All Forum Posts by: Jack P.

@Teri Feeney Styers, true that people will make the drive for the right neighborhood, but they are generally limited to homeowners.  People generally settle in a rural area because they want the extra land and solitude, and/or lower prices.  The vast majority of residents in rural areas are homeowners, and people probably don't want to move to a rural area just to rent in a master-planned community.  How many apartment complexes have you seen 10 miles from the nearest job center?  There is a limited market for renters looking for nice houses in rural area.  For the scope of this thread, I'm not sure I'd try and develop a B-class commercial property in a rural area.  

However, looking at your plan again, I kind of like the idea.  It's unique and offers something that others don't.  But at a huge risk. 

Similar to what @Teri Feeney Styers said, if the properties are all contiguous, then I'd develop a master plan for the street, similar to making it just one big complex. Capitalize on economies of scale with landscaping, trash, community pool, playgound, etc. If they aren't contiguous, then I'd look at acquiring the ones in between too. After establishing the master plan and stabilizing the rent, then I'd found an HOA for the options of parceling out the units if I need to raise cash for something else.

All this is of course contingent of the financial viability of the project, of which I have no idea.  A community 10 miles from the nearest jobs doesn't sound like it would attract any more than bottom-dollar renters.  

Kelly,

First, I would seriously recommend a home inspection.  The ~$500 is well worth the price.  You'll want to pay (or ask the inspector to) close attention to the condition of the roof, HVAC, and water heaters for each unit.  

Assuming you have all the financials, here is what you are looking for:

-2 years rental history for each unit so you have a good idea of the quality of your tenants

-All expenses paid for repairs during that time so you can properly budget maintenance

-quotes for lawn/snow removal, pest control, trash (if not included in utilities)

-statement for the utilities.  I'm assuming you'll have to pay water.  If you're paying electrical, that's pretty significant.

-get on Zillow and check the rental comps.  if you zoom in on the property you can click on it and check the previous rental prices for surrounding units

-Check the tax bill.  

-The year it was built.  If it's pre-1970s, then you have to start worrying about lead paint.  Not sure when asbestos stopped being used.

-If the rental history has high vacancy, dig into why.  Are the units competitively priced? Is it in a bad neighborhood?  Is it in a good neighborhood, but in bad condition?

-Finally, make a list of at least 5 property managers in the area and talk to them about managing your property.  Ask them for a copy of their lease agreements (for the tenants) and the landlord contract (for you).  Scrutinize and compare those against each other.  Look at each company's web page and see the other types of properties they are managing.  Are the similar to yours?  What does the company look like?  Is it an office of 3 people who simply take 10% to collect rent each month, or are they fully staffed with office and field personnel.  What is their volume?  Good property management from distance ownership can make you, while bad management will break you.

After you've done all the above, closely go over all the financials to come up with your own pro-forma of how you think the property will perform with all of the above included.  

Hope this helps.  Please let me know if you have any other questions.  

Most all of the information you need is in the post by @Chris Mason.  One more piece of thought:

Just because you can buy a house (1-4 units) for $0 down, doesn't necessarily mean you should. The numbers still have to work. My VA-purchased 4-plex still hit all the magical rules of thumb, as well as checking out in reality upon further analysis. It was a really good investment at the time, and has proven to be the best one I've made. But that was irrespective of it being a VA-purchased property.

In my opinion, it's actually more important that you build in a buffer because you will be fully leveraged.  A tank in the market and all of a sudden you're significantly under water in your mortgage.  

I can't comment on the difference between using a VA and FHA loan, aside from the commonly known information. I've seen some arguments to use the FHA loan first, since your VA benefit is a set amount, regardless of how many houses you have. (I think the point was to wait to use the VA loan until you absolutely need it)

I've weighed in on similar discussions in the past, and will echo a lot of the comments above stating that it isn't really a good business practice to offer a military discount, unless there's a business decision behind it.  I can't speak for the legality of offering one in accordance with the fair housing act in WA state, but can offer my point of view on the efficacy of the military discount in general.

I'm not really sure what the point is of offering a discount after they've already submitted an application?  You've got them in the door on the merit of the product you are selling...why leave $300/yr on the table? 

I've seen some malicious actors that heavily advertise a military "discount" for their apartments, when in reality the list price is above market rate, and the discount drops the price to the market rate.  Not saying that's what you're doing, but my stance is that any tenant you really want to have is going to select your unit because it meets their needs...not necessarily because you offer a "discount."

However, I recognize the psychological effect of creative advertising, and understand its benefits from a business standpoint.  It just churns my stomach when snide businessmen attempt to capitalize on some misdirected sense of patriotism or charity.  

Military members are fairly compensated, and receive a more than fair housing allowance that follows local costs of living.  They don't really need a "discount" for their residence.  What they need are landlords that treat them fairly...the same as everyone else.  

Don't worry about fudging the rent numbers by paying yourself.  It all works out the same in the end.  Actually, it may cost you more, since you're tax burden is the difference between your income and expenses.  By paying yourself, you would be showing additional income for the property.  I'm not a CPA, but if you paid yourself $700/mo in rent, that would look like your property received an additional $8k in revenue for the year.  And since rent payments are not tax deductible, you don't get that money back.  As you lay it out, if you didn't pay yourself, the property probably shows as a loss on paper.  However, if you paid yourself $700/mo, you may end up paying taxes on it (albeit not much).  

If for some reason you wanted to establish a record of income for the property being rented at full value ($2800/mo vs. $2100), I guess it may look favorable for a lender when trying to secure financing for your next property, but that's a stretch.  

I wouldn't pay myself.  It's more complicated, and I don't really see much of a benefit.  

As for your financing, the federally-insured programs (Fannie/Freddie/FHA/VA) are 9 times out of 10 going to give you the best rates and terms. They are low-risk for the lenders, so they cost less. People use private lenders and hard money because they don't qualify for traditional financing, either because of the property type, or other circumstances (such as investment properties).

I have a couple things for you.  I house-hacked a 4-plex as my first real investment property.  

First, in order to get FHA financing, you can't put the property in a LLC. It has to be in your name. FHA loans are for homeowners, and a LLC is a business, so there's a bit of a conflict if a business is trying to take advantage of a programs designed for homeowners. It's not a big deal though, as an umbrella insurance policy probably gives you more protection than a simple LLC (any lawyers can chime in here and tell me I'm wrong).

Since this is your first property, I'd highly recommend having an agent represent you and walk you through the process.   Generally speaking, the seller pays all agent fees, but in this case, since it's off-market, you can work with the seller to come up with an acceptable commission (maybe split it).  Most agents receive in the neighborhood of 2.5%, so that'd be $5k in this deal.  The seller may not be very happy about cutting into his cost, so your purchase price may have to come up a bit if he's going to cover it.  The agent can walk you through all the requirements, and will have leads on lenders.  

When you apply for financing, the lender is going to dive into your finances and still require you be able to cover ~6 months of costs (held in a liquid asset), and may not count the rent generated from the other units.  They'll also require an appraisal to make sure the property is worth what you are paying for it.  Start shopping for lenders immediately.  I'd recommend starting with local banks.  Have the face-to-face conversation with a loan officer and explain everything you're trying to do.  If you aren't getting a good feeling, look towards the national lenders, such as Quicken (who are unexpectedly attentive and responsive).  

As part of the offer contract, make sure to include a significant due-diligence period to go over all the financials, and a good property inspection from a licensed inspector.  You'll want to get all the real operating costs from the owner, including pest, lawn care, taxes, insurance (you can get your own quote), maintenance, utilities, management, etc.  If he doesn't keep good records, then you have a bit of a problem, and will have to calculate it yourself.

Finally, with all the information you've collected, you determine if it is a good deal or not.

Based on what you listed above here's an example ballpark monthly budget:

Principle & interest: ~$1,000 ($195k loan @ 5%)

Taxes & insurance: $300-500/mo (depending on your locality)

Utilities: $200/mo for water (most 4-units has the owner paying water)

Vacancy: $140 (based on 95% occupancy at $2800/mo)

Maintenance/Capital expences: $280 (standard 10%)

Management: $280 (10%)

Total: ~$2,300-2,500, leaving you with a profit of around $100/door, with only $10k invested.  Not bad.  However, since your not going to pay yourself rent, you really just get to live in the place rent free, while your tenants pay off the principle.  

You may be able to start by self managing, since the tenants seem stable.  However, you may go through some growing pains once you have a vacancy and have to find a new tenant.  Trust me, I wish I would have hired a property manager after my first vacancy.  Instead, I did a poor job of picking tenants, and it cost me two evictions and lots of lost revenue before I learned my lesson.  

To offer some insight, I've been the commanding officer in a few different organizations, and dealt with debt collectors in various molds on a regular basis (probably once a week).  Here's what we normally did:

-dove into the service member's finances.  That includes figuring out all their bills, debts, and income.  Then worked to establish a feasible budget for him.

-if there was an unexpected expense (such as a car repair or family emergency) that the service member didn't have the cash or credit to pay for, we would arrange for a certain military charity to offer a no-interest loan (or sometimes grant) to get him by for a couple months.  

-sometimes Soldiers would buy a car they couldn't afford (with a 22% interest rate), or would have marital problems that forced them to downsize and move into smaller apartments.  In those cases, we would work with the Soldier to sell the car, or beg the landlord to break the lease.  Sometimes the landlord was sympathetic, and realized a painful eviction was coming...sometimes the Soldier moved out and paid a hefty fee to break the lease.  

-I did have one Soldier get evicted.  We simply oversaw that he found a cheaper place to live.

I mention the above because this is a real estate investing forum.  If you'll notice, I didn't mention at any time attempting to work with the debt collectors to satisfy the debts, or compel a Soldier to pay his bills.  There's a large level of personal responsibility here.  I think it's important to know that from the military side, our focus is on taking care of the service member.  If you choose to get the chain of command involved, understand what you're doing is really highlighting a problem, and not necessarily making leeway towards getting them to pay you...which isn't a bad thing.  It's in our best interest to have our service members satisfy their debts, but we really only have the legal authority to lead the proverbial horse to water...not make him drink.  Nor do we have time to babysit and personally oversee every financial transaction a Soldier makes.  Some service members are just a real pain to deal with...for both the chain of command and their landlords.

My opinions aren't the same for every commanding officer, but I would say the vast majority hold the same view.  Hope this helps to understand the situation a bit more.

I understand the generalization on the $500 vs. $1k rent. But, like several posters have said already, it really depends on a lot more than that. Generally speaking, the lower the rent per unit, the higher the cap rate. So you may be pulling a 15 CAP for the $500/mo complex, and only an 8 CAP for the $1k/mo complex. There's money in both markets, it just depends on how well your system is suited for each one.

 My advice would be to treat service members the same as everyone else.  Most are upstanding citizens who don't generate any issues.  But, like with the rest of society, there are outliers who cause you a bunch of problems.  The difference is that active duty and mobilized reservists are protected by additional laws that protect tenants.  Like every other circumstance, you just have to understand those laws and abide by them.  

The vast majority of service members follow rules and abide by all the terms of their leases...but there are exceptions.  No different than the rest of the population.  Remember that it's against the law to discriminate against an applicant because they are in the military.  However, the normal background and credit checks will almost always weed out undesirable applicants.  Bottom line, treat service members just like everyone else.  Don't make exceptions.