All Forum Posts by: Brian Kloft

Quote from @Troy Hanson:

Hi, I'm looking for advice on purchasing a long term rental.  Real estate continues to be high where I am located and when I calculate the mortgage payment with 20% - 25% down, it only breaks even with the rent I could collect.  My question is, would a down payment at 40% or more be realistic for this type of acquisition?  I assumed I could cashflow for 20% or more, so I want to see if I need to adjust my expectations based on the experience of others.  Thanks.  

I could not find this specific question looking through the first half dozen pages of results when I searched in this forum for this question. 

Keep in mind that just because 90% of the people on here use heavy debt, it does not mean you have to. There are investors out there that put large amounts down, such as 50% or more and those that pay cash. Obviously the more cash down the higher the cash flow. The up side of low down is that you can buy more properties and get appreciation on more properties. The up side on large down or all cash is you minimize your risk plus fewer properties means less work and less headaches. 3 properties with large debt or 1 property low debt or paid off generating the same or more income as the other 3. Take it another step and you have 9 properties to deal with vs 3. Most people on here think the 3 properties is a horrible way to go but there is a group that goes this way and there is the group that starts off the 9 property way but then stops and focuses on paying them off to be in the little to no debt group and enjoy huge cash flow without as much work and never worry about making a mortgage payment or worrying about having the cash to buy a new roof.

Quote from @Bradley Buxton:

@Sarah Ali

You're never too old to get started, that is someone projecting their own fears on you. Ignore them. If you can house hack and buy a property every year for the next 5 years in areas with strong appreciation you'll be well on your way to building equity. You don't need to pay off the properties to cash in the from equity.  One option is sell 2 of the properties pay off the other 3 and now you have 3 cash flowing properties that will still continue to gain equity. Then keep buying a property until your in your late 50s and repeat.  I was living in SLO, CA and moved to the Reno Tahoe area because it was more affordable and still had the CA outdoor lifestyle. There is strong appreciation in this market with tech and manufacturing jobs. Late 40s is the new 30s and you can still build wealth with real estate.

 The sarcastic side of me just wants to reply and say that someone in their 90s is probably too old to get started. 😂

Quote from @Sarah Ali:

I'm one by one tackling my fears by reaching out to BP community!

Next fear: I'm late 40s and have no RE. Am I too old to get started? in 30 years when my mortgages will finally be paid off, I might be dead.  What would a realistic plan for someone my age be? Ideally I would like to live off income from REI, as I cannot currently work in a traditional sense (ie, desk job).  How can I get there and how long would it take?

I'm thinking to house hack or do a 2, 3 or 4 plex where I live in one of the units.  But where I currently live (SF Bay Area) is so expensive. Could I find a place here? Should I look in other, cheaper parts of CA? Or OOS?

 @Bradley Buxton is correct. Another option is to pay the loan on a 15 year term. That way in 15 years they will be paid off, so early to mid 60s for you. Also as Bradley said, assuming appreciation and debt pay down you can either sell one and just cash out the equity or use it to pay another off.  One big benefit of the 15 year loan is that the payment isn't significantly more than a 30 year but you pay significantly less in interest over the term of the loan. 

Quote from @Lucia Rushton:

@Brian Kloft to piggy back on your post. Also in todays market why would one buy a 5% CAP when their interest rate is 7.5% for example. They are negatively geared from day one.

As always just my opinion and not written by Ai

 That is the beauty of real estate. Every person and situation can be unique. I would consider paying a 5 cap for a property with lots of upside and value add. Example I am looking at a triplex at $300k but it only had rents of about $1850. It ends up being a 5 cap.  However I know what I can renovate each of the units for and all three units are paying approx half of market after being fixed up. After fixing them up I can get about $1200-1,300/month each thus a new gross rent amount of around $3,750. After adding in renovation costs I get around a 10 cap. Also if you are unlike most on here and can pay cash it can still look like a great opportunity. 

First to get a better understanding of cap rate, flip the formula around. Purchase price x cap rate = NOI. Basically the cap rate is what % interest rate you are going to make on the property. So if you buy a $100,000 property at a 5 cap you in theory should be making 5%, after all expenses, on an all cash purchase. This is one reason that people have been saying cap rates would be going up because why would you buy RE at a 5 cap (5%) when you can take that money, in todays interest rate environment, and invest it in safe investments that take zero of your time and don't have unseen expenses, and get 5% or better? People are still buying the RE because of the other benefits such as value ad upside, leverage, tax benefits, etc. As Bradley pointed out they can be all over the place. From my experience small properties don't seem understand cap rates, or even care about cap rates as much. If small enough they seem to look at house values. The bigger you get, the more cap rates actually play into it. Example, in one of the markets that I am in there are two different trip plex properties. Both listed for around $499,000. However one has $3,700/mth in income while the other has $1,875/mth. Both have about the same expenses as they are similar properties in a similar area. The one has a 7.5 cap while the other has just over a 3 cap. When you start talking larger multi family properties and commercial buildings (office, retail, industrial) then cap rates become a much bigger factor.

As far as what cap rate is a fair cap rate, well that is up to each of you to decide if it is a fair cap rate and the buyer and seller may not agree on what is a fair rate. Best you can do is look at what cap rate similar properties in your area are selling for. Other things that impact the cap rate can be premium location, newer age for the property vs old building, quality of tenants, etc. 

Quote from @Alexandra Joy:

Quote from @Brian Kloft:

This whole discussion and the responses on here are part of the reason we have problems like these. People have forgotten about just being friendly people. Yes you have to make sure that you are not being taken advantage of, but you also need to be nice and friendly to others as you will get a lot more out of it. Tenant or just neighbor, someone asking you to print off a document for them is not a big deal. (Assuming it is not something like a 100 page document.) If one of my tenants in my office building asked me to print something off I would be fine with it. When I had my management company managing 400+ houses if a tenant stopped by and asked us to print something off I would not have any problem with it. (I know it happened, or at least copies so it is not theoretical.) Even if a homeless person were to open my office door and ask me to make a copy of something because they have to turn it in to social services but they want a copy of it, I would be happy to make a copy for them. As long as it doesn't become a regular thing such as every day or two asking you to print, then they would be taking advantage of you. If it is not going to significantly impact you then help them. Perhaps sometimes you might help someone too much, but that is the price of being a helpful person; but hopefully that means that some of the people you helped turn around and help others as well. That makes the world a better place. Perhaps printing that document helps them out while they are in a bind that allows them to turn in that paper that gets them that better job making more money, or win a scholarship, or....  You never know what a very small and simple act of kindness can lead to.

I know some of you are going to think that I am some free loving, hippie but I am far from that. I am a business owner and real estate investor that likes to make my money, and that often means enforcing contracts and lease provisions. However I try not to forget about being a human being and that others are human beings too. 

 No, I think this is a good point.  It's probably something I would ordinarily do if it were easy but part of it for me is that it's actually very inconvenient.  I don't have my computer and printer set up to access it easily.  I don't have a home office the way most people do.  I don't even have Internet access besides my phone so email wouldn't be possible either.  Also just the fact it was in the evening and I was already down for the count.  This might seem strange to most but I just don't have a home office the way many do these days.

Though it's true that she didn't know that.  She might think it was an easy request.  So maybe she didn't realize how big a favor it actually was that she was asking.  

ok, I am all for treating people with kindness and helping out when we can.  But I just began to feel this person was just starting to ask so much of me to the point of imposing in an inconsiderate way.  Maybe she doesn't realize and I just need to explain my situation.

I agree with the people talking about boundaries.  As a new landlord that is the advice I think I most need.  The way I see it now is that these are above all business relationships.  Businesses have set hours and a specific service they provide and though are almost always gracious with their clients, the relationships also have a professional distance and clear roles.

 If you don't have the ability to print at home because you don't have a printer at home then it should have been a simple, 'sorry I don't have a printer at home. I do all of my printing at the office.' At least then the person doesn't think that you just don't want to be helpful. My guess is that she had no clue that you didn't have a set up. As you have said, most people do. 

This whole discussion and the responses on here are part of the reason we have problems like these. People have forgotten about just being friendly people. Yes you have to make sure that you are not being taken advantage of, but you also need to be nice and friendly to others as you will get a lot more out of it. Tenant or just neighbor, someone asking you to print off a document for them is not a big deal. (Assuming it is not something like a 100 page document.) If one of my tenants in my office building asked me to print something off I would be fine with it. When I had my management company managing 400+ houses if a tenant stopped by and asked us to print something off I would not have any problem with it. (I know it happened, or at least copies so it is not theoretical.) Even if a homeless person were to open my office door and ask me to make a copy of something because they have to turn it in to social services but they want a copy of it, I would be happy to make a copy for them. As long as it doesn't become a regular thing such as every day or two asking you to print, then they would be taking advantage of you. If it is not going to significantly impact you then help them. Perhaps sometimes you might help someone too much, but that is the price of being a helpful person; but hopefully that means that some of the people you helped turn around and help others as well. That makes the world a better place. Perhaps printing that document helps them out while they are in a bind that allows them to turn in that paper that gets them that better job making more money, or win a scholarship, or....  You never know what a very small and simple act of kindness can lead to.

I know some of you are going to think that I am some free loving, hippie but I am far from that. I am a business owner and real estate investor that likes to make my money, and that often means enforcing contracts and lease provisions. However I try not to forget about being a human being and that others are human beings too. 

Like with most of RE, Section 8 can be hyper local. While there are lots of areas where the Section 8 won't pay enough to get market rent, I have had plenty of clients that had Section 8 paying more than what market rent was for their place. I know this was true because they brought me their houses to manage so I was collecting the rent and then later had to rent it out again. Personally I have a problem with Landlords collecting more than market rent from Sec 8, just like I have a problem with Sec 8 tenants that are abusing the system. Both of them are a waste of tax payer monies that could be better used to help other people that truly need the help. But just like any government program or other large system there is a lot of waste. 

As far as Tim's reasons for not being willing to take Sec 8 tenants, most of them I see as just excuses used to justify the position and not valid reasons. 1. They want to make sure that you aren't charging Sec 8 more than what market rent is on your property. This is a good thing for tax payers to prevent fraud. 2. government shutdown causes delay in rent payment and you want to charge a late fee? 4. never seen that one before, I will have to look, but in all my years doing it I have never had any request even remotely like this. 5. If government shutdown causes delay you can't evict while waiting. However is Sec 8 will no longer be paying then the tenant will become 100% responsible and you can evict for non payment. 6. Not a big deal, some states require this for any tenant period. ----- Personally I think you are being way over paranoid. Have you ever looked at any of your insurance policies in detail, or if you live in an HOA have your read it in detail? Lots of companies that you don't have a choice in changing the wording of the contract or a choice in going with someone else have things like that in their contracts. Obviously you are free to use them or not, however many states are now putting rules in place where you can not deny someone just because they are on Section 8 so you may not have the option in the future.

Quote from @Steve K.:

I used to have S8 properties and for the most part I agree with your sentiment: it doesn't have to be as bad as the stigma around it might lead one to believe. I never had any issues waiting on paperwork or the bureaucracy side of it like I had been warned about. I actually never failed an inspection!

However I sold those properties, as when I looked at the numbers compared to my other properties in better locations, I realized I was making a lot more money on those other properties. Even though they had less pro-forma cashflow in the magic spreadsheet, they were actually more profitable overall. This is because of less vacancy/turnover, rents increased much faster, less tenant damage, less maintenance and repair costs, and most important of all MUCH higher appreciation due to being in more desirable areas that actually improved instead of staying stagnant like many S8 areas. 

Other than making less money overall, some of the other downsides of my S8 experience were the following:

1. It's a sad way to make money IME. A very high percentage of my tenants (in fact, almost all of them) were single mothers. Many of them had drug or alcohol issues. Many of them had abusive boyfriends who took advantage of them. 3 of them died in my units from drug overdoses. 1 drank herself to death. I dealt with a lot of domestic abuse situations involving children... some of my S8 tenants only had to pay $7 for their portion of rent every month, but I still felt bad taking that money from them. 

2. S8 tenants never have good credit, savings, or anything to lose if they trash your property (besides their voucher, not always enough to make them care in my experience). In my other properties with high-earning tenants, I can get a judgment and garnish their wages, threaten their pristine credit that they actually care about, go after their savings, etc. Not so with S8, I'm paying out of pocket even if the place is completely destroyed (happened to me a few times unfortunately, and not by people in the program but usually their friends or relatives). 

3. There is always a lot more people living in the property than the person in the program. First the approved tenant moves in: perfect applicant, single mom with one kid, no pets... soon her adult kids move in with their kids and then her ex moves in with his kids and their kid's kids and their pitbulls and mastiffs...  most of the problems I had were not with people actually in the program. You have less control for this reason, and the property gets way more beat up. You can screen all you want and evict all you want, but it's hard to control when they invite people in so it's unavoidable unless you live next door or something. Having that many people in the property puts a lot more wear and tear on it, even if the people give a crap (but many don't, in fact many are entitled with no respect or appreciation). I had to deal with a lot more issues than I've ever had in non-S8 rentals like extensive property damage and also bed bugs, roaches, drain lines completely clogged up by grease (I learned what sewer worms are, look it up), spray paint art on walls and food on ceilings, noise complaints, police at the property, removing dead bodies, etc.  

4. As mentioned above, S8 properties tend to be in bad locations. I reiterate this because I have made the lion's share of my money in real estate by investing in "up and coming" locations as they transition from borderline to popular parts of town. The problem with S8 buildings is they can hold an area back that would otherwise be in the "Path of Progress". If there are a lot of S8 buildings in an area, it'll never be nice. I've seen gentrification spread right up to a block of S8 buildings, and then go around that block leaving it right where it was and will probably always be (undesirable). 

Appreciation is where the real money is at IME, and S8 is an appreciation killer. Buying in areas with a lot of good jobs and desirability is the key to growing wealth from rapid appreciation. S8 renters simply don't have good jobs, or they wouldn't be on S8. People live there because they have no other options. Property values are usually flat for this reason, compared to better locations where more people actually choose to live. So S8 not longer fits my strategy personally. 

 Sounds like another example of RE being local. Most of my Sec 8 housing that I delt with has been in Phoenix AZ. While there are project housing apartments that are not in good areas, sec 8 tenants were able to rent anywhere and with our rapid expanding and relatively cheap housing; they were renting in regular middle of the road blue collar neighborhoods. I rented a lot of brand new houses to sec 8 tenants. My experience was that my percentage of sec 8 tenants that trashed properties was about the same as those that were not on sec 8. It sounds like most of your sec 8 rented properties were in a much worse neighborhood than your other properties. I would guess that if you had non sec 8 tenants in those same neighborhoods that you would have had the same problems with them. Thus the issue was probably more of a issue with being in a lower level neighborhood than who the renter was. 

I had some experiences where the sec 8 tenant was a single mother but her "boyfriend" lived there 11.5 months of the year. He couldn't be there the two weeks that the inspection would happen or she would no longer be low income, since he had a good job, and she would lose her free money (voucher). That kind of stuff is what really drives me the most nuts about the program, the fraud/abuse of the system. It happens on just about any large free money program. However there are also those tenants that I see are getting to raise their kids in a much safer/nicer neighborhood than if they didn't have it; and I have seen some people be able to move up in their career and their portion of rent get higher and higher, over the years, until they got off sec 8. Of course, now that I have some properties on the coast, it drives me nuts every time I see a person that just got their voucher in a larger city decide that now that they have their voucher it is time to go move to the more expensive coastal town. It's like they got their golden ticket so now it is time to go live and relax in a small vacation town. 

Thank you Chris!

Hi Lawrence, I will send you a PM.