Investment Property Strategy: How Many Properties Should I Buy?

Grand Junction Real Estate Advice

Dave ‑

I have about 150K that I am wanting to invest in a rental property. I was all set to find my property and my realtor suggested that instead of buying the property with cash, that I use that money to buy several properties which I would have smaller mortgages on.  I really don't like the idea of taking on any mortgages but I want to make the most of my money. What is your advice? 

Jarred, Grand Junction


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Jarred,

Great question! I will start by applauding you, looking to purchase investment properties right now to diversify your investment portfolio is a great idea!

To assess which is the best route for you and your family, you must determine what your long term goals are and how much risk you are comfortable with. I do not believe there is a right way and a wrong way to purchase investment properties, just different ways. There are two ways to look at the purchase of your properties and that is either to purchase with cash, which is the route that presents the least amount of risk or purchase with a mortgage which will introduce some limited risk. 

To make a cash purchase makes great sense, because it creates an instant income source. If you need to quickly generate income, then a cash purchase is the best way to proceed. When you purchase with cash, and therefore have no mortgage, you also remove the risk of market rent fluctuations, because you can easily “go with the flow” and adjust to any potential rent changes. Also, with no mortgage you should be able to easily weather a month or two without a renter. If your risk tolerance is low or you need to generate month to month income, cash is your way to go.

On the other hand, if you take your $150,000 and put $75,000 down on two properties then you have doubled the long term investment potential of your $150,000.

On the other hand, if you take your $150,000 and put $75,000 down on two properties then you have doubled the long term investment potential of your $150,000. This should still “cash flow” nicely for you and allow you to have room if there are rental market fluctuations. This will allow you to take advantage of the favorable market and also take advantage of low interest rates that remain historically low. You will be somewhat leveraged, but if done correctly and thoughtfully, and as always with the help you’re your accountant, you should be able to create a wonderful long term return with a little, but limited risk. Make sure to plan it out, be deliberate, but be ready to act when the right thing comes up!

The best thing here, you are taking positive steps toward your goals, thinking things through and are willing to look at all the angles to make an informed decision! Reaching for your goal, is the first step in obtaining it! Great job. Feel free to call if you need further information.

Dave Kimbrough
The Kimbrough Team

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Would owner financing on the sale of our home benefit our retirement portfolio?

Dave,

My wife and I wish to sell our home and retire to Arizona. We are in a position that we would  consider doing “owner financing” when we decide to sell. Our money market investments are a lousy return and doing owner financing with the sale of our home appears to us as an opportunity to earn 4% - 6% with minimal to moderate risk. The way we look at it, if the buyer fails to make the payments, we simply get the house back and reassess our options. Is this right? What experiences, good or bad, have you had with sellers who have done an “owner carry” with the sale of their homes? Any advice would be appreciated, Merry Christmas.

Jim and Marybell, Grand Junction


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Jim and Marybell,

Great question! The move to Arizona sounds like an excellent idea, as we near the dog days of winter. Please remember, I am not a financial adviser and will only be providing an opinion that is based on my personal experience. Should you decide to move forward with an owner carry on the sale of your home, I would urge you to discuss any ramifications with your financial adviser or accountant. If done correctly, this can be wonderful addition to your retirement portfolio.

There is no doubt money markets are not a high yield investment, actually they are a terrible rate of return at this point in time, but they are very safe, with virtually no risk. Money markets also provide you a high degree of liquidity that you will not receive if you do “owner financing”. Prior to stepping into an owner financing option with your buyer, you should first consider how important liquidity is in your retirement plans. Also, consider the fact that you will still have a home in an out of state location and this can prove difficult and burdensome, even under the best of circumstances. Let’s assume that you decide this is the route for you, then I can say the success of your owner carry sale is determined by the terms set up at the time of sale.

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You need to decide on an interest rate that will work for you. As I am sure you are aware, current interest rates are hovering around 4%, so I would expect it realistic to get somewhere in the 5.5% - 6.5% range. You also need to decide if it will be an interest only payment or if some of the monthly payment will go towards the principle amount owed. To make things cleaner, I would suggest an interest only payment with a balloon on the full amount owed.  After coming to terms on the interest rate, you need to decide what length the loan will be, more often than not I see a 3-5 year balloon. You can get your attorney to help you work up the note and deed of trust that will spell out the exact terms of the loan and where the payments will be made, what happens in the case of default, etc. Accuracy on this document is of vital importance.

The last detail, but the most important, is the down payment.  The owner carry deals I have seen be successful are the ones where the buyer puts some “skin in the game”, meaning that they bring a substantial amount of down payment money.

The last detail, but the most important, is the down payment. The owner carry deals I have seen be successful are the ones where the buyer puts some “skin in the game”, meaning that they bring a substantial amount of down payment money (10-20%). The down payment encourages the buyer to stay in the deal and gives you some cushion should things not work out as anticipated. The down payment acts as your insurance policy. Another option is to charge a higher interest rate with lower down payment and this will provide you with more monthly income, if the highest rate of return is your primary goal. With this tactic there is more risk, but you get a greater rate of return. In the back of your mind, always be prepared and understand what will need to be done should your new buyer fail to perform at some point down the road. Prepare for the worst and pray for the best! : )

All things being equal, owner carry terms can prove to be a wonderful vehicle for income and quite possibly could fit in perfectly to your retirement plans. Set it up right and it should provide a good source of revenue! Merry Christmas.

Dave Kimbrough
The Kimbrough Team

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When can buyers take possession of a house after closing?

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Dave,

I recently sold my home and before and during the closing the buyer stated they would give me a few extra days to even a week to move out after closing. The day after closing they showed up looking to move-in and informed me a locksmith would be showing up at 4:00pm to change the lock. Needless to say I was still packing the small stuff and the new owners stood in the living room hovering over me the entire time.

I called my Realtor and was told that technically I had until 11:59 pm if I wanted. My Realtor then called theirs and told them to leave but they just went outside and hung out there. I do have to mention that I let them come over a few times so they could measure for windows and things during the process and I feel like I accommodated them. I feel like they should have done the same and let me finish packing, which was done by 6pm.

What are your thoughts about this?

Chris K., Grand Junction         


Chris,

I am sorry to hear about your experience, but I can assure you that you are not the only seller who has suffered the fate of the helicopter buyer trying to take possession of their new home after closing! It can be SUPER stressful and no fun for all parties involved.

I am confident you can chalk this one up to the often overlooked, possession date and time of possession portion of the contract to buy and sell real estate. Just for kicks let’s just add in a little poor communication for good measure. Seems like most things that go wrong have a smidge of poor communication sprinkled in, so we will just make the assumption that this situation was no different. It is my experience, and I have been guilty of doing it myself, that everyone has such a keen eye on the closing date that the possession date and time of possession fall out of focus and are left with little attention until they create a problem. 

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Every contract has a specific field for closing date, possession date AND time of possession. In your case it sounds like you had possession until 11:59 pm of the day of closing (either written in the time of possession portion of the contract or that section was left blank). The unfortunate part of this situation is the above referenced “smidge of poor communication” or lack of buyer understanding about when they could take possession. Most Colorado contracts that I deal with have the possession time read “at closing”, meaning that when you close the house and the money has arrived then the buyer is the new owner and takes possession at that time. If that field is left blank and no time is designated, then it defaults to 11:59 pm (per the portion of the contract that specifically references the definition of “a day”) the day of close.  This appears to be similar to the circumstances surrounding your contract. 

It is my guess the buyer did not realize when they were contractually able to take possession and assumed that it would be at close OR they were not informed that you had until 11:59 pm on the day of close to get out, before they were to take possession.

It is my guess the buyer did not realize when they were contractually able to take possession and assumed that it would be at close OR they were not informed that you had until 11:59 pm on the day of close to get out, before they were to take possession. Either way, the circumstances were not ideal and uncomfortable.

I will also note that it is VERY typical for a buyer to want to come back to the home they are purchasing and measure for window blinds, refrigerators, televisions, beds etc. They would likely not see this as you “accommodating” them, but that they were just making preparations for purchasing your home and gathering needed information. I am sure they did not view it as putting you out in any way.

You are right, it would have been great for them to just leave and come back at a later time, but they may have not had anywhere to really go. This is one of those times to just handle the situation with class and an opportunity to show some grace! Most of the time the stress of the situation and the lack of communication tend to make these issues larger than they really are. I totally get your frustration, but it’s a great opportunity to look at it from another perspective and consider what could be done differently next time in order to prevent the same thing from occurring again! On the bright side, you did give them possession 6 hours early!  : )

Dave Kimbrough
The Kimbrough Team

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Decorating for the Holidays When Selling a Home

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Dear Dave,

We have had our home on the market since the beginning of October. Now that the holidays are upon us, we would really like to be able to decorate for the holidays – but we don’t want to scare away potential buyers. We would typically set up a couple of holiday blow-ups in our yard, as well as decorate our house with Christmas lights – our kids just love this. Do you think that is too much? What do you recommend when someone is trying to sell their home during the holiday season?

Thanks in advance and Merry Christmas!
Jack and Linda, Fruita, CO


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Jack and Linda,

I say, decorate and enjoy the holidays. In my opinion a home never feels more like a home than it does during the Thanksgiving and Christmas season. I don’t believe you will scare anyone away, but remember to decorate tastefully and try to err on the side of too little rather than too much. Believe me, if your kids love the way you decorate the likelihood is the families that come to look at your home during the holidays will love it also.

Remember that buying a home is still very much a “feel” thing for most buyers and the more senses you get involved and the more “like a home” you make your home feel the better off you are. I can tell you that more often than not, when a buyer gets a feel about a home and they can picture themselves or their family living there, your chances of them making an offer go up significantly. Also, don’t be afraid to bake some cookies, pies, a cake or at the least light a candle that plays up the season. Also note that a little Christmas music will not hurt your cause either. We purchased our cinnamon pine cones this weekend for less than 5 bucks and they smell wonderful. This is the greatest time of year to have fun and get immersed in the season, enjoy it because it will be gone too soon.

The key take away here is tasteful and not overdone, yet have fun and enjoy the season. 

The key take away here is tasteful and not overdone, yet have fun and enjoy the season. The spirit of the holidays is contagious and my bet is someone will catch the spirit at your house this season. Have a wonderful Christmas and don’t be shocked when your home sells because it looks so good!

Dave Kimbrough
The Kimbrough Team

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What do Home Owners Associations typically manage?

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Dear Dave,

We are downsizing and looking into different housing options that will require less maintenance. Most of the places we have looked at are part of an HOA or Home Owner’s Association.

What are typical things that you see a HOA managing? A couple of them seem pretty strict and we’re not sure what is normal and what might be a little over the top. We do not currently live in an HOA and are not sure if it is something we will like being a part of or not. We would really appreciate some feedback on this as we embark on this new phase of life. 

Thank you!

Bob and Ellen - Grand Junction, CO


Bob and Ellen,

As with everything, being part of a home owners association can be a great or it can end up being a painful experience. It is kind of like a big party, how enjoyable it is, depends on who shows up. In the case of a home owners association, you can't choose who is invited! One thing is for sure, if you are not used to being a part of a home owners association you will likely have some adjusting to do! If you purchase a home that was built in a neighborhood in the past 30 years it is unlikely you can avoid an HOA for the most part and all things considered it is a good thing. 

In the development process most all subdivisions are done with a set of covenants that basically spell out how the subdivision is set up and the rules by which it will be maintained and governed moving into the future. In these covenants it also describes and instructs how to set up the different committees that will help enforce the rules and regulations of the subdivision and all who reside there. This means that the HOA is only as good and cooperative as your soon to be neighbors make it. The design and intent of the covenants and HOA is to maintain the subdivisions integrity and property values over the long haul.

If you are looking in a single family home subdivision then, more often than not, the Home Owners Association is in charge of maintaining subdivision open and common space and to ensure that it is properly maintained.

If you are looking in a single family home subdivision then, more often than not, the Home Owners Association is in charge of maintaining subdivision open and common space and to ensure that it is properly maintained. They can also be in charge of the subdivision irrigation system, architectural control to ensure that any exterior improvements are in line with the subdivision covenants and general neighborhood rules. Examples might be that they enforce that RV parking be behind a 6 foot privacy fence or that the yards are maintained and mowed, or that no cars are left on the street for a long period of time. They will also ensure that any improvements made to the property fall within subdivision guidelines and are in turn complementary to the neighborhood and the other homes, thus protecting the neighborhoods consistency and value.   

If you choose to live in a condominium or town home project then the HOA may also be responsible for water, sewer, trash and not only yard and common ground maintenance, but also exterior building maintenance and repair. This kind of HOA is much more involved and typically much more expensive, since they cover more monthly expenses and continued maintenance. Often times these HOAs have an on-site manager or a management company than handles the operation as it is much more extensive and time consuming.   

As you are probably finding, most newer neighborhoods built in the past 25-35 years have a home owners associations that was set up when the subdivision was first developed. If you are the type that likes to do things without checking with others to gain approval, then an HOA may not be for you. If however you read through the subdivision covenants and find the rules and regulations to be acceptable, then you are likely to adjust easily. Just make sure to read through them and make sure you find them acceptable. 

My bet is you will like and enjoy what the HOA provides and the easiest way to ensure it works well for you and others is to get involved!

Dave Kimbrough
The Kimbrough Team

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Should We Xeriscape Our Yard?

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Dave,

Our landscaping needs a complete overhaul! We were in the middle of drawing up plans to revamp our front and back yard when I ran across some ideas for xeriscaping online. I can’t believe I didn’t think of it in the first place! We would love the low maintenance aspect of it since my wife and I travel a lot. The only thing is we’re thinking of downsizing in a few years. Before we take the leap and jump all in on the idea, what’s your opinion on the style and furthermore if it will turn away buyers once we go to sell.

Love your column!

Cynthia & Bob, Grand Junction


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Cynthia and Bob,

I think it’s a great idea! Xeriscaping is quite popular and can be very attractive, especially in our “high desert” climate that easily lends itself to that style. The one hesitation I might have revolves around what type of home you have? If your home/neighborhood lends itself to families with younger children then I might lean toward xeriscaping in the front yard and having some grass/yard in the back. I totally get the low/no maintenance attraction, but people with younger kids tend to want a grass back yard for them to have a play area and gravel does not make the most inviting play area for younger kids! 

Xeriscaping is quite popular and can be very attractive, especially in our “high desert” climate that easily lends itself to that style.

If you take these things into account I do not believe you will have any issues when it comes time to sell, in fact it might be a selling point to many buyers who crave the low/no maintenance yard as people's time only becomes more valuable as we all get stretched even more thin! Again, great idea and enjoy your new landscaping! 

Dave Kimbrough
The Kimbrough Team

I'd love to buy a new home! How can I improve my credit score?

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Dear Dave,

I would really like to be able to buy a house this winter or early spring? However, I don’t have a very good credit score. Five years ago I had a foreclosure and two years ago I changed careers to get out of the natural gas industry and several bills were late, including a couple car payments and one rent payment. Over the past year everything has been working out great, as my new career is starting to take off and I am getting firmly back on my feet. I am ready to own again! 

Can you give me some advice on what to do to improve my credit score? I am really trying to clean up my act and want to have a chance at getting a decent loan.

I would appreciate your advice.

John - Grand Junction, CO


John,

Sounds like you are on your way back to financial stability and you are to be commended for what sounds like “proactive” moves to help get off the instability treadmill and move on to firmer, more predictable ground. When looking into your question, I consulted James Pulsipher, Regional Manager at Fidelity Mortgage here in Grand Junction. He has some simple, yet sound advice:

The good news with credit, is that time tends to heal all wounds, and you have had some time.

For the foreclosure itself--for conventional financing it must be 7 years old, but FHA will allow financing with a foreclosure after 3 years. FHA also allows financing with credit once you have had one year without late/derogatory payments.

The best bet is to take a look at your credit and see what needs to be done, but out of hand, the credit is not something that would prohibit you from buying a new home.

There are  a few specific things you can do now, if you are not already doing them to help boost your credit score in fairly short order…six months or so.

1. Payoff remaining debt.
2. Use your credit cards less by charging less.
3. Don’t be late on any more payments.
4. Consolidate your debt at lower interest rates
5. BE PATIENT!

Sounds like you are already in a position to purchase with an FHA loan, but likely a couple years away from conventional financing.

These items can start to impact your credit score quickly and significantly and allow your credit score to climb. Sounds like you are already in a position to purchase with an FHA loan, but likely a couple years away from conventional financing. There are some wonderful FHA loan programs out there, with competitive interest rates that will allow you to purchase your new home this winter. I would also suggest partnering with a good lender to help you develop a plan and timeline for becoming a home owner again! Awesome job thus far and I do see home ownership in your near future!

Dave Kimbrough
The Kimbrough Team

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Can we use more than one agent to look at homes?

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Dave,

We are in the midst of the home buying process—which has been really exciting! Our question for you is about “proper buyer behavior”. We have an agent who we really love and has been so helpful throughout the process. Last week she left town for a week and while she was gone we were still driving around town looking at homes. We found one we wanted to see—called the agent on the sign and had him show us the home. At the end of the showing he asked if we wanted him to set us up on an online home search. We told him we didn’t need another search because we had one through our agent. He got really stern all of a sudden and told us that we should only be looking at homes with our agent and not leading other agents to believe they’d get our business.

This was so confusing to us! That perspective never crossed our minds! Is it not okay to have different agents show us their homes? Should we only see homes with our agent? Thank you in advance for helping us!

Janey & Mike, Grand Junction


Janey and Mike,

You accidentally and unknowingly stumbled onto one of the real estate professions “hot button” issues, where agents are concerned, and that is why the agent got stern with you. As you pointed out in your question, you guys are excited and the process of looking for your new home is fun! You are really only focused on finding your new home which is hard to do when your agent has left town and not provided you a plan on how to access homes while she was on vacation. Life is tricky, with lots of moving parts, but you never know when the perfect house is going to come along and the good ones go fast!

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There are many ways to look at this, but ultimately your agent should have made a plan with you about who would show you property while she was gone. I can see this unfold in my mind.  You guys saw a house that looked like it might be “the one”. You called the agent who had the home listed and asked him to show you the home, as you don’t want to miss the perfect home because your realtor is on vaca. He was eager to make that happen and accommodate your wishes because he thought he could potentially work with you as a buyer and asked you very few, if any questions, other than what time would work and he was excited to show it to you?  Your only concern was to see the home so you set up a time to meet him. Since nobody explained to you how things work, because your agent was only focused on her vacation and not how it would impact your home search while she was gone, you had no way to know that you were crossing any lines you should not cross. 

Ugh…communication is hard. It is clear from his reaction that he ASSUMED you did NOT have an agent, but failed to directly ask you if you were working with another agent before agreeing to show you the home. If he had not assumed and had asked you the question about your agent then my guess is your experience would have been completely different. You would have still seen the house, however your relationship with him would have been defined before you ever met and he would have had no unspoken expectation of “picking you up” as a buyer which led to his “stern” response to setting you up on a search. I hope this all makes sense.  Assumptions and unasked questions are the two biggest culprits of communication breakdown and conflict!

One of the unwritten rules in real estate is that you, as the buyer, should only look at homes with the agent you plan on using to help you purchase your home. But how are you to know this “unwritten” rule?

One of the unwritten rules in real estate is that you, as the buyer, should only look at homes with the agent you plan on using to help you purchase your home. But how are you to know this “unwritten” rule? Frankly, your agent should have explained this to you and arranged for one of her colleagues to show you property in her absence. My assumption is she was probably only focused on her vacation and not how the vacation might impact your house hunting!

Funny how even the simplest things can become cumbersome and confusing. There is a small life lesson in your question about assumptions and unasked questions! Best of luck and I hope the perfect home is just around the corner!

Dave Kimbrough
The Kimbrough Team

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