All Forum Posts by: Cameron Miller

Why did you post this twice?

In my market if the apartments have no amenities the SFH rent for more. This leads me to speculate that the apartments have amenities like pool/spa, fitness room, bbq area and may not be good comps. Do you have the Rentometer pro? Can you see the comps used?

By the way BP has a rent estimation tool.  I use Rentometer, BP, and Zillow rent estimators.  If they all come in similar it is likely that they are accurate.  Quite often they show large variance.  In all cases I look at comps and eliminate the ones that do not apply.

It is my belief your duplex unit will come in at the low range of the SFH. It likely does not have the amenities of the apartments and what advantage does it have over the typical SFH?

I do not refer to rent minus piti as cash flow but recognize some people do.  My cash flow number is the cash flow reflected after extracting off all sustaining expenses.  This implies even if it has a new roof, I allocate the monthly cost for the next roof which in my market is about $50/month for detached asphalt shingle.  

You have 2 units with maintenance/cap ex (likely at least $300/month per unit), pm (likely at least 10% at those rent points), vacancy (in my housing shortage market I still allocate 5%, but in a typical market I would allocate 10% and have it include delinquent rent), book keeping/tax prep, asset protection (could be $0 when starting out), miscellaneous (such as water Cost from a slab leak - I just had a $3k water charge due to leak that I picked up because tenant did not use the water and it would not be fair to charge them for it). 

Unless the interest rates fall or you have a large value add, I see no advantage to paying down early to refinance. I am not betting on a significant rate decline. I exert effort to keep my LTV high to maximize my benefit from leverage. To pay down the cheapest money available is foreign to me. I strive to keep 70% LTV or higher and am failing badly in this environment even though I refinanced everything between Dec 2020 and Dec 2021 (if fed states that they are going to raise rates it is generally a good idea to believe them). I suspect I am a bit lower than 50% LTV currently.

note if it is a good home for you and your family, it does not have to be a good re investment for it to be a good purchase.  Just recognize this and understand it will not lead to return that is likely to positively affect your life.  Even if the cash flow was $250/month for 2 units ($125/unit), it is not enough to have that cash fliw positively affect your life.  Also at that cash flow, you basically are getting compensated for managing as a pm likely would charge at least $240. 

My time is worth much more than a pm makes from managing properties.  In addition, your sustained cash flow is not $250/month and is negative (the maintenance/cap ex, pm, and vacancy places this many hundred dollars a month negative).

Financially in the near term you are better off renting.. If you believe this is a good home for you and your family, then the financial performance is less of a criteria.

Good luck

 Lansing has far worse historical appreciation than grand Rapids.  https://www.neighborhoodscout.com/mi/lansing/real-estate

If both units at $1200 (so after the house hack), the unit has $250/month before all expenses not included in the PITI. This implies the property is many hundreds a month negative. My rough estimate is $800/month. To get here you have to raise the rent $200 on the existing tenant. The $200/month increase would not by itself be of concern but you want to raise an existing tenant to full market rent when market rent are units that have been flipped. There is a good chance the tenant chooses to rent a unit that has been flipped and you have the cost of the unit flip and the loss of income associated with the vacancy.

It is a tough time to enter RE. Two recent studies show that in virtually every large city it is initially cheaper to rent than to owner occupy (OO). Note that investors have costs that the OO does not have including PM and vacancy. In addition, in some markets OO pay lower property tax than RE investor.

What you are proposing to purchase is a negative cash flow property, with poor rent growth and poor appreciation.  I can say with confidence that in the short term you are financially better off to continue renting.

Do conservative, thorough, and accurate underwriting.  Use the long term appreciation of 2.5% or less (remember conservative).  I am confident your underwriting will show that in the near term you are better off financially renting.

this will change if interest rates drop significantly or if property prices drop without an associated drop in rents  To be blunt, I think both are unlikely.  You will need to look for a killer deal for the numbers to work.  This likely means off market listings.

Good luck

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

@Cameron Miller Sounds like a potential nice deal, but also potential red flags!

You are too trusting and while your relatives may mean well, but who will pay for their mistaken info?

1) The property taxes will probably double:(
Read below copy & paste info:

Michigan has some of the most complicated property taxes in the USA. Here’s what to know.

State Equalized Value versus Taxable Value

Back in 1994 Michigan passed the Headlee Amendment:

(http://www.legislature.mi.gov/(S(k5m2va1uyfgwtbyjf4nqb1bx))/mileg.aspx?page=LoadVirtualDoc&BookmarkID=6536)

that capped annual increases to the Taxable Value of a property to the lower of 5% or Michigan's Cost of Living increase. This was done to protect senior citizens on fixed incomes from being forced to sell their homes due to unaffordable property tax increases.

Since the passing of this amendment, all properties in Michigan have two property tax values associated with them:

1. State Equalized Value (SEV): supposedly equal to 50% of the market value of a property, not based on recent sales price.
2. Taxable Value: the SEV annually capped as long as there is not a transfer of ownership.

City Assessors are charged with determining how much property values have changed each year. Since they can't do each property individually, they use comparable sales to make broad generalizations to determine percent changes. Then these are applied to all properties in that area of the city.

Property owners get an annual update on their SEV & Taxable Values with their city property tax bill, typically sent in December.

So now, the city assessor tracks the SEV, but homeowners are taxed based upon the capped Taxable Value. These two numbers diverge over time as the SEV increases with property value, but the Taxable Value is capped. The Taxable Value is uncapped and equated to the SEV upon a sale or other transfer of property ownership, with limited exceptions.

Homestead versus Non-Homestead Millage Rates

Counties & cities in Michigan are allowed to set their own millage rates, with one restriction – a primary residence (Homestead) is exempt from up to 18 mills of school taxes on their Homestead property. A property qualifies as Homestead for this exemption if an eligible owner files a Principal Residence Exemption (PRE): https://www.michigan.gov/taxes/0,4676,7-238-43535_43539-210891--,00.html#:~:text=Section%20211.7cc%20and%20211.7,purposes%20up%20to%2018%20mills.

Many investors have gotten an ugly surprise when they bought a property that was a primary residence of the seller for the last 20 years. The removal of the Taxable Value cap and the switch to Non-Homestead millage rates can double, even triple, the property taxes. By the way, the cutoff date is June 1 of each year for these changes.

City & County Tax Bills

Most Michigan properties receive TWO annual tax bills - one from the city and one from the county. Many banks handling tax escrow accounts for mortgages have mistakenly thought there was one tax due twice/year or totally missed one of the taxes.

Investors should research the SEV and the Non-Homestead property tax millage rates to project what the property taxes will be after adjustment.

You can use this tool to estimate future property taxes: https://treas-secure.state.mi.us/ptestimator/ptestimator.asp

2) Who cares what, "they say market rent is..."!
- Go find out yourself! Use Zillow, Rent-O-Meter, etc.

3) When is the lease for the tenant up?
- You can't raise the rent until it ends.

4) Have you walked the property & the units? 
- When is the last time the units were updated?
- How much deferred maintenance is there?

5) Be sure to get your own home inpsector and have sewer camera'd to avoid expensive surprises.

Cameron, my quick thoughts are this sounds like a good opportunity for you if the location makes sense for you and your lifestyle.

I don't know what you currently pay in rent, but if it's more than $1,000/mo this seems like owning this duplex would be a nice move forward. You'll build equity and you can learn the ropes on how to be a landlord.

Personally, I wouldn't even worry too much about making a profit on this because you could potentially get your living costs reduced dramatically by having the other side of the duplex subsidize whatever you currently pay.

In short, I'd value owning a property, building equity, having exposure to potential appreciation, etc. over making money on this acquisition. You have to consider, the vast majority of people that own a home own it as completely liability without it generating any income. House hacking turns that on its head. I'd go for it!