All Forum Posts by: Carlo Michelotti

 I just called him and asked him for his email address. I have his physical address, so could send him certified mail.

All contracts have been verbal at this point. He says that he'd be willing to go "above board", but that I'd be seeing a 20%+ increase in labor prices if we do things that way.

I myself have done side-work for cash, and haven't thought much of the pros and cons. As I understand it, here are the...

...

PRO's:

- Investors attract union & undocumented workers, both of whom don't want financial records to endanger their union membership and/or US residency status(es).

- Investors pay less in labor.

- Contractors don't have to pay taxes.

...

CON's:

- Investors don't get protection of written contracts, liscensing/bonding, etc.

- Investors can get prosecuted for tax dodging? or not reporting payments to independent contractors?

- Contractors can get prosecuted too if they are audited?

...

I guess I don't have a good understanding of the down-sides, and how bad this kind of thing really is. It seems like a LOT of people are doing it though. Does anyone have data that can help to quantify the "cons"... the liabilities? Does the government really care about the little guys?

I've have guys doing rehab work without a contract, and I pay them with checks out of a business account. They're licensed, but this is "side-work" for them. They do good work and don't charge a lot, so I thought everything was good.

But then I read @BrandonHall 's "Accounting Hack" article which says that I should be sending them 1099's and asking them for their Tax ID number.

So I asked some of them to fill out a W-9, which asks them for their SSN or EIN. But they don't want to give it to me, because they don't want to pay taxes! It turns out they were charging me a lower price because they like getting paid "under the table".

They money's gone, the year's almost over, and THE TAX MAN COMETH. Am I in trouble?

Update: Discussed seller financing with seller - he sounds interested!

Here are the expenses numbers

Sorry, here's the analysis numbers in a more easy-to-read format.

Buyer (me) has a sh!#load of cash burning a hole in my pocket, enough cash for 4 or 5 of these cheap houses. Seller (a landlord) wants to sell multiple houses/two-flats and 1031 exchange them for bigger & better things (he has 20+ properties). Traditional mortgages are off the table for me, and seller financing doesn't seem to make sense, because then how would you do the 1031 exchange?

MY INVESTMENT GOALS:

I invest in traditional investment vehicles as well. They are performing very well, at 10%-15% ROI. I WANT TO BEAT THESE NUMBERS BY INVESTING IN RENTALS.

ESTIMATING EXPENSES:

Properties are all in the same area, are about 100 years old; (almost) all have tenants, and could do with similar amounts of minor maintenance; major issues can be identified before closing and purchase cost can be adjusted accordingly. I'm not from the area, and am new to investing, so I could use any feedback you have on these numbers. I'm using roughly the same expenses for all the properties, and I'm trying to be conservative. Maybe too conservative?

One-time Expenses

$1000 - Acquisition Costs (minor rehab, legal, & inspection)

Annualized Expenses

10% Gross Annual Rent - Vacancy Costs (turnover & lost rent)

10% Gross Annual Rent - Property Mgmt (standard)

$1176 - Repairs & CapEx ($1 per sq foot for tpical property)

$1516.46 - Property Taxes (5 year historical average for typical property + 10%)

$1000 - Property Insurance (a nice round number: seller reported that he paid $708/mo for one duplex)

$27 - Water & Sewer (average across several properties from last month)

$0 - Gas, Electric, HOA, Snow Removal (tenant pays or not applicable)

$60 - Lawn Care (I made this number up)

COMPARATIVE ANALYSIS:

This is my analysis of the five properties that are being negotiated right now, listed from best to worst.

Property Alpha (two-flat)

$1250 - Income, Monthly (actual)

$567.37 - Expenses, Monthly (estimated)

$42,000 - Price, Signed Contract

36% - Cap Rate (Annualized Income / Price)

16.6% - ROI, After Tax (annually, assuming 15% income tax)

6.0 Yrs - Until this property pays itself off

Property Bravo (two-flat)

$1100 - Income, Monthly (actual)

$537.37 - Expenses, Monthly (estimated)

$42,500 - Price, Signed Contract

31% - Cap Rate (Annualized Income / Price)

13.1% - ROI, After Tax (annually, assuming 15% income tax)

7.6 Yrs - Until this property pays itself off

Property Charlie (duplex)

$1075 - Income, Monthly (actual)

$532.37 - Expenses, Monthly (estimated)

$55,000 - Price, Informal Discussion

23% - Cap Rate (Annualized Income / Price)

10.7% - ROI, After Tax (annually, assuming 15% income tax)

10.3 Yrs - Until this property pays itself off

Property Delta (SFR)

$875 - Income, Monthly (actual)

$492.37 - Expenses, Monthly (estimated)

$48,000 - Price, Informal Discussion

22% - Cap Rate (Annualized Income / Price)

8.8% - ROI, After Tax (annually, assuming 15% income tax)

13.6 Yrs - Until this property pays itself off

Property Echo (SFR)

$770 - Income, Monthly (actual)

$471.37 - Expenses, Monthly (estimated)

$62,500 - Price, Informal Discussion

15% - Cap Rate (Annualized Income / Price)

4.1% - ROI, After Tax (annually, assuming 15% income tax)

24.4 Yrs - Until this property pays itself off

Notice how the price keeps going up? The seller has been saying that he has realized how out-of-touch he is with housing prices today, and that future asking prices will be more in line with the market.

I think Alpha and Bravo were steals. Do I buy the rest? What should I pay?

Just to complicate things, I'm trying to convince him to sell me an option to buy Bravo, Charlie, and Delta all at once in the next few months while I get together more cash, but I'm afraid that ship may have sailed, along with the prices I haven't already nailed down.

Please, HELP ME WITH THIS!

I wanted to share this Zillow research I found while seeking a more data-driven approach to evaluating local rental markets...

I was surprised to find "In my preferred neighborhood" didn't even make the top ten factors that renters consider!

Here are some ideas of how to turn these research findings into an effective strategy for evaluating that location, location, location:

"Is within my budget"

•  Avoid high-end properties in your buying strategy... Average renters make $37.5 K, meaning that half of all renters can't afford more than $937.50/month. Most Important Concern!

"In a safe neighborhood"

• Target ONLY low-crime areas. Extremely important to renters!

"Close to job/school"

• Average Commute Time is a good metric for this one. Trulia's commuter maps, WNYC commute times map, and WalkScore.com for downtown areas are all good resources that I've found.
• Quality of schools and local "anchor" companies also plays into this one... but safety and cost are still 2x and 3x more important (respectively) to the average renter.

Check out this Zillow research link for more research findings.

Thanks guys, but to predict cash flow you need to estimate your fair market rent and vacancy rate, which are two inter-reliant metrics that basically boil down to the question, "Are enough people looking to rent in this area?"

A lot of people just assume that the tenants will come, even if there are few rental properties currently. Other people assume you can only find tenants in proven rental markets, even though there is higher competition.

I don't like to assume, though. It would be extremely profitable if you could identify and open up a brand new rental market. Are there things look for that could help you distinguish the gold mine from the pit fall?

Has anyone owned property like this? In some areas there are few renters - almost all properties are owned. Does this mean that there is...

- no demand for rental property. When you try to enter the market you are forced to sell or convert to condos because you can't find tenants

- a low-competition area with untapped demand for rental property; tenants will knock down your door and you'll cash flow even if you overpay for the property

Which is more likely, and how do you tell? Either way, HOW DO YOU ANALYZE A RENTAL MARKET THAT DOESN'T EXIST?

I'm stuck in analysis paralysis: Do I look at similar towns? Survey real estate agents? homeowners? landlords/property managers in nearby towns? Consider percentage of vacant houses in area? number of laundromats? number and size of local institutions with skilled transient workforces? number and quality of local schools? class of the neighborhood? amount of new construction?

bleh.

WHAT WORKS FOR YOU?...

1. How do you estimate key indicators that you would typically use comps for, specifically fair market RENT and VACANCY rate?

2. What local factors best indicate no demand for rentals, what are the WARNING SIGNS?

3. What local factors best indicate an UNTAPPED DEMAND for rentals in a low-competition market?

I recently started in 2015 as a contractor for a house flipper. I noticed that many real estate investors in my area (Northwest Suburbs of Chicago) mention the need for reliable contractors, and I believe I can expand my business to serve this market. I am hoping that the BP community can help me learn how to become the best possible contractor and find additional work.

I am also very interested in real estate investing myself. I am ready to purchase a home, and I would like my first investment property to be a fixer-upper that I could rent out and/or flip. I am on BP to learn how to find and recognize a great investment opportunity, how to be a successful landlord without spending a lot of time at it, and how to keep a good handle on my personal and business finances at the same time.