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Excalibur Home Management Blog

ZESTIMATES - HOW ACCURATE ARE THEY?

Chris Ledermeier - Thursday, January 04, 2018


We’ve all done it, and for some of us it’s become a weekly ritual. We turn on our computer and before checking social media or email, we Google our address to see our most recent Zestimate on Zillow. But how accurate are Zestimates, and how can you best understand where your property rests in the evolving Atlanta market?


According to a report published by Zillow.com itself on November 14, 2017, the Zestimate margin of error for the Metro-Atlanta area is 4.1%.



If we dive deeper on a county by county basis, we begin to see that Metro-Atlanta’s average margin of error is composed of percentages ranging anywhere from 2.9% in Gwinnett County to 11.4% in Decatur.  That means that if you have a $1500 rental property in Decatur and decide to rent it at the Zestimate, you could be leaving over $2,000/year on the table due to under pricing. You could also be advertising it $170/month over market value, and while that seem reasonable, the carrying costs associated with having your property vacant in excess of the average days on market as a result of overpricing, immediately begin costing you money, rather than making money. Even at Atlanta’s average margin of error of 4.1%, you still risk losing money either due to under pricing or excessive days on market.  So why is there such a large discrepancy, and what does Excalibur do to help close the gap?


The answer is very simple, and it starts with a question, 

Has Zillow ever been inside of your house?” 


Zillow pulls its data from tax records, and if you’ve ever taken a close look at your property tax bill, you might find this information isn’t always correct. Have you ever noticed that your property listing on Zillow has the incorrect room count or square footage listed? This is why. Additionally, Zillow does not have the capabilities to factor in condition, finishes, market projections, and market competition.


In the Metro-Atlanta market, getting the most money out of your property is just as important as doing so in the shortest amount of time. This is why Excalibur puts a great deal of effort into analyzing those properties that are currently listed for rent so that a strategy can be put into place ensuring your property is selected first. Not only is this analysis done prior to the property going on the market, it’s done throughout the listing period to ensure your property is strategically placed so that you get the most money in the shortest amount of time.


To guarantee this, our first step is to have a licensed Realtor® conduct a comparative market analysis on your property. Our reports are not automated and will not be immediate. They may take an hour to get to you, but the value you get in waiting that extra hour is well worth the accuracy you will receive by having your analysis done by an actual agent who will call you to talk through the report.


Additionally, Excalibur will arrange to have a Leasing Agent specializing in your area walk your property with you, document condition & finishes, and provide you with an in-depth analysis and strategy that considers much more than just tax records.


There is no cost for any of this and no sign-up required.


We are by no means trying to discredit Zillow. In fact, our agents will look at Zillow as part of their strategy as we know potential tenants will be comparing your listed rental rate with the Zestimate. What we want to do is educate you so that you can make the best decisions possible for your situation and to show you how Excalibur will go the extra mile to ensure your home is rented for top dollar in the shortest amount of time.


If you are interested in having one of our agents conduct a detailed market analysis or if you’d like to meet an agent in person to talk about your specific property needs, please let us know Here!


Did you know we are giving all new property sign-ups during the month of January 3 MONTHS OF FREE PROPERTY MANAGEMENT? No catch. No additional paperwork. Get more information Here!


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A Message from Excalibur President, Michael Nelson

Chris Ledermeier - Tuesday, December 12, 2017


To All of our Wonderful Clients,

The end of the year brings no greater joy than the opportunity to express to you season’s greetings and our best wishes. 

May your holidays and New Year be filled with joy.  At this special time of year, we give thanks for clients like you who have made our jobs easier and our lives more fulfilling. 

Thank you for being you. 

From all of us at Excalibur Homes, LLC we would like to express our sincerest appreciation for the trust you have placed in us.  We look forward to moving into the New Year together.

Best wishes for a joyous and safe holiday season,

Michael Nelson
President, Excalibur Homes, LLC







Equity Doubling – The Secret Sauce of Rental House Investing

Mike Nelson - Thursday, December 07, 2017


We are offering 3 MONTHS OF FREE PROPERTY MANAGEMENT to all new properties signed up during the month of December. If the below peaks your interest in rental investments, now is the time to act! Learn More Here!


The Gift of Double Equity!

According to several sources, including Investopedia.com, the average annual return from the stock market during the previous 30 years is about 10%.  Adjusted for inflation they calculate the average annual return at 7%. 

According to the US Census, the prices for new homes between 1963 and 2008 increased at a rate of 5.4% per year. 

According to the National Association of Realtors®, the average rate of appreciation for all houses has been 3.7%. 

And according to Kevin Michels, with Medicus Wealth Planning, based on the performance of publicly traded REITs, the average annual return for real estate between 1970 and 2016 was 11.42%. 


So if stock market investments grow at 7% per year, and real estate appreciates at a rate of 3.7% per year, why would an investor buy rental houses?  In short, “equity doubling” or leveraging to enhance your accumulation of wealth.


STOCK MARKET ANALYSIS



Above we assume a 25 year old investor puts $30,000 into the stock market, and that $30,000 grows at a rate of 10% per year.  Since it’s not typical that an investor would leverage their stock purchase, that investor at the time of his/her retirement (approximately 40 years) would have an investment now worth $1,234,000 (no adjustment for inflation).  


RENTAL MARKET ANALYSIS

However, suppose the same investor purchased a rental house, using the $30,000 as a 20% down payment on a $150,000 rental house.  Suppose the average appreciation rate for the next 40 years is only 3%.  And suppose that as the equity in the house grows the investor uses the additional equity to purchase a 2nd house, then a 3rd house, and so on.  In the 7th year, the investor can purchase the 2nd house even considering that the purchase prices continue to increase at market rate and consequently, that the 20% required down payment also increases. Over the course of 40 years the investor ends up with 8 houses that appreciate from the year of purchase forward at the assumed appreciation rate of 3%.  Without adding any cash to the initial investment of $30,000, at the end of 40 years the investor is entering retirement with over $3 million in equity (no adjustment for inflation).

You might wonder how an investor can access their accumulated equity to make additional purchases.  Two straight forward options include 1) a cash out refinance or 2) selling one to buy two by way of a 1031 tax deferred exchange.

It’s important for investors to understand how appreciation affects investment returns for rental houses.  For every other form of rental real estate investments, such as apartments, retail, or office buildings, the sale price of the property will be a function of Cap Rate and Net Operating Income.  But this is generally not true with rental HOUSES.  When the investor sells the rental house, the typical buyer is an owner occupant who doesn’t care what the NOI is.  They care about how good the local schools are, how long the commute to work is, and many other amenities.  When rental house investors buy houses with an emphasis on Cap Rate, they often end up purchasing lower quality C or C- properties based on potentially higher cash flows but these houses will not appreciate as rapidly.  Rental house investors need to focus on Internal Rate of Return (IRR) which will encompass ALL aspects of the investment including appreciation, cash flow, and loan amortization.  When appreciation is factored in, we often find that B, B+, and A- properties often have the higher IRR because of the rate at which they appreciate. 

We are not trying to promote investing in rental houses rather than investing in stocks.  We are illustrating that investing in rental houses is a great way to diversify your investment portfolio and enhance your retirement.


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The Impact of Service Animals on "No Pet" Policies

Mike Nelson - Thursday, November 30, 2017


 

 

You have a "no pet" policy, but your applicant wants to keep a "companion animal" or "emotional support" animal. 


Do you have to accept the animal?  Can you require a pet deposit or pet fee?

 

The term “companion animal” is often used to refer to an emotional support animal.  In 2013, the Americans with Disabilities Act was amended to include a much more restrictive definition of a “service animal.” However, according to the U.S. Department of House and Urban Development (HUD), landlords have a broader obligation to accommodate tenants that require a “service animal” or an “assistance animal”.  Below is a link to HUD’s web site with an extract defining “assistance animals” and “service animals.”

 

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT - SERVICE ANIMALS

 

"An assistance animal is not a pet. It is an animal that works, provides assistance, or performs tasks for the benefit of a person with a disability, or provides emotional support that alleviates one or more identified symptoms or effects of a person's disability. Assistance animals perform many disability-related functions, including but not limited to, guiding individuals who are blind or have low vision, alerting individuals who are deaf or hard of hearing to sounds, providing protection or rescue assistance, pulling a wheelchair, fetching items, alerting persons to impending seizures, or providing emotional support to persons with disabilities who have a disability-related need for such support. For purposes of reasonable accommodation requests, neither the FHAct nor Section 504 requires an assistance animal to be individually trained or certified. While dogs are the most common type of assistance animal, other animals can also be assistance animals…

DOJ's revised ADA regulations define "service animal" narrowly as any dog that is individually trained to do work or perform tasks for the benefit of an individual with a disability, including a physical, sensory, psychiatric, intellectual, or other mental disability. The revised regulations specify that "the provision of emotional support, well-being, comfort, or companionship do not constitute work or tasks for the purposes of this definition." Thus, trained dogs are the only species of animal that may qualify as service animals under the ADA (there is a separate provision regarding trained miniature horses), and emotional support animals are expressly precluded from qualifying as service animals under the ADA."

 

If your applicant declares that they have an “assistance animal” and request an accommodation to the landlord’s “no pet” policy, the landlord can request that the applicant have a letter sent from their health care provider stating why the applicant requires the assistance animal.  NOTE: you can’t ask what their disability is. You can only receive verification that the applicant has a legitimate need for that assistance.

 

Once the need for the “assistance animal” is established, the landlord cannot deny housing to the applicant on the basis of the landlord’s “no pet” policy.  Nor can the landlord charge the applicant any additional pet deposit or pet fee.  However the applicant is still required to meet the landlord’s financial qualification requirements.

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Prepare Your Home for Winter

Chris Ledermeier - Monday, November 27, 2017


Winter is here “weather” we like it or not. While Excalibur is just a call away 24 hours a day, 7 days a week, 365 days a year for any emergency maintenance needs, we’d rather be proactive in helping you prevent issues before they strike, ultimately saving our homeowners money and our renters, headaches.


REVERSE THE DIRECTION OF YOUR CEILING FAN

Large, vaulted ceilings are a key design feature in the south, but they often lead to hot second floors and cold main floors. Hit the switch on your fan so that the blades move in a clockwise direction, pulling warm air down and cold air up! This will ultimately save you money in heating costs and put far less pressure on your furnace during the colder months.


LET THE FAUCET DRIP WHEN THE TEMPERATURES DROP

Letting water slowly drip from your hot and cold faucets will help prevent them from freezing and ultimately bursting causing one large, expensive mess.  It’s also recommended that you open cabinet doors under sinks to allow warm air to circulate around the pipes. If you do this, make sure you remove any items that may be hazardous to children.


CHECK THAT CHIMNEY

According to the Chimney Safety Institute of America (CSIA), the U.S. experiences over 25,000 chimney fires each year responsible for over $120 million in property damage. It’s no surprise that during the Summer and Fall, animals make nests in chimneys, leaves and other debris fall into the chute, or soot from the previous winter season has accumulated in the shaft. If that is not cleaned out, the potential for a chimney fire becomes extremely high putting not only your home in danger, but yourselves and your tenants in danger.  The CSIA says that if you hear a loud cracking or popping noise, experience an immense amount of dense smoke, and an intense hot smell, you are likely to be experiencing a chimney fire.  Make sure your investment and your lives are protected. Have your chimneys cleaned.


TRIM THOSE TREES

When warmer day time temperatures bring rain, the lower night temperatures bring ice, and when the tree limbs become coated in ice, the extra weight can often prove to be too much causing the limbs to break. These falling branches can cause large headaches and even larger expenses if they fall on your home, your car, or on electrical wires. So do yourself a favor, make sure your trees are trimmed so that they are not extending over your home or your driveway. This easy step can not only save you money, but it can also save lives.  



MAKE SURE YOUR HOME IS SEALED

As it gets colder outside, your home will begin to attract unwanted guests.  In order to prevent pests from taking up residence in your home and potentially creating one very large problem, clean-up all debris and edible vegetation around your foundation. Make sure your crawlspace is secured and that all potential entry points, high and low, are sealed. If animals do find their way into your home, you could be looking at high extermination costs and the potential for interior damage to both your electrical system and HVAC ducts. 

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The Weather Might be Cold, but the Rental Market is HOT!

Mike Nelson - Friday, November 17, 2017

 

 

We're in a Rental Explosion!

Home ownership has dropped from a high of about 69% in 2007 to about 63% today, and that rate continues to shift toward a higher percentage of renters.  Economists have observed that Millennials are postponing when they get married, postponing having kids, and correspondingly, postponing buying houses.  They more rapidly move from one job to another which often means moving from one city to another and thus don’t want to be tied to owning a house.  This all leads to higher demand for rental houses applying upward pressure on rental rates. 

Not convinced? The proof is in the numbers...

 

 

 

As you can see, 2017 has seen an increase in Rental Sales Volume and a decrease in Rental Inventory indicating that low rental availability continues to push the market upward, leaving more and more money on Atlanta’s Rental Table.

THE SOUTHEAST is a more favorable market for landlords.

In general, states in the Southeast have landlord/tenant laws which are more favorable to the landlord when compared to many states on the West Coast or in the Northeast.  Landlords can recover a property from a non-paying tenant in a matter of weeks rather than months.  Additionally, the southeastern US correspondingly has a greater supply of rental houses at more affordable purchase prices and rents.  Investors can get positive cash flows and tenants can afford to raise their children in single family detached homes rather than apartments.

 

Atlanta: a great market within the Southeast to invest in rental houses.

The four states across the Southeast experiencing the highest rates of growth with respect to population and new businesses are Texas, North Carolina, Florida, and Georgia.  The growth in Texas is spread among several cities including Dallas/Ft. Worth, Houston, Austin, San Antonio, and others.  In North Carolina, the growth is spread between Charlotte, Raleigh/Durham, Greensboro, Asheville, and Wilmington.  Florida’s economic growth is spread among Tampa, Orlando, Miami, Jacksonville, Gainesville, and all along the panhandle.

In Georgia, the vast majority of economic growth and development are taking place in Metro Atlanta along with the port city of Savannah.  With no geographic barriers to expansion, such as oceans or mountains, along with the abundance of affordable land and nationally ranked schools, Atlanta’s suburbs continue to expand.  These suburbs are filling as rapidly as the houses are built with approximately 1/3 of the new occupants being tenants.

Source: Statistics and Graphs are from the 2017 National Single-Family Rental Research Report published by HomeUnion™

 

Markets with a high Opportunity Ranking are those that are favorable in price, supply/demand, and growth potential (ie limited threats). Because of this, Excalibur Homes, The Dan Nelson Team, is helping several investors with the purchase of investment homes in Atlanta that carry positive cash flows and favorable appreciation expectations.

 

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CURIOUS IF RENTING WOULD WORK FOR YOU? Let us help you learn more!

ARE YOU READY TO INVEST IN YOUR FUTURE? Get your custom quote now!

 

 

Landlords Performing Criminal Background Checks May be Violating Fair Housing Law

Matt Nelson - Thursday, June 22, 2017

Landlords Performing Criminal Background Checks May be Violating Fair Housing Law

In 2015 the Supreme Court ruled in the case of Texas Dept of Housing & Community Affairs vs. The Inclusive Communities Project, Inc. that under the Fair Housing Act some otherwise lawful activities, while free of discriminatory intent, may have a “disparate impact” on minority groups.  Recently HUD announced that, in HUD’s opinion, denying a rental applicant on the basis of their criminal history may be a violation of fair housing law.  HUD’s observation is that more people of color have a criminal history than do white people so the use of a criminal record to determine an applicant’s ability to fulfill a lease obligation would have a disparate impact on applicants of color.   If a landlord or property manager is going to perform a criminal background check on an applicant and use the results of that screening result to deny the applicant, the landlord needs to be able to show that the criminal conduct that occurred in the past would have a direct impact on the applicant’s ability to honor the lease. 

Technique – Don’t conduct criminal background checks on applicants.  Generally speaking, criminals are not financially responsible.  It is likely that the applicant you want to deny, while they may have a criminal background, it is likely they also have bad credit and/or a bad landlord reference.  There are two benefits to NOT conducting the criminal background check.  First, you reduce the chances of having to defend an accusation of housing discrimination.  Even if the landlord can prove that there was no intent to discriminate, or if the investigation determines that there was no evidence of any violation of the Fair Housing law, undergoing the investigation process is very expensive and time consuming.  Second, you reduce your liability regarding the actions or conduct of your tenant with respect to neighbors.  You have probably read or seen a news story where some tenant was attacked in their apartment and they sue the landlord because a security light was inoperative on the other side of the apartment complex.  Example - you offer a property as available for rent and you get an application.  You conduct a background check, including a criminal check, and find that the applicant was found guilty of car theft 10 years earlier.  Because it was a non-violent, non-drug related crime, and the applicant has good credit now, you rent them the property.  Months later your tenant attacks a neighbor and causes them severe injury.  It turns out your tenant has been a career criminal all along, they just never got arrested after their earlier car theft conviction.  Because your tenant is “judgment proof”, the neighbor sues YOU claiming that you were liable for their medical bills because you allowed this tenant to move in.  And during the Discovery process, your records indicate that you knew the applicant had a criminal record but you approved their application any way.  Would the plaintiff’s attorney use that information against you?

Since you have no obligation to check an applicant’s criminal background, wouldn't you have less liability not to have any knowledge regarding their criminal background?  And you would definitely have less risk of a fair housing violation.

Technique – to reduce the chance of having someone actively involved in criminal activity, during the showing of the property, and during the application process, make sure the applicant understands that you are a proactive manager and you WILL be coming by the property to conduct periodic inspections.  If the applicant is really engaged in criminal activity, the last thing they want is a landlord coming around all the time and they will look for somewhere else to live. 

Excalibur Homes is more than just another property management company.

We are an investment real estate firm that specializes in helping investors with buying, renovating,, leasing, managing, and selling single-family rental homes throughout Metro Atlanta.  

Click here to view our leasing & management services.

Looking for pricing? Click here for a custom quote.

Helpful Lease Clauses - Atlanta Property Management

Matt Nelson - Monday, May 08, 2017

The lease form that you use needs to comply with your State’s landlord/tenant law.  Some states, such as Georgia and Texas, have form leases prepared by the State Realtor Associations which comply with the law and are widely used within the State.  One of the benefits of using a lease form that is widely used is that your local judge is more likely to be familiar with that form and less likely to dispute specific clauses.  They will apply their judgments more toward how the blanks were filled in and the merits of the individual case.  If you use a specific lease form that is very landlord friendly, then you are at risk for a judge that determines the lease itself doesn’t comply with the law so now the issues will be resolved as if there is no lease and the tenant is a tenant at will.  It might also influence the judge to think that this rich landlord (you) is trying to take advantage of this poor tenant.  You will not enjoy how the rest of that hearing goes.

With whatever lease form you use there are several lease clauses that can make your arrangement with the tenant easier to administer and enforce.  Remember that the lease is a civil contract and enforced in a civil court.  If your lease permits the landlord to show the property to prospective tenants and buyers during the last ___ days of the lease, but the current tenant refuses to grant you access to the property for showings, then your current tenant is in violation of the lease.  This doesn’t give the landlord the right to come to the property with the lease in hand and force their way in to show the property.   This is called “criminal trespass” and the landlord is likely to find themselves in handcuffs.  When the tenant failed to comply with the lease, the landlord now has the right to terminate the lease and evict the tenant.  But the tenant is already moving in a few weeks.  So there is not a practical way to solve the problem - unless you make sure that you add a clause like the “Failure to Grant Access” clause which would read something like “ Tenant agrees to pay $________________ for each incident where Tenant denies Landlord access to the Premises (“Denial of Access Fee”) as described elsewhere herein.”   In order to make this enforceable our lease form includes a general clause to cover that certain lease violations financially harm the landlord and so there are “damages” to which the landlord is entitled.

“Liquidated Damages. It is acknowledged by Landlord and Tenant with respect to any reference in the Lease to liquidated damages, that the actual damages of the party being paid such damages are hard to calculate and that the liquidated damages referenced in the Lease are a reasonable pre-estimate of the party’s actual damages and not a penalty.”

Other helpful clauses include “Early Termination by Tenant” and "Early Termination by Landlord”.  In the case of a tenant terminating early, it is going to happen.  People get job transfers and divorces.  If you have a good credit tenant, and they want to maintain their credit and comply with the lease, your clause could compel them to 1) Give ___ days notice 2) Pay penalties of $_____ (to landlord) and $____ (to property manager if applicable) to cover the costs of re-renting the property and 3) otherwise comply with all of the requirements in the lease for a departing tenant.  If your tenant moves before the lease has expired, then they have “skipped” and you would process their charges and deposit accordingly.   The “Early Termination by Owner” clause will provide the landlord with an option to force a tenant to move with ___ days notice and a payment of $___  in the event you want to sell the house.

Other helpful clauses includes:

Notice Not to Renew – make clear that even on month to month agreements the tenant must provide at least ___ days notice to vacate.

Re-Key fee – if the tenant does not return all the keys, garage remotes, HOA pool access cards, etc. when they vacate.

Smoking – no smoking within the premises or a $___ fee will be charged to remove the odor.

Holdover Rate – the daily rate you will charge if a tenant is not out by the required date.  Make sure this amount is higher than it would cost the tenant for a motel room and truck rental.  Otherwise if your tenant’s next home delivery is delayed, such as a delayed closing for a purchase or the next rental house is not ready yet, they may stay in the property knowing it will take you many weeks to evict them and it is cheaper to stay than move to a motel.  This could ruin your sale or next lease.  So make sure that the motel option is cheaper to your departing tenant.

Unauthorized Pet Charge.

Lease Renewal Clause – if you are a “buy and hold”  investor, consider a lease renewal clause that calls for an automatic one year lease renewal if notice to vacate has not been provided.  A common problem that many landlords experience is the non-responsive tenant.  Make sure your lease is set up to automatically do certain things even when the tenant does not respond.  And a great way to keep your turnkey expenses down is to renew the lease in annual increments automatically.

We use several other clauses and addendums to make the management more effective for us and more profitable for our clients.  As you identify your “pain points” you can modify your lease form to address and minimize those problems.  Just make sure your clauses comply with your State law.

Excalibur Homes is not just another property management company. We are an investment real estate firm that specializes in helping investors with buying, renovating,, leasing, managing, and selling single-family rental homes throughout Metro Atlanta.  

Click here to view our leasing & management services. Looking for pricing? Click here for a custom quote.

Is Leasing Permitted? HOA Issues in Georgia

Matt Nelson - Monday, January 16, 2017

Is Leasing Permitted? HOA Issues in Georgia




If you are shopping for a rental house to buy, it is important that you know if the house is subject to an HOA and whether the HOA permits leasing.  The majority of houses built in Metro Atlanta since the mid 1990s are located in subdivisions that have an HOA.  The last thing you need is to buy a house to rent out just to discover that renting is not permitted.

In 1994 Georgia adopted the Property Owner’s Association (POA) Act.  One of the important aspects of this Act is that, if an HOA decides to become subject to this Act, any of the covenants passed by the HOA are enforceable against ALL of the property owners within the community.  This would include any restrictions or limitations of property owners to lease their property.  However if the HOA is not subject to the POA Act, then O.C.G.A. 44-5-60 (d)4 is likely to apply.  This law basically says that changes in the HOA covenants only apply to those property owners that voted in favor of those covenants.

While the listings in the MLS will indicate whether the house is in a community with an HOA, neither the listing agent nor the owner may know whether leasing is permitted and under what circumstances.  Often the HOA Board or their management company can tell you incorrectly also.  The answer is in the Docs – the HOA covenants as recorded.  You can visit www.GSCCCA.org, create a user name and password, and search the deed records for most of the counties in Georgia including the recorded covenants of the HOA.

Often HOAs are not subject to the POA Act when the HOA is first created by the neighborhood’s developer.  Once the management of the HOA reverts from the developer to the homeowners, it is common that the homeowners will then file an amendment to the covenants making the HOA subject to the POA Act so that any covenants are applicable to all property owners.  So you would need to look for any amendments to the HOA’s covenants in addition to the original documents.

Upon examining the HOA covenants, if the HOA is subject to the POA Act, and if there are any restrictions to leasing, you need to understand that the HOA has the power to enforce those restrictions.  Depending on how the covenants are drafted, the HOA may have the power to compel your tenant to pay the rent to the HOA or the HOA may evict your tenant if the lease was not properly authorized by the HOA.

Do your research before making the purchase.  Since these covenants are recorded documents, trying to use the excuse “I didn’t know” later is not likely to help.  This is just one more step in performing your due diligence.  Invest wisely and profitably.

Excalibur Homes is an investment real estate firm who specializes in the management of single-family rental homes. Click here to view our Leasing & Management Services.

Calculating Your Expected Yield For Rental Houses

Matt Nelson - Wednesday, December 07, 2016


Calculating your expected yield for rental houses

With all other forms of investment real estate, except rental houses, the value of the property is a function of the market Cap Rate applied to the Net Operating Income.  A quick review: “Cap Rate” is short for capitalization rate.  The Net Operating Income (NOI) is the total gross income minus the amount lost due to vacancy and delinquency, minus the amount of all the operating expense but NOT including any reduction for debt service (mortgage principal and interest payments).  Divide the net operating income of the property by its price and you have the Cap Rate (%).  When sellers price their investment properties they determine what the market is willing to pay as a Cap rate and apply that toward their net operating income.  So buyers can apply their desired Cap Rate requirements toward all the NOIs of properties for sale to determine which properties best meet their investment expectations. 

But this doesn’t work with rental houses.  One day, when the rental house investor wants to sell, the most likely buyer is an owner-occupant.  And the owner-occupant buyer doesn’t care what the house rented for and what the Cap Rate is.  They are buying for other reasons related to neighborhood amenities, quality of the local schools, commute time, and many other factors.  This is why it is important that investors who buy rental houses need to look at the Internal Rate of Return (IRR) rather than the Cap Rate or gross yield for a rental house.  A lower quality property may offer a higher monthly cash flow but that house may not appreciate much.  A higher quality property may not generate as much cash flow but may appreciate in value a great deal.  The Internal Rate of Return calculation will take all factors, including anticipated appreciation, into consideration.  Review HOW to “Quantify” the Quality of different Rental Houses (Blog 11/04/15).  It may take a little longer to calculate IRRs versus Cap Rates but this is the only way to make a true “apples to apples” comparison of different investment opportunities.  There are several Excel templates you can find and download on line to help you calculate IRRs quickly.  We use a proprietary template which includes our estimates for vacancy, delinquency, and maintenance and repair costs based on our experience in the Atlanta market.  As with any projection, just make sure your assumptions are realistic.

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Excalibur Homes
2855 Marconi Dr, Suite 310
Alpharetta GA 30005
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