Originally posted by @Jeff S.:
Congrats, Edward.
I think the FHA (or VA) owner occupied 2/3/4-plex has got to be one of the best deals Americans have to get started in (profitable) REI. I own my own (mortgaged) house, but am working on a deal to buy/occupy a duplex for cash flow.
I'm sure others here would join me in encoraging you to share your good/bad experiences as a new landlord. Sometimes advice from the "experts" is harder to relate to.net
(1) I absolutely love people. I love interacting with people, helping people, and creatively working together to solve problems. Landlording has challenged me to do this to a large degree. It is helping me with creative thinking, negotiating, and interpersonal skills which are invaluable in other industries I will find myself in (e.g., real estate agent, property manager of others' units, real estate investor, and fund raising sponsor).
(2) You must absolutely know the deal's numbers backwards and forwards. I did the numbers over and over and over again as new information was available. I always used the rental property calculator on bigger pockets and it helped a ton. The further I got in the deal, the more accurate would become the calculator's result. For example, I estimated my initial insurance. As the deal proceeded and as it looked like we might be able to come to a final agreement, I got quotes from several insurnace agents, selected one, and put that quote in my rental property calculator to refine my numbers. The whole idea was to keep my rental property calculator as accurate and precise as possible as the deal progresses to ensure I'm always cashflow positive with enough margin. A few things you can refine as the deal progresses are: closing costs, insurance, utilities, and loan interest rate.
(3) Read the leases that are currently in place with existing tenants. I did not read these leases until after I had signed the final loan agreement, and it was my lender (not my realtor) who told me it was foolish to do this deal if I had no idea the kind of lease agreement I was stepping into. And that is so key. Of all the BP podcasts I've listened to, I've never heard @Brandon Turner or @Joshua Dorkin discuss this super important point. When I bought the property, I inherited the lease. As the new landlord, I am bound to that lease, for good or for bad. Read the lease agreement with a discerning eye (as I did not until it was too late), and look for those pitfalls or loopholes that could have you at the tenant's mercy. Mine has some kind of weird clause about how it's $5 per day for late fees until the tenth day, at which point it escalates to $10 a day. With this kind of language in the agreement, I feel less able to evict in the event of untimely payment (a very real problem at this very moment).
(4) After reading books, listening to probably hundreds of hours of BP podcasts and hundreds of hours of other real estate seminars, taking real estate agent courses and becoming an agent, and analyzing probably a 150 deals, bidding on several, negotiating in 5, using 2 real estate buyer agents, and conversing with a dozen or more seller's agents, I have found the vast majority people in real estate investing have no idea how to help you analyze your deals. The few people that do ( @Brandon Turner , @Joshua Dorkin , @Ben Leybovich , and several others that have been on the show) should be listened to intensely. I asked my first buyer's agent if he'd look over my numbers that I'd put together for a deal we were trying to do. He said, "Looks good!". Then when the seller's countered my offer, he was confused why I would not offer more money. "Because that's the most I can spend and still be cashflow positive" was my response. To which he replied, "Well, I get all that. I get the numbers stuff, but sometimes it's about more than numbers. It's about emotions and making the seller's feel good about the deal to. So, you should offer more anyway." In the next deal, he tried to convince me to make up the difference when an appraisal came back $25k below sales price. He was then fired. My second buyer's agent was not much better. He could not understand the "2% Rule", even when I explained it. He also recommended a property I later bought would be a great deal if I bought it at $190k, even though I told him the property couldn't (by my estimation) cash flow unless I paid $184k or less. I got it for $184k. The appraisal later revealed the property was worth $188k. I was right, he was wrong.
(5) Most landlords as a general rule have absolutely no idea what they are doing. In my estimation, these landlords overpaid for the property, have no experience in what it takes to manage tenants or property, and will throw anyone into a unit, regardless of credit score, criminal background, monthly income, employment history, or rental history. They do this in part because of desperation - the landlord is losing money every month because of inaccurate cashflow projections and does not have enough leads to lease his property because of ineffective marketing. In the end, he settles for a sub-standard tenant who becomes a huge headache for him. Why is this a problem for me (or you)? We already know how to screen tenants, so that won't happen to us, right? It's important because you'll find out very quickly (as I did), that these un-vetted tenants become your tenants when you buy the property. So buckle up and prepare for an eviction immediately. And as difficult as an eviction may be, it's even harder (and scarier) when you house hack a multi-family dwelling. Do you feel safe going out to your car at night when the neighbor knows you're throwing them out? Are you ready for a showdown? It's not like evicting a tenant in one of your trap houses on the wrong side of town - make a few phone calls and the sheriff is over there throwing their console TV onto the lawn. In my case, this is my home too. I live here 24 hours a day. I can't hide. They know me and I'm totally vulnerable.
(6) Have reserves on day one. The reserves should cover an immediate eviction and vacancy for at least a month while you repair the unit, get it rent ready, and market it for a new tenant. If you are househacking a fourplex, be ready to evict 3 people. DO NOT wait for the first rent payment to come before you start to build your reserves. That tenant may decide never to pay. The reason I say this is because of what I said in "(5)" above: the landlord you bought from more than likely did not properly screen this tenant, meaning they'll probably pay late (if at all) or do other things that deserve eviction. In my case, I lucked out. I had a couple thousand bucks left over from a 401(k) withdrawal and was going to use it to fund some fixes on my unit. It doesn't look like that's going to happen. The money is instead being used to fund the cleanup of a backed-up sewer line into the tenant's half-finished basement (where a bedroom existed). The money is also being used to spray for roaches in both my and the tenant's unit. I didn't know there was a roach problem when I bought the property. The tenant is currently 1 day late on rent and I haven't received a rent check yet.
(7) Understand your agency agreement, meaning find out to whom the agent owes his loyalty. For whom is he working? I always had exclusive buyer's agency agreements with my agents - they worked only for me, and I worked only with them, not with other buyer's agents. I made the mistake, however, of telling my buyer's agent how much I was willing to spend. As I later learned, even if your agent works for you, don't tell them anything you don't want the other side to know. I might have saved thousands on the property by not letting my buyer's agent my highest and best offer. Somehow the property's price magically fell from $199k to $184k in a single phone call after I told my agent "We have to be able to get this property for $184k or less, so my offer is $180k." The seller's counter was $184k. I think my agent may have told the seller's agent, but I have no way to prove that.
If there's anything else I can expand on or answer, let me know. i'm always happy to share. I feel a little self conscious posting such a long post, but hopefully it helps some of you. I welcome your feedback. Thanks.
