Tag Archives: Real Estate

15 Essential Duties of a Real Estate Lawyer

Generally speaking, it’s not advisable for people who wish to engage in real estate transactions to do it alone, especially as individual real estate transactions differ greatly from each other, depending on the country, state, or city where each transaction takes place.

The value of non-legal service providers can hardly ever be compared with that of good real estate lawyers. In fact, no other legal professional offers the kinds of specialized skills that real estate lawyers offer.

Although some non-legal service providers claim to offer the same quality of legal services for lesser money than that requested by real estate lawyers or attorneys, it may be far better off to pay extra money to employ the services of a real estate lawyer.

Whether or not your country, state, or city legally demands that its citizens employ the services of a real estate lawyer in closing real estate or property deals, real estate lawyers can be invaluable during real estate buying and selling transactions.

Property transactions conducted through non-legal service providers or advisors may not be as secure as those conducted through real estate lawyers or attorneys who have stronger protections and more government or legal backing in place.

Because they have certain educational and licensing criteria that must be met, lawyers are held in higher regard and to higher standards and can provide insurance or security for any damages in the event of mistakes, accidents, or errors.

Who is a real estate lawyer?

A real estate lawyer (or real estate attorney) is anyone who is licensed to practice real estate law and qualified to legally handle or engage in real estate or property proceedings, cases, or transactions; they negotiate conditions and terms of real estate transactions, offer advice to entities or people involved in real estate deals, and can file a lawsuit against certain aspects of a real estate transaction.

Duties, responsibilities, or obligations of a real estate lawyer

Real estate lawyers are generally hired to address certain aspects of a real estate transaction or litigate real estate- or property-related lawsuits.

A real estate lawyer’s specific duties, responsibilities, or obligations would depend on what a client (seller or lender) hires them for, and what their country, state, or city laws permit or require to be done in order to get a real estate or property deal sealed.

Many countries, states, or cities require a real estate lawyer or attorney to be present when a real estate or property transaction is being closed or sealed. Specifically, these are 15 of the most essential duties, responsibilities, or obligations of a real estate lawyer or attorney:

1. Explain or interpret the meaning of regulations, laws, or rulings that concern real estate transactions.

2. Manage and resolve real estate disputes, define clear boundaries, and defend the rights of landlords or property owners and renters or tenants.

3. Evaluate the offer made by a buyer, and re-examine all legal paperwork regarding buying or exchanging of property. This is done to ensure that details are exact and the buyer’s or client’s utmost interest is defended.

Paperwork could include documents on titles, property transfers, home purchase agreements, title insurance policies, mortgages, and property taxes. When a client is buying a property or home, the real estate lawyer can:

  • Accurately interpret the purchase contract and ensure that documentation abides by the most current property regulations and laws.
  • Prepare or draft and file all essential legal documents, agreements, and leases, and review all paperwork that a buyer may be required to sign before collecting official identification.
  • Prepare title insurance after conducting a title search to protect a buyer from potential problems by ensuring that there are no existing claims to real property.
  • Transfer funds from buyer’s account to an escrow account, and handle mortgage loan and borrowing agreement paperwork whenever a mortgage lender is financing the purchase of a home.
  • Ensure that buyer obtains a valid title that is only subject to financial obligations or liabilities that the buyer themself accepts.
  • Identify any unpaid loans and ensure that no concordats, covenants, or claims are filed against properties that buyers are interested in.
  • Evaluate any modifications, including the cost of utilities and owed taxes—if any—before closing a real property deal.
  • Attend and represent buyers during closing.

4. Re-examine legal paperwork for selling of property, or evaluate any offers received by seller, in order to ensure that details are precise and seller’s or client’s best interest is guarded. When a client is selling a home or property, the real estate lawyer can:

  • Affirm that ownership is suitably vested in the seller of a home.
  • Prepare or review the sale and the negotiating terms and purchase agreements or documents that need to be signed by the parties involved, prior to receipt of official identification.
  • Ensure that documents are in line with the most current property laws and regulations.
  • Arrange security deposit transfer.
  • Arrange provision of insurance certificates, if required.
  • Redress any potential issues regarding the title.
  • Attend and represent sellers during closing.

5. Confirm that parties involved in a real estate deal fulfil their obligations under a contract agreement.

6. Manage foreclosure proceedings in certain circumstances in order to repossess collateral for defaulted loans, and protect assets.

7. Monitor transfer of documents and titles, access whether there is legal risk in real estate or property documentation, and advise clients when or where necessary.

8. Ensure that necessary approvals are established before real estate transactions are executed.

9. Supervise compliance-related and regulative services.

10. Represent real estate companies during purchases and sales of properties.

11. Provide general advice and support for legal needs that are linked with any large-scale real estate listing or portfolio.

12. Explore obligations like utility charges, taxes, and homeowners association fees and compute them on the basis of their allocation in a contract.

13. Prepare deeds, disclosures, and notes or mortgages to secure debt in compliance with a mortgage lender’s instructions.

14. Negotiate and review real estate contracts to ascertain how money can be properly allocated.

15. Prepare settlement statements that indicate funds from the buyer and charges to items such as title search fee, lawyer’s or attorney’s fee, loan discount points, agent commission, underwriting fee, etc.

Characteristics of a Valid Real Estate Contract

Usually, transactions that involve buying and selling real estate properties are always expressed in writing. The most vital document in/part of any transaction is the sales contract which, in the real estate field, is also known as the purchase agreement. Although contracts can be oral instead of written, it is advisable to avoid going into oral contracts.

After investing time and finding a property that is in line with your investment dreams, you need to prepare a real estate contract that should have at least a minimum number of characteristics, features, or elements to make it valid enough for presentation to the seller (of the property).

A valid real estate contract is a written agreement between two or more individuals, entities, or corporations; it is legally binding between them in regard to an exchange of property and money or services of any kind.

Any valid real estate contract is no joke: it contains a legally enforceable set of assurances that must be executed because it (the contract) is anchored on the basics of contract law.

We’ve now known what a valid real estate contract is, but what makes a real estate contract valid? A legally binding real estate contract on any activity is valid because it has all the most important and necessary characteristics, features, or elements that empower it and make it legally enforceable on a certain activity (or activities).

The following are nine main characteristics you have to be familiar with and ensure that your valid, enforceable, or legally binding real estate contract possesses them:

1. It (valid real estate contract) consists of individuals or entities that are legally competent

Each individual who is involved in a real estate transaction must be legally competent or have some legal capacity: in most countries and states, the legal capacity is defined as being at least the legal age (usually, 18 years) and mentally matured enough to understand the consequences of taking actions.

Some of the people who are mentally ill and criminals may not be legally competent or have the required legal capacity to engage in a contract. It may even be wise to avoid dealing with people, especially older persons if they appear to have difficulty in communicating or understanding terms or things that a contract has to be founded on.

In some cases, it is important to inquire (from the person you are dealing with) whether they have a representative or someone who can act legally on their behalf.

2. It consists of an offer

The individual or entity who is interested in a property has to make an offer in writing or through written communication to the current owner or seller of the property. The offer has to clearly express the buyer’s interest and willingness to purchase the property according to specific terms.

Nearly all offers have an expiry date or time. Except an expiry date or time is included, the seller may accept an offer at any time before it is revoked or canceled officially by the interested individual (or potential buyer). On the other hand, the seller is at liberty to continue considering the offer or continue to wait or look for a better offer.

3. It consists of information that proves acceptance (of the offer)

Not all offers are accepted. If an offer is accepted, it is expressed as a positive written response that is in agreement with the exact terms stated by the buyer/potential buyer. In cases where the seller proposes changes to the terms or conditions, he may make a counteroffer and notify the buyer.

4. It may consist of a counteroffer

A counteroffer can also be referred to as a “legally new offer”; it only comes into existence when the original offer is rejected or becomes void. Sometimes, counteroffers can go back and forth between seller and buyer until both (seller and buyer) come to an agreement. At this point, the final accepted offer becomes the binding agreement between the individuals or entities.

5. It consists of an exchange

The exchange part of a real estate deal is very important to most individuals or entities; the exchange aspect of a deal involved the substitution or transfer of property and money or services of any kind, between seller and buyer.

Usually, buyers offer money, services, or something of great value to sellers who, in return, hand over ownership of property to buyers. A real estate contract would not be enforceable if each individual or entity doesn’t offer at least some form of exchange to the other individual or entity.

6. It consists of information that clearly identifies a property

All property must be clearly and unambiguously identified in order to leave no surface scratched. Usually, a legal description is used for each property. Clear identification is necessary so as to erase any uncertainty about a property that is being exchanged, sold, or transferred from seller to buyer.

7. It has a legal purpose

Most countries support legal acts and ban acts that are regarded as illegal. Your real estate contract must have a legal purpose and should not be used for illegal and immoral purposes that are against public policy. Some properties are used to carry out certain activities that violate the local prohibitions that are against operating businesses; for example, some people operate factories or similar types of businesses in residentially zoned areas that prohibit such actions.

8. Its information is stated in writing: it’s a written contract

A valid real estate contract has to be a written contract because that’s the requirement for all legally binding exchanges in real estate. All the conditions or terms surrounding the sales or purchase agreement must be done in writing, even if the contract contains minor items that don’t seem to be important.

Written contracts help to prevent or erase confusion surrounding the content that is used to describe its components or constituents. It is crucial that all relevant and consequential details be written or clearly specified in writing, and whatever is not for exchange or sale must be clearly written as well. In fact, if anything is not in writing, don’t regard it as part of the contract.

9. It is signed

A valid real estate contract must be signed by the individuals involved and have statements that describe all dates and times which are important and should not be ignored by any involved individual or entity without the written consent of the (individual or entity).

Whenever one individual’s consent is ignored or overlooked by the other individual, then the latter has breached the contract or contract terms. Once a breach of contract has occurred, the other individual or entity may be entitled to sue, claim monetary damages, or use the law to force the seller to agree to the contract terms.

Advice

Ensure that all agreements (for real estate sales) made between you and other individuals or entities are done in writing. Unless they are done in writing, do not regard them as being valid, legally binding, or enforceable real estate contracts. Without being written, they aren’t!

No matter how reasonable or convenient it may seem at the moment, never make an oral agreement of any kind on any real estate property. Most countries and laws require all exchanges in real estate to be in writing and enforceable in a court of law. They must include purchase agreements or sales contracts, and leases, and may include loans secured by mortgages or notes, commission agreements with agents, listing contracts, etc.

A contract can be declared invalid or void if it fails to possess the essential elements of a valid real estate contract. An invalid contract has no legal power and is thus unenforceable in a court of law.

Economic Concepts to Consider When Evaluating Real Estate Properties

It’s important to acknowledge and understand certain economic concepts when you are evaluating the present or future potential value of any real estate property or investment.

For various reasons, the demand for and value of different types of real estate properties is either low, medium, or high: a property can be relatively accessible or inaccessible, regardless of its location, the surrounding weather, and the complexity of local, national, or regional government requirements for ownership of properties.

So what leads to the differences or disparities in the values or prices of real estate properties? To be in a good position to answer this question, you have to consider various important economic concepts when evaluating the potential value or price of any property.

The basis for evaluating the value of any piece of real estate is anchored on the following economic concepts:

1. Demand

Demand is an economic concept that is influenced by the need or desire to possess or own a property or properties. People who have sufficient financial means or purchasing power also have the ability to satisfy their needs. Having both the desire and ability to purchase real estate is known as “effective demand”.

2. Scarcity

Scarcity is an economic concept that expresses the level of deficiency or inadequacy of the quantity or number of a specific type of property in comparison with the demand for the same type of property. In other words, scarcity refers to “the relative demand for” versus “the relative supply of” a specific type of property.

For instance, there could be high demand for and low supply of a specific type of property in one region; yet, in another region, there could be low demand for and abundant supply of the same type of property. Therefore, properties are scarce in regions that have high demand and low supply.

3. Substitution

The economic concept known as “substitution” refers to situations whereby investors decide not to pay more money for a property that is similar to another property which has a known price. Generally, properties are unique and limited and the economic concept of substitution only applies when another property can meet the same needs or desires of the investor who is linked to the property.

4. Utility

The economic concept known as utility refers to the ability of a property to be maximally used or utilized for an intended purpose; it can be defined as the ability of property to be put to practical use.

Various factors that influence utility are aesthetics (physical looks or attributes), location, government regulations, environmental limitations, etc. For instance, a location that is very inaccessible or difficult to access won’t be suitable for retail (selling of goods or services) purposes.

5. Transferability

This term/economic concept refers to comparative ease of transferring or exchanging ownership rights and control of a property from one person or party to another.

Transferability makes it possible for people or parties to acquire, own, and control real estate property. Transferability and the value of a property can be affected by constraints or restrictions, conditions, and formal agreements.

6. Conformity

Conformity is an economic concept that can guide against any form of waste created by over-improving a property. The value of a property is optimized if it “at least” conforms to the attributes of its surrounding or location.

On the other hand, the value of a property can be negatively impacted if it doesn’t conform to the attributes of its surrounding or location.

Optimized value or high value is what real estate investors seek when they purchase properties, especially distressed properties which need to be renovated to enhance their utility and appearance to such an extent that they can conform to the attributes of their surroundings or locations.

7. Regression

It’s important to consider regression when investing in properties: the value of a property can be negatively impacted if the attributes of its surrounding is of a substandard value, inferior value, low value, or in a worse or terrible condition.

In other words, it is advisable not to waste your time and money investing in good properties if they are located in deteriorating or bad neighborhoods.

8. Progression

This concept is very important—if not the most important—for people who wish to achieve long-term success. Progression is about constantly moving forward in terms of increasing the value of any property and making high profits which can both be accomplished by investing in and improving poorly maintained or neglected properties that are located in good neighborhoods.

The value of many types of properties can be significantly increased by maintaining, upgrading, and repairing them in order to raise their level to at least that of other properties in the same surrounding or vicinity.

Note

Most (if not all) real estate investors would like to invest in properties that are maximally productive or have the potential to be maximally productive. Maximum productivity is synonymous with the “highest and best use” (HBU) analysis.

The economic concepts of utility and substitution are the drivers of HBU analysis or assessment which is a concept in real estate appraisal that establishes how the highest value for a property is attained.

The highest and best use is always that purpose that would generate the highest value for a property, regardless of how it is currently being used.

The highest and best use of a property might not remain constant over time. In fact, zoning of a property can rule out some potential uses of a property during evaluation—i.e., when it is being evaluated.

At the end of the day, determining the possible, likely, or “fair market” value (the price that a buyer is willing to pay and a seller is willing to accept for a property at a given time) of a property is often baffling because—as they say—“beauty is in the eye of the beholder”!

The Value of Real Estate Cycles: Understanding Buyer’s & Seller’s Markets

As it happens in other fields, it also happens in real estate: some real estate investors don’t monitor real estate market conditions, locally or globally, and end up losing ground where they could have won it.

Some investors make the big mistake of not continuously conducting research that can update them with information about recent economics of the local or global real estate market.

Some investors are only concerned about the money aspect of real estate; as a result, they aren’t even aware that real estate cycles exist and the tides of any real estate market can change when they least expect.

Lack of awareness about any change can lead investors to failure after investing their time and money and making so-called “juicy” or “promising” investments.

The old news (for those who know) and new news (for those who don’t know) is one and the same: the real estate market and criteria that influence people’s decisions are dynamic and do fluctuate. And their value deserves people’s attention.

Therefore, even if you’ve been successful in the past, or you plan to buy and hold real estate, you need to pay attention to/be up-to-date with the real estate cycle or market conditions.

Intelligent real estate investors always find time to monitor their markets to look for signs of real estate cycles which can open opportunities for real estate businesses.

On the other hand, lack of awareness of real estate cycles can stunt or halt the growth of a real estate business.

The fact that real estate markets are cyclical—they have cycles—is one major reason why you need to keep track of real estate market conditions and the timing of buyer’s and seller’s markets.

What is buyer’s market?

In real estate, a buyer’s market situation occurs when property owners aren’t able to sell their properties quickly because supply is higher than demand—i.e., the demand for properties is lesser than the supply.

This condition makes sellers more flexible with their prices and gives buyers an advantage over sellers. It opens great opportunities for investors to seek seller financing.

What is seller’s market?

A seller’s market situation occurs when property owners are able to sell their real estate properties quickly because the demand for them is higher than the supply.

This condition makes it possible for property sellers to receive multiple offers in a short period of time and even sell properties higher than their respective asking prices.

Real estate cycles, influenced by demand and supply

A real estate market may have either more demand, or more supply, or a comparably equal level of both. More demand for properties causes shortage of supply, increases rents, and appreciates the value of properties.

This can expand real estate businesses and lead to building of more properties. It other cases, it can even lead to overbuilding—meaning, high or excess supply of properties—and subsequent decrease in rents and property valuation when the real estate cycle changes—supply becomes higher than demand.

Some property investors believe that regardless of the economic situation or level of demand and supply, they don’t really need information concerning real estate cycles.

They believe they’ll be able to make it and expand their businesses, unhindered, because people will always search for places to buy or rent and live in.

Although this could be partially true, it is important to note that demand and supply fluctuate in different regions of the world, and the economic base of a region greatly impacts its rental rates, occupancy, and even tenant and buyer quality.

So, even if people are always going search for properties to live in, certainly, the same people would hardly ever demand for properties located in regions that are known or becoming known for issues such as fighting, wars, or being blown away by floods and earthquakes.

Various conditions can cause demand to be low or missing and create opportunities for investors to fall or rise, depending on the decisions they take.

Follow the path of knowledgeable and successful property investors who are aware that real estate has cycles and, with good timing, the real estate market can yield great dividends from wise decisions after tracking cycles and acquiring valuable information.

Important Questions You Should Consider Before Investing in Real Estate Properties

Real estate investing has a lot of benefits and anybody can succeed in it if they make up their mind, put in appreciable effort, and do their homework which would consists of some necessary tasks.

However, as is applicable to many other endeavors, an interested individual has to ask themself some important questions and provide reasonable or good answers before making a final decision about getting involved in real estate investing.

This article discusses the following important questions you should ask yourself in order to be in the best position to know whether you have what it takes to succeed if you make real estate investments which involve managing properties:

1. Do you have interest in real estate investing?

The best and most successful real estate investors have interest in real estate investing and are always striving to expand or maintain their businesses. If you don’t have interest in real estate—or anything—it will be difficult to succeed at doing it. Real estate investing, like many other ventures, is not for everybody; you have to be interested and feel comfortable with it so that you can be in a good position to make any progress or achievements.

2. Do you/will you have adequate time for real estate investing?

Acquiring real estate is often time-consuming: it usually takes considerable or even a lot of time to establish any type of real estate investing business; it takes time to find ethical and competent real estate practitioners; also, it takes time to investigate neighborhoods, zones, and properties to assess whether there are any issues that have to be resolved before investing.

From the onset, it’s not always possible to foreknow the amount of time that would be required to seal a deal; if you fail to do your homework properly before purchasing real estate properties, you may end up making mistakes and overpaying or purchasing properties that have issues.

Even if you hire a property manager to assist you in evaluating prospective tenants, managing your properties, solving problems in properties, and collecting the rent, you would need to create some amount of time while paying for the property manager’s services.

If you have many other responsibilities and don’t have enough time, it may be more preferable to look into the aspects of real estate investing that are less time-intensive or time-consuming.

3. Do you have what it takes to handle real estate investing issues or problems?

Issues, problems, or challenges are part of everyday life, and problems may inevitably occur in real estate investing, especially when you want to buy or invest in properties. At all times you have to be prepared beforehand for problems which could arise from anywhere during negotiations, purchases, or investigations that are tied to properties.

If you don’t have enough steel or guts, then you won’t be able to manage properties and the type of tenants who don’t take proper care of the properties that are entrusted to them. If issues or problems cause you to be out of sorts and unfocused, then you might not be able to succeed in real estate investing and may need the services of a property manager.

Financial rewards can come after all the headaches, but you really need to ask yourself whether you would feel comfortable owning and managing properties along with tenants and any unforeseen issues that could arise in the future.

4. Can you/will you be able to handle downturns in the real estate market or activities?

Real estate can be fun when prices and rents are rising, but not a whole lot of fun when real estate market downturns occur! Consider what happened when the prices of real estate properties in the market declined in most communities during the late 2000s.

Although many people experienced losses, other people who had cash and courage or guts, saw the decline as an opportunity and cashed in and reaped good benefits much later. Can you/will you be emotionally and financially balanced when the real estate market experiences rough times?

The truth is that real estate investing can face difficult times, especially when there are downturns or declines in real estate business activities and property prices. Do you/will you have the financial wherewithal to handle any possible downturn? Will you be able to handle your real estate investments when their values fall?

You probably don’t have the gift of clairvoyance to predict how prices may rise or fall, or how properties may appreciate or depreciate; so you need to be prepared to handle your property carefully, especially if property values drop, the real estate market goes haywire, or recessions occur and it becomes more difficult to find and keep quality tenants.

How to Analyze Rental Properties by Estimating Cash Flow

In order to consistently make wise investment decisions and attract good profits, you need to understand how to analyze rental properties by doing the maths that’s usually involved in analyzing rental properties.

If you don’t do your analysis properly or correctly from the onset before investing in any property, you could end up losing money when your expenditure/expenses on the property are higher than the expected income. Poor or incorrect analysis attracts losses.

On the other hand, if you do your analysis properly or correctly from the onset before investing in any property, you would end up earning good profit because the expected income would be higher than the expenses. Good or correct analysis earns profit.

Major Reasons Why Some People Fail at Rental Property Investing

Every real estate investor should understand how to analyze rental properties and know how much money they are going to make before they invest in any rental property. Analyzing a property involves making an estimate of the cash flow expected from the property after investing.

The formula for calculating cash flow after estimating the income and expenses is: cash flow = income ─ expenses. This implies that the cash flow from any property can be either positive (profit) or negative (loss), depending on whether the income is greater than the expenses, or vice-versa.

This article discusses how to analyze any rental property and estimate its cash flow or money-making potential which can help an investor to make a wise decision: whether to invest or not to invest in a particular rental property.

For each property, the income and expenses have to be evaluated before the cash flow can be calculated:

1. How to estimate income

A number of property characteristics are often considered when estimating the projected income that a rental property could possibly generate. To estimate a rental property’s projected income, an investor needs to have an idea of the rate of the average or fair market rent price for the rental property.

It would be fair to state that the average market rent price is at least a huge part of the income, if not equal to it. A rental property could be a commercial building, a large apartment building, a small multi-family property (duplex, triplex, and fourplex or quad), a single-family property, or a small apartment complex.

But, what is the “average market rent” price for a rental property? The average market rent price is the exact amount of money that a potential tenant is willing to pay in order to rent a property during a certain time period.

Property characteristics that are usually considered when determining the income of/average market rent price for a rental property

The nature of each local market influences and determines the average market rent price for different types of rental properties; each average market rent price is determined by the following property characteristics that are usually considered when investors are estimating or deciding the rent price for a property:

1. The area covered by the property: the size of the property.

2. The number of bedrooms and water closets/bathrooms in the property.

3. The presence or absence of modern facilities such as air conditioners, heating appliances, etc.

4. The location of the property.

The average market rent price of a property can also be evaluated by applying the following tips:

  • Asking about the average market rent price from landlords and real estate practitioners in your locality.
  • Reading the real estate property or market section of local/offline newspapers. Although newspapers are traditional or old school, you can still find valuable information in them.
  • Going through the listings in the market section of your local real estate companies’ websites. The listings usually show the areas/sizes of each property, the number of bedrooms and water closets/bathrooms in each property, the amenities or types of modern facilities—if present—in each property, and the location of each property.
  • Searching for the prices of available rental properties on your local MLS (Multiple Listing Service). Multiple listing service is a real estate marketing database that is updated by real estate professionals (agents, brokers, etc.) and provides clients with information about the renting, buying and selling prices of properties. In addition to MLS, you can search Craigslist.
  • Raising the rent price for your property and waiting to see whether people will actually pay despite the increase in price. You can employ this method when your property is vacant or when there are too many applicants or people interested in your property. If you don’t get a favorable response after a few weeks or so, you can gradually reduce the price until someone pays the rent price for the property. Regardless of what happens, you will eventually get someone who will be willing to pay the average market rent price.

After you are through estimating the income by applying any of the tips listed above or considering the general characteristics of properties listed earlier, you need to estimate the expenses that would be made on your rental property before you can eventually calculate the cash flow.

2. How to estimate expenses

Expenses could be a bit difficult to foresee and estimate, and they usually make many investors lose money, unexpectedly. Even if you know the actual expenses that have to be made on a property, unexpected situations can arise and incur more expenses, and reduce the amount of cash flow or profit you expect to make from the property.

Generally, a number of items are often considered when estimating the expenses that have to be made on a rental property. Some properties will require more expenses than others; not every item (for example, insurance, taxes, renovation, sewer, electricity bills, water bills, etc.) should be considered by an investor when estimating expenses because renters/tenants may pay for some items associated with certain expenses.

Items that are usually considered when estimating the expenses that would be made on a property

To estimate the expenses that would be made on a rental property, an investor has to consider some or all of the following items (Note: Depending on your locality or country, you may need to consider more items than the ones listed above; additional items may include flood insurance, lawn maintenance, snow removal, gas, etc.):

1. Renovation/repairs

2. Capital expenditures

3. Taxes

4. Property insurance

5. Property management

6. Vacancy rates

7. Sewer

8. Water

9. Electricity

10. Trash/garbage

To determine the expenses for each of the above items, apply the following tips:

  • Ask a contractor(s) to assess whether renovation/repairs would be required, and how much the expenses would cost.
  • Ask a contractor or consultant to assess whether a property would require long-term improvements or replacements (for example, plumbing systems, roofs, appliances, etc.); if it would, then any expenses due to such works should be included under “capital expenditures”.
  • Inquire about taxes from your local or state government parastatal that’s in charge of taxes.
  • Ask your insurance salesperson about the expense(s) for property insurance.
  • If you’re not managing your properties by yourself, inquire about property management expenses from a property manager.
  • Inquire about vacancy rates from local real estate practitioners or property management companies.
  • Inquire about sewer expenses from your local sewer company/department.
  • Inquire about water expenses from your local water company/department.
  • Inquire about electricity expenses from your local electricity distribution company.
  • Ask your local waste disposal or management company about the expenses for trash/garbage.

For any other items that aren’t listed above, but are applicable to your locality, inquire about their expense(s) from real estate practitioners and landlords in your locality.

3. How to estimate cash flow

After estimating the expected income and expenses by adding all the items on the list for the income, and all the items on the list for the expenses, you can then proceed to estimate the cash flow that would be generated from the property.

Remember, cash flow = income ─ expenses; therefore, to estimate the cash flow or return on investment (ROI), deduct the total expenses from the total income.

If the cash flow is positive, it means the property would generate profit; therefore, it would be wise to invest in it. On the other hand, if the cash flow is negative, it then means the property would incur a loss; therefore, it would be wise not to invest in it.

Pros & Cons of Investing in Fixer Upper Houses

Fixer upper houses, or “fixer uppers”, are houses that need to undergo changes, renovation, or rehabilitation works before they can be rented or sold out: a fixer upper requires little, considerable, or much rehabilitation to make it more sellable or rentable for any desired purpose.

The amount of rehabilitation work or repairs that need to be carried out on a fixer upper may range from light to massive renovations on plumbing, electrical, roof, foundation, or any other aspects or parts of a house or building.

Is it advisable to go for fixer uppers if you’re interested in investing in real estate? You might be wondering whether you should invest in fixer uppers if you decide to venture into rental properties. The truth of the matter is that investing in fixer upper houses has its pros and cons.

Fixer upper houses can attract recurring dividends or tons of money after you fix them; on the other hand, they can also attract an appreciable or high degree of risk which can make you earn lesser ROI or lose money if you don’t play your cards right.

Now let’s take a look at the following pros and cons of investing in fixer upper houses:

The Pros of investing in fixer upper houses

1. Fixer upper houses can be fixed to appreciate in value and attract greater returns or cash flow

Fixer upper properties build immediate equity and always tend to gain value over time. It’s possible to shorten the time in which you can make immediate equity; you can do this by making some immediate changes in any fixer upper, thus raising their value and making dividends from the resulting appreciation due to the effected changes.

Because the nature of fixer uppers makes it easier for investors to buy them at far less rates than other properties, fixer uppers can attract greater returns or cash flow.

2. Fixer upper houses attract less competition

Most real estate investors don’t like investing in houses that have problems, especially many problems that fixer uppers usually have: most investors would rather invest in houses that are easy to handle and sell or rent out. As a result, there is less competition for investment in fixer uppers because the majority of investors simply don’t want to get involved in doing the necessary work required to fix fixer uppers and make them look better or offer better service(s).

3. Fixer upper houses can be fixed by using various financing options

The nature of fixer upper houses makes them open to many financing options or ideas; in fact, you could invest in fixer uppers in ways that would enable you to make money by investing little of your own cash. You could make use of financial options such as conventional loans, portfolio lenders, and private lenders; on the other hand, you could make use of financial creative ideas such as home equity, partnerships, seller financing, and house hacking.

The cons of investing in fixer upper houses

1. Fixer upper houses can be stressful to fix

It’s not always easy to rehabilitate a house that has a lot of problems or needs appreciable or lots of repairs. It can be stressful to deal with the drama associated with renovating or rehabbing fixer uppers: a lot of frustration could be involved when an investor is looking for different types of workers, hiring out work, chasing after contractors who miss deadlines or show up late for renovation works, etc.

2. Fixer upper houses can attract unexpected, unforeseen, or hidden expenses

Generally speaking, it isn’t easy for new investors to accurately estimate the amount of money they would need to fix or rehabilitate a fixer upper, because, when undertaking various aspects of rehabilitation works on fixer uppers, the more a wall, roof, floor, or any other covering is unveiled, the more likely one would come across other things that may need to be fixed.

For example, if an investor decides to replace old cabinets with new cabinets, they may suddenly realize that they need to also replace electrical works in the wall behind the cabinets, or repaint the wall behind the cabinets, etc.

Because of these reasons and many more, renovation works on fixer upper houses may require more money than an investor had initially planned to spend, and the duration for renovation may end up becoming longer than it was initially estimated.