Should You Self-Manage Your Rental Properties?

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If you’re like most investors, you want to create extra income.

Whether that was to pay off some bills or to build a savings to set a retirement in place for yourself because maybe your job isn’t going to give you the retirement plan you want.

Zack Childress

Or maybe a reason you want to buy rental properties is to replace your income so that you can leave your job.

There are lots of reasons why people lean into buying rental properties because everyone’s different. And the outcome is for the purpose of that individual person.

There are a lot of benefits with rental properties, such as tax advantages.

Another big reason is for legacy. We want to be able to pass down to our children: something that we didn’t have or something to give them a good start or maybe just to help them a little bit with some income.

But did you buy rental properties to manage them or did you buy rental properties to create cash flow off them?

If we are trying to buy rental properties and manage them, this can be a big headache. When it comes to managing rental properties, cash flow is what we want. This is why we buy rentals – the cash flow.

We don’t buy rental properties to create another job for ourselves. And this is where I lean into management because sometimes we think, “oh, I’ll self-manage it” without understanding the outcome or all that goes into managing properties.

So, to be truly focused on cash flow, we need to take a step back and let management take over.

Don’t let cash flow take over your life.

Sometimes we think too small and we count pennies and we lose focus on the overall goal. Yes, management charges a fee but it is well worth that fee.

If you’re running your numbers and you think about this fee as lost revenue, you’re really looking at it wrong. Because, for what management charges – 8, 10, 12 percent of gross rents, we’re only talking about $50 a month; sometimes it’s $70, sometimes it can be $100 but this goes back to when we run our numbers.

The fee helps you enjoy your life and it allows you to stay focused on finding more rentals and focused on really what you’re trying to do with a rental portfolio, which is manage it and not each property as you build.

When should we self-manage our rental properties?

I get this question a lot as the president of the Madison County Real Estate Investors Association and my answer is, if you’re just starting out and you bought a little single-family residence, then sure, try it out.

See what it’s like to manage. You’ll find the tenant, you’ll need to do the tenant’s screening, collect rents, deal with all the phone calls. Then you can see if that’s what you want to do.

Most cases, you won’t have time for it or you just won’t like it if you do.

If you’re holding several rentals, don’t do it. Put management in place because the next thing you’re going to find out is you’re running around chasing tenants, trying to collect rents.

Sometimes you have to self-manage when you bought the property wrong or got a bad loan on it and it can’t cash flow with property management in place.

In that scenario, you would have to come back to self-management, but this goes back to running your numbers to make sure that you can afford property management when you’re looking at the deal to buy it.

What are the benefits of having a management company?

This could be a 50-page book by itself. There are so many reasons that you should have management in place. Let’s just start off with the first one: safety. Safety for yourself and safety for the tenants.

Management companies have to follow state laws. Sometimes, as a landlord you may not know those laws and so you might be violating your tenant’s rights. You might be doing things that aren’t safe or not legal and therefore you could get in trouble for that.

The other reasons are finding tenants and screening them. Do you have the time for that? Probably not.

Management is also there to deal with all the calls from tenants as your portfolio builds. You’ll be surprised at the phone calls. They call for all kinds of reasons such as a leaky faucet or toilet’s clogged, or their door won’t shut all the way. Management handles all that.

Collecting rents or even chasing rents down when someone is late – these are all cases of what management can do. There’s the eviction process and dealing with that, even if you have to go to court to get them out. Other jobs include scheduling repair work and putting together monthly reports for the rentals for accounting and bookkeeping.

It’s like having a partner who does all the work that you don’t want to do. These are just some of the benefits of a management company and, as you can tell, it’s well worth having them in place versus self-management.

How do management companies work?

Most management companies in our area work where you bring them the property and they step in and take over. They’ll collect your rents for you and deposit them or write you a check to your bank account. They will give you a profit and loss statement on your rental properties each month, so you know what’s going on.

They charge anywhere from 8 to 12 percent on collected rents, which means their goal is to collect as much rent as possible each month and to help you increase rents so that they can make more on their service fees. 

Now, why can real estate investing be easy?

Well, when we look at real estate, yes, it comes with risk. And yes, it can be hard, but in most cases when real estate starts to become easier is when we have the right team to help you run and manage your rental and your investment business.

Management companies are key to making real estate investing easy for yourself when it comes to rentals so that you don’t have to deal with it any of the headaches.

Check out our vendor list at www.MadisonCountyREIA.com for management companies who are helping investors in this area.

You can also come to one of our meetings and meet some of our vendors, including property management companies. Get to know them to see how they could benefit and how they could be part of your team.

 If you’d like to come out to one of our meetings, visit www.JoinOurNextMeeting.com for information.

(Zack Childress is president of the Madison County Real Estate Investors Association.)

Is Warehouse Space a Good Investment?

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There are so many ways to make money in real estate, whether you’re just getting started and you want to use strategies like wholesaling or maybe creative financing; or maybe you want to do the fix and flip model. But, in most cases, people seek real estate investing for the purpose of building wealth and cash flow.

So when we take a step back and we look at all the many different ways to make money in real estate, which one is going to best serve you? And if that is moving forward with cash flow, then you’re going to be looking at income producing assets and one of those are warehouse space.

Zack Childress

To be clear, a warehouse is just a building for storing goods. And warehouses are used in many industries and for many reasons.

It could be for importing goods, exporting goods; it could be for manufacturing-type businesses; it could be for transporting and storing goods for businesses.

These spaces are usually large plain buildings in an industrial park, on the outskirts of town in most cases.

Warehouse space is an essential need for our community. It’s an essential need for businesses in general.

If you are looking to lease a building for your business you’ve got to start thinking about what type do you need? Do you need a warehouse space? Do you need a manufacturing space or do you need flex space?

Flex space tends to be one of the most popular types of warehouse opportunities either for businesses seeking to lease or for investors seeking to lease them out.

Flex space leans more toward the demand and the current market right now. Flex spaces are warehouses with a small portion of them built out into office space.

Some things that you do want to think about when you’re looking is: What is your monthly budget? What type of space do you need by square footage? Where’s the location? Is it going to fit the need of your business and transportation?  What type of features are needed? Do you need raw warehouse space or are you going to need fiber optics or telecommunications built in there?

Also think about the lease terms. A lot of times you’re signing three-, five-, sometimes six-year leases. Some of those leases are going to have what’s called a gradual increase in lease payment over time.

What type of inventory is really out there when we’re looking for leased space?

In the industrial or flex type warehouse space in Huntsville, there are less than two dozen buildings available for lease.

This is a sign that you should really look at as an investor because there’s just not a lot of lease space available. There are only three buildings available for lease in the industrial and flex space market in the Madison area; in Birmingham there are 38.

Now, if we take another look and look at what’s for sale in the industrial warehouse and flex space community in the Huntsville area, there are less than a dozen buildings for sale; Madison, are only two for sale and, in Birmingham, there are only 13.

So, what does this mean?

Well, this means that there’s not enough space available and what is available is already being consumed, especially for the for sale side. We need more of it because the demand is obviously there. When you look at Madison only having two and Huntsville with 11 that are available on the market right now, there is a huge opportunity for this.

From the investing side, I’ve always been a fan of warehouse space. I’ve owned warehouse space for many years for a few reasons. One, there’s low maintenance in warehouse space. The tenants typically are long term, but they are used for business and not personal. And the leases are always in our favor because we can do triple net leases that are very hands off from a landlord’s point of view.

You don’t have to deal with the same type of issues that we deal with when we’re renting out apartments or single-family homes. We’re signing agreements with businesses and they tend to stay for long periods of time inside the warehouse.

What is a gross lease, this is where a tenant is going to pay typically higher monthly rent. But it’s also because they’re covering the taxes, insurance, maintenance, utilities, and any other expenses that come with that building.

Now the most common least that you’re going to see out there from a either looking to lease a building or as an investor buying a warehouse space and leasing it out is known as a triple net lease and this is where the tenant is going to pay their pro rata share of everything that consists of insurance, taxes, maintenance, and typically any common area upkeep. They will also pay for their own janitorial services and utilities that are associated with them acquiring the space that they’re in. This is probably one of the reasons it’s the most common lease out there, which is known as the triple net lease.

What is the cost range on average to lease a warehouse space?

Typically, in the flex space area, you’re going to see anywhere from $6 to $9 a square foot for the year. So, if it’s a 2,000 square-foot building that you’re looking to rent out as an investor, then you’re looking at $7 a square foot, which means your tenant will pay roughly $1,166 a month for that space – making your yearly income $ 14,000 for the year.

Now, on the industrial side, you could see anywhere from $7 to $18 a square foot. And typically, when the price gets higher, it’s because the space is newer or there are more features,

There’s been a huge demand for new warehouses. When you look at everything from Amazon and Facebook and Google and the creation of cryptocurrency, they’re all looking for new space, new cooling system, new digital input and output, updated electronics, new communication systems, etc.

The high demand for new warehouses puts us in a little bit of a disfavor for old warehouses which don’t have the features that new warehouses have.

In my experience, I have found that warehouses are among the safest investments.In most cases, it can be easier to develop a new warehouse than it is to buy an older warehouse and bring it up to date.

Now, on the other side, if you can find land cheap, building the new spaces will help tremendously in meeting the need and supplying the demand that’s out there right now. Just think again about Madison having just two buildings for sale in the industrial and flex space arena.

What it really comes down to is building wealth through real estate. Whether you’re choosing warehouse space, industrial space, flex space, strip centers, apartments or single-family homes, it’s all for the sole purpose of building wealth through cash flow and owning income-producing properties.

When people ask what area should they go into, I’m always going to direct them to start where it makes sense for them.

Where do you have the most knowledge? Where are you prepared to move into the market? Is that single-family homes? Small apartments? Warehouses? Industrial flex space? Strip centers?

It’s really where you feel comfortable getting into the market or where you feel comfortable getting educated on the processes of working this business we refer to as real estate investing.

(Zack Childress is the president of the Madison County Real Estate Investors Association and has been an investor for nearly two decades. The Madison County REIA meets monthly. Visit www.JoinOurNextMeeting.com or madisoncountyreia.com.)

4 Big Retirement Risks—and How to Prepare for Them

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By Brad Cardwell

Some common retirement mistakes – such as overspending, investing too conservatively or veering away from your plan — are easy to avoid with a little discipline and forethought. Other risks, such as a health crisis or a market downturn, cannot be avoided, but they can be managed. Here are four of the most common dangers to your retirement strategy, and steps you can take to prepare for them.

1. OUTLIVING YOUR MONEY

Thanks to medical advances and healthier lifestyles, Americans are living longer than ever. That is great news, but it also creates the very real possibility that you might outlive your retirement assets—especially when 40 percent of people underestimate their own likely life span by five years or more, according to a 2017 Merrill Lynch study, “Finances in Retirement: New Challenges, New Solutions.”

What You Can Do: 

Think about delaying the age at which you claim Social Security. “By claiming at age 70 as opposed to 62, your monthly income could go up by 76 percent,” said Nevenka Vrdoljak, director of Retirement Strategies at Bank of America Merrill Lynch. Though you sacrifice income early on, knowing you will have higher Social Security payments in your seventies and beyond is like having “longevity insurance,” she said.

Find out whether an annuity might be appropriate for you. Investing in a lifetime income annuity could help you avoid the risk of outliving your retirement savings by providing a path to income for as long as you live. Because annuities come with certain costs and risks, be sure to talk to your advisor about all the pros and cons.

2. CHANGES IN MARKETS

If there is a significant market drop shortly before or early in your retirement—just as you are starting to tap into your assets—the value of your investments could shrink to an extent that undermines your retirement security. Even if the market subsequently improves, “If the first four or five years of your retirement are bad, it can be difficult to recover,” Vrdoljak said.

What You Can Do:

Take a second look at the way you invest. As you near retirement, shifting to a more conservative investment approach may help protect against market downturns. At the same time, it is important to consider maintaining some exposure to stocks to create a suitable balance.

3. INFLATION

Although quite low in recent years, inflation—even a modest percentage—reduces your spending power over time. People living in retirement are especially vulnerable. Over a 10-year period, a relatively low inflation rate of 2 percent can bring the value of every $100,000 saved down to $82,035, according to estimates made using the Bankrate.com inflation calculator.

What You Can Do:

Consider investments that could grow along with inflation. “That might be real estate or shares of stocks,” Vrdoljak said. If you have bond holdings, you may want to consider adding some Treasury Inflation-Protected Securities (TIPS). These government bonds offer returns that vary with the inflation rate. When interest rates go up, bond prices typically drop, and vice versa. “If inflation accelerates for whatever reason, you get compensated for that,” Vrdoljak said.

4. RISING MEDICAL EXPENSES

“When it comes to financial planning, people don’t systematically plan for health care risks,” Vrdoljak said. “In particular, it’s really important to take into account the possibility that you’ll need long-term care.” According to the Merrill Lynch study, 70 percent of Americans over 65 will at some point need that sort of care — which can include not just residence in a care facility, but help with daily activities like bathing or assistance with household chores. Even without such costs it’s likely that your health spending will increase as you age — and it’s important to note that Medicare does not fully cover these costs.

What You Can Do:

Plan early for long-term care. Some people may be able to pay for out-of-pocket long-term care or are able to rely upon grown children or a relative for assistance. But for many others, long-term care insurance may be the answer. If you do choose long-term care insurance, try to purchase it in your fifties—well before you need it. The cost rises as you age and may not be available if you develop certain medical conditions.

For more information, contact Merrill Senior Financial Advisor Brad Cardwell at 256-650-2432 or Brad_cardwell@ml.com.

Is Now a Good Time to Still be in Real Estate?

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So, the big question is, is now a good time to still be in real estate?

Zack Childress

As president of the Madison County Real Estate Investors Association, I get this question all the time.

And it is a very vital question: Is the market going to stay strong or is it cooling off? If we had a crystal ball, we would all be in a better place; but we don’t have that crystal ball.

There are things that we have to look for but, I will say this, we are in a great real estate market. This market is producing massive amounts of success for new and seasoned real estate investors.

However, I will say it will not stay here. But, that does not mean that you shouldn’t be in real estate right now, whether you’re fixing and flipping properties or you’re buying and holding as long as you’re buying them at the right price.

After 16 years of being an active full-time real estate investor, I can tell you that the market will turn. It’s just when, but real estate will always be a good investment. You just have to know which strategies to use during which market cycle.

What do I mean by this? Which strategy to use during which market cycle is based on the market cycle at that time. For example, right now we’re in an extremely hot market, meaning buyers are buying and are paying retail; some are even paying more than listed price in some areas.

So, during a hot cycle, when properties are being sold quickly and for more than they list for, the best strategy to deploy is a fix and flip. Therefore, you’re doing what’s called a cash grab during the hot cycle. Whether that’s a $10,000 spread or a $50,000 spread on what we we’re able to sell it for. We are in a perfect market for this right now.

But when markets do turn, and prices do come down, it doesn’t mean you should stop investing. It just means that you should change your strategy. You should move more into long-term buy and holds because the prices are cheaper.

And, in most cases, the rents go up because when a market shifts, it’s usually because of some economic indicators and one of those indicators is foreclosures. When foreclosures happen, you have displaced homeowners, who then need to rent instead of own, which makes a higher demand for a rental property.

So, to the big question: Is now a good time to be in real estate?

Yes. Now is a perfect time to be in real estate. And even if the market turns, it’s still a perfect time to be in real estate. You just have to understand how to change your strategy or get the information or the specialized knowledge to be able to change those strategies. But let’s talk for a minute on what to look out for.

What should we be looking for if the market has gone a term? Well, one of the things that we want to look at is available inventory on the market. Is the inventory still limited? Is it short? Or is there an abundance of inventory?

The national average has always been consistent around four months of inventory. Right now, in our area there is around 1 1/2 to 2 months of inventory. So, we have a shortage of inventory and we have more buyers than there is inventory available which creates the hot market.

The other thing that you want to keep your eyes out on is the listed price that properties are going on the market for versus what they sell for.

When you see a downturn, in that where a property is listing for $100 a square foot but it’s selling for $95 a square foot, then that means it is no longer a seller’s market. In most cases, it is becoming more of a buyer’s market, which means there’s going to be a shift in the market cycle.

A third one that you should keep your eye on is “days on market”. When DOM is consistently at 30 days the market and, all of a sudden you’re seeing 60 and 90 days on market, that is another sign of a shift that is happening.

So, those are a few things that you can keep your eyes on to protect yourself as you become active in the real estate market.

But I want to leave you with this: Don’t be scared if the market turns; just be prepared if the market turns, then move into cashflow, move into buying rental units, income-producing properties.

At a cheaper price, you could buy now for the long-term hold. You will get a better cash on cash return on those deals. But it is always my outlook that you should learn how to do all of this, whether it’s fixing and flipping or buy and holds.

We provide a lot of great information at the Madison County REIA, and you can always go to our website and learn more about market conditions. We have a real estate talk show that is recorded for the website. We also have monthly meetings that you can come out to and be part of. And so I encourage you, check out  www.MadisonCountyREIA.com.

(Zack Childress has been a real estate investor for more than 15 years and is president of the Madison County Real Estate Investors Association)