Real Estate Investing Archives

83 Questions to Ask Before Hiring a Property Manager

February 2, 2023 by Marco Santarelli

You don't have to tell us, finding a good property management company is hard. When we first started investing in residential real estate we went through several property managers, struggling to find one that was truly exceptional.

Over time we realized the challenges that owners face, and the questions we wished we had asked as investors. Some of these questions would’ve never come to mind if we weren’t property managers (#61 is a good example).

These 83 questions are the questions that we would ask, and many of them are the questions that other property managers will hope you forget.

General Property Management Questions

1) How long has your company been in business?

This question will help you understand this property manager’s level of experience. You don’t want a property manager who has only been in business for 1 year. They will still be struggling to figure out how to effectively run their business. Look for someone who has been in business for at least 3 years, at this point they will know what they’re doing.

2) How many rental units do you manage?

This will help you understand their size. Too few rental units and they are either inexperienced or have lost clients due to poor service. Too many rental units and you will get lost in the shuffle. Look for a property manager with 200 to 600 rental units. That’s when you’ve found your Goldilocks level of “just right.”

3) How many staff members do you have and what are their job functions?

If it is only one or two people running the show then you are likely to get poor service. If they employ 75 people you are likely to get lost in their sea of clients. Look for a company with enough employees to support the diverse responsibilities of a property management company, but make sure they haven’t become too large.

4) Where are most of your properties located?

This will help you answer two important questions. One, do they understand the area with your rental property? Two, do they cover the area outside of where your property is located? This second question is important because you may want to grow your portfolio. What if you find the perfect property in a nearby suburb, but the property manager you chose can’t help manage it? Find a manager that can grow with you.

5) Do you manage any other properties in my neighborhood?

This is a good follow-up to question 4. Just because a company doesn’t primarily manage your city doesn’t mean that they don’t have several properties in the neighborhood where your rental is located.

6) What professional organizations do you belong to or participate in?

Do they belong to the National Association of Residential Property Managers (NARPM), or do they belong to their local association for Realtors? Make sure they are actively involved in the property management community. This is typically a good sign of professionalism. For example, Active Renter is a member of the Phoenix Association of Realtors and our CEO is the 2015 Membership Chair for the Phoenix Chapter of NARPM.

7) How do you determine the rent amount?

A property manager should be able to complete a comparable market analysis of all the other available listings near your property. They should use properties that just went off the market and properties that are currently on the market to determine the highest possible rent. They should also have the expertise and experience needed to factor in the unique aspects of your rental property, like a pool or a new kitchen.

8) What steps have you taken to cut costs so that you can pass savings on to your owners?

Property managers should be making an effort to cut costs for their owners. This will improve your return on investment. To illustrate, at Active Renter we have written several proprietary computer programs that automate processes that would otherwise need to be done by one of our employees. This makes us more efficient, which then enables us to pass savings on to you.

9) Do your employees have specialized roles or do some of them fill multiple roles?

You should make sure that employees are not filling multiple roles. Why would you want someone managing your online rental listings when they were hired for their accounting abilities? You wouldn’t. This is why Active Renter employees have specialized roles. This way, each employee has responsibilities for which they are highly trained. Leasing agents do leasing and property managers manage. Their responsibilities are like the proton packs in Ghostbusters, they are never meant to cross.

10) What types of properties do you manage?

If they don’t typically manage your property type, don’t let them start now. The challenges will be different and you don’t want to take that risk.

11) Do I have to sell my property with you if I want to list it?

Some property managers will ask you to sign a contract that forces you to sell the property with them. Don’t fall for this. However, as a note, we at Active Renter will sell your property for you if you want to list us as the selling agent. We would never require this, but if an owner wants to sell we will refund the previous 12 months of monthly management fees if we are selected as the listing agent. How’s that for a perk?

12) Are you currently an active real estate investor in your market?

The company’s leadership should be investing in the real estate market themselves. Period. If they don’t invest in your market then they lack the understanding they need to help you excel.

13) What qualifications do your staff members have?

The majority of a property management company’s staff should be extensively trained and they should also have their real estate sales agent or broker licenses.

14) Can you explain the federal fair housing laws to me?

So this is a bit of a “gotcha” question, but these laws are incredibly important and your property manager should know them. If they can’t explain them then they aren’t knowledgeable enough to be managing your property.

15) What experience does your company owner have in managing rentals?

Some company owners have never even managed a property. If the company owner has never managed a rental, what is the chance that he or she runs a company that can effectively help you with your investment property?

16) How wide of a geographic area does your company cover?

This will help you identify if this is a property manager with which you can grow. If they only manage in your city, it might hinder the growth of your portfolio in the future. Growth of your portfolio means more passive income. Enough passive income means you can sit on a beach in Tahiti drinking Mai Tais while still earning money, which is pretty much everyone’s dream job.

17) Could you provide a few references for me?

Any good property management firm will have references – a really good one will have references specifically for your property type.

18) Do you work with out-of-state owners?

This is an especially important question if you are an out-of-state owner, but it is still important if you are local. If you are an out-of-state owner, then you need to make sure that this property manager can accommodate your specific needs. If you’re local this will indicate that the company is skilled and experienced.

19) Do you work with international owners?

Again, this is crucial if you are an international investor. It is also helpful for local owners because it indicates expertise. For example, we’d love to get coffee with all of our owners, but for some of them, this would require a 16-hour flight. This distance is a challenge that has pushed us to be better property managers.

20) Is your company privately owned or is it part of a franchise?

A franchise will have different concerns and be less flexible than privately owned companies. They are also more frequently concerned about their bottom line and less concerned about service. Think about the difference in quality between your local burger joint and Mcdonald's…can you see the difference?

21) Can I cancel my contract without a fee if I am unhappy?

Never get locked into a contract you can’t escape. Some companies will try to hold you captive with a contract and others will keep your business with great service. If a company is offering you an inescapable contract, it’s time to look elsewhere.

22) What type of insurance do you carry?

Your property management company should carry insurance that will help to keep you covered. For example, as a licensed real estate brokerage we carry a large general liability policy along with an errors and omissions policy (which protects you from any clerical mistakes).

Property Management Fees

23) What are your leasing fees and do they include any marketing costs?

You need to ensure that you aren’t being price gouged through leasing fees. You should also ask about the cost of the leasing fee when a tenant re-signs for a property. If they want to charge you the same amount as when the tenant first signed you should question the ethics of this company. In addition, make sure the marketing is included. Sometimes companies will tell you their lease fee is low, but then they will hit you with a large marketing charge.

24) What are the management fees when the property is being rented?

This question will help you understand your average monthly fee.

25) Are there fees when the property has no tenants?

This is a very important question to ask for two reasons. One, many companies will offer a “flat rate,” which sounds great until your property is empty…and they continue to charge you. This is why we charge a percentage of the collected rent. This way, we don’t make money unless we make money. Unlike some other companies, we aren’t happily taking a fee if we haven’t done our job to keep the property filled. Two, if a company is taking money with the property empty, how motivated do you think they are to fill the vacancy?

26) What miscellaneous fees could I be charged for the management of my property?

Again, some companies will try and get you to sign because they offer a low rate. As the saying goes, if it is too good to be true, it probably is. Once you’ve signed, a company that seemed inexpensive will now charge you lots of extra fees. Remember, a property management company has to make money, so if they aren’t making money from the low monthly fee they will find another way to do it (See #68 for an example).

27) Are there any fees if I want to change to another property management company?

Not only will property management companies try to lock you in with contracts, but they will also try to prevent you from leaving with fees. Although it is a nasty practice, it is not uncommon. Leaving a company with poor service shouldn't be reminiscent of the jailbreak scene at the end of The Shawshank Redemption. If they aren’t serving you, you should be able to walk.

28) What are your pricing options?

Some companies will offer a flat rate and others will offer a rate based on the rent amount. At Active Renter, we even offer 3 levels of pricing, which include a lease-only plan, a standard plan, and a premium plan. Again, you’re best off looking for a percentage of collected rent This motivates your property manager to fill vacancies because they don’t get paid if you don’t have a tenant. It also motivates them to fight for higher rent amounts because this helps their bottom line too. Flat-rate companies will get the same pay no matter what, so why would they be motivated to get you a higher rent?

Property Management Services

29) What are the various services that you offer to your clients?

You want to make sure that you find a property management company that can market, lease, manage, and sell your property. It is also important to make sure that this company can provide top-notch maintenance, conduct inspections, and administer in-depth background checks.

30) Do you offer direct deposit for your owners?

Unless you’re living in Back to the Future and you’ve traveled to the 1800s, your property manager should be able to deposit your check in your account. This saves you time and effort, which is the whole reason you hired them.

31) How do you collect rent from tenants?

Asking tenants to bring checks to an office is a lot like wearing acid-washed jeans, it might have been okay in the ’80s, but the times have changed. If your property manager isn’t having your tenants pay online that is a red flag for two reasons. One, it slows down the speed at which you can get paid. Two, it makes it easier for tenants to miss paying the rent. If payment is online, tenants can automate their payment and these two problems are avoided.

32) Do you conduct property inspections and, if you do, what charge is associated with them?

Remember Home Alone? Kevin McCallister did whatever he wanted in that house because he didn’t own the property and he was left without supervision. Don’t make this mistake with your tenants. Your property is at risk if your property manager doesn’t conduct inspections. This should require a small fee and it will be one of the best investments you can make. It ensures you catch problems before they spiral out of control.

33) Do you offer an eviction warranty?

Some companies, such as ourselves, will offer eviction warranties. It is only a small fee, but it will give you major coverage should you need to evict a tenant.

34) Do you guarantee tenants for any amount of time?

Your company should guarantee that the tenant will stay in the property for a certain amount of time without needing an eviction. If they don’t, then they aren’t confident in their tenant selection process and you shouldn’t be either. At Active Renter, we guarantee tenants for 6 months.

35) When do you begin paying your owners following rent collection?

You need to get your money quickly, but some property managers just don't understand that. It’s like waiting a month after your birthday to give you your presents – unacceptable. As a reference point, we start paying owners on the 10th of the month, which is right after 95 percent of tenants’ payments clear the bank. Other PMs will hold onto your money until the following month.

36) What steps do you take to market properties?

Your property manager should be advertising properties through a variety of channels. If they are still just placing newspaper ads and hoping for the best then you should steer clear.

37) Do you work with Home Owner Associations?

Understanding every HOA’s rules can be difficult and if a company hasn’t worked with an HOA before, or is unwilling to work with yours, then you need to be looking for a different property manager.

38) Do you provide payment statements, and if so, how often?

You should watch your payment statements like a movie on a lazy Friday night – on demand. Your property manager is doing you a disservice if you can’t get payment statements when you want them. We offer online payment statements 24/7 through our online Owner’s Portal.

Key Success Statistics

39) What percentage of your rentals are usually vacant?

This is also known as the vacancy rate and it should never be above 4 or 5 percent.

40) What percentage of tenants renew their leases?

This is also known as the lease renewal rate and a good property manager will have a lease renewal rate above 80 percent.

41) What percentage of rent do you collect per month?

This number should be near 100 percent. If it isn’t, you need to question why this property manager would have so many tenants not paying their rent on time.

42) What percentage of owners do you retain as clients?

This is also known as the owner retention rate. Some property managers have found financial success by bringing in new owners, charging them with fees for a while, and then cycling in new owners. You want to avoid a property manager if their level of service can’t retain close to 100 percent of owners.

43) How long are your properties typically vacant?

The average vacancy time after a property is ready should be about 2-4 weeks. Any longer than this suggests the property manager is struggling to find tenants, any shorter than this suggests that your asking rent amount is too low and you might be leaving money on the table. Either of these scenarios is bad for you and your rental property.

44) What percentage of tenants do you need to evict?

Any good property manager will have a low eviction rate. Otherwise, they are failing to conduct an appropriate background check. However, beware if a property manager says they never have to evict tenants. They aren’t tough enough on tenants who violate lease agreements, it’s like your bouncer is on the dance floor and no one is watching the door.

45) What is your average occupancy length for tenants?

A long average occupancy length is a good sign. This means that the property manager is keeping tenants in properties, which subsequently gives you cash flow that makes Niagara Falls look like a peaceful spring.

46) What percentage of the billed rent is paid to owners by the last day of the month?

Property managers should be getting the paid rent to their owners by the end of the month at the very latest. If they are not, then that is a major red flag.

47) What percentage of the security deposit is usually refunded to tenants?

This statistic is very similar to eviction rates. If very little is ever refunded then the property manager is doing a poor job of screening tenants (or excessively penalizing them at move-out). However, if this number is close to 100 percent then the property manager is doing a poor job of holding tenants accountable.

Communication

48) How many property managers will I interact with (or, will I have an assigned property manager?)

This question will help you determine the type of interactions you will have regularly. At Active Renter, we don’t assign a specific property manager to your rental. Our property managers don’t work 24/7 and neither do our competitors. If someone wants to assign you to a specific property manager then they are okay with making you wait until that person is back on the clock.

49) How often will I get updates on my portfolio?

Just like payment statements, you should be able to get updates on your portfolio as often as you need them. Your properties are your business and not offering updates as often as you want would be the equivalent of telling your property manager that they can’t check their email for a week. It is a situation that would guarantee failure.

50) How do your tenants contact you?

A good property manager should have an effective system for communicating with tenants. Imagine if they didn’t. What would happen if your rental had a flood and the tenant couldn’t contact the property management company? Yeah, we wouldn’t want that either.

51) How do your owners contact you?

Owners keep a property management company alive and that’s how they should be treated. If you can’t easily contact someone about your rental property you need to move on.

52) Can tenants directly contact the owner?

Our advice to owners is that you should always let us be the barrier in between. This is why you hired us and a tenant would have to pry your contact information from our cold, dead iPhones before we would give it away. However, if for some reason you wanted a tenant to have your information we wouldn’t stop you.

53) How quick is your average response time to owners and tenants?

If you interview a property management company and their response to this question isn’t, “lightning quick,” then you need to continue your search. You and your tenants deserve better than a slow response.

Tenants

54) What steps do you take to ensure that I am getting quality tenants?

Every property manager should have a plan in place that strategically works to obtain the best tenants for you and your property. This should include marketing the property in a variety of ways, setting certain income requirements (usually 3x the month's rent), and executing a background check that examines credit history, criminal history, and prior evictions.

55) What are your income requirements for tenants?

If they don’t set a standard then how can they be sure this tenant will make rent? It should go without saying that a tenant needs to have enough income to pay the rent.

56) What is your timeline for evictions?

This process should begin as soon as it is legally possible to start the eviction. If your property manager is willing to sit around waiting for late rent money then they are doing you a disservice. This process should take between 20 and 45 days depending on the court calendar and the constable’s schedule.

57) Can prospective tenants conduct self-guided tours of the property?

At Active Renter Property Management, we firmly believe that self-guided tours are in the best interest of the property owner. This allows for more tenants to tour the property, which reduces the length of vacancy. We have a system in place that protects the property by validating the identity of the prospect with a credit card and we have never had a problem with self-guided tours. That said, some property investors feel uncomfortable letting tenants tour a property and we always leave it up to their choice.

58) Is there a grace period for tenants to pay their rent?

Tenants have had about 30 days since they paid the previous month’s rent, right? Well, we like to think THAT is their grace period. Some companies will offer a grace period of 5 days. However, this makes the 5th of the month their new due date. Grace periods leave tenants less motivated to pay on the 1st, which results in a longer period until you get your money.

59) What control do I have over the tenant lease agreement?

Your property manager should give you some input into the lease agreement if there are one or two issues that are important to you. However, if you are putting in lots of additions, you should have just written it yourself. Make sure your prospective property manager is confident in the leases that they have written for tenants by asking this question.

60) What steps are taken to ensure that your website is easy to use for tenants?

Tenants will apply for rentals on their website and should be paying rent on the site as well. If a property manager isn’t taking steps to make the website easier to use for tenants it could be hurting your business.

61) Do you require tenants to have renter’s insurance?

Lots of property managers don’t require renter’s insurance and this is a huge mistake. Make sure you find a property manager who does. This will cost you nothing, but it will protect you in case something goes wrong like a fire, flood, explosion, or the tenant’s dog biting the neighbor kid.

62) Do you select my tenant or do I get to approve them?

It should be the property management company’s job to find tenants, but you should get the final say in who is selected.

Maintenance Policies

63) Is there a maintenance reserve requirement?

This question will help you understand how much will be in the reserve and this should tell you how often you’ll be involved in decisions. If the property manager wants a $1000 reserve, they want too much freedom with their finances. However, if they only want $100 then they will be calling you often for approval. You hired them to manage, not to call you every time a doorknob needs replaced. Make sure it is a reasonable maintenance reserve.

64) Who is responsible for yard maintenance?

Typically this falls on the tenant, but you will want to check with any property management company you think about hiring.

65) What is your relationship with your maintenance vendors?

This will tell you if they have strong relationships with vendors who can offer them discounts or if they even use vendors at all.

66) How do you go about notifying me if there is a cost for maintenance?

You wouldn’t want to receive large maintenance bills without a conversation first. That is why our policy is to call you for approval any time costs exceed the maintenance reserve. This should be the policy of any good property manager.

67) How do you handle maintenance requests?

There should be a clear and effective way to handle maintenance requests. For example, we use a ticket system that ensures that any maintenance request receives an immediate response. Then, these requests are completed most efficiently and effectively as possible to keep your tenants happy.

68) Do you mark up maintenance and repairs?

You need to make sure that a prospective property management company doesn’t make a profit any time they do maintenance. If they are willing to charge you for maintenance then your profits could greatly diminish.

The Extras

69) How much advice can you give me to help with growing my property portfolio?

Some people start investing in real estate to grow a portfolio. Others stumble into it because they had a home left to them by a relative or because they couldn’t sell their own house. Regardless, property investments can be very lucrative, and it is helpful to have a property manager who will help you grow. At Active Renter, we have even coached clients in buying their first investment property.

70) What discounts can I receive on maintenance, etc. if I have you as my property manager?

A good property manager will take advantage of their size. Companies like us will use their quantity of rental doors to negotiate lower costs from maintenance vendors and insurance companies, which helps make you more profitable.

71) Do you have a move-in checklist?

Your property manager should have this list to let new tenants know exactly what to do during move-in

72) Do you have a move-out checklist?

For you and us, it seems obvious that tenants should clean a rental and take all the necessary steps to return a property to its original condition (or close to it). To tenants, this is not so clear. A move-out checklist will set clear expectations for tenants about what they should do during move-out.

73) What market updates and education can you offer?

Albert Einstein argued that if someone can’t teach a topic simply, they probably don’t know it well enough. If your property manager can’t keep you updated and educated then they probably are not experts themselves. This is why we develop a market update for Maricopa County every financial quarter and write articles discussing strategies for landlords. These can be found on our rent-it-blog.

Bonus Questions

74) What software do you use to help you manage properties effectively?

As previously stated, you want a company that manages more than a few properties. However, any company of adequate size will have trouble keeping track of its properties if they don’t have the right software to manage them.

75) What is their application fee for tenants?

Sure, it isn’t your money, but when a property manager has a high application fee you end up with a smaller pool of prospective tenants and a longer vacancy period.

76) How do you handle security deposits?

They should give you a very specific answer to this question and they shouldn’t be using the security deposits for anything until the tenant is out of the property. During a tenant’s tenure, the deposit should be kept in a trust account, which will make sure it complies with strict security deposit laws and that it’s safe and secure.

77) How many properties did you rent in the last year?

This number gives you some insight into the success of a property manager. If they haven’t rented very many properties then it is likely they are struggling.

78) What steps do you take to be “available” to your owners?

Any property management company should be able to list the ways that they have tried to improve the communication process with their owners.

79) What is your late rent fee?

There needs to be a late rent fee and it needs to be enforced, otherwise, tenants will find it very easy to not pay on time.

80) What are the steps to evict a tenant from a property in my area?

Any property manager should know the process for evicting a tenant. They should be able to tell you that they follow a strict legal procedure of notices, court filings, judgments, and lockouts.

81) In your opinion, what should a property look like when it is ready for tenants?

This is what we in the property management business refer to as “rent-ready.” You need to make sure that you and your property management company are on the same page. If they want to place tenants into poorly prepared properties, you need to continue your search.

82) Should we put a rental property on the market before it is ready for tenants?

Some owners like to try and put a property on the market before it is ready for tenants. The goal of this plan is to have it scheduled to be available with the hopes that someone will sign for it ahead of time. This would allow an owner to avoid time with the property vacant. While this sounds good in theory, it does not work in most cases. This plan usually backfires by adding more time to the days-on-market. Then, when prospective tenants see that it has been on the market for a while they think, “there must be something wrong with that property” and choose not to rent. Good property managers will know this, so test prospective managers with this question.

83) Do you employ bilingual or multilingual employees?

This is usually a good sign that a property manager is accepting of people of all cultures. Moreover, it will make your property more marketable to a wider audience if your property manager can work with prospective tenants in their primary language.

How to Do Real Estate Market Analysis in 2023?

February 2, 2023 by Marco Santarelli

Real estate market analysis involves evaluating the current market conditions and trends in a particular geographic area to determine the demand and supply of properties, as well as the overall economic conditions that may impact the real estate market.

You can gain a better understanding of market conditions and make informed investment decisions by conducting a comprehensive real estate market analysis. Because market conditions can change over time, it is critical to update your analysis on a regular basis.

Many investors frequently make the often damaging (or fatal) mistake of buying a property with little to no consideration of the neighborhood and market the property is in. This can be one of the greatest mistakes an investor can make because if you buy in the wrong neighborhood or market, you’ll be stuck with the problems that come with it because of its location. Your only option may be to sell the property at a loss.

I’ve literally seen dozens of investors buy nice rental properties that would impress most people, but they happened to be in distressed neighborhoods with blighted properties, and in depressed markets with high unemployment and a decreasing population. It is more important to be concerned about the overall market health and its future prospects than it is to get lost in the potential cash flow and other “numbers” on the property.

They’re all important of course, but purchasing based solely on the property without considering the bigger picture of the market and neighborhood is like trying to sail a ship against strong headwinds. If you don’t start with the right market and neighborhood, over time you will experience more tenant turnover, shorter lease terms, increased late payments/defaults, and decreased or negative appreciation.

How to Do Real Estate Market Analysis in 2023?

Here are the steps to conduct a real estate market analysis:

LOCAL ECONOMICS

There are several local economic factors you’ll want to consider before choosing a market to invest in. Evaluate factors like unemployment rates, population growth, and economic indicators to determine the overall health of the local economy. This will help you understand how the local economy is affecting the real estate market.

Employment Trends

Employment is one of the most important economic factors related to the current and future health of a market. Simply put, people who have jobs have the income to afford to pay their rent. Those that don’t will be able to afford to pay their bills, and may be forced to move to find new employment which often involves moving to another city. The Bureau of Labor Statistics (BLS) and the local chamber of commerce are good places to start for local employment data and trends.

Net Migration

Study the demographic trends in the area, including population growth, age distribution, and household income. Understanding the demographics of the area can give you a better understanding of the demand for certain types of properties. Are more people moving into the market or moving out? This has a major impact on the market as demand for housing increases and decreases based on the total population in a given market.

Take for example the Dallas, Texas market:

Texas has joined California as the only other state in the nation with a population of more than 30 million, according to new data from the U.S. Census Bureau. Texas' population has grown by 470,708 people since July 2021, the most in the country. Texas consistently ranks first in the bureau's annual population updates.

Net domestic migration accounted for roughly half of that growth (the number of people moving to Texas from other states), with the other half split almost evenly between net international migration and natural increase (the difference between births and deaths).

According to The Texas Demographic Center, 10 counties in Texas are projected to have 1 million residents by 2060. Harris County, home to Houston, will remain the most populous county by far, followed by Dallas, Bexar, Tarrant, Travis, and Collin counties, all of which already have more than 1 million residents. Denton County’s population is projected to hit 1 million in 2027, followed by Fort Bend County in 2035, Hidalgo County in 2041, and Williamson County in 2058.

This increased population growth creates demand for more local housing which helps push property values and rental rates up, in addition to an ongoing need for good residential housing stock. Be sure to put yourself on the right side of the trend.

Industry Diversification

A market with a diversified range of industries offers less market volatility in harder economic times or recessions. A market driven largely by one or two industries tends to be affected harder than more diversified markets and takes longer to recover afterward. Although many investors do well in “one trick pony” markets, it’s best to mitigate your market risk by focusing on markets with a broader employment base.

HOUSING MARKET

It’s good to know the condition of the housing market you’re looking to invest in. Evaluate local zoning laws. Research the local zoning laws to understand any restrictions or regulations that may impact the housing market. For example, zoning laws may limit the type of properties that can be built in certain areas.

Look at current market trends, including any changes in property values and sales volume, to get a sense of how the market is changing. Based on the information gathered, draw conclusions about the overall health of the market, the demand for different types of properties, and any potential risks or opportunities in the market.

Market Conditions

Are you in a buyer’s market or a seller’s market?

A buyer's market is what you get when there's more supply than demand. There are more people looking to sell houses than there are people looking to buy houses. In a buyer's market, sellers may have to accept a lower price than they want to sell their property and may have to resort to providing incentives. This is the ideal situation for buyers because they can get a better deal.

A seller's market is just the opposite. The demand is larger than the supply. People have more money to spend on real estate, so sellers will often see several buyers competing to buy their property, which drives up the price. This means that buyers will have to spend more to get what they want. This is the ideal situation for sellers because they often get a better price on their properties.

Median Price Trends

The median price (the midpoint between high and low) is often a very good proxy for indicating real-time market activity. As the median price changes, this can indicate key market movements.

A rise in median price means that sellers are responding to more sales in their local area which means that the local market might be “strengthening” or getting “hotter” – favoring sellers, so they will ask more for their home. A fall in the median price might indicate the opposite – few homes selling at the current price levels which causes homes on the market to drop their price and for new homes on the market to price more aggressively.

A rise in median price could also mean that homes in the lower part of the market are selling and leaving the market. This means that the remaining homes on the market are at a higher price point, which causes the aggregated median price to rise.

Market Inventory Trends

Inventory is simply real estate lingo for “the number of homes for sale.” This stat shows you how much supply is available in the market you are researching. Inventory levels can ebb and flow frequently due to seasonal effects. There’s usually more inventory on the market in the springtime as the natural rate of real estate activity picks up during this time of year.

Alternately, there’s generally less inventory in the fall or winter as real estate activity slows. Evaluate the current supply of properties, including the number of new construction projects, the amount of available inventory, and the amount of time it takes for properties to sell. This will give you an understanding of the overall level of competition in the market.

Average Days on Market (DOM)

Simply put, the Days-on-Market tells you how long the active properties currently for sale, in aggregate, have been on the market (a.k.a. “time on market”). In other words, of the active listings currently available for sale, how long have they been for sale?

This factor is the average number of days it takes to sell a house in the relevant price range. For example, a market in which a house sells for $150,000 in three weeks is quite different from a market in which the same house sells in six months. The latter is known as a soft market.

In a soft market, sellers can drop prices, give concessions, or wait longer for their houses to sell. The vast majority of homes are owner-occupied, so there’s generally no negative impact on sellers who can’t sell their houses because they can continue to live in them unless sellers are in dire need to move because of a foreclosure, job transfer, or another firm deadline, they’re likely to hold out to get their prices.

Study interest rates:

Review the current interest rates and their historical trends. Higher interest rates can impact the demand for properties and affect the overall market conditions.

TIP: If you’re working with a good and reputable company to help you find or provide you with investment-grade properties then they should be able to advise you on the various markets and neighborhoods as well as provide you with detailed market information such as local economic data and housing trends.

IRA Investing in Real Estate: What You Need to Know?

February 1, 2023 by Marco Santarelli

Investing in real estate as a part of your retirement planning requires you to learn the governing rules and regulations that will affect your decision. Some conventional IRA experts say that it is better to stay away from investing in real estate through IRAs due to the strict government control over them and the hefty penalties imposed on wrongful transactions.

However, if you have a bit of help from a knowledgeable adviser, do your own due diligence, are aware of the rules governing IRAs, and have a keen eye to spot real estate deals, then real estate investing may be the way for you to further diversify your IRA account.

In order to make a real estate investment with your IRA, you need to make sure your IRA is with the right type of custodian, one that will allow you to make alternative investments. However, it is important to keep in mind that the custodian of the IRA, when you choose to go self-directed, only carries out the details of your investment transactions in your specific direction.

Therefore, the custodial firm you select for your account is not responsible for an errant investment, a poor purchase, or a prohibited transaction made on your part because your custodian is essentially a third party to your investment selection.

Investing in real estate through a self-directed IRA can be a viable option for those looking to diversify their retirement portfolio and potentially earn higher returns. However, before making this decision, it is important to thoroughly understand the pros and cons, as well as the rules and regulations that govern self-directed IRA investments.

Pros of Investing in Real Estate with an IRA:

Diversification: Real estate investments can provide portfolio diversification, thereby minimizing total risk. By spreading investing dollars across different asset classes, investors might potentially lessen the impact of market swings in any one area.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds. This can be especially true for well-chosen properties that appreciate value over time and generate rental income.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management. This level of control can be appealing to those who prefer to be hands-on with their investments.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation. Unlike stocks and bonds, which can fluctuate in value, real estate can offer a sense of security, especially if purchased at a reasonable price.

Cons of Investing in Real Estate with an IRA:

Complexity: Real estate investing can be intricate and may necessitate extensive research and due diligence. Among other variables, investors must examine market conditions, property conditions, financing opportunities, and rental demand.

Risk: Investments in real estate are susceptible to property market declines, decreased rental income, and property damage. Although there are measures that may be used to mitigate these risks, it is essential to recognize that real estate investing is not risk-free.

High Costs: Investing in real estate may be a costly endeavor due to the variety of fees that may be incurred, such as those associated with the financing and management of the property. Investors must not only have the financial means to meet these costs but also be prepared to make the kind of long-term commitment that is typically required by real estate investments.

Restrictions: Self-directed IRA investments are subject to stringent rules and restrictions, including prohibited transactions and disqualified individuals. Noncompliance with these rules may result in significant tax penalties. Investors must be aware of these restrictions and understand their legal obligations.

What Real Estate Qualifies For Being Purchased Through an IRA?

A real estate investment made to a self-directed Roth IRA, if you plan on holding it directly in your retirement portfolio, should only be rented out to a non-disqualified person. It should be purely a business transaction, where the rental or lease income from the property goes back into the IRA account. The real estate should not serve a primary or secondary use for the IRA owner, and should not be used as a vacation home.

Neither can you use the IRA property as a personal residence or for the benefit of any disqualified family member, even if you or the disqualified family member pays at or above fair market rates to use or rent out the IRA property, since this would also be considered a prohibited transaction?

All the taxes, expenses for property repairs and property maintenance work should be paid directly from your IRA account. Even if you don’t manage to find a tenant immediately, then you will have to continue with the payment of taxes and mortgage, so your IRA account needs to be flush with funds to finance the continuing expenses a real estate purchase will incur.

Most custodians disallow or disapprove of a mortgage facility to fund the real estate investment and only allow non-recourse mortgages, which are more expensive. Non-recourse mortgages may incur a higher rate of interest and generally require more money down.

Other guidelines to consider when making an investment inside your IRA include:

Your IRA cannot indulge in any property transactions with disqualified persons, including immediate family or a company in which you or a family member hold a specified percentage of shares.

Neither you personally nor other disqualified persons can give a loan to the IRA for making any investment or purchase.

The IRA is the owner of the purchased property, and all legal documents will be executed in the name of the IRA.

All income from investments made through the IRA should go back to the IRA account.

What Kind of Property Is Suitable and Can be Purchased Through the IRA?

You can purchase various types of real estate through your self-directed or Roth IRA, including single-family homes, multi-unit properties, condos, apartment buildings, mobile homes, and commercial and retail spaces.

Since it is not possible to reside in or use the buildings owned by the IRA for personal purposes, they need to have good potential as rental or lease properties. If you have a property management consultant working for you, they might be able to work out a good deal for you. Reliable, consistent, and quality tenancy is essential for your rental property to achieve good returns.

A reputable property management company service will help to ensure you need not have to worry about other management problems like leaky pipes or troublesome neighbors. However, the property management fees should be paid out of your IRA account.

Rental Market Considerations

Buying a property to rent is very different from buying property for self-use. Your rental residential property need not be located in the same suburb or close to where you live. Research the property and rental values in your state or county. You will be able to spot areas where there is a strong and sustained demand for rental homes.

Rental values are also high for areas that boast good connectivity with city centers or commercial and corporate hotspots. A boom in employment may also trigger a higher rental demand. Small towns and suburbs are seeing tech giants and start-ups setting up offices, which in turn has resulted in a demand for rental properties from young professionals.

University towns generally have good demand for condos and apartments.

When buying property for investment purposes, it may also be a good option to buy in an upcoming area with good connectivity to urban nerve centers. Proximity to hotspots may also be a good sign that the next region to go upscale will be yours.

The Bottom Line

In conclusion, investing in real estate with an IRA can offer potential benefits, but it's important to thoroughly understand the risks and restrictions involved. Before making a decision, it's recommended to consult with a financial advisor to ensure that it aligns with your overall financial plan and goals.

Real estate has traditionally given good returns. However, a profitable investment won’t just happen on its own. If you plan to invest in real estate, then you should thoroughly complete your own due diligence, research your target market, speak to experts, hire an advisor, read up on the related news, and understand all the legal regulations before taking the plunge. As with all other forms of investment, it is the educated and well-informed investor who takes calculated risks that makes the most of their dollar.

And one last piece of advice, you may want to consult with a real estate attorney and a real estate tax accountant before you dive into investing in real estate with your IRA.

What is Self-Directed IRA Real Estate?

February 1, 2023 by Marco Santarelli

Self-Directed IRA Real Estate

A self-directed individual retirement account (SDIRA) is a type of IRA, managed by the account owner, that can hold a variety of alternative investments. A self-directed IRA is a type of retirement plan that gives the account holder control over their funds and investment choices. It allows for alternative investments such as real estate and private equity to be used to grow retirement savings.

The account owner has the power to make informed investment decisions and can choose to invest in assets they are knowledgeable about, thereby enhancing their IRA's earning potential. The account holder of a Self-Directed IRA can invest in a broader range of assets, including real estate. A self-directed IRA is similar to a traditional or Roth IRA in that it allows you to save for retirement tax-free and has the same IRA contribution limits.

The only distinction between self-directed and other IRAs is the type of assets held in the account. Self-Directed IRA real estate investing permits individuals to invest in real estate with their retirement funds without paying taxes or penalties on the funds spent or the profits produced. Instead, the investment grows tax-free or tax-deferred until retirement, when it is withdrawn.

Self-directed IRA plans are considered more powerful than traditional IRAs because they offer a wider range of investment options. In addition to traditional stocks, bonds, and mutual funds, self-directed IRAs allow the account holder to invest in alternative assets such as real estate, private equity, and precious metals, providing a potentially broader and more diverse investment portfolio. The account holder also has more control over their funds and investment decisions, as opposed to having a financial advisor make these choices for them.

Investing in real estate through a Self-Directed IRA can provide a number of advantages, including the possibility of higher returns, diversification of a retirement portfolio, and the ability to invest in a tangible asset with the potential to appreciate in value. However, it is critical to understand that investing in real estate through a Self-Directed IRA entails risks and responsibilities, such as the need to manage and maintain the property as well as comply with the rules and regulations governing IRAs.

How to Buy Real Estate with Your IRA?

Did you know you can invest your IRA in real estate? Like many people, you might have heard about this before but are not quite sure how it can be done. I’ll walk you through the simple three-step process and how it works. The good news is it’s simple and easy. Let’s walk through each of the three steps one at a time. Following this process allows you to gain control over your retirement account and invest in assets you want to invest in.

STEP 1: You Need a Truly Self-Directed IRA

First, you will need a self-directed IRA (SDIRA). If you were to go down to your bank or brokerage and tell them you need a self-directed IRA they would probably tell you that’s what you have. However, their definition of self-directed means you can choose from a list of limited investment options that they charge a fee or a commission on.

If instead, you ask them if you can take title to a specific property in your IRA, what will they tell you? “You can’t do that” or “you can’t do that here.” Why? Because they can’t charge you a commission on the real estate you purchase so they simply do not permit these types of investments.

What makes an IRA self-directed? The short answer is, it depends entirely on the custodian or trust company that holds your IRA. Each IRA trustee is allowed to impose restrictions on the types of investments they hold. Therefore, you need to choose a truly self-directed IRA custodian, one that allows you to choose your own investments, whatever they might be.

There are several truly self-directed IRA custodians that we work with that are not commission-based institutions like your bank or brokerage. A self-directed IRA custodian will typically charge an annual fee for the IRA service and does not charge commissions or take any percentage of your profits. This affords you the freedom and flexibility to select your own investments.

Most IRA custodians are not self-directed so step one is to identify a truly self-directed IRA custodian and open an SDIRA. Once you’ve identified your new custodian, it only takes a few minutes to open a self-directed IRA account. Most of the process can be handled over the phone or online.

STEP 2: Deposit Money in Your New Self- Directed IRA

Next, you deposit money into your new self-directed IRA. You can do this in a few different ways. First, you can make a contribution. Contributions come from your earned income and you can simply take money from your savings or checking account and deposit it into your new self-directed IRA.

Second, if you have already started a retirement account through a previous employer you can move that money into an SDIRA. You can “roll over” an old 401(k), 403(b), or any other thrift savings plan (TSP) directly into your new self-directed IRA. Third, if you have an IRA already, you can transfer assets or cash from an existing IRA at your bank or brokerage to your new self-directed IRA.

When you do a rollover or transfer properly, there are no taxes, penalties, or fees associated with moving your money from one custodian to another. Now that you have an SDIRA set up and you have money in it, you are ready for the third and final step in the process, to make your first real estate investment.

STEP 3: Make an Investment

This is the final step. You make an investment, in this case, a real estate investment. If this is your first time purchasing real estate in your IRA it is always advisable to contact your custodian first to ask what paperwork you will need to submit. Generally, there is a “Direction to Invest” form that you complete that instructs the custodian on what you are purchasing in your IRA, how much the investment will cost, and where you need to send funds for closing.

One of the most important things to keep in mind is, “Who is going to own the real estate?” Since you are using your SDIRA, it’s not you but your IRA who is purchasing the asset. Therefore, when you write your offer to purchase, the purchaser's name should read as:

XYZ Trust Company FBO Your Name IRA, #12345

Your custodian will sign and process all of the recordable documents since it is the custodian actually making the asset purchasing. Now your SDIRA owns the real estate. When your IRA owns the investment, all the expenses will be paid from your IRA. IRS rules do not permit you to pay expenses personally.

Paying bills for your SDIRA investments is as simple as instructing your custodian to do it. With regards to the income your SDIRA makes, here's the best part of all — all income and profits will return to your IRA, tax protected! No income tax, no capital gains tax — no tax! By investing in a tax-protected environment your wealth can grow exponentially faster than if you are paying taxes as you go.

By following these three simple steps, you will gain control over your retirement account and become an expert SDIRA real estate investor in no time at all.

Pros of Self-Directed IRA Real Estate Investments

Diversification: Real estate investments can provide diversification to an investment portfolio, reducing overall risk.

Potential for High Returns: Real estate can offer higher returns compared to traditional stocks and bonds.

Control: Self-directed IRA account holders have more control over their investments, including the ability to choose properties and make decisions about financing and management.

Tangible Asset: Real estate is a tangible asset that can offer stability and a hedge against inflation.

Cons of Self-Directed IRA Real Estate Investments

Complexity: Real estate investments can be complex and may require a significant amount of research and due diligence.

Risk: Real estate investments carry the risk of property market downturns, declining rental income, and property damage.

High Costs: Real estate investments can be expensive, with costs including property purchase price, financing fees, and property management fees.

Restrictions: There are strict rules and restrictions in place for self-directed IRA investments, including prohibited transactions and disqualified persons. Failure to comply with these rules can result in significant tax penalties.

In summary, Self-Directed IRA real estate investment allows individuals to use their retirement funds to invest in real estate, potentially providing benefits such as higher returns, diversification, and the opportunity to invest in a tangible asset. However, it's important to understand the risks and responsibilities that come with investing in real estate through a Self-Directed IRA.

How to Calculate Market Value of Property in 2023?

February 1, 2023 by Marco Santarelli

When a real estate housing market crashes, there are so many foreclosure and bank REO sales, figuring out the real value of a property can be difficult. When there is a large supply of properties available for sale in the housing market, it can be challenging to determine the true value of a specific property.

In a market with a high number of properties for sale, competition among sellers can drive down prices, making it difficult to determine what a property is worth based on current market conditions. Additionally, there may be a wide range of properties available, with varying sizes, locations, and features, making it challenging to compare properties and determine the true value of a specific property.

As a result, it can be difficult to determine the real value of a property in a housing market where there are many properties for sale. The comparable sales method is the most commonly used — and still the most accurate one — to determine the value of single-family homes, condominiums, and smaller multi-unit properties (two to four units).

How to Find Property Value Online

Start by researching information about sold properties on your local government websites for your target area. Many tax assessor's offices and county courthouses offer searchable online databases that allow you to view the prices for properties within a specific area. They usually list full details about the properties, including square footage. Plus, subscriber websites such as Electronic Appraiser (www.electronicappraiser.com) give you detailed information, particularly in areas where online data is scarce.

Free websites such as Zillow (www.zillow.com) also offer property data, but the information is less detailed than the paid sites. For example, the seller's name may be missing, which could be relevant if the seller was a bank, as in the case of a foreclosure sale. If that's the case, it can't be considered a comparable sale because the property was sold in distress.

Be careful about using websites that offer a computer-generated valuation. These are called automated valuation models (AVMs), which aggregate sales data from comparable properties to determine an estimated price. While AVMs can be a benchmark for determining value, they can be off by as much as 10% or more. With a little research, you can pinpoint the value to as close as 3 to 5% percent.

The most useful computer database for getting information about comparable properties is the local MLS. This database shows the number of days on market and includes notes that indicate whether the property was updated, whether the seller offered concessions on the sale, and so on. This additional data is generally not available through other sources, so asking a real estate agent or appraiser to help you will be crucial because most MLS systems aren't accessible to the general public.

While many factors come into play when you're evaluating a residential property's value by “comps” (comparable sales), the three key factors are location, the size (square footage) of the home, and the number of bedrooms and bathrooms. Obviously, you'll need to look at many other aspects before you can pinpoint the exact value of a property, but these are the “big three”. You should be able to look at comparable sales involving properties with these three factors and get a good idea of the value of the property you're selling

Location

Location is extremely important when you're comparing sold properties. A professional appraiser typically looks at houses within a one-mile radius or less, and so should you. In the case of a subdivision — where the houses are all similar and built in the same time period — you need to compare similar houses with similar styles in the same subdivision to get an accurate valuation.

If there's a wide mix of properties in the subdivision, you may need to go outside of it to get comparable sales. Just be careful with “dividing lines”. Geographic lines such as opposite sides of the river, the park, or a main highway can be invisible dividing lines that put the property in another school district and may not garner equitable comps.

Square Footage

When determining a home's value, be sure to evaluate the square footage. Note that appraisers typically look at homes that are within 20% up or down in square footage as comparables. Generally (especially within a subdivision), most homes fall within a fairly limited size range. Therefore, you should be able to develop a good gauge for the selling price of homes in those particular sizes.

Of course, not all square footage is created equal. Most people think that if a house has 1,000 square feet and is worth $100,000, then the 1,100 square-foot house next door would be worth $110,000. Wrong! The extra 10% in square footage equals only a few percentage points in value.

If these two houses offer the same location, style, and number of bedrooms and baths, the 10% additional square footage won't change the valuation much. Why? Because there is a fixed cost on a house based on the value of the land, cost of construction, sewer, subdivision plans, and other factors. An extra few hundred feet of space involves very little cost — only wood, nails, carpet, and possibly some minor electrical and plumbing costs.

Rooms

The number of bathrooms and bedrooms is more relevant than simply the raw square footage. In other words, a three-bedroom home with 1,200 square feet might be worth more than a two-bedroom home with 1,250 square feet. It also matters where the bedrooms and bathrooms are located – on the main floor or the basement.

While finished basements can add value, the amount of that value is less than it is for above-ground living areas. Plus, this greatly varies depending on different regions of the country. In humid areas, below-ground living space isn't as valuable to homeowners as in dryer areas of the country.

To determine a home's value using comps, also look at the quality and number of bedrooms and bathrooms. Three-bedroom homes are generally a big plus over two-bedroom homes, but four or five-bedroom homes don't add as much over a three-bedroom if they are roughly the same size in square footage. Likewise, two bathrooms are a big plus over one bathroom, but three or more don't add as much value.

When comparing bathrooms, make sure you understand the different types of bathrooms and compare them correctly. A full bathroom includes a shower, bath, toilet, and sink. A three-quarter bath has a shower but no tub, plus a toilet and sink. A half bath has a toilet and sink but no tub or shower.

A three-quarter- or full-bath creates roughly the same value, particularly if another bathroom in the house has a tub. A half bath has less value unless there are enough other bathrooms in the house. Also, a five-piece bath (separate shower and tub) generally wouldn't add more value than a regular full bathroom with a combination shower and tub.

Other Factors

There are other factors to consider that affect the value of a home, but generally, you’d give this less weight than the location, size and number of bedrooms and bathrooms. Some houses have one-car or two-car garages, some have carports and others have neither. The garage factors in some value, depending on the rest of the neighborhood.

For example, if the neighborhood comps all have two-car garages, this can affect the value as much as 10% on the subject property if it only has a one-car garage or no garage. However, if the houses are all small and there's a mix of garage options, the garage won't be as big of an issue.

Likewise, a four-car garage in a three-car garage neighborhood probably won't count for much either. One exception is with condominium developments. Parking spots or garages are generally sold with condominiums and can have substantial value, particularly in large cities where parking is limited to the street.

In addition to looking at properties sold in your target area, you need to look at properties that are for sale. While asking prices are not sold prices, it will give you an idea of where your local market is heading – up or down. Also, keep in mind that if your strategy is to flip the property, the properties for sale are your direct competition, and thus the asking prices are very relevant.

For example, if you find properties that have sold for $150,000 but the current inventory on the market is priced at $140,000, the asking prices of your competition become just as relevant, if not more, as the sold prices of other homes.

If you regularly invest in the same neighborhood, take some time to build yourself a “due diligence” notebook of properties that have sold, are under contract, and are for sale within your area. Have your realtor check the MLS every week for new listings and sold properties so that your information is constantly up to date. Remember, you are only as good as your data, and the more information you have, the more accurate your values will be!

It's important to note that no single method is perfect and that different methods may result in different valuations. A professional appraiser or real estate agent can help to determine the most accurate market value by considering multiple methods and factors such as location, size, condition, and recent market trends. Additionally, obtaining a professional appraisal is often required when obtaining a loan or selling a property.