All Forum Posts by: Jack P.

Echo the above, but it also depends on your long-term plans.  Are you flipping the property, or holding it long term?  I subscribe to the philosophy of not creating artificial vacancy.  If it is cash-flowing when you buy it, then no need to upset the occupancy just to say you are rehabbing units.  I keep the rents the same, and let natural turnover create the vacancy.  If I know that in order to raise the rents $100, I need to do about $10k worth of work to a unit.  That'll take me 8 years to make my money back.  So it doesn't really make sense to remove someone from a residence.  

As a counter argument, depending on the scope of the project, it may make sense for economies of scale to have everyone out at once.  

*Side note: I realize that many may pick apart the reasoning of spending $10k for a unit rehab that only nets $100/mo more, but there is a specific reasoning for that.  A $1k rehab won't demand more rent, and maintains the status quo.  A $5k rehab may get you $25/mo more, but that's all.  A $10k rehab creates demand for the unit, which reduces turnover, and increases the quality of tenant.  It also has a cumulative effect on the perceived value of the complex.  Attracting better tenants makes it a better place to live for everyone.  

Can you elaborate on your budget, projected revenue, and other factors?  Are you selling after completion, or going to rent them out?  I'm curious about doing this approach myself, but can't really make the numbers work as well as buying older buildings.

Risk vs. Reward.  Does the potential reward justify the risk?

Since it's owner financing, you don't need to worry about satisfying the lender with 2 years' worth of financials, but you need to have a good feeling you can still make money.

I'd say that if your VERY conservative estimates still net a healthy return, then proceed.  Basically, you need to do a lot of legwork, and inspect EVERY unit with a fine-tooth comb, including current leases and tenants.  Normal due-diligence stuff, but bring along contractors, property managers, etc, just like if you were starting from scratch.  His lack of record keeping doesn't kill the deal, it just leaves more work on your end to find out if the deal is worth it.  That comes at a premium, and should be reflected in the price of the deal, with a heavy discount to you for doing all the legwork that he neglected.

A second for new flooring...luxury vinyl planks.  Look at doing all the common areas with it.  Shelf live over 10 years, and doesn't deteriorate like carpet over time (meaning it holds its rental appeal longer).  Something else looking into are stainless steel appliances.  I don't know what it is, but every unit that I put stainless in rents in minimal time, while white appliances seem to stay on the market a while.  

If you are up for it, also look at replacing that florescent light with a nicer fixture or ceiling fan.  A couple hundred bucks can go a long way there.  

@Dean I.,

I own 3 quads in a similar development.  It's kind of a neat environment, like a co-op apartment complex, depending on the other owners and their goals.  Either way, here's what you need to know:

-Figure out the HOA rules and responsibilities. In a community like this, all of the tenants are renting, but the owners are responsible for abiding by the rules of the HOA. If the affiliation isn't very strong, conflict resolution becomes a problem.

-For the value of the building, either check the tax records (some municipalities make it easy to access via an open website) for purchase prices, or use a website like zillow or realtor.com to see the sale prices of the surrounding buildings.  The appraiser is going to pull those comps, so it helps if you already have an idea of what similar quads sold for on your same street.

-Keep in mind that since the buildings are individually owned, even though they look exactly the same from the outside, their maintenance can vary drastically.  For example, I purchased one of mine for $175k, and a month later the same floorplan a few houses down was listed at $280k.  It wasn't worth nearly that amount, but I think they found a buyer in the $250k range (still way overpriced for its condition and rents).  

-Check the rents of the surrounding units to bounce off your proposed rents using the same websites.  If you play around with it, zillow caches old rental listings.  Your rents may be higher or lower than surrounding units, which should tell you something.  

-Your refi amount will be again tied to the comps in the area.  If you buy at the highest historical prices for the development, there's no room for improvement, no matter how much money you dump into it.  That's kind of the downfall about those developments is there isn't really any room for growth, unless you score an amazing purchase price.  One of the buildings in my development sold for $130k (same floorplan as listed above) because the owner had liquidated her whole inventory, and that was the last building.  The rest of us bought as steady, proven cash flow, with maybe a little wiggle room for some cash-out.  Basically, if you purchase at the median price, then you probably won't be able to pull any additional money out.

-You don't have to live in one of the units, but make sure your lender knows it's an investment property...and you'll have to put 25% down.  

Let me know if you have any other questions.

So as I grab my popcorn...

Keeping in mind that this is purely for entertainment value, lets analyze the veracity of his claim:

-$25k on an 8-unit.  

-Turning 1 bd. into 2 bd. units

-$5k total labor costs.

-undisclosed material costs.

First, the labor.  The dude is rehabing 8 units for $5k.  I thought to myself a scenario where this might be possible, and it may not be too far off.  

-Find a guy who has some construction/handyman experience, isn't licensed, and doesn't have another job.  Maybe he's a felon and can't find work, or an undocumented worker.  Either way, he's willing to work for cash under the table.  I'd value his labor at $800/wk.  He's not paying taxes, FICA, SS, etc, so he's happy with this wage.  

-Under that assumption, I would have about 3 days per unit (5 weeks) to complete the job within budget.  What can I do in 3 days? probably patch all drywall, paint, clean, maybe some other basic things like replace electrical outlets or basic plumbing.

The value-add two bedroom:

-assume again that the current 1 bedrooms are 12x16.  Put a wall up and split the room in half to make two 8x12 rooms.  Keeping in mind that my laborer probably only has 1 day to complete the job, it's probably not going to be the greatest-looking thing, non-textured, funny doorway (i.e. a sheet), but ostensibly it's another room.  

Undisclosed material costs:

-since he didn't specify, there's a blank check for materials.  So I'll assume that he spends out the a$$ on fixtures and appliances to compensate for the shoddy paint job, bedroom partition, old flooring, and other common area drawbacks of the apartment.

Conclusion:

While it's nowhere near legal, within code, permitted correctly, it may just be possible to rehab 8 units for $5k + materials.  I guess you have to cut corners somehow.  Plus, you have to work through the problem of the refi when the appraiser walks through and realizes what happened to this place, then alerts the county.  

First I would say that it's OK for this to cause you a little anxiety.  Second, I would say that it's not a great purchase from a financial perspective.  However, I think BP tends to over-value immediate profitability, when compared to the value of gaining experience.  I agree with @Jonathan Holmes in that it's probably about a break-even property when you eventually list it for rent.  However, in the interim you will gain a ton of experience that otherwise would be left on the table had you not pulled the trigger.  If, like you say, you pick up a couple of roommates and live a a discounted rate for a year or two, then that's a win in my book.  As an example:

You purchasing house:

Total invested: $16k

Expenses over next two years: ~$7k (completely arbitrary $300/mo)

Total cost: $23k 

Total gained: equity in house + experience gained + not having to live with parents

You renting a place by yourself:

Expenses: Rent $800/mo (again, completely arbitrary) 

Total cost: $19k over 2 years

Total gained: none, except experience through reading more BP and kicking yourself for not buying when you had the chance.

Bottom line, your deal seems safe, even though you're probably not going to make any money off it (but probably won't lose much either).  Remember, there's more to it than just making money.  The quality of life gained through home ownership is also a consideration.  In a couple years if you don't like it, then sell and try again.  

When analyzing a house hack, treat the entire property as though you weren't living in it.  In your case, here's an example:

Purchase price: $100k

Potential rent: $2k/mo ($1k per side)

The above would meet the 2% rule.  However, when you look around, there aren't a lot of properties that can meet that threshold.  I guess it depends on how comfortable you are living in a neighborhood with $100k duplexes.  Really, you're talking about cap rate.  The more accurate rule of thumb is the higher the cap rate, the less desirable it is to live in those places.  

Realistically, the art of the house hack is finding a place where your tenants pay your expenses for you, and you live rent free.  Don't be limited by the 2% rule, 1% rule, or any other rule.  Depending on your market, you may not be able to achieve any of those standard rules, but you can still offset (almost) all of your personal housing costs.  Point is, perform your due diligence, and calculate all the variables.   Make sure your property can survive without collecting rent from the unit you're living in, otherwise the "hack" doesn't work as well.    

Like what @Danny Randazzo said, double check what you consider "market" rents.  I think some of the best advice I've seen on BP is this: You don't set the rent prices, the market does.  If you get it wrong, high or low, it will cost you money.  Say you raise the rent $100/mo and your tenants leave, but you were wrong in your market assessment.  The unit stays vacant for an extended period of time, and you have to lower the rent to fill it again.  

I inherited tenants for probably 80% of my rentals, and have subscribed to the philosophy of leaving them in place under current prices, letting natural turnover take place.  Check the vacancy history for your units.  If all the tenants have been in place for less than two year, you know that you will experience a decent turnover rate, and consider anything over a year to be bonus.  Raising the rents just accelerates that process.  Try not to create artificial vacancy if possible.  A unit is renting for $100/month under market rate at $800/mo will take you 8 months to recover 1 month of vacancy.  

The other part to consider is the rehab required for turnover.  Current tenants agreed on renting the unit as it is now.  That unit may or may not be in great shape.  If the current tenant vacates, you may have to dump a considerable amount of time and money to get it into condition to rent at "market" rate again.  

Through my personal experience, last year I purchased a 4-plex with all units full, knowing that they were each in rough shape.  They were all renting for $75-150 under potential.  I decided to leave the tenants in place until they left under their own conditions, because I knew that whenever one left, I would have to spend $10k to bring the unit up to a condition that would attract the tenants I was looking for.  I didn't want to spend $40k the first year, so I will keep the prices low and keep the existing tenants in place for as long as possible.  When they leave on their own, I'll do the rehab.  

So it looks like you're going well above the 2% rule, which is great...so great that it seems too good to be true. How accurate are your rental numbers? $750/mo rent for one unit of a $70k duplex seems like it'd be pretty high, regardless of the location. Is that what the units are currently rented at? Did the seller provide the financials? I'd also expect that for a property in that price range to incur quite a bit of CAPEX and maintenance costs. Your management fees should be 10% for anything less than 10 units managed by that company. Once you have them manage more than 5 units, then you can start to negotiate their fee. The placement fee is market dependent. Some markets charge the fee, others do not.

At face value, I'd have bought this property yesterday.  However, I would suspect there is something else that is not showing up here.  

As for the gas and water, check your local laws and market conditions.  It may not be feasible to bill your tenants directly for common costs.  If no one else in the area is doing it, then you probably can't either, because tenants will just move somewhere else that doesn't charge for those utilities.  Plus, how is a tenant going to view the fairness of paying half the water bill, when there's no way to prove they used half of the water.  If one side has a family of 5, and the other side a single woman, then there is a little disparity on what is fair.  

Again, it sounds like a great deal, but I think you're missing something.  Is it properly zoned and permitted?  Are there significant issues with the property like foundation problems or it needs a new roof?  Is it in a terrible neighborhood?  Why hasn't anyone else jumped on it?