All Forum Posts by: Greg Scott

Anna:

Congratulations!   Assuming your rehab numbers are right, this is a very good deal.  (I would get a contractor in to really take a good look.  A 1940s property can have a lot of "issues" you may not notice.)

I would only buy and rehab with cash if you then do a deferred refinance to get your cash out. Otherwise, there is no point in the BRRR.

Or, you could do a hard money loan and after the work is done do a rate and term refi.

You may want to rethink about doing the work yourself.  A contractor can do it faster.     If you spend 6 extra months rehabbing the property a hard money loan can eat up most of the savings by doing it yourself.   There are also rules about timing of a deferred refinance.   In this case, spending more money on the rehab might make you the most money in the long run.   Plus, you can avoid all the brain damage of doing the work.

BTW, your quote for property management looks like a person that primarily manages single family.   In multi-family, it is more common to see a % to the management company plus direct labor for the apartment.   So, you might pay 4% to the management company for all revenue and then $1000 per month for a resident manager to show units, clean things, and notify maintenance of any problems.

Will:

Have you taken any courses on apartment valuation?   I HIGHLY recommend you do this before purchasing.  You should also get some training on operating them.  The expense of those classes are far cheaper than the cost of messing it up.  These are big assets, so if you get it wrong, it is VERY expensive.

Based on the little info you have given me, a good swag is fairly easy. With NOI at $140K, you have an expense ratio a 42%. This sounds a bit on the low side, so you would want to confirm everything. You also want to confirm how much taxes will change on you after purchase. For that matter, you want to confirm the income side too.

Is there any deferred maintenance.  If you look and the roof is leaking everywhere, you better budget to replace it.  So, if required repairs are, say $200K, you need to be ready to take that off of your offer price.

Assuming the NOI is correct and the condition is OK, what are prevailing cap rates? Given you have Section 8 tenants, I'm assuming it is a C or D class neighborhood. I do not know what the cap rates are there, but a C class neighborhood, you can find at 7 or 8% around the country. To be more conservative, let's use 8%. At that rate, the valuation should be $1.7M.

I have worked 21 years with the same company.  One major regret is that I put almost all my savings into the 401(K).    I dutifully maxed it out ever year.  Now that I have learned how to successfully invest in real estate, I wish I hadn't.

With real estate I can consistently get 20%+ returns, and if I manage them well, I can defer taxes indefinitely.  I have greater control over my money and how it grows.  I would gladly pay the 10% penalty to get to my money, but the government won't allow me to get at it until I quit my job.   Funny thing is, I would already be retired if I hadn't put that money into the 401(k) in the first place.

Keep your powder dry and ready to invest.  You want to be able to jump on a deal when you see one, so don't put it in anything that takes a while to get out of, like a CD.

Don't invest in anything that can drop suddenly either.

I basically keep mine in savings.  I don't care that I'm making 1%.  When it finally gets deployed I make 20%+ but I couldn't do that if I don't have cash ready when I need it.

Wow, that is a big question!

The short answer is look for the things that are expensive to repair.

A longer, but insufficient answer is, here are the things I would look for:

 - How does the roof look?  Don't just look for water stains.   look at the condition of the shingles.  Bring binoculars to be able to see it better with out a ladder

 - What are the age of the HVAC systems?   Assume old ones will die

 - How is the foundation?   Too much to explain here on foundations.  I hope you know how to notice a bad one.

 - Is the layout functional?  If you have to move walls and plumbing around, it gets expensive. 

 - Has it been vandalized?   If the pipes are all ripped out, it gets very expensive

 - Does it have asbestos, aluminum wiring, lead paint, mold, etc?  Anything that may require mitigation for health issues gets expensive

 - How old are the appliances?   May need replacing

 - How is the location?  (This should probably be the first on the list.  I'm assuming you don't plan on moving the house.)

My first reaction is why would you want to partner if you had enough funds to buy?  If you just need more funds for rehab, there are places that will do that.  If you are concerned because you have no GC experience, well, that was a discussion for before you bought. If it is just a time issue, I think I would rather drag the project out a few weeks than add a partner.

Getting into a partnership requires a lot of effort.  You would need to spell out exactly who has responsibility for what, who makes which decision, and how you resolve disputes.  You would want to make sure you found the right person too.  If your personalities don't mesh, you will be dying to get the deal done.   Having been in a few partnerships, it seems less work to actually completing the project yourself.

If you decide to continue the partnership route, a lot of it depends on the degree of difficulty.  If it is a simple rehab, then I would give up very little.  If the guy has to basically rebuild the house in an area with all kids of permitting issues, you may want to give him more than 50%.

Sure.  Just create a lease addendum.   I would also read through the current lease to make sure it is clear that the lease doesn't already give them access to the garage.  

The most important thing is congratulations on starting so young!

Condos can be problematic because you don't control as much of the cost side and there are risks form the HOA getting sued and screwing up any exist strategy. Many condos have "special assessments" to cover bigger rehabs so they can maintain the appearance of lower cost of ownership. I've found that single family homes in the 150K range make the best return. Of course, I'm not investing in expensive areas.

Investing your own money and paying cash is actually a terrible way to invest, even though lots of people push that idea.   

Let's do a quick mental model:

• You can buy a house for $100,000 and pay cash
• It rents for $1,000/mo or $12,000 per year
• Taxes, insurance, and everything else is $4,000 per year.
• Your return is 12K-4K or $8K divided by $100K is an 8% return on investment

Now assume someone will lend you $50,000 on any house you buy and charge you 5% interest

• You buy two $100,000 houses with that same amount of cash
• They each cash flow $1,000 per month or $24,000 per year
• Taxes, insurance, and everything else is $8,000 per year
• Your gross is now $24K-8K or $16K, less $5K in interest payments
• You make $11K on a 100K investment or 11% return.  Much more than you made before.

It gets even worse if you calculate taxes.  With two houses, you get depreciation on both houses to offset your income.  In this example, you can depreciate about $3500 with one house or 43% of your income.  In the two-house example you shield 63% of your income from taxes.

Want to make it even worse, assume the houses appreciate.  You get twice as much for both houses.

Being conservative is great and smart, but paying off a rental property is bad investing.

There is no set "rule" other than what you decide you will and will not accept.   To avoid fair housing problems, your rule should be applied consistently across all applicants.

That said, whatever rule you choose to use is completely up to you and your risk tolerance. Letting in tenants who cannot afford your rent, typically will get you in trouble, which is why most landlords set the income to rent ratio at a level that typically ensures the tenant can afford to pay their rent.