All Forum Posts by: Mike H.

Yea. If you plan on STR then you will have to do snow removal and lawn mowing. Snow removal is typically dependent on the amount of snow.

Usually you can find someone that will do a driveway for $50 to $75 a pop. You just ask to be added to their customer list and they'll come automatically when the snow hits.  And we typically only get 4 to 5 snows a year that require the drives to be plowed.  That being said, you never know what the weather might bring.  You might get 8 or 9 snows a year or you might get 2 or 3.  Last year I think I shoveled my drive twice and i'm further north than bloomington here. 

To me the biggest issue with out of state investing and long term rentals is that you have to deal with property damages and/or evictions.  Depending on the state and even the county, the eviction process can be a nightmare.  And typically long term rentals don't make it easy to include property management fees into the numbers and have them still work well.

I would consider looking into STR type areas where you can avoid the risk of property damages (str and pm insurance covers almost everything that they might damage) and evictions/collections. If you have a tenant that doesn't pay and you have to evict, you might lose 3 to 5 months of rent payments plus have make ready costs of 5k to 6k depending on what they do. That house won't have a profit for 3 or 4 years now.

As an out of state investor, I think STRs are now the way to go. Built in property managent. Less risks of significant cash outlays and/or collections defaults. And you still get the same benefits in terms of tax benefits (depreciation is a beautiful thing), rental profits, principal paydown and appreciation. 

I think there are more horror stories than anything when it comes to those kinds of companies.  They tend to overcharge for rehab and/or overvalue the properties they find investors and then overpromise on the rents they can get.  Sometimes they find a renter that will sign a lease for a high amount only for the renter to default leaving the owner eating the vacancy. 

I think the days of growing a portfolio through a company like that are done as well. 

Now that doesn't mean you can't get creative on your own to avoid paying retail.  If you put in an offer at 85% of list price on every decent home on mls in your targeted area, you're going to get a house or two that should only need cosmetic rehab - which you could control the costs better.  Then you just need to find a property manager. And a good property manager could help you get the cosmetic rehab done.  

Or maybe find a builder that will build for you at 90% LTV and see if the numbers work at that price.

Honestly, I still think STRs are the best way to go for Out of state investing.  The PM fees are built into the numbers. 

I've been doing rentals for close to 20 years and I just learned a new trick that some people probably already know about but it wasn't something I'd seen before.  My brother in law showed it to me when he put in a bunch of blinds in my rental cabin. 

I bought the cheap lowes light blocking blinds.  But instead of using the brackets, he just put the screws straight through the blind bar itself.  Thing isn't going anywhere. 

I wish I had knows that years ago.  Cant' tell you how many times renters had yanked the blinds down out of those flimsy brackets......  Just thought I'd add a little trick to consider. 

I definitely think with your age and the money you have, I would look into a vacation type area that has STRs. Go with a smaller rental and you should be able to find something in that 300k to 350k price range.   Maybe something like the poconos or branson mo or something similar. 

Make sure the numbers so that if you put in 60k to 70k you're getting some sort of annual net profit so you aren't having to feed the investment. 

And absolutely don't pay retail.  You want to pay 300k to 350k but you want that property to be valued at 360k to 420k (i.e. don't pay more than 80% of what its worth).  And that may sound undoable but those deals are out there on mls if you make enough offers.  

In 10 years, that property that you paid 300 to 350k will be worth 500k to 600k and you'll only owe around 200k to 210k and it will likely be making about 15k to 20k in annual profit. 

But that is the one thing to keep in mind.  Sometimes people look at the cash flow in year 1 or 2 and question why anyone would invest in real estate.   Look at the overall numbers if you were to hold something 10 years and that will change your mind real quick. 

The key is to not have negative cash flow. And STRs really help because you don't have the large dings that long term rentals have - i.e tenants damaging the property to where you have huge make ready costs (the str insurance covers that), no collections or evictions issues. 

Landlords in illinois for sfh rentals don't provide snow removal or lawn cutting so thats not an issue.   The tricky part of illinois can be the property taxes.  Some of the nicer/newer homes are up there in property taxes even in bloomington (4k to 6k).  The older homes there aren't as bad (2k to 3k).  Thats in the 1500 to 1800 sq ft size. 

Just be wary of the taxes there.  The other issue is that town is a one trick pony.  You're not getting people moving there that can commute to anywhere.  So your renter pool could be limited.

If you like that price point, I would suggest going a little further north.  You'd still be outside of the chicago suburbs but they'd be close enough to where they could work downtown.  Areas like bourbonnais, manteno, bradley, and peotone. Home prices are a little bit higher than bloomington but so are the rents. And you have a lot less availability in terms of rents.

Overall though,when it comes to investing out of state, I would always suggest people look at STRs. You get built in property management which makes dealing with repairs easier.  And you avoid things like damaged properties (guest insurance from airbnb or prop manager themselves cover that), evictions, collections, etc.   And when a furnace does go out, the property manager will fix it.

You can get a property manager for a long term rental too but the numbers in terms of cash flow just don't seem to work well as they do for str's. 

I stopped buying sfh's as long term rentals here in illinois. I just couldn't find deals that allowed me to be all in after purchase and rehab for no money out of pocket like I used to. 

What I did find is that as a builder in eastern tennessee, I could build STR cabins for less than 70% LTV so that I could effectively BRRR my way into growth without coming out of pocket for a down payment.

Now it does take a lot more cash to do because as a builder I have to front a lot of money at times (land, permits, each stage of construction while I'm waiting on the draw).  So its not as easy as it was before with sfh's where you could get 100% of the purchase and rehab as long as the ltv was 70% or better.  But in terms of being able to grow a portfolio with a ton of equity and solid cash flow, being a builder in this area really works.

I think the STR part of it also helps as well. I can build a 1,000 sq ft cabin including land  and holding costs for about 350k or so and the cabin will appraise out for about 500k to 525k and will produce gross rents in year 2 between 50k to 60k. With a loan of say 350k, and paying property management, it should still provide net profit of about 4k to 7k a year in year 2. And go up from there.  

But what I like about it the most is that I don't have "find" any deals to BRRR. Every single cabin I build is a deal I'm going to add 150k or more in equity (I've done a couple of larger ones that have 200k to 300k in equity) and anywhere from 5k to 10k a year in net profit by year 2.  Year 1 is probably a loss though so that is something to consider. Just the way the str thing works because rents seem to take about a year or so to stabilize.

My goal is to get 20 cabins in the next 5 years.   I say that but my goal for sfh rentals here in illinois was to get to 20 houses in 10 years and I ended up getting to 83 in 15 years (I've since sold half though so I don't own that many now). 

Getting title and getting clean title for properties bought at tax auctions are two different things.  Most title companies will never give title insurance on properties bought at tax auctions. Some will need 5 or 7 years to pass and then they might.  So selling it to someone when you can't give them clean and insurable title can sometimes be an issue.

At that price point, not so much. 8k properties tend to have a buyer pool that won't care as much that the title isn't insurable if they see the reason why is because it was bought at a tax sale.  But they'll also need to be aware that they won't be able to get a loan to build anything on it either in the future.

There is at least one company out there I've looked into before.  Something like tax title services.  I think they charge 2k or 2,500 or something and they'll do some legwork on the tax sale and then I believe they work with title companies so that they can insure the title (maybe they underwrite the title policy or something, i don't really know how they work).  But they would allow you to get an insurable title policy on the property which makes it much easier to sell.

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 think a big missing piece from the puzzle is where are you at personally with your income. Equity and cash flow are equally important when deciding whether to pull money out.

If you can put the equity to work by adding another property while still having a nice cushion on your cash flow, then I would say definitely yes.  

If you were to refinance property one and pull out another 100k (lets assume a 500k house in tampa that you need 100k for a down payment), you'd be paying 6.5% or so on that 100k.  Now you have to see what your returns would be on a 500k str property there.

Lets say you were to net 5k a year in rental income, there's 5% right there.  Add in the principal paydown on the investment property which would be another 5k. And now another 1k of principal paydown per year on the 100k additional money in the new loan. Now you're at 11% return. And then add in the typical appreciation of say 3 to 5% (of 500k). Another 20k?  Now you're at 31% return.

Now thats making a couple of key assumptions - 1) the property you're buying is around 500k. And 2, that the property with 100k down will have a 400k mortgage and will net you 5k a year. 

And that may not sound like much.  But what does that look like in 10 years.  That property might be making 15k to 20k a year in rental income.  It might be worth 700k by then.  And you would now owe about 330k by then so you would have gained 370k in equity in 10 years.  All from taking out 100k on one of your properties.

The key, to me, when deciding to use more leverage for growth. First and foremost, is the property you're going to use the money to buy a good investment.  And then the second item is - if you do take out more money, where does that leave you from a cashflow standpoint.   

Again, you appear to have two long term rentals. If one of those people doesn't pay or they move out, you're taking a hefty hit on your cash flow for sure.  Does your personal income give you enough of a cushion to handle that.  If it does, then to me the answer is absolutely clear - take that money out and add more property.

You will thank yourself a million times over when you see what that choice becomes in another 10 years. 

btw: I would add that I am very skeptical of anything in florida these days. I did some mobile home deals down there (4 total) and the change in immigration laws and the recurring storms has really dented the demand down there. Then again, as an STR I'm not sure that matters as much because you're not selling the home, you're renting to vacationers so that shouldn't be as affected. And the benefit to all the chaos with the last two storms Is you should be able to negotiate a killer deal on a purchase right now.

I would put in lowball offers (75 to 80% of list) on every house you're interested in and see if somebody bites. You're an investor. You should never pay retail! If you can walk into the deal with some nice equity then it gives you more options in case you want to get out of the area.