All Forum Posts by: Chris A

I started by accident. I would have never categorized myself as "the type".

-Bought our first house with 3% down 12 years ago
-socked some money away and bought our next house 5 years later. Kept the first house, refi-ed it, and then rented it out to college students
-socked more money away and 4 years later bought our next house. Kept the last two houses and rented them
-realized about this time that we were getting the hand of this thing...
-1.5 years ago bought a 4-unit from a friend who was moving out of town and so got a discount
-this summer sold first two rentals and bought a large 12-unit one block from the local state university. Got our first taste of a management company. Finally enjoying the relaxation of having somebody else do the work.
-Now I have the bug really bad. I'm actively looking for 2 new apartment buildings to partner on with my long-time best friend. He's got deep pockets but I have the experience. His willingness to partner means I can finance my half without any money down.

Merrily we roll along!!! I'm well on my way to reaching my long-term goals by it's definitely not a fast process. Still I will be retiring from my day-job about the same time as my parents and that's quite an accomplishment.

If you are talking just one house you should just manage it yourself. I have a tough time imagining a property management company is going to be willing to even do it for their piddly percent of gross rent. I have only seen this work when you have a portfolio to offer them.

Thanks Jon. That has been my assumption but I realized that I had no real knowledge to back that up. In my experiences I have seen expenses run about 35% including reserves but I haven't been doing it long. It sounds like I just need to make sure my DD can keep me from having a down year on year 1!

Back on topic:

I've been using 50% to analyze various investment opportunities because it seems very conservative but I'm not sure I truly understand the theory behind it.

Bear with me please:

Does it represent an overall average ratio of expenses over a long timeline?

or

Instead does it represent a typical down-year scenario which includes notable and unusual expenses such as legal fees?

While I own a couple apartment buildings I have never really experienced a down-year so I am realizing that I may be very naive. Thanks in advance for the insight.

Sorry I phrased it poorly. I have typically seen expenses run 35% of gross rents so I multiplying gross rents by 50% is a very conservative estimate. Please understand that while I have purchased a couple buildings I am not an expert.

Mike please don't skewer me for this but I believe I have seen the "50% rule" in other books although it might not have that exact wording. I was reading "The Complete Guide to Buying and Selling Apartment Buildings" by Steve Berges last night and he used that as his way of initially screening buildings.

Now that I have said that, my experience has been that expense ratios typically fall around 65% (plus or minus 5) excluding vacancy rates. I've been using 50% as a conservative estimate in my calculations though and if a building is break-even based on those numbers then I explore further.

Chris

Wells Fargo doesn't scan the deposits. I wish they did. Is that normal?

I use Rich's method of providing deposit slips. I recommend it with one minor reservation. We didn't plan very well in advance and now I have several tenants that pay the same amount each month. When one doesn't pay on time I have to figure out which one and that's a bit of a pain. Next year all of our leases will be odd numbers ($502 for example) which will make it pretty foolproof.

Hmmm. My local lender (Wells Fargo) was willing to consider this scenario as long as they were in the first position and the seller took the 2nd position. It shouldn't make much difference to them except they like you to have some skin in the game ideally.

Now I just need to find a seller who is both willing to sell for a loss and willing to finance the DP! No luck yet but I keep looking.

One other thing to consider is simply asking the seller to Carry-back the down payment for a reasonable rate. If they are serious about selling it then self-financing 20% in order to get their full asking price might be reasonable. It doesn't hurt to ask right?