All Forum Posts by: Bao Nguyen

Congrats on the buy Michael!

@Michael Mudrey not sure what you mean by "the really bad areas" vs "those that safe to invest in".  A lot depends on if you're flipping or buying and holding.  I rate neighborhoods from A, B, C, D, E...etc.  A = nice (think country club or new sub divisions).  E = war zones (places you're not comfortable driving around at night).  Use common sense when making a determination.  The people you sell to and rent to are normal people that use common sense just like you and I when making a determination if that neighborhood is "nice" to live in.  Imagine yourself as renter or a buyer, that will answer your question.  Generally speaking, however, the suburbs of Lansing (Dewitt, East Lansing, Okemos, Mason, Holt, Delta Township, Grand Ledge..etc) are where the more affluent buyers are, and school systems are better than City of Lansing school system.

From a flip perspective, I only flip in the B and higher neighborhoods.  A $400 replacement window in an A neighborhood is the same $400 in an E neighborhood, but you may get $1k or more in sold price for the A property, but not so in an E property.  

From a rental perspective, D+/C neighborhoods rents aren't that much lower than A neighborhoods (we're talking $300/month difference). After deducting property taxes, the net profits from A rentals may be $100 to $200 higher than C or D neighborhoods, but the A property's cost basis will be 2 to 6 times as much as the C/D neighborhoods, which makes your A property's ROI way less attractive than the C/D properties. Read between the lines: instead of buying 1 A property, use that same money to buy 4 C properties. What do you think will yield more money? 1 A rental or 4 C rentals?

Ultimately, where you want your rentals is a matter of personal preference: high yields and lower quality tenants vs lower yields and better tenants.  When I first started real estate, I only wanted B+/A rentals because I didn't want any "trouble tenants".  I soon realized that my A tenants would complain about every little thing, like having leaves in their gutters in the middle of Fall.  The C tenants were much more forgiving and "less of a headache" in this sense.  You just have to vett your prospective tenants more carefully in the lower end neighborhoods, but there are good people in all neighborhoods if you treat them right and your property is nice (no slumlording!)  Renters are people that deserve respect just like you and I.  Respect them and their hard earned rent money, and offer them a nice property that you yourself wouldn't mind living in, and you'll sleep much better every night.

@Rylie Hendren I agree with everyone that you're on the right mindset, but reality is much different than theory.  The implementation is what will kill you. A few things to do more thinking/research on if you want to get rich while in college:

1) Rental license laws in East Lansing is worse than communism.  I purchased a property on Snyder Rd last year with the intention of renting it out.  Long story short, EL has very strict, expensive, and lots of hoop-jumping, to get a license.  Only class 1 (owner occupied rental) and class 3 (up to 2 unrelated parties) licenses are available, and only in certain neighborhoods (verify BEFORE you buy).  For a class 1 license, you must own and live in the property for 18 months before you can even apply for a license, and then the application process takes 3-5 months, $1200 in fees, and no guarantees that you will get approved for a license.  You'd graduate, be married, and have a child before you can call up your college friends  to see if they want to rent a room from you for the semester.  The other way is to buy a house with a current rental license.  Those properties are rarely for sale, and they are never sold at a discount.  Just to give you and idea of how strict EL is on rentals, I placed a few craigslist ads for different rental prospects (entire family, 1 room available, 2 rooms available..etc) to see what types of responses I get.  Well, I got a call from the EL rental housing division, stating they saw my craigslist ad and that I don't have any rental licenses for my property yet.  Freedom of speech and press...crazy isn't it?  Needless to say, I just sold my property, took my money and ran out of EL as fast as I could.  

2) Although it's the correct financial decision to buy a property during college and rent to your friends, I'd agree with Caleb: focus on school.  Real estate can take up a lot of your time.  The only people I know that don't spend a lot of time in real estate are people who own apartment buildings and commercial real estate, where they have full time management and their ROI is 1-5%.  For residential property investments, it's a hands-on affair if you want good returns: you'll be dealing with maintenance issues, insurances, bills, collecting rent from your friends (get ready to lose friends).  College is taxing: your brain is constantly focused on class and homework and what to eat and where to sleep 18hrs a day.  When you do have free time, would you rather hang out with your boyfriend, or go lookup a reputable contractors to fix your gutters because water is pouring into your window?  You can't call up contractors or Consumer's Energy when you finally get a break at 1am from your studies.  Having said that, learn and get involved in real estate, just realize you will experience time management issues during finals and exams.  I don't know about you, when I was in college, it felt like I had an exam or a big project of some sort due every week.  3.2 gpa will be a lot tougher than you think when balancing college with real estate.    If you have the entire summer free, perhaps spend 100% of your time during this summer to get your property up and running before school starts.  

3) Your long term goals of owning a bunch of properties and living on passive income is perfect.  I had those same goals, and that was the very reason why I got involved in real estate in the first place.  Again, reality is a bit different than theory.  You need to crunch the numbers more carefully and you'll see why.  

When starting out, your options are pretty much limited to single family homes (they're cheaper and easier to acquire than multi-family, easier to finance, easier to sell if you made a mistake..etc)  Each single family property in the Lansing area, on average, yields a net profit of $400- $600/month.  Assuming you're a successful college grad, you could make $4k/month after taxes.  That means you need to own 10 properties, free and clear with no loans to break even.  And that's you working and managing those 10 properties.  If you get a property management company involved, good luck, your business will not thrive as much (if at all) as if you were doing it.  No one cares about your money as much as you do. 

With all the challenges ahead of you, I still think real estate is the way to go, especially AFTER college.  I made the shift from being a software consultant to real estate and I wish I had done it sooner.  Running a business isn't for everyone, but for those who do like it, the yields are incredible.  It's a lot of fun and a lot of money once you get over the initial learning curve that yields a lot of mistakes and pain.

@John Backus So let me recap your dilemma:

1) Your property is worth $60k, and you owe $90k, and it needs more repairs, and it's giving you headaches.  Let's examine the options you have:

1) Keep the property: this means you are paying your tenant $80/month to live there while you stress out about fixing the house up constantly.  Doesn't sound great, but you will have great credit. 

2) Short sale: you are making the bank as whole as possible, and whatever the bank lost on your mortgage, they will get the government (aka you and I) to pay them back via mortgage insurance.   Anyone with experience with short sales will tell you this: it takes forever to get the bank to play ball, and once they approve, your buyer already bought another house.  During that time, you have to get your tenant out, clean up the house, fix it up and make it sale-presentable..etc etc.  Headaches after headaches on your end just to sell the house so you can get the bank as much money back fro them as possible, so that you only get "semi-crappy" credit instead of "fully-crappy" credit.  You are now picking between eating dog food (walking away/foreclosure) and Purina Premium Cat food (short sale).  Both suck if you ask me.  

3) Wholesale to investors: Investors are not dumb.  They will not buy this house for $90k if it's worth $60k. 

4) Sell it on the MLS for $90k.  Buyers are not dumb, they will not buy a property for $90k if it's worth $60k.  

5) Walk away: unless one of the above makes sense to you, this may be it.  Deed-in-lieu means you are quit-claiming the property back to the bank and then walking away.  If you are planning on walking away, there are investors in Lansing that may pay you some cash for keys, and they try to work out a deal with the bank.  You might want to explore this.  

 The question here is not about walking away because one is underwater.  The question is should you walk away if that's your best financial move?  Do you believe banks think about ethics when they take people's homes via foreclosure?  No, they think about dollars, and what's the best decision based on max dollars returned.  Banks expect homeowners to walk away when it doesn't make sense for the owner to stay the course.  Banks even have a process to handle this very common situation: foreclosure.  A property owner should think the same way.  If walking away makes the best financial sense, then not doing so means you are thinking not with your mind but with your emotions.  Good luck with being a successful, emotionally driven, investor.  

@George P.  It's in progress.  :-)  

Question to all investors out there who have experience working with contractors, specifically disgruntled and hard-to-get-along contractors:

If you got into an argument with the contractor, and let's say for arguments' sake that the contractor is wrong, but he walks off the job and goes put a lien on your property.

How do you fight this?  What's the legal way to stop the contractor from putting an un-just lien on your property?

Welcome Anastasia.  Best way to learn is go work for some investor for free.  Sounds awful, but that's how you learn real fast.

@Account Closed Hey Minh, how much does each unit in a 4-plex at $1.5million rent for in your area?  From what it sounds like, your biggest gain is from appreciation, not from cash flow.  What's your exit strategy?  How long do you hold your properties before you sell them off and capture the appreciation/equity gain?

Thanks for the detailed and thoughtful response Jerry!  Your numbers are realistic and it's what I'm starting to experience as well.  Thanks again for the honest answers.  Of all the books I've read, and what I've learned from mentors and seasoned investors, they all pretty much tell the story you are going through as the tried and true way to make it in real estate.  It's work, it's a job, and it takes a long time, but it does pay well in the end.  Glad to hear you're over the hump and things are starting to come to fruition.