Going at it alone?

Question

I have been searching for a duplex for around 6 months to do an owner-occupy to begin Real Estate Investing. I have just found one that I'm interested in. It is a FSBO. I currently have had a realtor who has showed me a few properties. The seller of this FSBO property has expressed that we could both save some money by not bringing in a Realtor. Do you think I need one? I've done quite a little bit of research, but am a little bit uneasy. His asking price is more than I had initially been planning on spending so I'm looking to cut corners where I can to make my offer the most attractive to him. The property has only been "on the market" for about one week.

Any fellow investors in the Lincoln, NE area?

Michael Rossi · Answer

Yes, they are really that high.  In fact, throughout the United States, operating expenses run 45% to 50% of gross rents.  You can verify this information yourself by checking with any of the large apartment associations.  Mwarden did a good job explaining the reasons that the 45% to 50% figure is accurate.  In addition to the expenses he listed, you also have advertising, damage done by tenants (above the security deposit), utilities paid by owner (even if the tenant usually pays the utilities), office supplies, management, maintenance, tax preparation, etc, etc, etc (I could go on and on).  The "gurus" don't tell you this stuff, because they are selling the dream of easy riches.  Finding out that all these expenses exist makes the rental business sound more like work and less like easy money (which it is).  It's hard to sell a multi-thousand dollar bootcamp or seminar when you're saying that real estate investing is a lot of work (the truth).

Consider just one of these expenses - "damage done by tenants".  Let's say that you don't account for this expense.  You only own one rental and you go five years with absolutely nothing going wrong, all the time earning $100 per month positive cash flow (or so you think).  Then, you get a bad tenant who gets mad at you when you evict him for not paying his rent.  You are out 2 months rent, legal fees, court costs, and setout fees.  This amounts to $1,800.  Then, just before the tenant leaves, he decides to get even.  He takes a hammer and puts a hole in every wall; he breaks several windows; he pours concrete down the commode and in the sinks  -  he does only $4,200 in damage more than your security deposit.  Now, you're out $6,000 due to this single tenant AND YOUR ENTIRE "CASH FLOW" FOR THE PAST 5 YEARS IS WIPED OUT!  You've been working for free IF THIS IS THE ONLY ONE OF THESE EXPENSES YOU HAVE.

This scenario is entirely real and these situations do happen with regularity.  If you don't account for this and other predictable expenses, your business will fail unless you are prepared to pay all of these expenses out of your pocket.

Personally, I'm not spending all this time and effort to lose money.

Good Luck,

Mike

N/A N/A · Answer

Since I'm still a newb and learning about numbers.  If I'm right your taking 50% of rental costs and stuffing it away for property expenses??  I'd like to know if Im right at this...just taking a wild swing at it.

Lynn Z · Answer

many people living in duplexes forget they only can take depreciations/expenses etc. off for half of the building.  If you bought a triplex, you can sometimes carve out a free apartment paid for by the other two.

have you considered renting out the two apartments in a duplex, take all of the write offs, and buying a sf where you can take tax free gain after two years?  I sometimes think it's the strongest way to begin.

N/A N/A · Answer

MikeOH and the others are correct.  I would just keep looking and making offers on properties where the 45-50% expenses would still allow you to cash flow.   It would certainly lower your risk and get you started at least with a fighting chance.     Like all the guru's on here say, just don't pay retail.   This is where so  many new investors fail  (I've nearly fallen into this trap).    I've found this problem where I was interested in 2-3 4 plexes.  All listed WAY too high.   All of them sold within 2 weeks near the asking price.   If I used MikeOH's rule of thumb of 45-50%, I may break even but more than likely losing about $50 a unit.   So... I wait in frustration.   It seems more and more newbie investors keep buying all these apt. buildings are retail and thus hard to make the numbers work.

Now, with that said, maybe 1 day I will find something I can make the numbers work.   No hurry... I'm not going to fall in love with any 1 house or apartment.   There will be another.

MATT WARDEN · Answer

But it's not better than waiting to find a property that cashflows. I think that's the real point here.

Michael Rossi · Answer

AMEN!  That IS the point.  Why buy a loser property when you can buy right to start with and actually MAKE MONEY?  Isn't that the point of running a business?

Mike

Keith Schulz · Answer

but at the same time your paying down your loan by $150/month and your gaining a couple hundred dollars of appreciation (i'm a believer that the market will bounce back). Also, your getting a nice tax break because it will show as a loss on your taxes (especially after depreciation). So, in my opinion it's still better than renting.

MATT WARDEN · Answer

I get what you guys are saying, but if you purchase a negative cashflow property and live in one unit, you are effectively just overpaying rent. If it would lose $100/mo if rented at market rent of $500/month, then you're just paying $600/month for a place that is only worth $500/month.

Keith Schulz · Answer

yllw98stng,
There are some good cautions explained by a few others that you should be aware of and pay attention too. However, I still think this is a great way to get started. I am not a seasoned pro investor. However, I bought my first duplex several years ago doing this same thing. I made many mistakes from an investors standpoint, but it still turned out to be a possitive deal. Not to mention I learned a ton by just jumping in. Now I still own that duplex, a house, and I'm closing on another duplex next month.

Here was my situation starting out (almost the same as yours). I was finishing my last year of college, looking for a duplex to live in one half and rent the other half. I had a realtor showing me places. However, I found a nice duplex FSBO. The realtor had already done lots of work for me, and I had no clue how to do the paper work. So, I brought the realtor along on the FSBO deal. Knowing what I know now, that was a huge mistake. The paper work is pretty simple, just have a lawyer review it all. I ended up having to pay several thousand dollars more because I had a realtor.

Also, (like your situation) the duplex I bought would not cashflow if I rented both sides. Knowing what I know now, I did pay too much. However, I needed a place to live anyway, and putting my cash towards ownership of this property was far better than continuing to rent. When I first purchased the property I would have been negative $400 cashflow had I rented both sides. I lived there for 3 years, did some minor improvements, increased the rents, and refinanced to a cheaper mortgage. Then I moved out, rented both sides, and purchased a house to owner occupy. Now, I'm cashflowing $400/month on that duplex, and it is worth about $50,000 more than I paid for it. So it all worked out great.

The bottom line is, you would never want to buy income property that is negative cash flow unless you plan on making it your home (or your extremely confident in a highly appreciating area). Even though you do plan to owner occupy, you should take a look several years down the road. You should plan to find a way to make it cashflow by the time you move out.

In any case, this situation worked out great for me, and I gained a lot of experience just by getting into my first property which was also my first income property. By standard experienced investor guidlines, you wouldn't go for this. To get started with investment properties and have a place to live, it's not a bad idea. Just remember, look a few years down the road to see what the numbers would look like if you move. Just my opinion.

Richard Warren · Answer

You don’t truly understand how high expenses can be until you experience it for yourself.  Using the 45-50% that MikeOH uses will help keep you out of trouble.  If they aren’t that high that is just more profit for you.  I usually figure mine at 40% but the homes I’m renting have been rehabbed and usually will have a new roof, bathroom, water heater and other items that will typically have a high replacement cost.

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