All Forum Posts by: Alan McClain

Hello,

My partner and I are interested in a communal co-living property located on the outskirts of Detroit, MI. This property was a duplex converted into an 8 bedroom with each of the rooms leased separately. Currently there are 5 rooms rented with 2 rented for 1 year leases and 3 on month to month leases. Does anyone have experience with this type of property and any insight on what to estimate for vacancy? 

Hello Todd,

I would always account for a vacancy expense when running numbers. This is because you are always susceptible to vacancy, regardless of how you pay for the property. I typically estimate my vacancy expense based on the rental market in the area and the property type. For example, if I am in an A neighborhood with a desirable 3Bed/2Bath home I will typically account for lower vacancy - maybe around 5%. If I am in a C neighborhood with the same property, I may account my vacancy to be 10-12%.

You should also account for CAPEX, repairs and maintenance as you will always be susceptible to these expenses as well, regardless of how you pay for the property. Typically I try to estimate my repairs and maintenance based on the condition of the property and neighborhood. If the property has newer appliances, HVAC, roof, siding, driveway, etc, I will account less for CAPEX - maybe around 5% and if they are old I would account for 10-15%. For maintenance I typically estimate around 10% in repairs just to be safe. This may be aggressive, however I would rather account for the worst case scenario to ensure I am still cash flowing than buy a liability.

For my first investment property I made the mistake of not properly accounting for CAPEX and repairs and it turned to what should have been a cash flow king of a property to actually breaking even. Almost every month there was an issue happening to the property - new furnace, new water heater, repair to leaky toilet, exterminator, etc. If I would have properly inspected the property, I would have either negotiated for the seller to repair/replace or accounted for the repairs in my numbers and would have saved me a lot of issues. However, I learned a lot from that property and will not make that mistake again.

Some differences that come to mind when accounting for paying all cash as opposed to financing would be:

1.) No Principal & Interest payments

2.) No PMI

3.) No Loan closing costs

Good luck!

@Jarrett Mel Williams

Columbus is a great market and have a few properties in the area. What areas of Columbus are you looking at?

Also, I wanted to comment on the seller down payment as an option for low money down as I have some experience in past deals. It is a great strategy, but requires negotiation. You can request in the purchase contract that the seller contributes money at close. You can then use these funds as a down payment instead of funding out of pocket.

@Jerry Stevenson

Congratulations on taking action! Some things to consider:

-Always account for vacancy in your numbers- even if it is owner occupied at the moment because you plan on renting the other units and need to view the numbers for when you move out

- Have you done research on the home builder? Some builders use cheap materials and a rush job which could impact repair estimates and value.

- Based on what you think the rents will be ($700 per room) total monthly income will be $2,100. With a purchase price of $244,490 my guess is this will not cash flow especially with high taxes and HOA fees. However this does not mean it will be a bad investment. If you plan on living there for years this is a great way to possibly reduce your rent and build equity with a house hack strategy.

- It is not common in my area for investors to purchase new builds for cash flowing properties simply because they are selling at retail prices. These are mostly for families or people looking for a home, not investors.

What is your goal? If you are trying to purchase a cash flowing property this does not appear to be a good investment. However if you are trying to reduce your rent and build equity in an upcoming neighborhood to sell eventually this doesn’t sound like too bad of a plan. You will learn how to be a property owner and landlord, which will give you valuable experience. Also you will need to live somewhere anyway so it is a less risky way to begin investing. Good luck!

@Minka Sha

Please do not even consider option A as you are purchasing a liability. Assets put money in your pocket, not take money out! Have you considered what would happen if the market slows and you cannot sell it for the price you think (2008)? What if your income drops and can’t afford to pay the additional $500? Not to mention all the other risks you are taking to lose money each month such as liability, assessments, repairs, etc.

Sell the property, live in it and rent it out as a house hack, turn it into an STR if it can be profitable.

@Patrick M.

While STRs typically provide more revenue than long term rentals, it comes with greater risk. One of those risks which many hosts should have taken into consideration is higher vacancy. Hosts are experiencing that now with the current pandemic. Having reserves in place for large repairs and vacancy is a way investors can mitigate risk. This should hold them over for a few months to get through this event or create a new plan such as longer term leases.

Similar to the financial crisis in 2008, many banks and investors found themselves over leveraged. This resulted in consolidation and increased reserves. I believe this will happen in the STR market. While it is painful to go through, it will help create a more stable market.

Personally, I operate both long term rentals and was in the process of opening a STR. However, I have been unable to open the STR due to permitting. I have used both of the risk mitigation strategies mentioned above to whether the storm. When performing due diligence, I stress test the deal with various vacancy rates. My short term rental will remain profitable even with 50% vacancy and will be able to break even converting it to a long term rental. While the situation is not ideal, I will be able to get through most downturns and hopefully buy properties on the cheap from those over leveraged investors.

@Jonathan K.

Hello Jonathan,

Can you share what your criteria is? I lived in Cleveland for 20 years (mostly on the west side and downtown) so am very familiar with the area. Personally, I like the properties closer to Kamm’s Corner. There is a plaza, bars restaurants, and access to the metro parks. Some areas near Bellaire, Almira, W100th are sketchy.

@Jared Hampl

Great to hear! I just read The House Hacking Strategy by Craig Curelop and exciting to see it in action. Did you screen your friends at all before moving in? Do you still plan on renting by the room if your friends move out?

@Ryan Brocklebank
It sounds like you have a great relationship with your PM and have systems in place to scale your business. Currently, my PM manages the rentals including tenant screening, showings, rent collections, managing repairs/service calls, etc.

You mentioned they also manage the renovations. Can you elaborate? Do they act as the general contractor for these projects? Do you BRRR these properties or flip them?

I have never done a rehab but is something I am interested in doing in the future.

@Ryan Brocklebank

Would you mind sharing what you have increased PMs authority to and why that amount? My thoughts on why I prefer around the $250 range are:

1. It gives you the opportunity to touch base with your PM besides the monthly reports. It allows me to ask other questions over the phone to get a better feel of how the tenants and the property is doing.

2. While I have established trust with my PM, it is always good to have checks and balances especially when you have skin in the game and they do not.

3. Could decrease long term expenses. When the property manager is running the show they may only think about fixing that one repair. You may be able to add other items that could be repaired to decrease future maintenance/ repair calls.