Turning an unfortunate situation into a portfolio

[Brandon Polcawich]

Hi, a few months back I lost my mother to leukemia.  My wife and I decided to keep the house and turn it into a rental.  While working on the house to rehab a few small things we have decided to get into real estate investing.  We are now looking at some duplexes in the Pittsburgh PA area.  Currently, looking at some properties that have renters in place already. We are of the mindset that this is the best play because it takes some risk out of taking the plunge.  We are aware there are still plenty of risks.  Running some numbers on some listings we have found a couple that are generating what we could consider a decent amount of cash flow.  We have put 5% for capex and maintenance on our numbers and we are wondering if that is too conservative.  Looking forward to learning a lot from these forums. 

[Nathan Gesner]

Quote from @Brandon Polcawich:

I recommend you spend some extra time educating yourself on how to run the numbers so you don't miss something and get into a bind. The national average for maintenance is 10% of the annual income, so it will be more on an older home. Capex is separate from ordinary maintenance.

There are also considerations when buying an occupied rental. Do they have written leases? Are they strong leases? Were the tenants screened? Are they paying market rate? Was the property well managed, or poorly managed? Do you want to keep the renters, or would you prefer to buy it empty and place your own?

I recommend your purchase agreement include an opportunity to review any lease agreement, payment history, and application screening for current occupants. You can also ask for an estoppel (see below). And if you want to keep things as they are or place your own tenants, make sure your offer includes the requirement that the seller not extend, renew, or replace any leases!

ESTOPPEL

The estoppel is a form filled out by the tenant, then confirmed by the Landlord, and then accepted by the Buyer. It's supposed to ensure there are no surprises after closing. For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was $2,000 because they paid the last month's rent. How will you know? An estoppel certificate fixes this problem.

Some things it may include:
1. Tenant name, contact information, and address
2. Occupancy date
3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
4. Are there any modifications to the written lease?
5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
6. Current lease term (expiration date, month-to-month)
7. Current rent rate
8. Rent due date
9. Security deposit amount
You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchanging "doc" with "pdf" for more options.

Here is an example and explanation: Sample Estoppel

Some have a lot of legal jargon but this document does not need to be so detailed. This is an essential tool for anyone buying a tenant-occupied property.