All Forum Posts by: Frank Chin

@Mar Liu

I at one point, in the 1980's started investing in 2 family and 3 family homes. But I spent months searching for each, finding flukes and got them at 25% below market. Many of them are owned by people who had them for 20 or 30 years or more, with tenants paying way below market. So, the question is, what to do?

My best education to this is I bought a duplex in 1984 for $180K when market values for them are $220K. The vacant property needed some work, and I spent a month or two rehabbing it, and patronized a bodega for snacks a few times a day. It turned out the bodega owner owned the 2 story multi use property as well as the 2-family building next to me. 

This was in 1984, and the bodega owner bought the building next to me for $72K in 1972, and rented the 2BR units out for $400/month. In 1984, market rents for 2BR's run $650 to $750/month. Surprisingly, he kept the rent for one unit at $400/month, while the other at $600/month as there were some turnover.

Interestingly, I got into a long discussion of why he never raised the rent. So he started telling me stories where landlords kept rents low, rarely raising it, to one owner raising it every year to market. He said even with $400/month, he still cash-flowed, as he had a small mortgage, around $30K at 5% at 1972 rates, and he avoided the constant turnover of tenants in the neighborhood where owners charged market rent. On the other extreme, another owner charged market rents from the beginning, increased it every year to market, had constant turnovers, constant renovations, constant vacancies, that he had to sell it after several years of headaches. 

The greatest thing was his $400/month tenant maintained the backyard, swept the hallways and stairs, and swept the sidewalk every morning. When I heard that, I spoke to his tenant next door to me, and for the use of my driveway, swept the hallway, stairs and sidewalk, take the garbage cans out for sanitation pickup and retrieval. Better yet, he stayed by his living room window watching the streets every morning for littering where the city issue citations. 

In cases like yours, it's probably better you inform tenants that rents will be raised and give them time to move. I know of this in a number of cases, the tenants who lived there moved out to a smaller place and downsized. The $400/month next door tenant was still there when I sold the property in 2004, and when his landlord sold the property, he and his wife moved in with his son.

In another case, I rented a 1BR apt for $800 when market rents went for $850 to $900 and it was rented quick. Three years went by, and market rents went up to over $1,100. I advised the tenant I'll increase the rents to $850. She was shocked and threatened to move. I said "fine, I'll keep the rent at $800 for 3 months so you can find an apartment for $800. She came back a month later and frantically beg to stay for $850. I got a good laugh out of it.

No, it violates housing codes. I grew up in Astoria, Queens and my mother-in-law in Elmhurst NY. They have neighboring landlords turning SFH into rooming houses, renting out around 10 rooms in these properties. My M-I-L thought it was funny that one such property across the street from her was found out by the city, forced to close the rooming house, and sold, because the owner was unable to make money renting it out normally. The funny part was the owner never told the buyer of the issue, the buyer thought it would make a nice rooming house, rented it out again as such, and was promptly shut down again by the city. There was a snitch that lived on the block, someone who's a friend of my M-I-L.

I own several duplexes and 3 families through the years in Nassau County and Queens, and normally, 2 or 3BR rentals should be rented to no more than 2 or 3 unrelated persons. There are issues with housing codes as well. Also, having so many people in each property creates overcrowding situations and parking among other things causing neighbors to file complaints. Such rental situations are hard to hide and keep secret with so many people coming in and out of the property besides taking up available street parking.

@Gene D Stephens

Adverse possession laws vary by state. Oklahoma adverse possession law   If the neighbor has notoriously occupied it for a period years, in your state 15 years, he has legal claim to it. You might check with a local attorney on this.

In NY where I am, the period is 10 years. I bought my home in 1993, and some years back the prior owner neighbor advised the border fence is a few inches onto her property. About year 2010 it was purchased by the present owner and in conversations, he knew about it but did nothing. Under NY state law he cannot now or in the future demand that I move the fence back onto the property line as I now have a legal claim to it.

@Jill Keller

I personally owned and managed several rental properties, mainly one family, 3-families and been advised by a number of attorneys through the years to forget doing LLC's. The main reason cited that as a small property owner, not using PM's, if anything happens, the LLC and you will be sued anyway. I bought a business where the prior owner had it in an S-Corp, the S-Corp and he was sued personally for three million. He had insurance on the S-Corp for one million and none for himself. Fortunately, he moved to FL after the sale, bought a mansion as his retirement home, and saved by the state's homestead laws. The plaintiffs settled for one million, the insurance money.

I did put my business in an LLC, but got the LLC and myself insured for $3 million. The LLC was used in an active business for separation of the active business from my other businesses, rental for one. Active businesses have to get workman's comp, unemployment insurance etc., and mixing it with other business would cause much confusion. For a few rentals, forget the LLC's, just get adequate insurance.

I at one point charged tenants the first $50 of repair costs. One small problem I found in most rental units that eventually there would be a small leak under the sinks. When I charged the %50, no one reported the drips. They place a pail under the sink to catch the drips and often they forget to remove the pail when they move and, in some cases, forget to empty it. The wooden cabinet holding up the sink begins to rot. Repairing it costs more than $50.

When I stopped charging such repairs, tenants report it and I had a local plumber who repairs it for %75.00. 

@Nik Farooqui

I bought 3 properties at auctions during the real estate downturn in 1992-1993. One is a duplex I currently live in since 1993. The market price at the time was $325K and I purchased it for $208K free and clear. Currently the ARV is $1.5 million. It was bought at a public auction where nearly 200 properties were auctioned off one by one with an announcement that the first six will be sold absolute, meaning the successful buyer with the highest bid will be accepted. The REO bank had loan officers at the auction and approved a $180K mortgage. I gone to auctions where this is not the case and was notified later my bid did not meet the reserve price and rejected. If not sold free and clear, the buyer will also be responsible for paying back taxes.

I bought a condo at another public auction for $40K where the market price is $130K in 1993. A developer did a conversion where a high school was turned into 104 condo units. They had 60 vacant units sold at the auction and only managed to auction off 30 of them. I put down $8K and the REO bank gave me a $32K mortgage. I put my sister who lived in section 8 housing as a 40% owner on the deed and she moved in paying the mortgage which was much less than the rent she was paying in rent. She later remarried, paid off the mortgage and I gifted my part ownership to her and still lived there. I approached the REO bank that owned the condo complex a year later when they're still stuck with 30 units and got another one for $40K. They wanted $65K but agreed to 40K after I rejected $65K pointing out the units had been vacant for several years. It was sold 10 years later for $110K with my sister acting as PM as it's out of state.

Back 1n 1992-1993 there were pages and pages of auctions advertised every week, and in 1992-1993. I attended a number every month totaling 50 plus of them over 2 years. There were on site auctions where it was held in the auction unit, courthouse step auctions, and public auctions where a large number are sold. Court house step auction was a waste of time as the REO bank would step in and bid a price equal to the mortgage when they did not receive a bid equal to the unpaid mortgage.

The other issue is I often cannot view many of the properties as they have squatters. The duplex I bought at the auction had two open houses and I attended both of them with the property in perfect condition.

I hear stories of people getting lucky at auctions. The complex where I bought condos at auction had a condo sold at an on-site auctions by a foreclosing bank when the owner fell behind on the mortgage. My sister attended, and the foreclosed condo owner attended with his twin brother to watch. It was a badly organized auction and supposed to be absolute. Turned out no one came to bid, and it was absolute. When the twin brother of the owner realized this, he put in a bid of $5,000, and because there is only one bid, it had to accepted. This happened when the market price of the condo was over $100K, and he got it for $5K. The condo board was so upset over this, as it would ruin the market values of its condos, the bylaws was changed to prevent such occurrences.

By the way, I attended many on site auctions where no one else came to bid. 

Hi Kailis:

You can have a 3BR SFR, rented to 3 singles, though it's not advisable, you can give each renter a separate lease. The fact that you have 3 separate leases does not make it a multifamily triplex. You got one rental unit rented to 3 separate people.

Hi Tony:

The best way to handle is to visit the city planning department which zoning is usually part of to see if a variance is granted, and examine the plans filed. If the area is zoned 1 family, anything thing else would need a variance. Where I am, professionals called expeditors, most of whom are architects can review it for you, including a walkthrough some years ago costing me $150.00 per visit. A zoning board meeting and vote is required for a variance approval and is usually rejected due to local political opposition.

Also, there might be problems with files from 1915 and it took me 3 visits before they were able to locate the files and see the original plans. Sounds like the seller may not even have file plans or obtain any variances.

Hi David:

I started years ago in 1983 investing in MF rentals when interest rates were at it's peak. By 1985, I had several MFs with mortgages totally $300K at 13.5% interest. 

The real estate market in New York City peaked in 1986 and bottomed out in 1993. Mortgage interest dropped from 13.5% in 1983-1985 to around 10.5% at in 1990. Should I refinance? I didn't. I thought the downturn still has some room to go and I should wait a while. It's a 50/50 decision to refinance at 10.5%, a savings of $9K/year, or take a chance to wait a bit that rates would go down further. I chose to wait.

Good thing I cashed flowed even at 13.5% interest, living almost rent free at one triplex. Interest rates continued to drop till 1992 reaching 7.5% when I decided to pull the trigger. But by then my wife became a stay-at-home mom and my DTI prevented me from getting larger mortgages. I refinanced the $300K mortgages keeping it at $300K increasing my cash flow by more than $18K/year.

The good news is 1993 was a bad year and there are pages and pages of RE auctions. I accumulated enough cash with the added $18K/year to purchase at foreclosure auctions, including the duplex I currently live in, now mortgage free. Duplexes and triplexes increase overall by $1 million or more since 1993 here in NYC.

Comparing my situation to yours, if I were you, I would hold off. Refi will not increase your cash flow by much nor can you cash out by much. Thinking back, had I refi at 10.5%, I probably had to do it again when rates dropped to 7.5%, doubling my overall refinance cost.

The other lesson I learned is develop good banking relations. My DTI was borderline with my wife not employed but having friendly bankers on my side did it.

I generally market my rentals a little below market to get a good turnout and quick rental. Once I placed an ad for a 1BR apt, an open house and people started coming. Got so crowded that we ask people to form a line outside which finally stretched to 15 to 20 people. When one looker was questioned, she mentioned she was the owner of the house across the street and wondered why there's a big, long line. We told people that they should make up the minds quick with so many people interested.

Afterwards we figured we maybe underpriced a bit but got it rented.