If more than a couple of these factors ring true for you, it may be time to consider selling your property and possibly make a 1031 exchange into a passive replacement property.
Sign 1: Your State/Local Landlord Regulations Have Become Intolerable
Oregon and California recently became the first two states to impose statewide rent-control legislation. Not only do these laws cap annual rent increases, but they also impose onerous requirements for removing tenants after 12 months of occupancy.
If you feel like your state or local governments are adversarial to your interests as a rental housing annual provider, you are not alone.
RECENTLY IMPOSED STATE/LOCAL REGULATIONS INCLUDE:
✓ Screening limitations or prohibitions
✓ Security deposit restrictions
✓ Seasonal eviction moratoriums
✓ Late-fee limitations
✓ Forced relocation assistance
✓ Complicated notice and eviction procedures
Sign 2: Your Risk of Legal Liability Has Exceeded Your Comfort Zone
When you own rental real estate, you expose yourself—and your assets—to a whole new world of potential legal liability. In addition to the dozen ways a rental housing provider can trip over federal fair housing laws and local landlord regulations, state premises liability can be devastating.
Courts in California effectively presume that an injury was the result of a breach of duty and shift the burden to the property owner to prove otherwise. This stems from the California Supreme Court’s view that regardless of actual fault, “liability should often be imposed on the party, often a business, most able to implement steps that promote social welfare by enhancing safety, spreading the risk of loss and ensuring compensation.”
In other words, some courts promote the notion that you should pay for more than your fair share of injuries occurring on your property simply because you have more money than your tenants or their customers.
If you are tired of worrying about being sued in a pro-plaintiff state, you may be ready for a “change of venue.”
Sign 3: Demographic Trends May Not Be Positive for Your Area
DEMOGRAPHIC/ECONOMIC FACTORS DRIVING RENTAL PROPERTY PERFORMANCE:
✓ Positive migration
✓ Overall population growth
✓ Job growth
✓ Supply of rental housing relative to demand
Differences in economic prospects and cost of living can drive migratory behavior. Such differences, in turn, reflect differences in tax policies, business friendliness and right-to-work policies.
Click here to see an example of how disparities in living costs impact interstate mobility.
If you live in a state whose employers are leaving (and whose employees are following), you may not be able to count on past patterns of upward population growth.
Sign 4: Your Yield on Equity is TOO LOW
Over the last 12 years, many rental housing providers on the West Coast have watched their equity increase much faster than their rental income. This is particularly true for landlords whose property was once an owner-occupied property, such as an SFR, condo or townhouse. In these examples, prices are driven by the supply/demand for single-family properties, rather than multifamily cap rates.
Twelve years ago, you may have purchased a property with an 8% yield on equity (aka cash-on-cash yield) and today the same property may only generate a 2% yield. Why would you continue to accept such a low cash flow while bearing all of the risks and burdens of individual property ownership?
If you feel your current net cash yield—as a percentage of your property’s equity—is too low, you should consider relocating your equity to a market with potentially higher yields.
Sign 5: The Burdens of Operating Your Property are Affecting Your Life
Sometimes, enough is enough. Younger landlords simply have more energy to cope with the trials and tribulations of property ownership than the older versions of themselves. And sometimes, the wrong property manager simply exacerbates the problem.
Whether your hot button is problem tenants, overwhelming bills/accounting, unending property maintenance or looming capital expenditures, you may be ready to “tap out.”
You are in good company. Each year, thousands of people make the transition from active operators to passive investors. There are multiple options for investing in real estate without the weekly headaches of self-managed rental properties.
RICHARD D. GANN, JD
Managing Partner
1031 Capital Solutions
(800) 445-5908
1031CapitalSolutions.com
Richard (Rick) Gann is an attorney, licensed real-estate broker, and general securities principal
specializing in 1031 exchange solutions and he is co-author of the book How to Retire from Being
a Landlord.
Want to read about our experience with our 1031 exchange?
Recently, we decided to sell farmland in one state and exchange it for a 4-plex multifamily complex in a different state, neither state of which we resided in. Having never done this before, we thought our readers might like to know what our first experience with a 1031 exchange as rental property owners entailed. Where we gained insight and learned a lot, it certainly was not an easy task. Would we do it again? Click HERE to read about our experience to find out and determine if a 1031 exchange is right for you.
Prefer to listen to what we have to say about our 1031 exchange? Listen to our podcast!
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By: Spark Rental
You’ve probably seen condemned signs on houses. But how do properties become condemned, and what do you need to know as a buyer or seller?
There is likely a condemned house somewhere in the neighborhood you live in. Some are so far gone that demolition is the only answer, while others just need some good TLC (and a solid investment) to bring value to their owner. Here’s what happens when a house is condemned, and what it could mean in terms of buying, selling or simply owning that property.
What Is The Definition Of Condemnation In Real Estate?
A property is considered condemned when a government entity deems it unsafe or no longer fit to live in. Once a home is condemned, it may not be inhabited again until it has been rehabilitated and inspected, if that’s even possible.
In many cases, condemning a home does not necessarily mean it is a lost cause forever. Whether or not you can un-condemn a property depends on why it was condemned in the first place.
What Are Grounds for House Condemnation?
Most condemned homes are only condemned after they have already been abandoned and the owners or residents stop maintaining the property.
According to the US Department of Housing and Urban Development (HUD), there are currently more than 10 million abandoned residences in our country. Many of these will be well on their way to being condemned if no one steps up to maintain their care.
Regulations can vary based on municipality. Generally, a home may be condemned if:
- The house has been abandoned for an extended period of time; in some cases (and depending on the condition of the property), this could be as few as 180 days.
- It is dilapidated and/or deteriorated to the point where it’s no longer structurally sound.
- It is considered unsafe or unsanitary.
- The house does not have adequate utilities, such as power, water, electricity and/or sewer.
If a home is condemned, it is no longer legally habitable. If the problems are not fixed within a specified period of time usually stated on the condemned house notice, the home’s occupants will need to move out.
A home can also be considered condemned when eminent domain powers are exercised. This means a perfectly safe home may be forcibly acquired and modified — or in some cases, even destroyed — simply because of its location.
In cases of eminent domain, public authorities seize private property, such as a home and land, if it is in an area that is to be used for certain public projects. That means if your state wants to build a highway or airport through your backyard and you don’t want to sell, they can still condemn your property. (Yes, you’ll be compensated.)
How Long Does It Take to Condemn a House?
The length of time necessary to condemn a home depends heavily on its condition and why it’s being condemned. The specific regulations also vary from one municipality to the next.
Generally, the process of condemning a house or building takes time and involves notifying the owner and/or residents that the property is in violation of health and safety requirements. This often means receiving citations about the property’s violations, sometimes in a pattern lasting weeks, months or even years.
If the owner doesn’t correct the violations, the property generally goes before the courts for a formal legal hearing, at which time it may be declared condemned. The owner may then have a specified period of time, often between 30 and 60 days, to correct the violations, request new inspections, and apply for new permits before the property is declared uninhabitable.
In some cases, condemning a house can be much faster. If the property is determined to be structurally unsound, for instance, it can be condemned immediately and the residents forced to vacate with little or no notice.
How to Sell a Condemned House
If your property has been declared condemned because of code violations or lack of upkeep, you may decide that it’s not worth repairing. In this case, you can choose to sell your condemned property, though there are a few important things to keep in mind.
The first is that, generally, without making the required repairs, you will be unable to sell the condemned house as a structure. Instead, you can sell the lot the home is on, drawing in buyers who would plan to demolish or renovate the property themselves.
This is common, said Glenn Phillips, the CEO of Lake Homes Realty, a multi-state real estate brokerage based in Alabama. “We operate real estate brokerages in 33 states, and more often than not, we will see buyers purchasing a condemned home mainly for the lot. Once the sale is complete, the home is demolished and construction of their dream home begins.”
Expect a limited buyer pool for condemned properties. Buyers will have a difficult time getting a mortgage lender to approve a loan for a property that contains a condemned, even as a fixer-upper. Instead, you may have better luck selling to a buyer with cash or an investor who has the backing of a hard money lender.
There are also a number of companies that buy homes , often “in any condition.” Depending on the location and value of your land, you may get a fair offer even with a condemned house still on the property.
Buying a Condemned House
If you are simply looking to demolish the structure and build on the land, your biggest hurdle will be finding a lender. If possible, buy the property in cash. You can also borrow from a hard money lender like Kiavi or LendingOne, but you’ll still need to come up with a down payment.
If you’re looking to rehabilitate the home — either to live there yourself or even flip the house — you’ll want to do your due diligence and determine what you can afford.
Once a home is condemned, there are added steps in order to facilitate a purchase. For instance, if the property was condemned because of safety violations, you work with a code enforcement entity when making your offer. If the property was foreclosed on, you deal with a bank rather than an owner.
In this case, having a good real estate agent on your side can be very valuable.
Additionally, many lenders will only approve a mortgage based on the value of the property as it stands. This means that the land value and the condemned structure’s current value are factored in, but you may need significantly more money in order to actually demolish or renovate the property.
Having a partner investor or working with a hard money lender can be a good way to purchase the property and also have the cash necessary to complete your project.
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Where to Find Condemned Properties for Sale
Was the property eventually condemned because it was abandoned, or was the property abandoned because it was declared condemned?
No matter which came first, condemned and abandoned homes frequently find themselves on the path to bank foreclosure. And once these properties are foreclosed on, it can be easy to locate and move toward purchasing them.
You can also check with your city or county to see if they keep a list, or even a website, with local condemned homes. These condemned house lists can give you a great place to start looking if you’re interested in buying a condemned and abandoned property.
Your area may also hold auctions for abandoned and condemned properties; your county clerk may be able to direct you if such auctions exist in your town or county. These auctions can be a good opportunity to find a good deal on a property, though they may only be held periodically.
Lastly, if you come across a home that appears to be abandoned or has been declared condemned, one option is to contact the owner about purchasing the property. You can often reverse-search addresses through your county tax assessor’s office, which will give you information about the owner of the home. Then, you can contact them directly to see if they’re interested in selling and how much they’re willing to take.
Can You Fix a Condemned House?
A condemned home may initially seem doomed, that its only future involves demolition. However, you can often fix a condemned house and restore it to a beautiful property.
“The main benefit of buying a condemned home is the value,” Phillips said. “While some people will perceive very little value in many of these properties, they often have the bones necessary to create a wonderful home. Often, architectural elements from condemned structures can be saved and incorporated into an updated home.”
A home’s condemned status can be reversed, as long as the reasons it was condemned in the first place are corrected. If the home was condemned because of code and safety violations, that usually requires a significant investment into the property to bring it up to date.
The issues could be serious and structural in nature, or something as simple as electrical wiring. Be sure to get copies of the original condemned orders as well as a trusted home inspection before you buy, so you know what you are getting yourself (and your bank account) into.
Once you complete any necessary repairs, you need to request inspections from local authorities. If the renovated property passes those inspections, the condemned status can be reversed.
But does a stigma remain attached to those once-condemned homes, even years later?
“After a home has been renovated or replaced with a better version of itself, the stigma goes away and the homeowners will have a house they love,” Phillips said.
Final Thoughts on Buying and Selling a Condemned House
While many of us think of boarded-up eyesores when we hear “condemned home,” the truth is homes can be condemned for many reasons.
Whether you’re looking to sell a condemned property, build on a lot with a condemned home or plan to renovate a previously condemned house, it’s important to go into negotiations knowing what sort of value the property retains and how expensive your project will be. Buying or selling these properties may involve jumping through a few hoops, but the value that can be found in a condemned lot can be well worth the extra work.
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If you’re at all interested in multifamily real estate investment, then there are two words you need to learn right now: house hacking.
What does it mean to hack a house? The definition is simple: buy a residential multifamily (4 units or less) with strong cash flow numbers, live in one of the units, and rent out the rest.
New investors are discovering house hacking as the best way to get started in real estate investment. In this post, I’m going to share three big reasons why that’s the case.
Ease of Financing
One of the benefits of multifamily investing, in general, is economy of scale. One transaction gets you multiple income-producing units. As a result, per-unit acquisition costs on multifamily properties are typically much lower than single families. From a cash-on-cash perspective, that’s terrific news.
Economy of scale matters for financing, too. Especially with new investors, lenders like to see a property with multiple streams of income. They want to know you’ll have enough cash flow to keep paying the note even if a tenant disappears on you.
On top of that, lenders will typically count 75% of the income from those additional units in your favor. That added income will help you qualify for higher dollar amount than you could on a single-family property.
Scale isn’t the only thing that makes financing a house hack easier than a commercial multifamily. Thanks to FHA, residential investors can take advantage of loan products with significantly lower down payment requirements and better rates than the alternatives.
A Smarter Way to Pay for Housing
Consider the following scenario:
You’ve got a decision to make: buy and live in a single-family or a duplex. You’ve only got 5% to put down, so you’re going for an FHA rather than a conventional mortgage.
Let’s take the single-family first. You find a house you love for $300,000 and put 5% down on a 30-year loan at 4% interest. Assuming a tax rate of 1.5% and insurance at $2000/yr., that’d put your monthly payment at about $2,000/month. You might decide to rent out a room or two. If not, that $2,000 is entirely on you.
Now, let’s imagine you choose a duplex instead at the same price point, down payment, and loan terms. Let’s put the rent at $1,250 (about the national average for a 2-bedroom). Congratulations. You’ve effectively lowered your monthly housing obligation to $750. Not bad.
Take that scenario a step further and imagine you went with a triplex instead of the duplex. Assuming the units you choose to rent are both 2-bedrooms, that puts your monthly gross income at $2,500. Now you’ve got a $500 surplus at the end of the month to plow into expenses, capital improvements, and so on.
This isn’t pie in the sky math. This is how house hacking works.
Of course, you’re going to have to trade off some things in the process—a bedroom or two, yard space, parking, etc. But this is just the beginning of your investment journey, not the end. Just a few years in a hacked plex will prepare you to move into the single-family of your dreams soon enough.
Learn on the Job
“Passive income” is a paradox. It doesn’t just happen; it takes years of hard work to establish a portfolio and a system that’ll put real money in your bank account every month without you having to handle the day-to-day.
One of the hardest parts of that early journey is learning to manage property. Nobody’s born with a filled-out property management toolkit. It takes time to build up the business sense and emotional intelligence needed to handle people and properties well.
The question is: where are you going to get that experience?
House hacking answers that question in the least intimidating way possible. When you hack a plex, you become your property’s on-site manager. From a tactical standpoint, that puts everything within arm’s reach. It’s much easier to manage a property from next door than from the next state over.
From an experiential standpoint, you get hands-on experience as a landlord: marketing property, showing units, screening tenants, writing leases, collecting rent, and fielding maintenance calls. You’ll outsource these things soon enough, but it’s always better that you understand these basic mechanics before you hand them off to someone else.
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There’s no better way to learn this business than to immerse yourself in it. House hacking literally accomplishes just that. If you want to build a massive commercial portfolio someday, then that’s fantastic.
Source: Rod Khleif
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