All Forum Posts by: Dave Fagundes

This is an important point that I'd love to see some hard data on. One statement I've heard thrown around is that rents stay pretty stable in recessions because people can't buy or lose their homes, so rental demand increases and buoys up rental values. Of course, this may change in terms of location and sector. It could be that the very high end (LA's Miracle Mile) performs differently than other markets. Not to mention that the Great Recession was different than a standard cyclical recession like the ones that happened around 1990 and 2000, so what happened then may not be predictive.

For one data point, I lived in SoCal during the great recession and was renting. From 2008 to 2009, just after the worst hit, my landlord hiked the rent to the max allowed by the city's rent control laws. And in my small building there was some turnover but no vacancy to speak of. When I moved to Pasadena in 2010, I asked for a rent abatement the first time the lease was renewed. I showed them evidence that rents were decreasing throughout LA. Their answer was to show me the demand they had for tenants at the same rent they were charging me. So for a couple years rent was flat but then it crept back up again. This is not Miracle-Mile LA, for what it's worth, but some good-not-great areas of LA/Pasadena. 

Still, that's just my experience. If there are any studies showing rental trends during recession that breaks it down by area, type of housing, etc. that would be awesome. 

This is a good question and something I've thought a lot about. The concern is a valid one. Ideally a BRRR investment would be refinanced at the appraised value of a property, and if that value declines a lot you run the risk of being underwater, or at least having the value of the property dip well below the appraised value.

But is this a problem?

One reason it may not be is, as many have suggested, that if you're cash flowing, nothing really changes. Let's say your monthly expenses including financing costs are $500, and you're renting the place for $750. Even if the property's market value goes down, even below the level you have financed, you should stay steady at $250/month. Of course, there may be other disruptions in a down market, such as vacancy costs or tenant nonpayment of rent that could complicate this story. That said, rent tends to be pretty steady when the housing market dips, since demand for rentals goes up. If rent tanks too, that's not great but to use the numbers above, if rent goes down 20% you're still cash flowing $100. Not as good as before, but you're still making some money and covering your expenses.

Second, most refinancing will be at 75% or in the case of small multifamily 70% LTV. This necessarily limits the amount you can finance a deal, and forces investors to be conservative. So even if the market declines by 20% against the appraised value, you won't be underwater.

Finally, by using the BRRR strategy you actually limit your potential exposure by having very little cash in the deal in the event of catastrophe. Let's say you buy a place for $100k and then rehab it for $20k and then it is appraised at $150k. Assuming you get 75% LTV on the refi, you have spent $120 but got $112,500 back in financing, so you are in the property only $7500. Then even if you default on the deal and the bank takes the place back you'd have lost $7500 in your own money, even if the property has declined 20% in value to $120,000.

Thing about BRRR is it's really just a subset of buy-and-hold. So while it may make you feel like you're creating huge wealth at the outset by buying low, rehabbing, and then refinancing high, this should really just be the first stage in a loooong process. So assuming you're not crazy overleveraged and that you don't freak out if the value of a home declines when a recession hits, if you wait it out you'll be fine over the 5-7 year horizon.

Consider a rental property purchased vacant and in need of quite a bit of repair and make-ready before renting out. Let's say there's about a month of time needed to fix up the place after escrow closes. The optimal thing would be to have a tenant move in the day after repairs are done, limiting vacancy costs. 

Problem is, obviously, that you're limited in advertising and marketing the place effectively til the repairs and make-ready are complete, because until then you can't take good pictures or show the place to prospective tenants. 

Bottom-line question: Is there any creative strategy to get a place rented as soon as it's ready or does the advertising and tenant selection necessarily have to start at that point? Thanks for any thoughts.

Interesting thread. My quick reaction is that if it's just that her style is rude in the distinctive way lawyers can be rude (brusque, condescending) when you deal with her, that's an annoyance but not a major problem. If she pays her rent on time, then I'd embrace it as an opportunity to remind yourself that you alone determine your mental state. Her rudeness is about her, not you; don't let it get to you and you've freed yourself of the problem.

Now if it's not  just about style but also substance--I.e., she's blowing up your phone with repeated trivial repair requests--that's a different story. But then the issue is not really rudeness but costs, and how the unnecessary repair requests eat away at your cash flow. 

I also like the suggestion from some of the other posters that you could just outsource the tenant to a property manager. They'll bear the costs of dealing with her aggro style and you can just enjoy the cash flow from her regular rental payments. 

Great thoughts everyone, thanks for the contributions.

@Jenny Bayless, I had not heard of rate/term loans, that's a really interesting idea. I assume that among the features of the initial loan that you can modify is the principal, because if it's just the rate and the length term then it doesn't seem to give the opportunity to level up your equity, which is the key to the BRRR strategy.

@Andrew Hagmann and @Neil Goradia, the cautions in terms of cash flow are well-taken. I understand Jennifer's point to be that she models the entire portfolio's cashflow instead of looking just at a single property, and if the net cash flow increases thanks to a deal, that's on-balance a good move.

This makes sense to me, especially because as I work on REI more and more I try to resist getting caught up in max cash flow as the primary criterion of what makes a good investment. It's purely personal, of course, but for me I'd be OK with lower cash flow in exchange for a greater and growing equity stake, since I have a longer buy-and-hold horizon. Even so, the risk of thinner cash flow margins is that you have less room to take care of any unwelcome major expenses like HVAC going out. But this can be accounted for by increasing your reserves, and if you're renovating yourself then hopefully that should lower the risk of major expenses because presumably you've addressed any capex concerns in the initial renovations.

One final thought on BRRR and financing: I talked to a colleague who suggested acquiring a property with a construction loan. The rate would be higher, but the payment would be interest only; then restructuring to traditional financing soon after. I think this kind of loan can be restructured into traditional within six months, though it does require pretty significant cash reserves up front. This approach is pretty similar to Jennifer's suggestion about PL/HML then restructuring the rate/term.

Enjoyed this podcast a ton. Lots of great info and insights. One question and one follow up observation:

First, my experience has been that most lenders are unwilling to finance for more than the purchase price until six months after purchase. This would slow down the BRRR approach because it would mean that if you bought a place and then finished rehab in a month, you'd still be stuck with initial financing for five months. I've talked to lenders who have offered delayed financing options less than six months after purchase, but this option is always based on the purchase amount of the property, which defeats the purpose of BRRR because it misses out on the equity that is added by improvements. Bottom line question: are any (residential) lenders willing to lend based on the appraised value of a property within six months of purchase?

Second, one feature of the BRRR strategy that never gets mentioned much is that it necessarily constrains cash flow. If you finance a place for $100k, then improve and rent it out, and later do a cash out refi at an appraised value of $150, then the cost of financing is going to be significantly greater. You're paying to rent 70/75% of 50% again as much money, but the rent is presumably the same. So the higher financing costs necessarily diminish the cash flow to an extent. This diminishment may well be worth it to get the extra cash out to use; and by reducing the cash in the deal the cash on cash increases significantly even with the reduced cash flow. But it's a point worth considering that I've never heard mentioned in discussions of the BRRR strategy.

@Eric Levy, if you're still looking for a GC PM me, the one I work with is very reliable and does excellent work. 

I have a tenant who wants to get a dog. She's a good tenant (as evidenced by the fact that she raised the pet issue with me rather than just doing it), and I want to accommodate her to maintain our positive relationship. I've read around these forums that the industry-standard is to boost rent $25 for a pet, which seems reasonable.

That said, I wonder whether the presence of a dog also subjects landlords to liability for damage or personal injury caused by the pet. For example, if the dog bit someone visiting the premises, that could be a boatload of liability for someone. As a general tort matter, owners are liable for any legally cognizable harm caused by their pets (and not all pet bites result in liability, but some do and that's all that matters for the purposes of this post). 

But one could imagine that the plaintiff might also want to sue the property owner, especially since the landlord is likely to have deeper pockets than the tenant. And if this were the case, $25/month would not come close to compensating for the possible costs associated with a tenant's pet.

Obviously there are ways to protect yourself from liability regardless of the source, like LLC status and a good umbrella insurance policy. What I'm interested in are strategies that can limit your liability in the first instance. Here are a couple I've thought about

--Have your tenant get a renters insurance policy. This doesn't actually decrease your legal exposure, but it makes a plaintiff less likely to want to sue you because they'd more likely to get a complete recovery from the tenant, so the landlord's pockets would be relatively less deep than the tenant's.

--Amend the lease. Possible amendments: tenant alone accepts all liability for any harm caused by pet; no vicious breeds allowed; tenant must get rid of pet at first indication of dangerous behavior (this one may have a downside--it makes it seem as though the landlord has ability to remove the pet, which is an inference to avoid since it increases the possibility of landlord liability generally).

--Make sure that the tenant get an animal with no history of or propensity for dangerous behavior, but do not keep a close eye on the animal's conduct after that. Choosing a non-dangerous animal just moots the risk of injury in the first instance, and then staying in the dark about the animal's conduct gives you a defense if it surprises everyone by acting viciously (landlord knowledge of any dangerous animal conduct could result in liability). 

--If you learn of any dangerous conduct by the animal, do everything possible to have the tenant get rid of the animal. The most risky thing to do would be to allow a known dangerous animal to stay on the premises with your tacit consent (probably also something to manage in the pet lease addendum).

I'd be interested in others' thoughts on this such as which of these latter strategies is best, or if any don't work, or if there are other strategies to protect yourself as a landlord from tenant pet-related liability. Thanks--

It's a familiar point that generally speaking real estate is a strongly seasonal market, with demand higher in late spring and summer and weaker in late fall and winter. Some particular markets are exceptions to this. In places were job-related cycles are unique, for example, different patterns may emerge.

My question to the experts is how strong the general seasonal trend holds true in OKC in particular for rentals. Are there any factors that flatten out demand? Or any that exacerbate it? For example, I heard one local RE professional say that Jan/Feb are especially dead for rentals in OKC because there are ice storms.

Thanks, interested to hear any thoughts on this. 

Here's a paradox I've been thinking about w/r/t buying SFRs as rental properties. The conventional wisdom is that best time to buy is typically late fall/winter; that's when the market is slow, and low demand tends to lead to better deals. The CW is also that renting out properties in these months is very difficult for the same reason; people just aren't looking. So it seems like if you try to buy at the ideal time, you'll necessarily be renting out at the worst time. 

My sense of this is that a deal on a good SFR rental property is still worth going for in the winter. If you get a place onto the rental market, that likely means eating more vacancy costs up front, but those will eventually wash out as you acquire cash flow and appreciation later on. In other words, the longer term upsides of a truly good deal on an SFR rental would be worth the relatively shorter term costs of getting it rented in the off-season. Also seems like you could try to avoid the problem repeating by asking tenants for lease terms that would be slightly longer so they would come due in better seasons for rentals.

What do others think of this issue? Thanks in advance for any thoughts.