Calling New Investors!

I recently sent an email detailing several areas of real estate investment and thought it might be helpful to share this with everyone. As this was a response to several different inquiries, it jumps around but covers a lot of basic information should start to learn about if your thinking of investing in real estate.

U & O

Township U & O (Use & Occupancy) is required by most townships and is typically paid (in Southeastern Pennsylvania) by the seller. In properties where the owners are either short on funds, going through foreclosure proceedings, or when dealing with bank owned properties, seller’s often require that the buyer pay for the township’s inspection and make any necessary repairs to the property. Each township has different requirements that must be met in order for the seller to convey the property to a buyer. It’s the townships’ way of trying to keep properties to certain level of quality.

In Upper Darby Township and Haverford Township, they require that all curbing and sidewalks are in good condition, that address numbers are visible on the property, and that there are smoke detectors on all floors and bedrooms of residential properties. On commercial properties, which include commercially zoned properties and properties with 4 or more units, township inspectors often go through the properties and can basically point out anything they feel is a safety hazard. This could include out dated electrical systems, GFCI outlets near water sources, repairs to roofs, tripping hazards, etc. The cost of their inspection is about $100.00 and then any further repair all depends on contractors and the extent of repairs. The nice thing about dealing with row home properties is that typically a row is only 16’ or 18’ so even if you had to replace some curbing and sidewalks, its not that big of an area.


Other Inspections:

Whenever you have a rental property, most townships require that you get a renter’s license. This cost depends on the number of units but its annual and I just paid about 75.00 for my license in Upper Darby Township. Additionally, the townships want to come through and inspect the property, whether there is a tenant occupying the property or prior to their occupancy. For rental inspections, they are looking for any safety hazards. You are required to correct any items pointed out within 90 days.

Small Commercial vs. Residential

There are positive sides to each type of investment but here’s a run down for both:

Positive:

Commercial
- Often you have tenants looking for long term leases, b/c small businesses often hope to continue there business through the several years.
- You can require commercial tenants to pay all utilities, utility maintenance, insurance, even taxes if they are willing. It’s not always the case, but if a business wants a location, they are willing to spend more.
- You can set up long term leases that include set rent schedules that increase. This allows you to calculate your return on investment more accurately.

Residential
- Everyone needs a house and residential is open to any qualified renter.
- Residential doesn’t require specific changes to a property.
- If the property has the necessities and things work, usually you find someone to live there
- You don’t have to deal with zoning issues or change of use

Negative:

Commercial
- Zoning may not allow certain tenants to use the space. Any change of use has to be approved by the township. If a store front is being used as an accountant’s office and then wants to be changed to retail, you have to see if this use is allowable.
- When a commercial tenant leaves, you may have to undue changes they’ve made to the property…you can sometimes reduce this by putting certain wording into a lease.
- B/c of special use, a commercial property may take longer to rent then residential.

Residential
- Renters may not take care of the property and cause damage
- Quality of renters can often be lower
- Finding the tenant when payments are over due can be more difficult


Properties with Existing Leases

Whenever you buy a property with a current tenant, the lease remains with the property. This means that the terms and conditions which the tenant agreed to will remain in effect. You will actually have to sign off on the leases prior to settlement. There’s good and bad here too. If the lease does not allow for a “kick out” clause, and the rent is below market, you might be stuck with a tenant ‘til the end of the term of the lease. On the other hand, if the rents are strong and the property looks to be well taken care of, you could be in an excellent situation.


Multi units

Multi units lower your risk of having 100% vacancy, as typically all units won’t be vacant during the same period of time. There are definitely multi units available with & without renters in the area…it’s more of trying to find ones that aren’t overpriced.

When owning a multi unit property, you want to make sure that the utilities have been separated. If not, often times the landlord takes on the burden of paying heat, electric and hot water. Additionally, if utilities have been separated, landlord still pays for cold water to the property, b/c that’s not typically separated as it comes into the house.

Market Overview:

Residential (excluding sales over 1 million)

Upper Darby 2004 2005 2006 2007
Average Sales Price 127,344 142,223 158,157 165,818
Days on Market 32 30 38 50


Havertown 2004 2005 2006 2007
Average Sales Price 276,644 304,679 307,452 308,832
Days on Market 30 36 47 52


Commercial & Multi Unit Properties (excluding sales over 1 million)

Upper Darby 2004 2005 2006 2007
Average Sales Price 127,344 142,223 158,157 165,818
Days on Market 32 30 38 50


Havertown 2004 2005 2006 2007
Average Sales Price 276,644 304,679 307,452 308,832
Days on Market 30 36 47 52

You can see that the Days on Market (DOM) have increased which is a strong indicator that the market has slowed down over the last couple years. This also causes for me inventory to build up on the market.

Rental Data

While this data takes a little more mining, it is very neighborhood specific. I would recommend when we find a property that we research what landlords are asking by going onto Craigslist.org. While I have some data on the Multiple Listing Service, most landlords rent privately or through property management companies which advertise in newspapers and online sites like craig’s list. In the northern sections of Upper Darby Township, 3 bedroom, 1 bath rows typically rent anywhere from $1100 to $1300, one bedroom units around $600 and 2 bedroom units between $700 & $800.

I always like to take a conservative perspective when it comes to potential rental income. Another big factor that has be taken into consideration is the condition of the property and what has to be fixed and how soon. A property in good overall condition is worth a lot, even if the rent is a bit on the low side.

Last thought, b/c rental data is less abundant; the market place remains less of an exact. If your property happens to be the nicest available at the time, people will be willing to pay a little more.

Financing to Consider

The goal is to put as little money down as possible with the highest returns. When you’re looking at properties you want to make sure and look at the full picture. This includes:

Cost of Purchase – An easy way to get an idea of this is by figuring about 5% of the sales price. This will cover items such as mortgage fees, title insurance, tax reimbursements, tax escrows, insurance escrows, and 1 % transfer tax
Down Money – Most banks require at least 10% down on an investment property and often times more when it comes to commercial investing. 20% down is probably most common.
Renting Fees – Usually a license is about $75.00 a year + the inspection costs which might be another $50.00. If you wanted our office to rent the property for you, advertise in local newspapers, show the property and pre qualify renters, we charge one month’s rent. If you’d like us to manage the property for you, which includes collecting rents, providing you with a monthly statement and acting as a go between when renters have maintenance requests, we charge 6% of the monthly fee.


There are no dump questions. Please ask and I will share my knowledge. Also, check out all my listings and other cool features on www.talktotyler.com

I'll keep you posted.