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. 

[Nicholas L.]

@Brandon Polcawich

short answer - yes.  many Pittsburgh properties are old and have a ton of deferred maintenance.  5% likely won't cut it.

are you looking to house hack something? otherwise, unfortunately, most properties in decent areas won't cash flow at all, especially with DSCR debt.

[Brandon Polcawich]

I haven't looked much into the DSCR loan type. We are currently looking to do a conventional on a duplex or triplex.

[Jeremy Taggart]

@Brandon Polcawich I typically go $80-$120/unit each for both capex and maintenance on the older homes. I like to use a flat amount compared to a percentage since rents can vary depending where the property is located. Usually ends up higher than 5% though, closer to 8-10% in most cases. Where it falls in that range will depend on age, size, and current condition of the place and the major capex items.

Inherited tenants can be a blessing or a curse. I've had a mix of both. It really depends if the previous owner screened the tenants and how they managed the building. If they let the tenants run the show or ran a tight ship.

[Joseph Beatty]

Hey Brandon, I'm sorry to hear about your mother, but it's exciting that you're starting to get into investing! It depends on the property, but like the others have said, a lot of homes around Pittsburgh are old and will need more maintenance. Happy to connect if you have any questions about investing in the area! 

[Jonathan Greene]

This statement, "Running some numbers on some listings we have found a couple that are generating what we could consider a decent amount of cash flow" is very worrisome to me. Are you looking at these properties? Properties, for novices, which look good on paper and have good cash flow usually come with C to D+ areas, risky tenants, and a lot of cap ex that you can't see on the internet (basements, roofs, water issues, outdated mechanicals).

You are turning a terrible loss into a springboard which is great, but you are trying to move too quickly it sounds like. Buying into existing tenants can be very risky. Do not even consider it if you don't have proof of rental payments for the past year via bank accounts.

[Brandon Polcawich]

Thanks for all of the information.

@Jonathan Greene I am from Pittsburgh so I generally know which areas I would like to avoid.  Great advice on checking the bank accounts for proof of payment.  You are correct, that I just running numbers currently off of internet listings.  However, we do plan to look at a few properties before diving in.  Given some of the issues that we have seen with my mom's old house which is in the suburbs of Pittsburgh I know that costly repairs could be hiding somewhere.

[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.

[Jonathan Greene]

Quote from @Brandon Polcawich:

Thanks for all of the information.

@Jonathan Greene I am from Pittsburgh so I generally know which areas I would like to avoid.  Great advice on checking the bank accounts for proof of payment.  You are correct, that I just running numbers currently off of internet listings.  However, we do plan to look at a few properties before diving in.  Given some of the issues that we have seen with my mom's old house which is in the suburbs of Pittsburgh I know that costly repairs could be hiding somewhere.

I have a client with a unit or two in Pittsburgh if you'd like to connect with someone newer who has units there. Just DM me.

[Jay Hinrichs]

Quote from @Jonathan Greene:

Quote from @Brandon Polcawich:

Thanks for all of the information.

@Jonathan Greene I am from Pittsburgh so I generally know which areas I would like to avoid.  Great advice on checking the bank accounts for proof of payment.  You are correct, that I just running numbers currently off of internet listings.  However, we do plan to look at a few properties before diving in.  Given some of the issues that we have seen with my mom's old house which is in the suburbs of Pittsburgh I know that costly repairs could be hiding somewhere.

I have a client with a unit or two in Pittsburgh if you'd like to connect with someone newer who has units there. Just DM me.

@Jim K.  would be a great local to talk to about do it yourself landlording in that market. 

[Jonathan Greene]

Quote from @Jay Hinrichs:

Quote from @Jonathan Greene:

Quote from @Brandon Polcawich:

Thanks for all of the information.

@Jonathan Greene I am from Pittsburgh so I generally know which areas I would like to avoid.  Great advice on checking the bank accounts for proof of payment.  You are correct, that I just running numbers currently off of internet listings.  However, we do plan to look at a few properties before diving in.  Given some of the issues that we have seen with my mom's old house which is in the suburbs of Pittsburgh I know that costly repairs could be hiding somewhere.

I have a client with a unit or two in Pittsburgh if you'd like to connect with someone newer who has units there. Just DM me.

@Jim K.  would be a great local to talk to about do it yourself landlording in that market. 

Yeah! I forgot he was in Pittsburgh. Great connection.

[Jim K.]

I've messaged the OP.

[Brandon Polcawich]

Thanks for the all the information and local connections. I’ll reach out to get some more local information.