All Forum Posts by: Erik W.

A few things for a person starting out:

#1 - It is not clear who pays gas and electric. Is it the landlord or the tenants? If the landlord pays, those rent numbers are terrible, as even small units can end up costing $200 - $400 per month depending on how the tenant sets the thermostat and if they decide to open the window to cool the place off in the winter rather than just turning down the heat. If the tenants pay, then the rents sound decent.

#2 - Deferred maintenance. How old are these units? When was the last time they saw more than just a cosmetic renovation? How old are the roofs? HVAC systems? Pluming? Flooring?

#3 - The 1% Rule. This is a "quick 'n dirty" method of checking many different properties at a very high level. The rule states that the property monthly rent must be at least 1% of the total purchase price. Example, a $250,000 4-plex should bring in gross rent of at least $2,500 per month. That's usually a base level for finding a property that may cash flow positively, but there's more analysis to do.

Here's what I suggest: do a full Net Operating Income analysis on it. Fair Market Value gross rent less vacancy less bad debt less all operating expenses (taxes, insurance, utilities, lawn care, management, maintenance, supplies, permits, etc). Then once you have that, subtract out debt service. If the number left isn't at LEAST $100 per door, it's probably not a good deal.

Be sure to include a management fee of 10%, even if you plan to self-manage. As a property self-manager, you're buying yourself a job: better get paid for it. $400/month of investment income  for a 4-plex you manage yourself isn't enough. You should be getting a 10% "management fee" ($250 on the example above that has gross rents of $2,500) PLUS the investment income of $400, or it's not a true reflection of this property as an investment. Also, if you plan to do any of your own maintenance, lawn care, etc, you need to see if the property rents can "pay" you to do those jobs as well.

Bottom line: don't buy yourself a series of jobs and claim to be a real estate investor. A true investor's job it to make deals and allocate capital efficiently. If they choose to plunge toilets and cut the grass, that's not investing activity, and only people who buy sub-par properties are content with that set up. It gets old after awhile. Ask me how I know!

No, I'm a real estate investor, not a general contractor. Nothing wrong with being one's own GC, but one should be honest that this is what's going on. "Investors" who rehab their own properties are buying themselves an unpaid volunteer job and hoping their time and effort is going to bring a better return than hiring everything done and just finding good deals. It can be done, but the level of expertise it requires is beyond my scope of available time, resources, and desires.

I much prefer to find a building someone else has built, figure out better and more profitable ways to use it with minimal work, and buying it off them for the current value based on it's operating income (or less), then I raise the value by using the property more efficiently. One example was a 2 acre commercial automotive shop. I bought it for the estimated value of the shop rent only (it was vacant at the time), but then rented not only the shop, but also some of the vacant land to RV owners and people who needed other kinds of parking. The "vacant land" rent came out to about $1500 extra per month that I didn't pay for, because the sale price was determined only based on what estimate lease rates were. They just were not using that land to it's full potential.

Does the HVAC system still work? Saying it has to be replaced just because it's 30 years old seems silly. Maybe the new tenant doesn't WANT to pay for repairs on a 30+ year system, but so what? 

I've got a commercial until that was built in 1992. HVAC systems are still running strong. Tenant in one unit complained because she had to pay $135 last year to "top up" the R-22 coolant because there's a tiny leak somewhere. But, she has a $500 annual deductible on repairs and replacement of equipment, so basically she already agreed to that, and as I told her, for that one time up front payment of $500, you're basically betting that you'll be staying here at least 4 years to do slightly better than breaking even on your deductible.

Yes, I know R-22 is on the way out and getting harder to find, but it's not reasonable for me to spend $8000 on a new system just so the tenant doesn't have to pay $150 - $200 per year to top up the existing system. Plus, I already gave her a rent reduction earlier this year when we took over because she complained that the vacant unit next to hers was listed for rent at a price cheaper per square foot than her unit. Okay, I did that. Now she wants a new AC system too. You don't get to have everything. Negotiation is key in situations like this so everyone gets treated fairly... or at least acceptably.

When we do end up replacing that system, the rent is going up to reflect the cost of an improved, more efficient unit that costs the tenant less on yearly maintenance. My general rule of thumb is upgrades need to pay for themselves in 3 years. So if she wants a full swap out before the unit dies, that's $8,000 / 36 months = $222/month rent boost. Or we can keep things "as is" and she pays a once per year fee to top up the unit. The choice is hers.

"Show me in the contract where I must own it for a year, or I will show your tenants to the door."

This is a month to month contract, right? Give 30 days notice to non-renew on current rent terms. Easy-peasy. Let the tenants hounds the bureaucrat until they approve the rent increase.

Sounds like a lot of risk with no much reward. Why not just invest in S&P 500 Index and make 8-10% annually with zero hassle?
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I want my real estate deals to be KILLER. Not just "meh" or "kinda okay." There are tons of risks and hassles; whereas if you "bet" on the S&P 500 you're basically showing that you are confident in the American economy as a whole. While there is possibly the chance of losing money, the S&P has returned a year over year annualized rate of return of about 10.7% since 1972... that's a 50 year track record. And if the S&P 500 goes to crap, a four plex isn't going to help you. There will be rioting in the streets daily and you'll need gold, guns, and food stocks.
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This to say: I don't think the US economy is going in the toilet anytime soon. I prefer real estate to the stock market, but when the margins are as thin as what you're describing that takes the luster out of it, and I'd just take the easy route and get checks in the mail and/or reinvest via DRIPs.
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ALWAYS factor in Property Management. If you get sick or are otherwise out of pocket, you must account for those expenses. Otherwise, you've just bought yourself a volunteer job. Other investors will value the property based on having professional management in place.

Welcome to BP and and the investing world.

First, it probably goes without saying (but I'll say it anyway): NY has laws that are different from everywhere else in the country. I don't know what they are, but you'll want to be certain you know what they are if you're investing there. From what I hear other LLs say, NYC is the worst, but since you'll be in upstate probably you won't have to mess with as many of the bad laws. Be sure you're aware of things like rent control, no-fault eviction rules, etc that could massively impact your investing venture. Even using a PM, they'll have to follow these same rules, and you'll be paying them extra possibly if there are more hoops to jump through.

Second, unless you have a compelling reason to invest outside your location, I'd advise you start  "digging for diamonds in your own back yard." A small 2/1 is a good place to start learning the ropes. Can you articulate specifically why a 2/1 in Jamestown is your best bet, compared to something within a 10 mile radius of your home?

Finally, have you created metrics yet for how you'll measure this investment. I'm not seeing a purchase price or rehab price to measure your rent of 1000-1200 against. The best time to develop those is now. Again, articulate what you expect so you can measure the outcome.

Best wishes!

That's a noble goal you have. Decent, low income housing is hard to find.

Here's the major problems I see and some possible solutions:

1) While you have worked with someone on these kinds of projects in the past, you were not in the driver's seat. Lenders prefer to deal with people who have experience.

Solution: Try it on a smaller scale with some inexpensive houses first and build a reputation as a the project manager/leader from start to finish.

2) Your credit is not the best. You didn't say why. Regardless, the reason is irrelevant: lenders don't like giving money to people who are less likely to repay, and right now that's what you've said about yourself.

Solution: Get organized, lay out a written budget, and follow it every month to get caught up on your current debts. There are a lot of financial coaches out there who are great at this. Dave Ramsey is one of the more popular and useful with his down-to-earth, easy-to-follow advice. His books are cheap ($10) and quick to read and put the concepts in there into action. 6-12 months from now, your situation may improve significantly, which might not only help you get approved, but also it will reduce your interest rate.

3) Working with the homeless. Again, a noble goal, but often times the reason people are homeless is because they have underlying issues such as mental health or substance abuse. Many places are available to keep people off the streets if they're willing and able to follow a simple, basic set of rules like no drinking and no illegal drugs. It says something else deeper is going on when they can't do that. Will you have the resources to get them to cope?

Solution: Partner with a local homeless assistance agency and learn the ins and outs of dealing with people who struggle with mental illness, alcohol, and illegal drugs. Maybe they have access to resources that could assist you.

In summary, being a regular, everyday landlord is hard work. Being a landlord for people who struggle with basic life necessities like housing is harder work. Doing all that plus going solo on your first big move into multimillion $ homes for people who have more struggles than most others ... that's going to be super tough. If you've got the guts for it, all the best to your efforts!

The top three criteria renters look for:
1) Price

2) Location

3) Amenities

You need to shop your competition, which it sounds like you've done at least partially since you seem to know what the rent range is. So the next question is what are other complexes in your area (location) doing? You can't change the location, you think you're on the money with the price, so all you can do now is complete with amenities.

Do they offer free wifi? If yes, then you must also. 

Do they have a pool? If you don't... probably renters will fill up the pool units first. Can't fix that one unless you want to offer free gym memberships.

Do they offer free 1st months rent or $99 security deposit? If yes, then you must also.

Dig in and find out why everyone else is getting rented and you aren't. If during your digging you find out everyone else is having the same vacancy problems you are, then likely it's time to bite the bullet and drop your rents significantly.

I can tell you the Cons right now, and it all boils down to one main issue: they are non-standard types of building.
1) Permitting at the local level. You have to get the city/municipality to sign off on everything, and their codes and regs likely won't be updated for your project. You may be the one who gets to force them to update their codes and regs, assuming they agree to let you do it. This will be costly and time-consuming. So... kudos to you for being a pioneer, but keep in mind pioneering is difficult and costs more than following the trail that others have already blazed.

2) Renting. Tenants generally have amenities and features they like. While shipping containers theoretically are just as good (if not better) structurally, they just don't "look" normal. So you might find a very small niche market of people who like living in what resembles a ginormous corrugated boxes stacked on top of each other, but 90% of your renter pool isn't look for that, no matter what trendy color you paint it.

3) Construction and Maintenance. Finding labor to work on it will again require someone who is a specialist in those kinds of buildings. Odds are you will pay a premium and wait longer. There will also likely be construction issues such as not being able to run wires and plumbing through walls, unless you frame out the interior with drywall.  Also, shipping containers are odd sizes: 8 x 40 and 8 x 20 means rooms can only be a certain size unless you want to tack expensive modifications.

4) Financing. These units are not going to qualify for anything other than short-term, commercial financing from traditional lenders like banks. Ultimately, you'll probably need to pool private investor funds. Rates will likely be higher and subject to market adjustment after a few years.

On the bright side, you'll have units that can withstand hurricane force winds and that get taxed as personal property rather than real estate, and also depreciation might be on a shorter timeline. Not sure about that last one.

A standard shipping contain cost in my town is $3500 for a "one trip" 8 x 20. $4800 for 8 x 40. But that's just the box. Costs will vary depending on how easy it is for your supplier to deliver to you. My town is right on a major rail line, so we get them in frequently and they can be picked up with semi-trailers and delivered easily. After acquiring the boxes, you have to heavily modify them so people can actually live in them. You may also have to install them on commercial land that has been approved for residential structures. This will increase the cost over a standard residential multi-family parcel.

I would say for even an advanced investor, it would be a highly ambitious project with many unforeseen, expensive pitfalls. Works your numbers, then double them just to be sure.

Like you, I include the total cost to aquire, hold, renovate in the bottom (What I call the total cost of Capital), but like Brian I also don't include forecast revenues, just whatever level the property is performing at right now. Is that perfectly by the book? No, but I've found that my investor partners do appreciate that I track all costs and actual revenue in my figures.

As with all metrics, you need to understand what information they convey and what they don't. CAP rate is just one of many "broad brush stroke" ways to analyze a property. It's a starting point, and then you have to dig down into the details. Good luck! Anything above a 10 CAP these days is good.