Friday, January 30, 2015

Top Landlord Mistakes

This article was originally posted by Investor Real Estate Services here in Chattanooga. You can check out their website by clicking here.

You can learn from other people’s mistakes, so I would like to share mistakes that I have either personally made or have watched investor-clients make.

1. Being too quick to fill a vacancy

I often see new investors fall prey to this one. I, too, many years ago made these bad judgment calls (never again). It is easy to drop your standards when a unit is about to become vacant. Emotions take over and a prospect comes to you waving cash at you. Sure, they do not represent the perfect tenants and their income is lower than I require but they are nice people and they have the cash for the deposit and first month’s rent. Besides, I will start negative cash flow next week if I do not rent to them. Three months later, I struggle to collect rent and month after month is a fight to get paid. I tell myself, “I wish I held out for better tenants.” Like so many others, I have learned it is far better to have a few weeks of vacancy while finding the best tenant than to hurry and rent to a bad apple.

2. Treating tenants as an income source instead of valued customers

Having an investment property business is no different than any other business. We need to work hard to obtain customers and treat them well so they will return. I was a landlord at the age of 18 and to me then, tenants were my income source. I since learned this valuable lesson that indeed they are an integral part of the business and need to be treated as valued customers. I do continue to see investors treat tenants as an income source instead of a valued customer. Tenants needs to be nurtured so they feel like valued customers and are willing to return at time of lease renewal.

3. Failing to clearly define rules and boundaries

The big question is, “Who is setting the boundaries?”

My experience tells me that when you give them a chance, many tenants will immediately push the boundaries to see what they can get away with. So either you are setting precedents to the rules, or they are.

I create a list of expectations that is given to them at move-in when you do the walk through inspection. This list should outline the parts from the lease on policy and procedures which includes what they do as a tenant and what you do as a landlord.

4. Trying to become friends with their tenants

I do see a lot of landlords try to be friends with their tenants. You want to like and trust each other but you are in a business relationship and it should stay that way. Developing a close relationship makes it difficult to manage from a logical business person’s perspective. Emotional-based decisions have very little place in running an effective business.

5. Failing to keep property maintained

Looking at hundreds of properties each year, I continue to see a large number in disrepair. When talking with sellers the common theme is they want to increase cash flow and do so by ignoring repairs or simply doing inexpensive “bandages” on a property. In reality it creates unhappy tenants who move frequently, which actually results in lower cash flow. The repairs themselves that get ignored devalue the property. My experience tells me that to maintain maximum cash flow you want to maintain a property in great condition.

6. Missing opportunities on multiple-year leases

As investors, you all know that tenant turnover is the single largest expense we encounter. You do not have to continue to carry that burden. This is an expense you want to address and fix not just accept it. I have found great success in offering two- and three-year leases. It immediately goes to identify tenants who want to stay long-term. I have even used escalators to increase rental rates each year. Both ways your cash flow will be more consistent and your tenants who desire to stay will know what the future has in store for them as opposed to wondering what is going to happen on their move-in anniversary. You also want to treat these tenants well so they continue to renew leases.

7. Being a landlord instead of being an investor

This one may be subjective but it comes from my experiences working with hundreds of investors. I find a common denominator separates the most successful investors from the ones who struggle to advance. The most successful investors spend their time investing instead of being landlords. As a licensed real estate broker, I am always asked if I will manage my client’s property. I always state that managing property is a full-time position. To be effective at it, you need to devote full-time attention to it. Perhaps one of the biggest mistakes is trying to be effective as a part-time landlord.

“To achieve your dreams you must embrace adversity and make failure a regular part of your life. If you’re not failing, you’re probably not really moving forward.” This is my favorite quote from the book, “Failing Forward: Turning Mistakes into Stepping Stones for Success” by John Maxwell.

Friday, January 23, 2015

Chattanooga is getting an Innovation District

This article was originally posted on the Chattanooga Times Free Press website. Click here to see the original article and find out more information.
Economic promise spreads out like a bull's-eye on the city's grid of streets and buildings, over the start-ups and investors and the electric company that feeds superspeed Internet service to all of them.
The Innovation District -- its coming announced boldly last spring, its makings kept quiet until Tuesday -- will span a circular 140 acres, anchored by the Edney Building in downtown Chattanooga.
It will be the first innovation district for a midsized city, according to local officials, a place where new companies are born, talented creatives carve out compelling ideas and existing businesses expand.
As if to prove the point, Co.Lab, the nonprofit business accelerator that has juiced so many of the city's start-ups, expects to relocate to the building in April. It will be the anchor tenant.
"You've got to move fast," beamed Co.Lab Executive Director Mike Bradshaw, after Tuesday's announcement. "I'm moving ahead!"
The timeline to get things up and running is short: Private developers are expected to have ownership of the building by Feb. 24.
"It's ambitious," said Ken Hays, president of the Enterprise Center, the nonprofit organization that Chattanooga Mayor Andy Berke in April 2014 charged with spearheading the project.
The Enterprise Center in November entered an agreement to buy the Edney Building from the Tennessee Valley Authority for $1.3 million. It's under contract now. On Monday, a request for proposals for the building went out; as soon as the Enterprise Center owns Edney, it will be sold to a private developer. Hays said several are interested. The minimum price must be $1.35 million to cover the cost of Enterprise's purchase and $50,000 in due diligence expenses.
Architects are working on the space. The 10-floor building at 1100 Market St., which was built around 1950, shouldn't need much work, Hays said.
For now the district is just the geographic area designated, which includes EPB, Society of Work, Lamp Post Group, Causeway and Coyote Logistics, to name a few. It also includes locations that are being redeveloped, among them the Fleetwood Building on 11th Street owned by SwiftWing Ventures and the Fidelity Trust buildings on Cherry Street.
A task force will form in coming weeks to determine whether additional elements, such as tax incentives, should be structured for the district to lure new businesses, Hays said.
Like Enterprise South, home to the Volkswagen plant and Amazon, the district should drive growth, Hamilton County Mayor Jim Coppinger said.
"It's another economy that we're really excited about," he said. "People will be able to come here and create jobs."
Photo by Angela Lewis/Times Free Press.
Of course, that's happening already with Chattanooga's start-ups. But putting an address on something clearly called an innovation district gives it heft, Co.Lab's Bradshaw and others said.
"I think sometimes you need a visible sign, a visible place," said Charlie Brock, CEO of Launch Tennessee, the public-private partnership dedicated to supporting high-growth entrepreneurs. Launch announced Tuesday that investments in early-stage companies throughout the state last year totaled $276 million, 31 percent more than in 2013. East Tennessee, including Chattanooga, accounted for about $28 million of that.
Having a hub also helps with serendipitous collisions, Brock said, people of like minds running into each other and encouraging one another.
Officials didn't offer projections for the number of jobs they aim for the district to create. Boston's innovation district says it added 200 new companies with 5,000 new jobs in its first three years.
Co.Lab plans to hold all of its events in the Edney Building, including GigTank. It also expects to offer short-term leases to start-ups, fledgling companies that aren't far enough along to be ready for the city's incubator.
For now, though, about 170 TVA employees and contractors work in the Edney Building and are being relocated to the main Chattanooga office complex. After the sale, TVA plans to lease a few floors on a short-term basis. TVA spokeswoman Gail Rymer said the sale of the building, which TVA has used for nearly 65 years, is part of its overall corporate downsizing as the agency cuts its annual operating costs by $500 million.
Staff writer Dave Flessner contributed to this report.
Contact staff writer Mitra Malek at or 423-757-6406. Follow her on Twitter @mitramalek

Friday, January 2, 2015

The State of US Housing, According to Kathy Fettke

We’ve got good economic news coming out of the U.S. finally! Job creation is expected to be the highest on record since 1999, and the overall economy grew mid-year at its fastest pace in more than 10 years

This is great news for the U.S. housing market, which is dependent on job growth. But don’t expect real estate sales and home prices to boom in 2015.

While more people are obtaining employment, salaries have not increased as rapidly as home prices in many U.S. cities (Seattle, Portland, NY and most of CA). If this continues, more and more people will be priced out of the housing market, especially if interest rates rise.
However, in, highly affordable markets where jobs are abundant and salaries are increasing faster than home prices, expect home prices to continue to increase in 2015. (Texas, Indiana, North Dakota and Pennsylvania). In these markets, higher interest rates will have little impact.

Young adults are still facing high unemployment, forcing many to continue living with friends or relatives. As a result, new household formation is only around 500,000 this year, about half what it would be in a robust market. These new households are expected to be renters until they have a 2 year job history and have saved enough money saved to buy a home. Most have to pay down their massive student loan debt first, and that could take years.

Demand for rental property will likely be high for the remainder of this decade, so expect rents to continue to climb during that time – especially in areas where the job growth is attracting entry-level employees. This is exactly where buy & hold real estate investors should be focused.

So who will be buying homes?

Certainly smart real estate investors are buying properties to serve the strong rental demand.

And if job growth continues to accelerate in 2015 as expected, wages are expected to increase as well. This could attract more first-time home buyers into the housing market, which will allow more move-up buying activity.

Additionally, it could become easier to qualify for mortgages next year. Fannie Mae and Freddie Mac are now allowing down payments as low as 3% of the home price.

Banks are also expected to loosen up their overly strict lending standards due to Fannie and Freddie’s recent clarification on loan buy backs. Banks have suffered billions of dollars in penalties for issuing poorly documented loans and have been forced to buy many of them back. They were reluctant to lend for fear of more penalties and buybacks. The new rules state that buy backs will only be enforced if the original underwriting does not meet “Ability to Repay” requirements or if there is evidence of fraud.

Existing home sales were fairly flat in 2014, which could be blamed on a slow start to sales early this year due to freezing cold temperatures across the country. Plus, foreclosures and short sales accounted for just 9% of available inventory, down from 14% last year. Less distressed inventory means there were fewer “bargains” on the market, driving the median home price up.

Many people mistake these price gains as “appreciation” but in reality, it was a “bounce back” to normal after an over-correction. Now as price gains are slowing, many people ask me if we’re headed for another housing recession.

It’s highly unlikely that we’ll see major price declines. Sales and home prices will stabilize but they won’t crash like in 2008. The housing crisis at that time was based on a mortgage meltdown from loose credit. Remember, ANYONE could get a loan back then, whether they qualified or not. That has not been the case over the past 6 years! In fact, borrowers were heavily scrutinized and had to more than prove their ability to repay the loan.

Wall Street pays close attention to housing starts (how many new homes are being built) and new homes sales. Construction was definitely affected by the abnormally cold weather in early 2014, but we still made it over the 1 million mark, which is 3 times what was being built during the Great Recession.

Housing starts are up nearly 8% from last year, and that number is expected to increase to as much as 16% in 2015. All this new home construction could boost the GDP growth next year, creating even more jobs and a stronger economic recovery.

In summary:

The outlook is good for 2015! Higher employment combined with loosening lending standards will bring more real buyers into the real estate market. Additionally, there will be a healthy rental market for real estate investors.

This content was originally from an interview Kathy Fettke did on CNBC. She is the creator of Real Wealth Network. You can find her original post, along with a video of the interview, by clicking here.