T.E.A's FREQUENTLY ASKED QUESTIONS

Q) What areas would you recommend an investor like me to buy in? I'm looking for something that will appreciate, but will also produce a little income, I'm basically wanting to break even at least.

A) I recommend properties based on condition, price and rental performance. Austin in general has good properties available in every area. However the public demand into certain areas is greater than in others. For graphic proof of public demand, please download my "Days on the Market" graph. Lower (shorter) days on the market means higher demand -- people stepping on each other trying to get into that particular area. I try to buy the best value properties in those high demand areas. Demand generates appreciation. Cashflow is based on rental performance and how much money you put down. Many Austin duplexes and fourplexes will break even at 10% down, the great majority of them will cashflow at 20% down. Remember, 20% in Austin is usually no more than $40,000. In some coastal cities around the US, forty-grand won't get you even 10%. If you are simply seeking more appreciation and can just break even, it is better to pay more for a high-demand area as you will get much better appreciation, and your potential to raise rents is better. If you are seeking more income each month and doing this long-term perhaps 10+ years, I would recommend buying several lower priced properties in lower demand areas (these will appreciate and eventually become high demand areas). Or if you have a large amount of cash to put down, perhaps around $150,000 to use, I'd personally try to put down 20% on 3 properties in a high demand area. This will get you both cashflow and appreciation.

Q) How do you calculate the annual tax--is the tax amount on the property list what I am going to pay? Or, a new buyer has his/her own new tax calculation which is different than the present owner's?

A) Taxes are calculated every year in January based on the county appraiser's determination. Normally this determination is well below what you pay for a property. For example, you purchase a duplex in a nice area for around $180,000. The county assessor (appraiser) values that whole area's similar duplexes to be about $165,000. You will only pay the taxes based on the county's appraisal, not the price you paid. The city will send you a letter at the beginning of the year letting you know what to expect. You won't be billed until the end of the year. You have until January 31st to pay the tax bill. You will pay the same amount of tax as the previous owner paid. The tax bill is not based on sales price at all.

There is a detailed tax calendar (quite boring actually, but worth a look) located at:
http://www.window.state.tx.us/taxinfo/proptax/stmt/stmt0412/stmt0412_2.html

Q) What is the insurance rate? How do you calculate that? Without these two numbers, I can't come up with cash flow number accurately.

A) Insurance really depends greatly on how much you want to cover the property for. If you want full coverage it will be quite expensive, just like car insurance, but if you get the minimum necessary to acquire the loan on the property, then it's not that expensive. Normally a duplex can be insured for around $70 per month. A fourplex usually costs around $120-140. All this depends on size and the materials it was built with. It will fluctuate, but not by much. If you buy 3 sides brick or stone, it will be slightly cheaper than a property that is 4 sides wood or masonite. I have several insurers that can help you on the contacts page. Depending on the insurer, you may only be able to to cover up to 3 properties, while some insurers will cover up to 80 properties. This is usually not a problem for most folks. You can always change insurers if one is not performing for you, or doesn't suit your growing real estate empire's needs.

Q) What exactly does a property manager do? If I'm in California are the tenants going to expect me to come and fix the place if something breaks? How does the percentage per month work? Do you manage properties?

A) Property managers do a lot of necessary day to day activities for the property such as rent collection, accounting, respond quickly to maintenance calls, assist in move-in's and move-out's, show the property when vacant, and if need be -- handle evictions and legal matters. Property managers charge a monthly fee based on the rental income. The average fee is 7% of the gross monthly rents. If your property gets $1000 per month, the manager will collect this and then deduct $70 for their costs. Leaving you with $930 to pay your mortgage, taxes and insurance with. If you have a vacancy, they will normally charge at least 50% of the first's month's rent (a one time "lease fee") to cover their costs in advertising and showing the property. Each management company has a different rate and different terms, no two are alike, so please shop around for the one that best suits your needs. I used to manage properties, I do not manage them anymore since starting the new company in 2004, not to say I wouldn't, I simply don't have the time. I do have several great managers listed on the contacts page for you to check out.

Q) What about seller financing and zero-down loans? How can I get into real estate with no money out of pocket?

A) It's tough, but it is possible. If you owner-occupy a residence, you can do zero-down. If you get the seller to carry 10% note, you can also do zero-down. However, that's old school. Nowadays there are several loan programs that give investors zero down options. The rates on zero down are much higher, sometimes a blended rate of 9% or higher I've seen, but this allows you to acquire lots of properties with little cash down - you just pay closing costs, and occassionally we can get a few thousand dollars of those costs rolled into the loan. It's case by case. I will tell you that in a high demand area with hot properties, zero-down won't get looked at favorably by the Seller. The Seller's will get multiple offers from other people putting down 20% or 30% and they won't look at zero-down offers of any price. Not being rude, just being honest. I don't want to give anyone false expectations when my experience dictates we do it differently. Seller financing is possible in some cases, but normally on larger unit purchases like a 4plex. For a Seller to carry a 10% note on a $150,000 duplex would mean basically $15,000 spread over several years at a low rate -- normally Seller's don't want to do this since they don't really make any money. However, higher priced properties like 4plexes and commerical properties - seller's are more willing to do this.

Q) What about repairs or cash back at closing to get work done on the property?

A) When the market tanked during the recession from 2001-2003, it was a Buyer's market in Austin. We could pick up properties and have Seller's eager to do repairs or give us credits at closing. However, the tide has changed, and it's a double-edge sword for Buyers. While you as a Buyer will ride the gains of an appreciating market, the Seller's also know this, and are reluctant nowadays to put money into their property. So please don't be discouraged if the Seller turns around and says "AS-IS" in order to acquire the property. If the property is a pride of ownership property in a good neighborhood, chances are this will happen although we will always negotiate for something, we may not get it in all situations -- especially when there are more offers on the table.

Q) When I sell, what about capital gains taxes and expenses?

A) I wish I could say there were little or no expense in the sale of a house, however, the sale is quite expensive. There are title fees, agent fees and the ugly beast called Capital Gains taxes. It's pretty simple with title fees, usually 1% or just a little more. Agent fees normally are 6% (seller pays both agents). Capital gains is the tricky part. First, GO HERE - the IRS tax tips page on cap gains. Also, another FAQ from the IRS. If you own a rental property less than a year, you will be hit the hardest at possibly over 25%. The longer you own it, the better you will be, but after a year your tax is supposed to be pegged to your income bracket, which could be 15-20%. If you bought and sold a rental house within 1 year (you flipped it), any capital gains would be taxed as regular income. If you bought and sold a rental between 1 and 2 years, your gains would be taxed at the long term capital gains rate. Again, check with your CPA and other online sources, I'm not a tax expert, this is just what I've experienced out here with the sale of others and my own properties.

And some more we've collected:

1. Do I need a homeowner's or hazard policy?

-yes you need homeowner's insurance, however you won't have to actually pay for it until the actual closing date of your property. You will need to choose a provider, and there's tons of them. I would ask your current car insurance / renter's insurance if they cover duplexes and see what the rate is. Average is around $60-80 per month depending on size and construction (all brick being slightly cheaper than all wood paneling). On my contacts list I have insurance providers that can help you out.

2. Do I need a private umbrella policy to protect myself from a tenant lawsuit?

Well, insurance will pay for injury on the property to a certain amount, beyond this the tenant could go for your other properties (but not your personal residence). Most people end up putting a property into an LLC, and this protects your other properties from getting touched.

3. What kind of insurance do most property owners that rent out their property carry?

Many of our investors have just the minimum insurance required by the lender. Each property is different so there's no standard, as long as your lender is OK with it, I'd say it's pretty good because they don't want to risk losing their asset either. Hazard / fire insurance is normally all that is required.

4. Can I avoid paying PMI by doing "80/10/10" financing?

Yes, as far as I know, this is still OK although it has gotten slightly harder to get the other 10% loan.

5. Is 8% of gross rents a fair assumption of cost for a full-time property mgmt company to take care of everything since I'm out of state?

8% is just a little above average. We have several companies that will charge 7%, one that charges 6% and another that charges 5%. Depends on where your property is, for example, if it is in a high-drama area, they may want at least 7% since they will be fielding more calls. But yes, a fair assumption, we do all our numbers based on 7% mgt.

6. I don't want to pay all the utilities for a tenant but I do want to pay the water bill so that they don't stop watering the lawn. How much would monthly water for a duplex cost?

You've gotta be the nicest landlord in the world, I've got about 1000 tenants that would love you for this. The water bill would fluctuate greatly depending on the number of people in the unit. If you have a family of 4, you can count on $40-60 a month, per side. This is very nice of you, but you won't need to do this. Austin rarely has droughts and very rarely needs sprinkler systems or constant watering, you'll be happy to know that we're humid enough that lawns are green without constant supervision. I don't have a sprinkler system and I wish I owned a gravel quarry because I'd put rocks everywhere so I wouldn't have to mow it each week...

7. Do I need to pay separate money for lawn maintenance or does the tenant or prop mgmt company usually take care of it?

Another good thing is that tenants are required to do their own lawns out here, this will be in the lease you sign with them. The only reason why you'd need to be responsible for this is perhaps we buy a place that has an irregular shaped or "shared" yard that can't be defined or mowed by each tenant fairly. If you wanted to splurge on monthly lawn maintenance, it'll run you about $30-50 per time for the whole place (front and back of whole property). You only need to do it about 8 months of the year when the grass is not dormant. The mgt. co can line this up. But usually the tenants take care of it.

8). I have a question, Why are they selling a lot of Duplexes in Round Rock? What are the pros and the bad side of Round Rock?

A) Actually, there's very few duplexes in Round Rock to begin with, the ones that are on the market are at a normal volume for this time of year (the busy season in summer). It will drop off as December approaches, leaving about half of what's out there now. The majority of RR duplexes are located off Gattis school road, East 79 (Sunrise) and near Bowman, these three communities contain roughly 100 or so properties. Of those, about half are excellent condition, the other half being good to fair. Very rarely will we see a dog out there. There are a couple of small communities west of 35 in RR near Hester's crossing / La frontera, and again up north near Sam Bass rd. west. Not as many as on the east side though. West side oddly enough has several annoying flood plains that put several RR West duplexes in the middle of flood zones, leading to higher insurance costs depending on the house. We routinely buy and sell RR duplexes, there is good demand since the prices are generally lower than Austin duplexes, but carry the same rent as something in Austin, while usually in better condition. The only downsides are; fewer people in the market keeps prices from going up as rapidly as say something in Austin; and the Williamson county taxes are higher on certain properties.