Mandana Varnoos

As investors we face a number of very real and very scary challenges. Making sense of this market is no mean feat and one has to be very careful with his or her investment. However, we usually think about danger as financial. Unfortunately, on rare occasion it can be even worse than that. The majority of the homes investors are buying these days are vacant and once in a while people break in and live in these properties illegally. The last thing you want to do is walk in on someone camped out in a house, perhaps conducting illegal an activity.

This is no joke, you want to be HEARD when you walk into a property that is supposed to vacant. So make a lot of noise when you're at the front door. I always knock loudly before entering. Stomp your feet a little. Yell "Hello!" a couple of times. When you start walking down into the basement repeat the process. The goal is to have whoever is inside hear you and not panic and do something stupid. I hope you never need this advice, but keep it in mind the next time you visit a foreclosed home.

A lot of investors ask what an egress window is and when one is needed. Technically, it's a window for a room below grade that a municipality has deemed large enough to be safe for exit in case of emergency. While there are some variations, the window needs to be large enough that a firefighter with an oxygen bottle on their back could get in, then carry out an injured person in a fire. Most often, it's associated with a basement bedroom window, making it a legal bedroom. Basement bedrooms without egress windows are illegal. Installing an egress window makes them legal.

The confusion is that different cities, counties and agencies have different size requirements and height-above-floor requirements for these windows. Therefore, before you start cutting into the concrete foundation you better make sure you've visited the local building department to get their requirements. In addition, HUD, distributing Section 8 vouchers, also has their own requirements for egress windows. So if you're going to rent to a Section 8 tenant make certain you know what their requirements are. If you don't, you won't get credit for that basement bedroom and get way less rent than you expected - believe me it happens every day.

To be honest, there are probably hundreds if not thousands of rentals in Metro Denver that have basement bedrooms without egress windows. In my opinion, this is not only illegal, it's immoral. And if that wasn't enough to discourage you from having one, ask yourself what happens if there is a catastrophic fire and someone dies in your illegal basement bedroom. Not good! For about $1,500 - $2,500 you can get a competent contractor to install an egress window (only one is required per basement bedroom) and sleep better at night.

You walk into a property you're looking to buy and rent and you walk down into the basement and voila! you find a full second kitchen. Great! You start calculating how much rent you could get if you could rent the downstairs separate from the upstairs and the cashflow is out of this world! But wait, there are a number of very real problems with this scenario.

First of all, it's illegal unless the property is zoned for more than one tenant and the property has been converted to non-residential use. But there are even more practical reasons why having two separate tenants is often not a great idea. The first is the utilities. Since it's a house there will only be one bill for Excel and water. Who's going to pay it? Can you really get the tenants to pro-rate their share if you pay it? Good luck. Or do you just pay it, figuring the extra rent will more than offset paying the utilities? Maybe, but what you'll find is that when a tenant is not paying the utilities they have the heat at 90 degrees all winter and every time you go to the house the kitchen sink is running.

Your great cashflow gets eaten up by outrageous utility bills and you're back where you started. For these reasons and many more I suggest you don't try to put two tenants into a property made for one. But that doesn't mean the second kitchen has no value. It might be useful for an extended family who needs the extra space kitchen and might actually command a larger rent. Check with your local building department and your insurance agent though, to make sure it's acceptable to have a basement kitchen in the first place.

There are some signs of strengthening in our Denver market. The metro area's inventory of available resale housing decreased 20% to 23,120 units in October from October 2007. Some of this reduced inventory is attributed to homeowners taking their properties off the market in frustration because their property is not selling, but lower inventory implies a strengthening market. Remember, the Denver area had housing inventory of 31,989 units in July 2006. Home sales rose 14% to 4,265 in September compared to the same month last year. This is due almost entirely to the lower-end of the market (under $180K) selling like hotcakes. October's median selling price for single-family homes decreased 12% to $206,000 from the same month of '07, and was down 4.7% from September's median of $216,150. Median selling price for single-family homes dropped 10.5% to $222,000 through October, from $248,000 through October '07.Prices are still falling, but at a slowing pace. This trend should continue into 2009 when it is expected to bottom out and slowly climb back. Hang on, it's gonna continue to be a wild ride!

This blog will discuss a type of real estate investment, scrapes, pops and new construction, in the Parker area in Denver.

What this investment is: Purchasing a small home in an expensive neighborhood that may or may not need work. The home is bulldozed and a new home or duplex is put on the lot. Alternatively, the existing home is renovated and more square footage is added on. A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).

Equity needed: Being able to document your income and your assets will be critical. For a commercial loan, your net worth should generally be at least as much as the loan you are seeking. The good news is that the commercial loan usually does not show up on your credit report, so it doesn't count towards the "four investment home limitation" from Fannie / Freddie.

Importance of credit: Essential. A 720 FICO is a must. A 740 would be better.

Importance of experience with contractors: Critical. If you have never done it before, start with an easier "paint and carpet" project to build your skills. The more sophisticated the project, the better your contractor management skills must be to make money. Not surprisingly, the simpler projects have lower profit margins than the complicated projects. Make sure you can take the time to really focus on the project. We run classes on how to do this from time to time. Go to http://www.yourcastle.org/events.cfm to see when the next session is.

Important of experience with property managers: Generally not important for this type of investment.