All Forum Posts by: William Donaldson

How are you handling the accounting for your properties - cash or accrual?  If it's accrual, it's not an issue since you will only recognize what you have earned (May-Dec).  If it's cash, I'm not sure - check with your accountant.  Worse-case scenario is that you have a higher tax bill this year from the additional income, but a lower tax bill next year from the reduction in income (since half of the year's income was recognized the year before).

I own one student rental in a nearby college town.  It's been a great experience so far, but I've had the benefit of being fresh out of college and being able to place tenants myself.

Some quick things to expect:

-High turnover - it will be unlikely for any tenant group to stay more than a year or two.  Most students stay on campus their first one or two years, and afterwards many will make impulse decisions regarding their living arrangements.  It's not too difficult for a college student to move (i.e. limited amount of possessions)

-To counter what @James Wise posted above, many students will have the expectation that you'll be providing the appliances - dishwasher, fridge, oven, and possibly washer/dryer

-Some landlords find it easier to rent by the room, others do one master lease.  Make sure you make it very clear everyone is joint and severally liable for any damages.

-It's a good idea to get the parents to cosign, especially if your security deposit is minimal

-From my experience, students like to have carpet in the bedrooms.  If the carpet needs to be replaced in the living room or other common areas, I'd recommend a very durable, moisture resistant flooring.  Beer does terrible things to carpet.

-If you allow pets, make sure you have a sizeable pet deposit, if not fee.  You can justify the fee by noting that the funds will be used to clean the apartment in a manner that will allow anyone with pet allergies to move in without issue.

-If you use PM, budget at least one-month's rent for tenant placement.  50% for the services of the PM, and 50% for any incentives they use to get the unit rented.

Best of luck!

Based on Ben's blog post, I believe his point is that buying cheap houses at retail in C/D neighborhoods is a poor financial decision.  This conclusion is certainly not groundbreaking, and reaching it doesn't require complicated financial analysis.  

Ben did a great job in taking a simple real estate investing fact and turning it into an entertaining blog post.  I think people are taking the bait and providing the extra clicks.  Ben, I hope, is not asserting that it's impossible to cashflow at sub $1,000 rents and/or with sub $30,000 properties.  Real estate inputs are entirely market-specific, so certain markets will provide great investment properties at sub $1,000 rents because the lower gross rents are offset by lower costs - both monthly costs (taxes, insurance, etc.) and capex.  If Ben can't make money off sub $30,000 properties or sub $1,000 rent properties  in many of the markets investors on here invest in, then he should edit the title of the blog post.

The most important market factors I look at are the stability of the market's economy and population size, as well as the rent-to-price ratio (discussed later).  But that's only the first level.  Segmenting the market based on other qualitative and quantitative factors such as crime rates, school systems, proximity to the city or major streets, etc. is arguably more important. 

Using one metric, such as the rent-to-price ratio, is never enough when evaluating a market.  The rent-to-price ratio is excellent in some markets, but once you account for the city/county taxes or the flood/hurricane insurance or the vacancy level due to supply/demand, you're quickly in the red.  In real estate, you have to know what every line item is or should be, otherwise you risk jumping at a "great deal" that is anything but.

@Brice Hall 

There are some markets where you will not be able to cashflow outside of the C/D areas that will cause more headaches than its worth.  What can make some of those markets attractive is the potential for appreciation.  I'm not interested in appreciation plays, because equities are a better option, in my opinion, given the dramatically reduced time investment and liquidity risk.

There are plenty of markets where you can find cashflowing properties, but it can be difficult for out-of-state investors. You not only have to have a great grasp on the market you invest in, but you have to work harder to find the best deals, because investors who live the market have a distinct advantage.I haven't had trouble finding cashflowing properties in my market, but several of my properties have come from word-of-mouth or other mediums for obtaining properties outside of using the MLS. I'm sure you'll be able to find the right market that fits your risk appetite and investment needs. I've read several success stories on this site from out-of-state investors who bought a turnkey property, but then I've also seen a few horror stories.

My advice:  Don't get impatient and purchase a property that you had to talk yourself into.

The HOA fees kill the deal.

The HOA and utility payments put you over the 50% threshold for expenses as a percentage of gross rent. When you add in taxes, landlord's (and in this case renter's as well) insurance, vacancy, PM (since you're managing out-of-state), maintenance, etc., there is no room for cash-flow.

@Kevin Nichols  - that would be great!  I really appreciate the offer.

Thanks, @Dave Toelkes  Given that it's a great deal, I wanted to get the contract signed as soon as possible.  I was hoping I could draw up the addendum myself, but I realize that it is more prudent to wait an extra day or so for an attorney to guide the process.  

I recently made a verbal offer to the seller of a SFH that was accepted. This is my third purchase, but the first time I will be utilizing seller-financing to acquire a property. To be perfectly honest, I expected the seller to prefer the all-cash offer, but I am thrilled she is accepting the following offer:

Purchase price:  $40,000

Down payment:  $2,000

Seller Financing:  $38,000 first-lien mortgage fully amortizing over 15 years at a 5.0% fixed interest rate, resulting in monthly payments of $300.50

The questions I have are as follows:

-The purchase contract I am working on notes in the "Method of Payment" that there will be $2k down and a $38k mortgage to be held by seller.  I am working on the addendum that goes into more detail.  Exactly how much detail do I need in the addendum regarding the mortgage?  I will use a mortgage drawn up by my lawyer, but I do not know how much detail about the mortgage needs to be contained in the purchase contract/addendum.  

-Is it customary for the seller/mortgagee to send an annual statement that includes the amortization schedule, amount of interest/principal paid during the year, remaining principal, etc. to the mortgagor in an owner-financing arrangement?  If so, would it be acceptable for the statement to be managed by a third-party (lawyer/accountant) and signed by both parties annually?  I would like to reduce the burden on the seller while at the same time covering my bases.

-How is the Satisfaction of Mortgage document typically handled in this situation?  Since it is a standard form, I assume when we arrive at that point we can both sign the document in the presence of a notary.  Or would it be more wise to do so with the assistance and guidance of a RE lawyer?

Thanks!

Honestly, it's generally a terrible idea to begin your real estate investing career in an unfamiliar country. Given the risk of the investment, even if the return truly was 7%, which I am sure it is not, the return would be nowhere near what it would need to be to make it worthwhile. If you're shooting for a 7.4% ROI, just put your funds in an ETF.

If you're interested in commercial investing, you'd probably be able to find a property in your area with a Cap rate of 7%+. 

Also, the idea of using a mortgage to "increase returns" is that leveraging increases your ROE (i.e. cash-on-cash in this case).  It also frees up cash to purchase other cash-flowing properties, allowing for diversification, higher returns from debt-paydown (higher total debt = increased accruement of equity from the tenant essentially paying your mortgages), etc.  You can use a mortgage for this property or any other to increase cash-on-cash returns, but it isn't going to change the intrinsic value of the particular investment relative to other potential investments.