Remodelers' Exchange: Rental properties can be a road to success

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Remodelers have advantages over the average investor when it comes to rental properties. Professional Remodeler's Jud Motsenbocker talked to remodelers Bill Connor and Diane Menke about the opportunity and challenges of investing in property. Highlights of that conversation appear here, or you can listen to the discussion. 

JUD MOTSENBOCKER : Bill, how did you get started in buying rental properties?

BILL CONNOR : Back in 1987, we bought our first double. It was around the corner from my house. It seemed like a good thing to do, wasn't very expensive, needed a lot of work and was a good looking 1920 house that had good bones, and so we invested.

MOTSENBOCKER: Diane, tell me how you got started.

DIANE MENKE: I was eager to start working on developing some extra cash flow for myself and was scratching my head over it, and I realized I was sitting in a house that had appreciated really nicely over about the span of five years. I just took a [home equity line of credit] and went out and started buying up houses to flip.

MOTSENBOCKER: So Diane, do you buy and flip them or do you keep them for rental properties?

MENKE: I do both. Sometimes it is better to hold on for a while and rent it until you can get the equity to the place where a flip might be a good idea. I am not really interested in having a lot of single-family homes that I rent out to students so much as doing that while I develop the wealth and cash flow to such a state that I can start to hand it off, or maybe invest in commercial, getting into some larger projects.

MOTSENBOCKER: What type of properties do you look for?

CONNOR: Generally, ours are older, somewhat historic. Our business is sort of tied to older buildings, and we have always been in historic districts. We are always looking for something that has got some character to it.

MOTSENBOCKER: Do they need repair work when you take them over?

CONNOR: Yes. We don't buy anything that is already complete. My sense is that we will buy properties that other people won't buy because of our skill set and our ability to look at a building a little bit differently than the public. Sometimes they are a little dogged, or they don't appear to the market as being something that is valuable.

MOTSENBOCKER: Diane, what do you look for? What neighborhoods or what type of buildings do you look for when you try to buy?

MENKE: It depends on what my aim is. If I want to make some cash flow in the next 12 months, I am looking at a neighborhood where maybe there is some outside pressure, where the neighborhood is going to be improving in value. Usually, if there is a sort of transitional neighborhood, you may have that. In our city, you might have a house that is boarded up in the same block as a house you are buying, but because you have done your homework you know that there is enough pressure on that block that within a year the property values are going to come up, and that boarded up house is going to be sold or renovated. I just kind of keep my ear to the ground.

MOTSENBOCKER: In this case, your company does the maintenance. How do you charge for that?

MENKE: We charge by the hour, and then we mark it up. We get a marked up bill to the real-estate entity from the company.

MOTSENBOCKER: The company makes a profit on that particular project. Bill, how about you?

CONNOR: Pretty much the same. We just don't bill it at the standard public rate. I get a bill, and the hourly rate is just a little bit less. I feel like just because I own property, the company shouldn't really subsidize that, and the only way it does is that I get preferred rate.

MOTSENBOCKER: Bill, what are the advantages in buying investment properties?

CONNOR: Obviously return. It seems to me that sometimes I compare it to a sports car and a mechanic. A mechanic sees an old sports car and says, "Wow, that can be something," and he knows that he is going to spend X amount of hours on it and then he is going to have a return on it at the end. We look at houses in a similar fashion.

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AUDIO: Listen to the full conversation.