All Forum Posts by: Bill S.

@David Walton Colorado requires that security deposits held by brokers be held in a "Trust Account". This is a special type of account. Since it is a "trust account", if you go bankrupt, the creditors cannot access the funds in that account as it is not your money. I would suggest that you get with an attorney that represents real estate agents and run your plan by them. Frascona Joiner Goodman & Greenstein PC up in Boulder is a great place to start. While I use Tschetter Sulzer as my attorney for Landlord Tenant issues, I don't think they regularly practice in the area of Real Estate Agent representation. I would completely agree with the idea of putting at least some of the funds in an interest bearing account if you were self managing and not a licensed agent. 

On a personal note, I was audited by the state and found out that the bank I opened my "trust" accounts with for my brokerage with did not actually open true "trust accounts" for me. The lackey that opened the accounts added the label "trust account" and thought that was all that was needed. I did not know what was done. Fortunately I was not using my brokerage to manage my own property and I was not doing any property management for others so I was not required to have the trust accounts that I thought I had but didn't have.

I do know that not all banks will set up true trust accounts so finding one that will pay interest might be a bit of a challenge.

@Melanie Wilmesher so my advise. Ask him what he would take. The one who offers first, loses is the general rule of negotiation. When you counter, make 3 different offers. Make them all in writing and make them all ones that you would accept. Let him choose which offer to accept. With three offers there is less likelihood of him countering. He will just pick the best one for him. It also reduces the chance of him saying "no" as he has 3 offers so what other choices are there?

Finally, play the long game. A "no" today may be a "yes" in 6 months if you have kept in touch during the in between times.

Please keep in mind the issue of value. Sure a SFR by itself is worth x but this house is not by itself. The fact that there are 5 units significantly impacts the value due to the financing available for such units (incomes based value for 5 units vs comparable sales value for SFR). Unless you can split off the SFR and sell it individually, it is significantly devalued by being coupled with the four plex. The reality is the resale value might be greater if you combined two of the one bed units to make a two or three bed unit so the property would be a four unit property and qualify for the 30 year debt financing of conventional owner occupied multifamily property.

Another option would be to split off the house and sell it as a separate unit. Remember that both lots would likely have to conform to the zoning requirements for each lot (not likely in most cases but worth looking at). 

@Kristen Dolotina there area also stand along systems for taking automated payments from Tenants. I use a service called ClearNow. It is an ACH. I know @Randall Alan mentioned the time it takes for ACH to clear but those deposits that the software deposits into the account can be taken back if the fund end up not being there. 

I use the Zelle app to collect upfront money from tenants and it is instantaneous with no take backs but it is not automatic so I doubt you could set it and forget it. Also the sender has to initiate the process so your tenants would have to do that each month. Again not automatic. In addition, it sometimes poses limits on the amount of funds you can send in a day, a week or a month.

@Noah Bacon My vote also for the house hack approach. The sell and scale up crowd don't mention the costs associated with that approach. You have all agent fees as well as title fees etc. Those fees are based on the whole price of the property so selling property with 20% equity can shrink down to 10-15% equity pretty quickly which means you lose between 1/4 and 1/2 of what you made. 

Hang tight for now. Build some more equity and see how it is to have your properties some distance away from yourself. You can always scale up later if you find you don't like the long distance landlording.

@Robert Weissfeld so a couple thoughts. 

1) using "pre-approved or mostly ready-to-go building plans" sounds good but people paying $3m for a home don't want a cookie cutter so it might not be a good idea to go that route. You can use plans that have been used before but they won't be "pre-approved". Also I think Architects take a dim view of reusing their plans unless you pay them again.

2) You could just hire a builder. The challenge is a lot of the developers handle the GC function by building their team of subs that do all the work. That is where a chunk of their profits are. Most of the GCs available actually cater to the folks building their own "forever home" kind of market. They do more handholding as well as having higher profits and costs. 

3) My suggestion would be to find all the homes in the area that have been built in the last 3 years as well as those under construction and find out who built them and reach out to them to see how the project was done. You might start with the agent that listed the home for sale as they typically know the players.

@George Turner welcome. This is a great place to learn. I do have one question, you mentioned getting your "first property" via a 1031 exchange. Not sure how that would work as a 1031 exchange means you are selling one property and exchanging it for another so the 1031 works for the 2nd and subsequent properties but not for the "first".

I realize you are learning so just wanted to point that out in a friendly way. Perhaps you meant something else.

@George Turner so the best advise I ever got was "decide who you want to rent to, and only buy property they will rent" That is create an avatar for your ideal tenant and then buy property they are renting. 

My understanding from years of doing this is. It's more about location than condition/age of the property. You can value add to make it more appealing (fix it up) but you can't change the location. For example, if you buy in Westwood most of your applicants will look like the rest of Westwood. If you buy in Cherry Creek, most of your applicants will look like the rest of Cherry Creek. This is irrespective to of the condition of the unit. You can attract more quality from the tenant pool by having a nicer unit with more amenities but a renter for Cherry Creek will simply not even look at a unit in Westwood no matter how nice or what the price. The counter is true as well. 

So having said all that, properties that attract high quality tenants (location, location, location) cost more and have lower returns. Properties that attract lower quality tenants (more headaches) tend to cost less and have higher returns relative to the more desirable areas. 

The key to double dipping is to find emerging areas and invest in them and wait. When the area becomes desirable then you get the high quality tenant and appreciation.

One other thing to keep in mind which I did not understand when I started out. All other things being equal, a high quality tenant pays lower rent than a low quality tenant for the same property. For example, you have a place to rent, two applicants come, one has a 500 credit score and one has a 750 credit score. Who gets the property? The 750 credit score. The only options for the 500 credit score is to apply to over priced properties where there are no higher credit score applicants. I realized this when I bought a place in an up and coming area (Jefferson Park 20 years ago-it was a fairly rough area then). I moved out all the bad apples and fixed the place up nice. I got exactly the same rent as the previous owner did with a bunch of losers no one else would take. I had 10x fewer headaches but no more rent in my pocket.

Based on what I have seen with deals being offered in the multifamily space (5+) units. Get a 6% cap rate is the market now unless you get in the rougher areas when it might go up a percent or so. If you get in the nicer areas it might go down a percent or so as well. Your target of 6% is in line with the local market for 5 units or more. The problem is that for 4 units or more the value is based on what other units are selling for and generally speaking the price per unit on 4 or fewer units greater than the price per unit on 5 or mor units. That is because of the financing available with the owner occupied loans with the longer (30 year) fixed rate debt. People are willing to pay more when they can live in a property. Your market research is bearing this out. Take the feedback and adjust accordingly.

@Stacy E. My heart goes out to you. You are in a difficult situation. I continue to be flabbergasted at the local politicians who pass all these tenant friendly laws creating mounds of paperwork with a myriad of details and are surprised by why there are more evictions. The current long drawn out detailed and tedious process causes tenants to delay until the point of no return. If they knew they had to do something now they would if the could. If they know they can't pay they move and it's over. Now with the long delays the likelihood they will arrive at the conclusion that they they need to act is drawn out to the point of no return (full blown eviction). 

I certainly hope you did everything right (used the correct notices, etc.) because if you didn't it will cost you dearly. The laws are changing quickly here. One law (HB-1098) that just passed and was signed by the governor will impact you as well. It is called just cause eviction, where you now cannot evict a tenant that has not violated the lease. In other words you might not be done with the tenants at the end of their lease if they don't move on their own. Sorry for the bad news.

At any rate, how to care for yourself. First off - this is business and treat it as such. I realize they live in the same structure as you do so this is hard. Emotionally take a step back from it. Sure you need the money but if you can't afford the cost of doing business you need to get out of the business. I mean that with all sincerity. Sell your house and find another way to make money. Treating it as a business means that all communication with the tenants is business communication.

2nd - Stop texting them and contacting them about the rent they haven't and probably won't pay. Consider that money gone and look forward to what you need to do to get the next paying tenants in place. 

3rd - write down your lessons as you learn them. What mistakes you made in screening and what policies you will put in place (in writing) so you don't make them again.

4th - figure out what the next step is and go through it as a dry run. In Denver, after the tenant has been served then there is a court date set. This is not really a court date in that if everyone shows up, they set the actual court date for the trial. The first date is held virtually. If the tenant doesn't show then you can win by default. If the tenant does show and there is an actual trial set, go to the court ahead of time and watch the process. Observe the judges and the people. Learn the process. Generally speaking, the court is very unfriendly to landlords.

5th - Offer them a get out of jail early card. Offer to let them move out and stop the eviction. Many tenants don't know that if they move out before the court rules against them, it stops the eviction and means they won't have one on their record. Put this in writing by offering the early move-out as a way for them to avoid the eviction. Email works if they use that. If not, a type written note you hand to them personally is best. I do not recommend text for this as it's not as formal and they may not consider it. Say something like, "Our court date is x and I have been considering the situation and wanted to present you a one time offer to avoid an eviction on your record. If you move out and return the unit and keys to be by 5 pm Friday then the eviction process with stop and you will not have an eviction on your record. This offer is good until 5 pm Monday." If they take this, your are money ahead as you can start getting a paying tenant in sooner. Note if they move you will want to be sure to send them an accounting of their security deposit within the required time. It will show them the money they owe you. If they don't pay, you can pursue them in small claims court.

6th - Let the process carry itself out. This happens. It is not the end of the world. Learn from it, do better next time and move on.

@Scott Trench I agree that rental laws favoring tenants drive out investors which in turn creates scarcity relative to the absence of those laws which in turn drives up rents. The question becomes, what if the quality of life degrades to the degree that SF or any other blue city sees a shrinking population (ie Detroit in years past). When that becomes the case you will see property values (and rents) drop. For me the concern is not so much the difficulty of dealing with the new laws etc but the greater long term impact of those laws on the quality of life and the population. There has to be a point where no matter how good the weather is, the risk of being mugged, or the proximity to a year round tent city makes you feel so uncomfortable you simply won't go there. When enough people arrive at that same conclusion there is downward momentum and really no bottom to the mess. 

Decreasing jobs and decreasing population means you won't need rent control. At that point tenant friendly laws and a long eviction process will just be icing on the cake. 

@Dennis S. $200K is a down payment and some reserve money for a duplex here in Denver so buying all cash here is out of the question. The answer to your question here is Leverage. Duplexes are hard to find here as well. You might be better off to find a deal that is marketed as a SFR with an unfinished basement and turn it into a duplex assuming that you do your home work and zoning allows for it. A fourplex is my vote because there is less competition due to the higher price point and barrier to entry. The prices are more closely tied to the income they generate vs what the people next door paid for their house.

As for your long term goals, I am not sure starting with a duplex or four plex will open the door for owning in that asset class (larger multifamily) the way you might think it would. Sure you will learn about managing tenants and property managers but the larger building are different animals with different processes and different knowledge needed. Nothing wrong with your approach but something to keep in mind.