All Forum Posts by: Chetan Malik

Chetan,

A cash out refinance will not necessarily kill your cash flow or at least not for the long term. Mortgage rates started to drop last week and they are looking much better as they trend down. DSCR for example which is a great investor loan had rates this week in the low sevens and high sixes. This all depends on the loan factors like Credit score, LTV, DSCR ratio (rents vs the PITI payment), and loan size.

Good news rates are down but the other positive news is they are trending down and that means you can pull cash out now and then simply refinance in 12 months or more to lower the rate. You can also just do a cash out refinance and prior to locking the rate use some equity to buy the rate down to where the loan cash flows the best.

You also have options like 30 Year Fixed, 30 Year 5/6ARM, 40 Year and Interest only (maximizes cash flow).

You are essentially acting as your own bank by using the equity and selecting the best rate/term to benefit cash flow. I have seen far to many investors sit on the side line with low first mortgage rates afraid to make a move. When you wait you lose great deals on homes that are priced lower. Fast forward 3-5 years from now and even though rates are down those same homes are now worth or selling for $50K to $100K more.

You end up losing more money waiting for a rate to come down versus being able to buy a home for a lower sale price.

@Chetan Malik A few things jump out to me from your post. First, if you have access to equity relationships who only expect an 8% cash on cash return that is extremely inexpensive equity you have at your disposal. Equity is far more difficult to raise and generally more expensive than debt, so if if you have access to equity with the return profile expectations you noted, you have a great advantage over most. 

The second item and this is more a concern I wanted to raise is your objective of reaching 100 doors in the next 3-4 years. Why 100 doors? What does 100 doors correlate to exactly? A common mistake I observe are investors focused on unit count rather than the fundamentals of the underlying real estate that's being bought. For illustration purposes, what are the benefits of acquiring 100 units if they are located in a C/D market with terrible fundamentals and no reasonable expectation they will appreciate? Can't you perform better buying 50 units in a market that perhaps has a higher cost of entry but due to better fundamentals experiences significant appreciation?   Focus on fundamentals rather than the number of doors. 

Hi Chetan,

I’d suggest keeping a close watch on your cash flow when considering raising capital or refinancing. Partnering with others can help you grow, but it’s important to have clear financial agreements in place to avoid any issues down the road. If you decide to refinance, make sure your new cash flow can still cover all your expenses, including any unexpected costs.

I hope this helps you in any way!

Your journey of 23 doors in 29 Years of age is really motivating. I have just 2 doors and targeting to have 5 this year. Feel free to send me some deals , which you really hate to let go.
At least it will help others. 

Quote from @Chetan Malik:

Quote from @Melanie P.:

Is this issue that there is not enough room in your deals to pay the property management fees and still turn a profit? Or are the managers you find incompetent and mismanage the property out of profitability?

What is your average rent on the 17 doors?

The PMC was charging me 12% until very recently and just now reduced it to 10% for all of the above. Average rent is $785/door. I have had to do multiple evictions and fix up after the evictions which have costed me over $2500 each eviction. Also, the repairs that the property management company does, they charge me arm and a leg to do the repairs so now i have started hiring people on my own outside to do my repairs which has helped with costs. 

Now i have decided to take a lot of things in my hand and also removing the PMC from many of my properties that have good tenants in Cabot area and Conway area and do not require much management and only keep them for inner city NLR type properties that have been veey challenging to manage unless it is section 8.  

They are really good with getting property leased and taking care of tenants but very expensive, it is just that. Also, the tenants i am running into in inner cities have not been good. They seem good but than they change after a few months. And it is just a cycle one after the other. 

All my loans are at 8% or more with the bank so that does not help either. 

The bad tenants are the majority in the poorer neighborhoods. There are good poor people who pay their bills and keep a clean house. Learning to find them takes time and practice. Unfortunately for $78/mo you're not going to get the work you need out of the property manager and even without the manager the expensive debt is going to kill any chance of making money for 5+ years. If you're patient it WILL get better and you WILL be happy you didn't give up when the money starts coming in.

Since you're already hiring your own maintenance people the next step it to figure out how to oust the manager completely. You can do a better job on the screening. I'll help you with some processes. What you need is someone to do the showings. Do you have any current tenants that would be a good candidate for this? Someone retired or a younger person receiving social security and leads a quiet, sober life? I have an excellent low income application I'll share with you. When we had tenants show for us in the past we'd send them receipts for a $25 application fee and let them keep those cash fees for their time doing the showings. It was enough extra money to keep them interested and you set all the showings for the same date and time anyway so it's a few hours a week when there is a vacancy. Were the tenants that have been evicted placed by this same property manager? Do they charge any additional for placing a tenant like the first month's rent? 

In the good neighborhoods there are remote showing solutions like Tenant Turner that can let the prospects in and out for the showings. Do not do this in the bad neighborhoods or you'll get a squatter.

Property managers are paid commissions, not for their time, so they smartly use the most expensive vendors who respond quickly and do the job right the first time and then add a commission to the already highest price. I'm not sure if that's better for them or for both of us. We've had a string of vendors flake out or do shoddy work that resulted in additional damage and they're wearing me down to go back to the expensive guys...

Quote from @Chetan Malik:

Quote from @Nicholas Covington:

What are the actual units per building?

 Total of 6 properties: 4plexes, 3plexes and 2plexes

So you are looking for less than 8%? Are you willing to divide up the assets into individual loans? You may find more options / easier to tap into some of it at least. Are they all currently in one blanket? 

I’m looking at buying a LTR. When determining the net income, I simply multiply gross rents by an expense ratio to determine the net income. My question is, what do experienced LTR investors use for the expense ratio? I’ve heard 50%, maybe 40%.  The expense ratio is used for an initial screening, actual expenses would be determined before buying.

I am trying to decide whether househacking makes sense here if my goal is to generate $6K/month passive income asap.

I live in bay area California. I have the opportunity to build two ADUs on my primary residence. The ADUs will cost me total $700K to build. Assuming no loan, these will generate total $6K a month income after taxes.

Does househacking make sense here, or should I just focus on buying cash flowing rental properties in the country, or do both?

Househacking primary home = pays the mortgage on my home, instant $6K income, peace of mind, but some loss of privacy, too many eggs in one basket, appreciation on 1 property only.

Buying rental properties instead = multiple properties appreciating over time, more diversified, but cash flow very hard to find, how to get to $6K cashflow instantly?

I will appreciate any advice please.

Thank you so much!

@Chetan Malik sounds like you have Class C and D properties.

We manage Class C in Detroit, but do our best to stay away from Class D.

Class C for us, goes down to a 560 credit score. Below that the tenants have nothing to lose, so how do you control them?

The free rent many low-income tenants got during COVID has only made their attitudes worse:(

One thing to discuss with your PMC, how good are the contractors they are sending to work on your Class C and D properties? You need to MAINTAIN TO THE NEIGHBORHOOD, so sending the same contractors that work on Class A & B properties to Class C & D is a waste of money. 

Doubt the contractors you are personally hiring are properly licensed & insured. You can choose to take on the associated liability issues in doing this, but a good PMC CANNOT.

You may consider selling your Class C and D properties and buying Class A & B if you can't handle the challenges.