Good debt vs Bad debt in Real Estate
As a real estate investor, understanding the concept of good debt versus bad debt is essential for building a successful portfolio. While debt may carry a negative connotation, when used wisely, it can be a powerful tool for generating wealth in the real estate market.
In this blog post, we will explore the difference between good debt and bad debt and discuss how investors can leverage them to their advantage.
Defining Good Debt and Bad Debt
Good Debt
Good debt, in the context of real estate investing, refers to borrowing money for investments that are likely to appreciate in value or generate a positive cash flow. The fundamental principle behind good debt is that the returns generated from the investment exceed the cost of borrowing, creating a favorable outcome for the investor.
Examples of good debt in real estate include:
- Mortgage Financing: Taking out a mortgage to purchase an income-generating property with the expectation of generating rental income that covers the mortgage payments and expenses, thus building equity over time.
- Leveraging: Using borrowed funds to acquire additional properties or make improvements on existing properties, increasing in return overall investment value and potential returns.
Bad Debt
Bad debt, on the other hand, refers to borrowing money for investments that are unlikely to generate a positive return or appreciate in value. This type of debt can lead to financial strain and potential losses for investors.
Examples of bad debt in real estate include:
- High-Interest Credit Card Debt: Using credit cards to finance real estate investments, especially when carrying high-interest rates, can quickly erode profits and lead to financial instability.
- Speculative Investments: Engaging in risky ventures without conducting proper due diligence or relying heavily on market speculation can result in substantial losses.
Differentiating Factors
Cash Flow Potential
One of the key differentiators between good debt and bad debt in real estate is the cash flow potential of the investment. Good debt allows investors to acquire properties that generate positive cash flow, meaning the rental income exceeds the mortgage payments and expenses. This positive cash flow provides a steady stream of income and enables the investor to build equity and expand their portfolio.
Long-Term Appreciation
Good debt is often associated with investments that have the potential to appreciate in value over time. Real estate assets, when carefully selected based on market analysis and due diligence, tend to increase in value over the long term. By leveraging debt to acquire such properties, investors can benefit from the compounded growth and enjoy substantial returns.
Risk Mitigation and Diversification
Good debt is commonly used to diversify an investor’s real estate portfolio. By spreading debt across multiple properties or asset classes, investors can mitigate risk and reduce the impact of market fluctuations on their investments. This strategy allows for a more balanced and resilient portfolio.
In the world of investing, good debt can be a powerful tool for growing your portfolio and ensuring success. By strategically utilizing debt to acquire income-generating properties, investors can leverage the cash flow potential and long-term appreciation to build equity and generate substantial returns.
Understanding the distinction between good debt and bad debt empowers Real Estate investors to make informed decisions and optimize their investment strategies.
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Over the years Texas weather has become the brunt of many jokes!
From the severe heat during the summer months to the volatility of the fall and winter, our weather is quite nonsensical and, while this lends quite a bit of humor to our lives, it can make planning quite difficult.
Preparing your rental property for Fall should be a joint effort between you and your tenant.
You should be sending out seasonal letters with instructions on steps the tenant should take to prepare themselves and the property that they occupy for the season.
However, the onus is not entirely on your tenant to maintain and prepare the property. Make sure you are doing your part to keep the property safe and protect your investment.
One of the most important preparations is to ensure that your HVAC or heating system has been maintained and serviced. Heating is simply a necessity and in the eyes of the legal system, it is a requirement for the health and safety of tenants. Having the heating system checked out yearly before cooler or cold weather hits could avoid bigger maintenance problems and making necessary repairs can prolong the life of the heating system.
Here are some quick tips for fall preparation!
Exterior Preparation
- Check siding to ensure that it is stable and secure
- Have the roof checked for weak spots
- Insulate doors and windows
- Search the property for areas that may need to be caulked to improve heating efficiency
- Cut back any overgrow vegetation (especially if it is hanging over any part of the property)
- Clean out the gutters before fall leaves have had the chance to settle in. (Bonus Tip! placing a gutter guard into the shaft will make future cleanings much easier!)
Interior Preparation
- Have the chimney swept to remove any blockages
- Check all carbon monoxide and smoke detectors
- Ensure the weather stripping on exterior doors and windows are functional
- Check your attic insulation for gaps
As the first days of fall approach, you will need to ensure your property is ready. This will mean coordinating multiple vendors, admittance to the property, and updating/educating your tenant on their duties. You will certainly have your work cut out for you!
Interested in letting a professional take care of these tasks for you? Contact Frontline Property Management today! We have the experience to handle your investments through any season, and protect your frontline to protect your bottom line!
Have a property that you need help with? Just fill out this form and we will reach out to see how we can help!
Determining Qualifying Criteria
Before detailing how to determine which criteria you will use for your applications, first be aware that you are legally required to inform your applicants of what they are. Making this information part of your application ensures that the applicant both has the opportunity to review the criteria and signs the document attesting as much. There are legal ramifications if this signature is not captured, as the presumption is by default that the information was not provided for review.
Details about the following criteria should be provided:
Criminal History
Specify which kinds of convictions and adjudications will disqualify an applicant. Establishing a clear timeframe will also better inform an applicant with a criminal background as to whether or not you will consider prior convictions from three, five, or twenty years or more in the past. Check out our previous post that discusses the criminal background check! Understand that requiring an entirely spotless criminal record is considered a violation of the Federal Fair Housing Act. Otherwise, having a substantive reason for disqualifying based on certain other convictions and adjudications (namely violence, sexual offenses, and drug manufacturing and distribution) is reasonable.
Previous Rental History
You won’t be relying solely on the information provided to you by the applicant. Using a third party (or several) to verify rental history will help you to establish the kind of renters the applicants are. By having the applicant sign a release form, you will be able to inquire as to whether their rent was paid on time, whether or not any lease violations were documented, if there were any pets with the applicant, and what condition the property was left in. You are entrusting your property to your future tenant, and you want to know that it is in good hands!
Current Income
The standard household income requirement is a gross total of three times the monthly rent. This comes from section 8 of the Housing Act of 1937 which in 1981 was amended to state that a tenant must pay at least 30% of their monthly income towards housing. Between the rising cost of living and wage stagnancy, some renters in large cities are spending up to two-thirds of their income on housing. According to the 2020 Joint Center for Housing Studies of Harvard University, one in four renters pays more than 50% of their income on rent. If this trend continues, you could expect (due to supply / demand) that income requirements will be reduced to asking that the total monthly household income is only twice the amount of rent. However, three times the monthly rent currently prevails as the industry standard and a change to that threshold is not on the horizon.
Credit History
Many landlords have a flat credit score threshold for their applicants, while others prefer a context-based approach. Credit scores as we know them today began in 1989. As a landlord, you will most likely use credit reporting to screen your applicant for unpaid debts and other financial burdens that exist outside of their monthly income. While you may decide not to rely on the score itself, you will need to review the report for information that will be pertinent to you as a property owner such as unpaid utility bills, evictions filed against your applicant, and bankruptcies. The leading cause of bankruptcies in America is medical debt, with two-thirds of all bankruptcies filed due to the high cost of healthcare. Being informed of where exactly your applicants stand financially will help you make the best decision in your process.
Failure to provide accurate or complete information on the application form.
As previously discussed, online applications open the door to increased fraudulent activity. If at any point in the process you determine that documents, contacts, or any other information is fraudulent, you can deny based on this alone. If you can’t count on an application being accurate, then you can’t use it to qualify a tenant!
Keep in mind (as always!) that these qualifying criteria standards must fall within the guidelines of the Fair Housing Act. Meaning also that they must be applied to every applicant, every time, no matter what! Standardization not only makes for effective processing, it also protects you in the event that an applicant assumes that they have been unfairly disqualified for your property.
Adding another buffer between you and the applicants is also recommended! You can do this by hiring a qualified and experienced Property Manager who will screen applicants on your behalf. Frontline Property Management has a team of Property Managers as well as a department dedicated to processing applications. Our Tenant Coordinators work every day to handle incoming applications and find you the best tenant for your property!
Contact us today to learn more about how Frontline Property Management manages thousands of doors in Dallas / Fort Worth and surrounding area, and how you can turn your property into truly passive income!
Do you have a property that you need help with? Just fill out this form and we will reach out to you!
Sustainable Property Management: What Green Features are Millennials and Gen Z Expecting?
With an increased focus on climate and weather-related realities that we face, younger generations (who are quickly becoming the largest portion of the rental population – Millennials are already the largest group of homebuyers) are more likely to actively seek out businesses and properties that feature Green amenities. As a property owner with your eye on the market and a finger on the pulse, you’ll be exploring which features are right for your property and for your current and future renters!
Meeting the demands of Millennials and Gen Z renters will not only secure a stronger rent now, but will leave you well-positioned to increase attraction and retention down the line. Here are a few features that these renters are looking for:
Recycling Services
Making recycling convenient is not only something that tenants are looking for in a new complex; policy has now begun to reflect this growing concern. As of Jan 1, 2020, Dallas has had an ordinance in place which requires apartments & multi-family dwellings of more than 8 units to provide recycling facilities on-site. Fort Worth has had such a policy in place since 2014.
Smart Home Features
Between 89-95% of Millenials and Gen Z renters own smartphones. Implementing this basic tech in your property management is a direct avenue to reach these renters. There has been an increase in gadgets like keyless locks, doorbell cameras and smartphone-controlled led security lights, but also in higher-tech features such as “virtual doorman” services and extended smart home devices such as Amazon’s voice-activated Alexa. Property Management Apps mainstream communication between tenants and Property Managers.
Offering apps and devices that can keep up with the virtual age may not only prove to be energy efficient (think of lights that turn off when you leave the room, or a thermostat that can be controlled remotely) but will also assure your tenants that you are making investments in sustainability that provides more convenience and comfort for them – all of which bolters the rent cost.
Energy Efficient Appliances
Considering that renters with tight budgets and who pay for their own utilities will be more concerned about energy efficiency, it will be well worth it to consider appliances that reduce energy consumption. Renters consistently rank energy-efficient appliances as the top amenity request. We’ve reviewed other improvements that can be made to the property, but when upgrading an older home, the appliances are an easy Green win to list in your advertising!
Location, Location, Location
Millennials and Gen Z are known to prioritize sustainability and to invest more in experiences than property. Sustainability isn’t just about what construction materials are used, what programs are offered, and what amenities are available – it’s all about where this is happening. This means that your property is most competitive when it’s in close proximity to where those experiences can happen. Cities like Fort Worth and Dallas, which have invested in its arts & culture as much as they have invested in their business, stand to gain much more attraction from Millennial and Gen Z renters. Properties that have high “walkability” (or at least a short drive) to nearby restaurants, nightlife and other venues can lean hard into the sustainability of their location when advertising to these younger generations.
Other Considerations:
It’s important to note that newer complexes are automatically more energy efficient than older ones due to the continuing improvement to construction material. No need to shy away from how much more “green” your multifamily unit is, however! In hot markets like the DFW, you will want to list every energy-consumption-reducing amenity and feature that you have!
Another trend to consider is the increase in the prominence of the electric vehicle. Six utility companies have formed an electric highway coalition that aims to place charging stations on major highway systems on the Atlantic coast, in the Midwest and South, and in the Gulf and Central Plains regions. There are tax credits for buying electric vehicles – as well as for property management businesses that choose to install electric charging stations for their tenants.
If the demand is there, and eventually, it will be – you’ll want to be on the ball to provide this amenity for your tenants, considering that most EV charging happens while drivers are at home.
Understanding the consumer is the key to any business, and in property management, that means knowing your renter! While housing is a necessity, remember that your property is a competitive product and an investment. Ensuring that your property is at the top of its marketability game secures you the renters you need to thrive!
Unsure of whether or not you’re taking the right steps to maximize your efficiency, marketability & (most importantly) your bottom line? Contact us today!
Frontline Property Management has the experience, the staff, and the skills to help you get the most out of your investment!
