All Forum Posts by: Greg Scott

Your assumptions sound correct. 

The actual percentage of people that get audited is tiny.  Do you avoid driving because you might get in an accident?  The financial benefit of reducing or eliminating income taxes very much out weighs the hassle and costs of a potential audit.

You don't need anything fancy for a time log.  "January 5, Met with prospective residents, 2 hours"  I'm sure you can google examples.

If the tenant wrote you that they were vacating and they did, then you have legal possession.  No eviction is required.  Change the locks and start getting it ready for lease-up.

Determining what is owed is a different issue.  I'd break it down into two steps.  1) Move-out & physical damages.  You typically have 30 days to send the tenant a letter detailing the cost of any damages against their security deposit. Since they didn't pay September rent and usually there is a lease breakage fee, I presume the amount they will get back is zero.  That is fine, you still need to send them a letter.  2) How much the tenant will ultimately owe you depends on how quickly you re-lease the unit.  Once you know the exact amount you can send them a letter with a bill.  If they choose not to pay, you can sue in small claims court for damages.  One hard part may be serving the tenant. If you can't find them, you can't sue them.  If your records are good, you will probably win damages.  The next hard part is collecting.  If they do not pay, you can send them to a collections company who will take half of any proceeds to colllect.  In my experience, odds of collecting are about 25%.  Do the math and decide if you want to go to court.

Note: I did not read your lease. It is your responsibility to have a legal, valid lease and understand exactly what it is in it.

Seems like your tenant was trying to avoid the $147 fee, otherwise, why would the trailer be parked away from the house.

Seller financing is basically a private loan. These are not standardized agency loans.  You need to read ALL of the loan documents to understand the provisions of the loan.  For example, the seller might put in an expensive penalty if you refi early.

Regarding the interest rate risk, I would not buy it today if the deal did not work at today's interest rate.  The reason the GFC happened was there were all these people with mortgages that reset after a few years and they could not support the true mortgage payments. They could not refi out of the loans and they got foreclosed.  Don't let that happen to you.

With that in mind, if you qualify for a FHA 5% down loan, why wouldn't you do that now?

As an OoS investor investing in Michigan, you had better understand how property taxes work.

They are capped during ownership but uncap upon sale.  Depending on how long the prior owner lived there they may change very little or they could more than double.  I've known investors to get burned because they didn't do the math. 

Have your realtor pull the tax records and you can see the difference between the SEV and Taxable value to do the calculation.

There are TONS of turnkey rental companies out there.  If you have concerns, don't buy.  Go look at some others.

Talk with your lender about this proposal...

  1) Get a solid quote on the roof replacement and share it with your lender. 

  2) Put the funds in escrow with your bank for the sole purpose of replacing the roof. 

  3) Close on the property.  

  4) Install the roof.  

  5) Get reimbursed for roof expense out of escrow.

Most banks are fine with something like this if they know their downside is covered.  They will probably let you close.

If the lease covered a leap year, would it be more than a year because it is 366 days?

It is probably much easier and safer to simply give 60 days notice for EVERY lease because you never know what a judge might say.  

I presume they had a kitchen sink, so the sink is not a relevant issue related to habitability. However, a unit without a toilet would not be considered a habitable unit in any state.

You did not give a lot of background information.  The rehab for this sort of thing should take about 3 days.  If that is the approximate time frame, then throw them a bone and move on.

If they have been unable to use the bathroom since the water incident because it was declared unhealthful, then it would have been much better to have made an insurance claim.  If you have the right insurance, both the repairs and lost rent would be covered.

The big-picture idea is correct.  I'll point out some areas where there are potential pitfalls.

The 6.11% cap rate is absolutely correct if the price is $5M and the NOI is $305K. The important question is "Is that NOI real?"

How do you determine the property should have an NOI of $400K without raising the rents? It is usually dangerous to assume you can cut costs. It is much safer to assume the seller has been cutting back on expenses to boost NOI prior to the sale.

"DSCR loan" is a term used in single family. Ignoring short-term bridge loans, most commercial loan sizing is limited by DSCR, but they are not called DSCR loans. Please work with an experienced lender to help you understand the right loan products.

There is an operational cost to raising rents that does not seem factored into your process.  To truly achieve higher rents, you often have to spend a significant amount upgrading units.  Even if your units are in great condition, most residents won't be able to afford a $200/mo increase in rent.  This means they will move out.  If you want to turn the property in one year, you are going to experience very high vacancy and much higher unit turn costs.   Either way, you had better have much more cash raised up front. (Many syndicators are selling at a loss right now because they did not account for these things.)  

On the typical value-add I've seen, people are pouring about $10K+ per door into upgrades. In your 80-unit example, that would be $800K. You will also have sizeable closing costs and working capital needs. I suspect you will need to raise a little over $2M from investors to properly execute this deal.

As a side note, 12 months is never going to be realistic on a full turnaround.  The best I've ever seen is about 18 months.  It will take you a month or two to get your feet under you.  Even if you turned 100% of the units in 12 months, the bank is still going to want to see a solid trailing 3 months of financials before determining your loan size.

Food for thought...