All Forum Posts by: Jack P.

For my rehabs, I go with my property manager's go-to contractor.  I think he may be a bit on the pricey side, but the management company feeds him a lot of business, so he doesn't want to loose their trust.  Plus, he's been pretty fast, and complete's everything in a couple of weeks.  Also, that contractor does pretty good work, and after doing a few rehabs for me, he understands what I'm looking for.  

I think the old adage goes "you get what you pay for."  After seeing and hearing a lot of horror stories about flakey contractors, I figure that even though I may be paying 20% more than I could, I know that the unit will be tenant ready in less than 30 days, and I don't have to worry about someone not finishing, sub-par work, or other issues.  

In your case, if you have a property manager, see who they use on their projects.  Reputation is built through experience, and experience through volume.  PMs get a ton of volume, so they're a good resource.  Even if you are self managing, you may try to just call some PMs in the area and ask for contractor recommendations.  

As for process, I would recommend that when you do find a contractor that's highly reputable, you give them general guidelines, and let them do what they do best.  Don't be overly-prescriptive on types of materials, because that interferes with their supply chains and internal methods.  Instead, simply offer them the look and outcome you are going for, and let them do the rest.  Don't say "I want you to use these materials in this way for this price and this timeline."  Instead tell them "I'm looking for neutral tones, hardy material, and this budget...what are my options?"  After that, step back and be pleasantly surprised with the outcome.  Remember, they do this a lot more than you do, and are probably better at it than you too!  If they enjoy the freedom you give them, then they are more likely to want to work with you in the future, and start moving you up the list of clients to keep happy.

@Julian H.

In reality, the costs of the utilities (in this case water) are reflected in the rent.  You can also charge the tenants a utility fee in many locations.  However, it's a marketing thing.  Most tenants look at the simple cost of the rent, and only use that to compare prices.  If I am comparing two similar properties, but one has water included, tenants will likely choose the one with the less expensive advertised rent price, regardless whether or not one has utilities included.

If I'm paying $50/door in utilities, then I can probably only charge $25/door more in rent, compared to a similar separately metered property (that's an arbitrary number, but the point is you don't get as much of a return).  At the same time, tenants are turned off by paying a separate utility "fee" to the owner, as opposed to directly to a utility company.  Plus, feasibility is based on market conditions.  If no other similar units charge a utility fee, then your property is less attractive.

In addition, when there is a huge spike in prices, or you have a vengeful tenant, you're not stuck with the cost.  For example, I had a tenant mad at me because I sent her an eviction notice, so she turned on the water in the laundry room, stuck the hose down the drain, and let it run for a month.  She knew I would be the one paying for it, and there was no way to prove the extra $150 bill that month was due to her.  

Generally speaking, the economies of scale give the advantage to quads. For capex items, such as roofs, you're spreading the cost across 4 units, instead of 2 or 3. Same goes for landscaping, pest control, trash, and water. The basic pest control is charged by linear foot, so I pay the same amount for my 2-story quads as I do for my ranch style SFR. With lawn maintenance, if the landscaper charges $100/yard, then it's more economical to have 4 doors in one yard, than one in a single yard.

However, the real answer is "it depends."  You could have a phenomenally performing duplex that cash flows better than a mediocre quad.  Plus, depending on how it is metered, a lot of duplexes can have their own water meters and trash, which is a significant chunk of change.  I would love to rid myself of having to pay for tenants water and trash, but can't do that because the whole quad is on the same meter and account.

I'm trying to acquire properties that are adjacent to each other so that I can negotiate down the costs with the service providers.  If you have 3 properties next to each other, then the landscaper may only charge $75/yard because his setup cost is much lower.  And if I can have 3 properties share a dumpster, then that would reduce my cost for trash collection.  

@Stephanie Douglass,

As I've seen many times on here, the first step is to figure out your goals.  Do you want to become a real estate professional, and spend the bulk of your time dealing with acquiring, managing, or selling property?  Or would you rather take a hands-off approach and be a "passive" investor through a syndication?  You can do anything in between.  Bottom line, the more time you put into it, the more money you're going to make. 

That being said, if I'm in your shoes and looking for advice, I'd start small and get my feet wet with a safe property or two. $150k gives you the ability to make cash offers on SFRs, flip them, and sell for a little profit, or BRRRR. If you enjoy the experience, rinse and repeat. If not, and you find that dealing with contractors or the time consumption is more than you want, then find another method.

$150k would get you a $600k multi-family, which, using basic rules of thumb discussed throughout BP, could net you a nice monthly income.  Economies of scale are nice, but so are the lack of expense that SFRs have (such as the tenant paying for water, landscaping, etc.).

If you're looking to invest in buy-and-hold out of the area, I can't stress enough the need to find a good management company.  That should be your number one consideration BEFORE putting in an offer to purchase.  Really do your homework on the fees and level of care that management companies use.  Some markets charge a month's rent finders fee, some a flat fee, and some nothing at all (I have properties in all three markets, and it's frustrating paying $250 for a "lease renewal fee").  

Finally, I would suggest you look at a tax-free exchange to avoid paying capital gains tax, and invest straight into your next property.  There are numerous threads that discuss those methods throughout the forums.

Best of luck.

Great advice from @Jon Holdman and @Cara Lonsdale.  I have a couple of tenants who have been in place for over a decade, and I haven't raised their rents, but the difference is not nearly as dramatic as yours.  In my case, its more advantageous to keep the tenants happy rather than risk them leaving, because as soon as they do, I'm on the hook for a $10k rehab.  

As far as how to fund a rehab, there are a few options.

If you are in the local area (or at least within a few hours drive), take advantage of sweat equity and low-interest credit.  Home Depot offers up to 2 years at 0% interest on their credit card for many purchases.  I just put a roof on one of my rentals, and am financing it over that term (also for a much lower price than the local contractor).  Keep in mind that they'll do almost everything...flooring, cabinets, HVAC, etc.

A lot of credit cards offer an introductory rate, some as low as 0% for 18 months.  If you are coordinating the rehab yourself, use vendors that accept credit cards.  

Bottom line, you can finance a rehab on straight credit cards at terms much more favorable than a HELOC or personal loan. Use cash only when you have to. Just make sure to pay the balance before the promotional rate expires, otherwise you get hit with astronomical interest rates.

@Paul Palo,

you can use Zillow to see the listed rental prices on specific properties. Use the map view, zoom into the property in question, and click on the price listed (it doesn't have to be for rent/sale to do this). Scroll down to the price/tax history, and look there. If it's a multi-family, you may have to click on the 1 or 2 bd price. Play around with it, but I think it caches all listings on the MLS. You may have to switch between the "Rent" and "buy" sections. I use it quite a bit to comp my properties. Kind of scary actually, because it has the tax and sale price for every house I've ever lived in.

Prospective renters competitively shop for potential apartments the same as they shop for everything else.  They will compare your unit to others listed, weigh the options, and make the choice that best suits their needs.  In my experience, I always strive to make that choice easy for them, either by providing a superior product or superior price to my competition.  

That being said, without knowing the specifics of your market, something is turning them off.  I would guess it's the application fee associated with the process.  If someone takes the time to physically go and look at the unit, they are definitely interested.  You don't say how many people have showed up to take a look, but if its more than 5, your problem is on the other side of the price and location.  If I'm a prospective tenant, I wouldn't be inclined to fork over $40 of my hard-earned income to a seemingly arbitrary website without some type of assurance that my money isn't wasted.  To me, I wouldn't have a very good feeling that my money doesn't just disappear.  It's much different than showing up to a realtor's office (as a property manager) and paying them the money.  How do I know that there aren't 15 people already applying for the unit?  My suggestion would be a manual review of the application, and some personal reassurance to applicants that as long as their numbers check out, they will get the place.  You have to be somewhat of a salesman.

On the other hand, I generally offer some type of move-in special, up to a half-month's rent, to entice tenants.  

I would agree with the above comments that this looks like an interesting opportunity, but not a great deal at any price over $100k for both combined. Depending on the amount of personal attention you can pay to the rehab, there's a lot of risk associated with the second building, with not a lot of upside. I agree with @Mike H. that you probably have quite a few unconsidered repair costs with that building.  It may cost you $100k to rehab after replacing both roofs, all HVACs, paint, face-lifts, and any other unforeseen problems.  

As far as your accounting, I would say anything you spend upfront for purchase and rehab goes against your COC return. That initial cost will offset some of your maintenance and CAPEX costs that you have generously allocated in the analysis.

I don't know your entire financial situation, but the conventional financing terms you listed sound good; and I wouldn't want to deal with that owner anymore.  I wouldn't worry too much about the owner's record-keeping since you're basically starting over from scratch again.  As mentioned above, you got to know your rent potential for the 1/1 units.  Will a lightly cleaned 1/1 rent quickly at $450/mo, or will it require significant rehab (new flooring, paint, appliances) to rent for that amount?  Need to do your research and see some comps.  

Bottom line, do I think its profitable with a decent return? Yes.  However, it's not anything I'd get really excited about.  

@Ryan M.,

So I'm a small-time investor with just a handful of properties, compared to other who have already spoken here.  I haven't had the luxury of that much liquid cash, but if I were in your shoes, I would probably approach this a few ways:

1. Build experience through buying a small rental property or two with traditional financing (duplex-fourplex).  It's easy to get financing, and the lender doesn't care how much experience you have, as opposed to multi-family.  Hire a property manager to take care of the day-to-day and pay attention to the costs and work that goes into management.

2. Syndication.  One of the barriers that a lot of us can't overcome is the net worth required to get access to these deals.  You may have enough to get beyond that gate and get people interested in taking your money for a substantial return.

3. If you're looking to do this full time, find a house to flip, for nothing more than just to gain the experience of buying-rehabbing-selling it, and the interaction with contractors, realtors, vendors, etc.  

All of the above would be part of a 2-4 year plan, where after I get my feet wet and establish some credibility, I can put more energy and effort towards a bigger project.

I guess it really depends on how "passive" you want your investment to be.

To clarify, I'm asking out of curiosity.  I'm not looking to invest in flips out of state, that's way beyond the level of risk I'm willing to assume.  However, that "project manager" piece sounds like something I would enjoy during active retirement, or on the side of my next career.

Any thoughts on the regulatory restrictions?  @Vince Lucas, do you still have a GC oversee the labor?  Or do you coordinate directly with the subs?  I'm wondering if there's a line you cross since you're not the owner.  I would assume that would be kind of like wholesaling, where it's not exactly illegal, but pushes the boundary?  Obviously having a GC license would help immensely, but that's probably beyond the reach of most people, given the experienced needed.  

Having a RE license would help, since you could see the project through completion, and sell it on the back end.

The marketing aspect of it is also interesting.  Aside from an ad in the yellow pages, how do you communicate your unique service?

I don't think you're spilling industry secrets here since the competition is strictly local.