home Exchange and American Classified. There are a lot of sites you can use, and each one has its pluses and minuses. Craigslist has the most content, however, a lot of it is duplicate and a lot is fraudulent, and it is very painful to search there. The other sites are going to have a lot more content from professional property managers, the pictures and the ads might be better and you can can trust that the source of the ad is legitimate because they had to pay for it.

So the best thing to do is to go to Google and type in what you want to find. If you want to rent a home in Omaha, Ne. you could type in "3 bedroom two bath apartment Omaha that takes dogs."

The site that I recommend using is our site: Landmarkomaha.com. Between Craigslist & Landmarkomaha.com you should be able to find what you are looking for.
Another way to search are to look for yard signs. For landlords and property managers, yard signs are probably the biggest source of leads generation - even in an internet world, the method we used for the past 150 years is still one of the best. So if you are driving around Omaha, Ne. and cruise neighborhood the old fashioned way, you will eventually see something you like with a yard sign. If you are in the mode of searching for an Omaha rental and you don't want to burn up tons of high-priced gas in this economy, check out Landmarkomaha.com and let it do the driving for you.
Once you are in the market for a rental property, your radar goes up. So search for exactly what you want and see if it is there. Start with Google and if that does not work for you can look at Landmarkomaha.com & Craigslist or just contact me Chris Young, your intelligent real estate expert, at (402) 657-6938 and let me help you find what you're looking for.

Can You Still Buy Rental Houses in Omaha?

YOU BETCHA! In todays market there is a 2 step process that can make you very wealthy. Two steps...but you must do both to succeed. They are: 1) MAKE OUTRAGEOUSLY LOW OFFERS. Then once purchased, 2) RENT THEM ON SECTION 8. Lets examine both steps.

MAKING LOW OFFERS - There is so much inventory on the market making this the best buying situation in decades. Many sellers are beyond motivated and this includes investors that must unload for any number of reasons. I have seen houses that sold in $70,000-80,000 range 5 years ago sell today in the $40,000 range. Will the housing market recover? Yes! It will. How long will it take to recover? I don't know, but it will.

Now when you make these offers, say half of what the seller is asking will they be offended? Sure most will but who cares because you will eventually get the seller motivated or desperate enough to accept. It will probably take several offers but then one comes back to you with a yes. This also includes banks as they need to clear foreclosed inventory.

You still need to have a cash line of credit and a lender that will lend on investment property. This is more difficult to line up but not impossible.Buy with cash then put a loan on the property and repay your line of credit. Keep repeating this step.

As an investor myself the type of house I look for and would recommend would be the 1950s or 1960s built ranch style house. The older house built in the early 1900s most often comes with much more repair issues. I tend to avoid anything built prior to 1950. The house can be either 2, 3 or 4 bedrooms with a garage. I always want a solid foundation, newer roof and a good working order furnace and AC. It goes without saying they must be in well kept neighborhoods.

SECTION 8 IS 2ND THING YOU MUST DO - If you're a new investor, it is a simple process and if you're an experienced investor not using Section 8 for whatever reason you should strongly consider it. The main advantage is the rent that OHA is paying. As of today a 2 bedroom will rent around $700.3s are getting around $900 and $1000+ for a 4 bedroom. These amounts are generally much higher than what you get for a non Section 8 tenant. You receive the rent at the begining of the month automatically deposited in your checking account. Another reason to rent to a Section 8 tenant is on average they stay 3 times longer than a non Section 8 tenant (anything to avoid a vacancy in this business!).Also I have far less evictions with Section 8 tenants. You do have to pass an inspection before they move in but these are things you would generally do anyway before someone moves in.

Repeat this process 25,50,100 times in this market and once it recovers to the old values... well you can imagine a lifestyle you could create for yourself!

If you want to further discuss investing in rental houses feel free to call me at 402-250-6054.