All Forum Posts by: Dan H.

Quote from @Elena Facchinei:

lol, the developer said I could bring an investor into the deal or use some of his finacing. I'm also bringing another investor (Strong) who will take out a loan for the 250

 Be careful of the various rules.   A syndicator cannot have as sole role raising money.   It is not always followed, but if anything goes wrong that is when they will make sure the Ts have been crossed and the Is dotted.  Make sure you know the regulations. 

I suspect without money and active participation as LP, you cannot legally do what you suggest.

Have you seen the underwriting?  What is the experience of the group at performing this sort of development?   Have they gone full cycle?   How did they perform versus projections?

Fears/risks: the underwriting projection seems too good which likely means very aggressive.  The building of an asset that is down nationally is a risk.  Experience level of the team. Investor pool seems way too small to fund this effort.  Too many single point failure points.  What is the exit?  When?  If not sold at development completion, who manages the asset?

Tread cautiously.   Good luck

My problem in my market is the opposite of that expressed by @Mike H.. I can find properties that likely can result in a full investment extraction, but after the max LTV refi the property is large cash flow negative.

In my market most of the experienced investors are not buying to buy and hold due to the cash flow issue.  Flipping and other value adds is where the experienced investors are or if they are holding it likely is a development effort (such as adding a dozen ADUs).

Good luck

Quote from @Garry Lawrence:

Hey everyone,

I’m 19 and about to close on my first rental property! It’s a fully renovated, modern-styled, 2-story townhouse with 3 bedrooms, 2 bathrooms, and a basement in Baltimore County, where I live. I got the property off-market for $250k from a trusted family friend. It’s less than 15 minutes by car from two major universities (Towson & Morgan) and just a 7-minute walk from a shuttle that services both campuses.

I plan to rent the property by the room, targeting mainly college students due to its proximity to the schools. With 4 rentable rooms (including the basement), I expect to generate $3,600/month with full occupancy. My mortgage will be $2,005/month, and I’m budgeting up to $600/month for utilities, leaving a potential monthly cash flow of $995.

I also set up an LLC and a business account to track rental income and expenses.

Questions:

1. Do you have any advice for me as a young real estate investor?
2. Do you think my age will impact my authority as a landlord?
3. I’m debating whether to furnish the shared areas or just stage them for photos and viewings. Which would you recommend?
4. I plan to put a $600 utility cap in the lease. Is this a good or bad idea?
5. What are your best tips for screening tenants, especially for student renters?
6. Are there any specific clauses I should include in a room-by-room lease for a shared living space?
7. What property management software or tools would you recommend for tracking rent payments, leases, and maintenance requests?
8. Based on the numbers and my strategy, do you think this is a good investment for my first property?

I’m excited but also know there’s still a lot to learn, so I appreciate any insights you can share. Thanks in advance!

First, props for starting.

 Advice: 

- learn to underwrite expenses.   Where is vacancy, maintenance/cap ex, asset protection, PM (include it even if self managing as you deserve to be compensated for your efforts), utilities, misc.  understand the 50% rule.  

- recognize you are combining 2 if the highest effory rent models: student rental and rent by room. 

Age: I think it will but you can minimize it by being knowledgeable, professional, confident, and fair.   My son is 22 years old and leading his 2nd large rehab (1st was about $40k, 2nd will likely be $50k).  He deals with vendors and contractors.  They tret him like he has done dozens.  It may help my son.  

Staging versus furnishing: students are hard in furniture.  They drink and barf.  They rough house.   They eat where they want.  I would avoid furnishing.   If you stage, consider a virtual stage.   A 19 year old nay be able to figure out how to do this.  Regardless, it shoukd be a lot less expensive than a real staging. 

Utilities will be an issue.   If you put a cap, what happens when the cap is exceeded.  I guarantee most will point to someone else for the overage.   It is one of the reasons rent by room is more difficult to manage.

I have no experience with rent by room and the associated common space.  I suspect it will be well used and have high maintenance costs.

Software: office of google office, asana, possibly quickbooks (i would normally not suggest for a single rental, but the rent by room compounds things).  

Good investment!: I think your profit numbers are way high.  Would i think about this?   Not a chance.   Do i think it is good for you?   Possibly.  You will learn a lot.  I suspect most of what you will learn will not be favorable, but you will be learning.  I suspect you will learn the difficulties of student and rent by room models.   You will learn the cost of maintenance/cap ex and how tenant quality plays a big role.  You will learn the time and effort required of managing such a unit.  Hopefully you learn that RE can be a weakth creator even if this is more of a learning property.  

Good luck

Quote from @Mike H.:

Why do you have 24k in cleaning fees as expenses for an STR? Aren't the guests paying for the cleaning fees?

When I see a 500k property that can gross 100k in rents, I have to believe that thing is going to make a boatload of cash.  But is the issue that the 100k you're describing isn't gross rents, its gross revenue? And thats why you have 24k in cleaning fees as an expense?

I'm just more familiar with people quoting gross rents and typically assume the cleaning fees are being paid by guests. 

On the other hand, you stated that the management firm was charging 15% and had a 15k expense.  Management doesn't get a percentage of cleaning fees so something seems off or else its just very different there than here in Illinois or Tennessee. 

btw: Is there any way to eliminate the propane? I know that can get pricey.  But 1k a month in utilities definitely seems high. So I'm guessing thats the item.  Can you replace furnace, stove, etc with all electric and save 300 to 400 a month there? 

I also think you can get 6.5% interest these days so that should be closer 30k a year for P&I.

I just don't see how you can lose money like that if your gross rents are 100k on a 500k purchase price and you're putting down 20%.  Again, not unless its actually that your gross income (including cleaning fees) is 100k a year and your gross rents are actually only 75k. 

But again, your property manager should only be charging you 15% of gross rent not of revenue (i.e. cleaning fees that guests are paying).   So at 15% of 75k, its not 15k in management fees, its 8,625 per year so there's about 6,400 in savings right there.  If you can get a loan at the 6.5%, you're saving another 5k a year off your estimates.  Now things are looking a little better.

But I would be very interested in knowing whether the 100k a year is gross rent or gross revenue.  btw: 24k in cleaning fees seems quite a bit excessive even if it is. You calculated 8 turns a month? Thats a ton of different guest stays to average per month. Obviously you said you are very experienced so I'm sure thats based on that.  But boy does that seem like a lot of guest stays per month.   

i am putting 25% down, 2 pt buy down to get 6.99% dscr.  I cannot qualify for traditional conventional for multiple reasons but the over 200 to 1 debt to income ratio is a primary reason.  

i am less worried about first year than on going so $100k revenue ($70k for first year).

 The $100k is total revenue as airdna reports it so includes the cleaning fees.  I agree that the mgmt fee 15% should be exclusive of the cleaning fees so 15% of $30k better which $4500.  I wish airdna excluded the cleaning seeing it is a pass through but i do not set their policy.

the local cohost stated that cleaning would be $250 to $300.   It includes servicing the spa and cleaning the 3150’ cabin.   I fear i may be a bit aggressive on my allocation (i fear i am more likely low than high, i like my underwriting to be conservative).  

The electric bill is also high, it is a little higher allocation than the propane.  The spa is electric.  I used the electricity allocation from my co-host but it seem high to me (co host said $400 to $600 so i used $500). Water, trash, internet, and fire wood make up the rest of the utility allocation.  It would be quite costly converting away from propane and due to high electricity cost i suspect t not warranted.   The water heater is 80 gal propane.  

I do agree $100k revenue on $500k cabin seems should have positive coc, but the size ($7k allocated maint/cap ex which is unscheduled maintenance - annual fire prep has own allocation), delivered propane, expensive utilities, & expensive cleaning take their toll. 

Even though you are the only post that seems to advocating purchase, i lean toward purchase.  I have high revenue from my rentals and have diversified other investments that cover my lifestyle.  If the year 2 to end of loan coc is really between negative $12k to negative $15k, i can absorb it without impact.  Equity paydown and modest appreciation would result in a small profit; not enough to justify a non passive investment but i will own a killer cabin.  

Thanks for your response

If i lived in San Jose, the first RE investment that i would consider is a local property with an ADU that had distribution on the lot that would allow a profitable lot split.

Internet search ADU lot split "San Jose"

Here is one search result that is what i am suggesting: https://www.reddit.com/r/SanJose/comments/1e7lhkv/san_jose_b...

Good luck

For me it is not the markets i did not invest in as much as the properties i did not purchase.  I lost one once that projected great return because i requested an estoppel before accepting the offer.  Another offer came in and was accepted.  I have lost properties for a few $k that were projecting return hat would have done outstanding even if my offer was noticeably higher.  

back then, it was not whether you would make a lot of money as mych as if there was a different purchase that would produce a better return.  I should have bought all of them 😀.  I sort of believed that RE would always have plenty of opportunities.  

Good luck

Quote from @Aaron Breckenridge:

@Mike Dymski gotcha. We may roll it back in the next few weeks. Yall are not the first to take issue with it.

I like the triangle. I can expand it if i desire, but it minimizes the size of the post. Also i thought immediately that the triangle would expand the selection.

i hope it does not go away.

Quote from @Marisela Arechiga:

Thanks for your input! In my analysis the cost for an ADU in kern county would run about $85K and I have saved about 75% of that right now.

 Your estimate seems low, but even at that cost, it will not add that value.   You will be lucky if it adds $50k of value.  Building small units in small counts is expensive development.  Add the financing challenges and that you existing structure likely will become rent controlled.  

Here is a list of why adding ADUs in my CA market is typically a poor RE investment:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged by the ADU (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to lost opportunity because if you had purchased RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) Related to number 1, purchasing a property with an existing ADU is cheaper than buying a property and adding an ADU. Why add an ADU if it can be purchased cheaper?
9) adding multiple ADUs or adding an ADU to a quad looses F/F conventional financing. This reduces exit options and affects the value.
10) Small number of small units is the most expensive residential development there is. This implies residential units can be built at lower costs and provide better return.
11) adding an ADU to SFH can make the SFH fall under rent control. In CA currently only MF properties are rent controlled. If the house is older than 15 years old and n ADU is added, it can become rent controlled. Rent control laws are market specific. Make sure you know the impact that adding an ADU will have on any rent control.
12) investors seldom include the land value in the overall ADU costs. The reality is the land has value.

I believe you are typically far better purchasing a different property with conventional financing than adding an ADU. If you want an ADU, buy a property with an adu. You will likely achieve a better return than adding an ADU.

Good luck

Recognize any cash you add to down payment is increasing your cash flow by the rate of the loan.  Do you invest in RE for a 7% return?

I have made a lot of money in RE and negative cash flow is not a criteria that i typically ponder.  I look at total return.

My last purchase had horrendous initial cash flow.  At purchase the rents covered ~60% of piti.   My underwriting showed negative cash flow of almost $6k/month. 

3 years later i am up ~$1m and have positive cash flow of over $4k/month.  The cash flow is poor for this value of an asset and my equity position.   But the $1m value increase has produced a good return (and why my equity position is so high).

Recognize when you increase your down, you are purchasing the cash flow at a rate qual to the interest rate.   You can do better. 

Note i put forth effort in an attempt to maintain a leveraged position   With the recent rate hikes, my equity position has never been higher which i consider undesired (but teading 3% rates for over 6% rates is more undesired).  Paying more upfront than required is not something i would ponder.

Good luck

Quote from @Andrew Steffens:

It is tough to find positive CoC but not impossible. A lot of my clients buying in FL are happy with minimal return but are buying for second homes, tax benefits, etc.

I would stick with value add - with refi you can still achieve high CoC and a good equity position. The challenge is finding the deals.

In Tampa area I am well connected as a PM and broker and have a lot of off market in addition to MLS. I would recommend networking with Brokers in the markets you like to get more deal flow

I have looked at emerald coast. My underwriting shows it to be worst. The annual revenue is not 20% of the purchase price. Insurance and/or HOA are high. It does have nice destination and asan owner i like the private beach (not so good for the public).

I have also looked at hawaii.

It seems like sought destinations are projecting (at least with my underwriting) poor COC without performing value adds. I would rather di value adds local were i know i can do well.

Thanks for the response.