All Forum Posts by: Sam LLoyd

The 2 souls/bedroom is a rule of thumb when used to calculate the size of a septic system, and other utilities.  Probably similar to you, there are no codes per-se that govern the amount of people per room in my area.  I think there are internal stipulations a plenty.  For example... if your tenant is on assistance, the assisting agency can (and maybe should) require a certain size place for a certain size family.  Also, bigger apartment complexes and property managers set their own limits.. which is usually 2/bedroom.  I think this is for consistency for the most part, but is also influenced by their insurance.

From a landlord perspective, I like the idea of 2/bedroom +1 from JC... I think I'm going to apply that going forward.  The key is to apply this rule to every applicant so that you aren't discriminating.  The most I had apply was 14 people for a 3 bd.  I told them no, and stick to 6 people or less in that house.  Since all all my other properties have septic systems, it is a very real concern that the systems could be overloaded, so I take that into consideration when picking tenants.  

I'm not a pro, but I've been learning the same stuff you are, trying to match roofing products, dealing with flat roofs....  Here's my take.  Roofer #1 might have the better product, and he might be proficient at installing it.... and he might have a newer way to handle the product, but roofer #2 sounds like he knows more about the industry as a whole.... Oh, and MB (which is what I've been using because I can install it myself... haven't burned down a house... yet).... after a few years, depending on the product can look just like EPDM.  I had the same thing, thought I had EPDM, but old smooth MB is what I had.

Here's what I would do.... take it or leave it.  Get a second quote, or maybe a third on the masonry, just to make sure your #2 is on the right track.  Ask him for a referral for a roofer that does good work with the membrane you want.... if he knows his stuff, he'll know who to refer you to.

I think I might have some answers for you.  First, you'll have to be able to tell the bank that you have a reason to live there.... they will believe that you are moving into one of the units, so you might have to show them an eviction notice for one of the units before they will believe that you will be moving into it.  I'm pretty sure that if you give the bank 4 leases, and tell them you are going to owner occupy, they are going to have a fit.  kicking out a tenant shouldn't be a big deal.  If they are on month-to-month, they shouldn't be upset... they will, of course, but they shouldn't.  Tenants leave all the time with 30 day notice... it works the same other way.  Your offer should include the fact that you intend to owner occupy, and you should make it part of the offer that the seller needs to give notice and provide you with a vacant unit upon closing.  It's going to take at least a couple months to close the deal any way.  The trick is figuring out which tenant you don't want and getting them out.  So, when you go through the units, make sure you get a feel for which tenants are treating the place well... find out if any one of them is paying under market and/or missing payments.  

Utilities?  It all comes down to numbers weather or not it's a good deal.  I bought a 4plex with owner paid utilities... and it makes the money that I need.  One thing you need to be careful about is splitting up the cost if you have only one meter.  Frankly, I would never do this for heat or electricity because you will end up with your tenants being bitter towards each other for leaving lights on... keeping their heat turned up, or something like that.  Also, you might run into legal issues, billing tenants for something that isn't metered.

I hope these thoughts help.

Some perspective from someone who is completely unfamiliar with your market:  Taxes aren't fixed.  They also aren't variable... they just go up.  In my opinion, since we put taxes in our calculators as a fixed cost... when they do go up, the value of the property goes down.  The taxes are not to blame for the properties in your area not making money.... it's the government who's to blame for using taxation to eventually drive down property values which will hurt themselves in the end.  

From an investor's perspective, I wouldn't focus on the taxes so much as looking at the deal as a whole. When I calculate income from a MFR, I make sure there's a 30% margin between income and expense... this is where my comfort level is, regardless of weather the rents drop or the taxes go up. As far as taxes go, you probably have a better chance of them not going up more in an area where the tax hikes are already hurting property values, whereas if you buy property next door where taxes are low, you might getting in just before taxes get raised there.

If you've only got one or two rentals, I would recommend managing them yourself.  There is a bit of learning to be done, but the money you save will probably make it worth your time.  If you have no time, don't want to take a chance on your ability to screen/manage tenants, or don't need the extra money that badly, hire the property managers.  I've never heard of the condo management acting as property managers.  There job is to tell you (or your managers) when something goes wrong, and then you (or your managers) make the problem go away.

My calculations put it at about $500/month cashflow. My personal goal is for $200/unit, but that is self-managed. So, from that perspective, it is a safe investment. However, I'm showing a 3% Cash on cash return, and a CAP rate under 6%. These numbers are not good at all.

For my numbers, I bumped up your maint/CapX/Turnover to about 7k... which I think is more realistic, but if I use your number it's still a Cash on cash return of only 5%... still not great.

One thing I'd recommend is nailing down the rental rates for this building.  I'm working on buying a 4plex that has awesome cashflow, but I've done my own market research and determined that the seller has the rents above market.  Maybe he can keep good tenants in at that rate, but I can't count on it, so I'm basing my purchase on lower  numbers.  If I'm wrong, and it does make that money, I'll be fine with that.  So, it seams to me that there is a bit jump between the 1250 rent ant 1650.  You need to find out what the market will handle.  If the market is 1650.... then this is a great deal.  Get the rents of the other units up to 1650 and you'll be 8% Cash on Cash, which is a bare minimum in my opinion.  However, if you misjudged, and the 1650 is a fluke and you can only get 1450 for the vacant unit.... 

So... nail down the rents, and the returns on your money that you need, and go from there.  If these are good returns for your area, go for it.

Insurance.  Commercial insurance is a bear.  I think it depends on the current commercial use, how much insurance is going to cost, and what they are going to require you to do to the building.  Also, the type of building may limit the uses your insurance will cover.  I've been going through this all summer... with my insurance refusing to cover certain tenants and rates doubling based on what the tenant will be doing with the space.... partly because it's a mixed use building.  So get an accurate insurance quote and go after it.

I'm sure you're aware that commercial units tent to have longer terms and longer vacancies. It's been my experience that commercial tenant can surprise you too.  They've been there 30 years, and then not.... and then you have to get the unit back up to speed.  So make sure you have the funds to cover an extended vacancy with repairs.

From what I understand, the biggest issue is who's name is on the mortgage if it is financed.  If an individual got the mortgage and then transferred it to the trust, then the insurance needs to be in the individual's name with the lender as the beneficiary.  If the property is owned free and clear, I don't think it matters.  I think it would make the most sense if the entity on the insurance is the entity that is receiving income from the property.

My advice is look for  more area specific advice.  Also, you have to understand what causes the down turn... one cause may affect your area, another may not.  For myself.  The only impact of the last down turn was that other investors started drooling over Reno and other markets.  If there was any impact in prices or volume in my area, I did not feel it... though I only bought three places between 07 and 12.   One was a 4-plex out-of-state, which I did loose money on, but I think that was due to other issues than the market.

So.... ask you local real estate investors.

I think the last couple posts have the answer for you.  What I've always done is do my best to release the unit.  The tenant leaving knows that they are responsible for the rest of the lease, and I know that I'm going to have a hard time going after them for it.  I've always kept the deposit which covers not just physical damages, but also unpaid rents and fees.  Fortunately, I've always been able to rent the place within a month, and my tenants usually don't do much damage, so I haven't been hurt by this.  

Note:  If you have a pet deposit, you might have a legal issue holding this back if the pet didn't cause any damage.  This is one of the reasons I've started doing non-refundable pet deposits and/or monthly pet fees.