All Forum Posts by: Jack P.

@David McClain

Like @J Scott said, you have to figure out your priorities.

Flip= more cash on hand

BRRR= more sustained income

Flips over time= make more money doing more work faster

BRRRs over time = make less money doing less work slower

If you want to continue to flip houses, you can potentially make more money, but you're also taking more risk, and putting in much more work. Can you sustain and balance that with your full time job and the rest of your life? That being said, you have to start out with some cash somewhere. Flipping this house may set you up to purchase another to BRRR in the future that's more profitable. My recommendation, first figure out a long-term plan, then make your decision.

@Erik E.

Sounds like you're in the same place I was about 6 years ago.  Here're some of my lessons learned:

-All things being equal, I'd recommend 4-plex over duplex for a couple reasons. First, your first property is a learning experience. You'll learn much more about management, expenses, tenants, maintenance, and everything else with 3 tenants than you would with one. Think of it like this: a fourplex provides you 3 times the experience over a duplex (assuming you're living in one of the units), in the same amount of time. Second, your turnover has less of an impact when you have a vacancy. By living in one unit, a duplex is like having a SFR. When there is turnover, you're stuck paying the entire mortgage until it's filled. Eventually you may decide to use a management company. Having gained the experience through managing yourself, you'll be much better at providing oversight as the owner. There is some pain and suffering associated with self-management, but no more valuable learning experience. With a fourplex, the risk is minimal.

-I started a LLC to serve as the management company for my property thinking it would protect me from lawsuits, etc. In hindsight, now knowing a little more about the protections it actually offered under that structure, I was very naive, and it was completely useless. However, it was a great learning experience to set up the LLC, and the process of registering it with the state. I've since decommissioned the LLC, but am glad I went through the process. You won't have the option of putting the property in an LLC if you are using conventional lending. But, as @Ian Tvardovskaya mentioned, it's not really necessary at this point.  Just take out a good umbrella insurance policy to protect yourself (~$2MM or more policy usually runs less that $100/month).

-Definitely open up another bank account strictly for this property.  It helps with accounting.  I had my tenants pay their rent at the bank by depositing directly to the account.  That way their was a 3rd party handling the transaction and electronic record for everything.  Use that account to pay all bills, repairs, mortgages, etc.  Continue to build a sizable reserve to cover any costs associated with the property.  After that, pay yourself the profits.  It's up to you on how you want to account for your money.  I'm not too caught up in separating my rental income from my normal savings, 6 in one hand...

-Treat the purchase as a business transaction.  Only buy a property where you can make positive cash flow.  Don't get emotional about the property because you like the location, amenities, etc., just because you're going to live there.  If it doesn't make money on the bottom line, it doesn't make sense as an investment.  Really do your homework on the surrounding area.  

Finally, take it one step at a time, and don't get ahead of yourself.  Value the experience you gain by being an owner and manager on the first property, and use that to feed your next purchase decision.  You don't want to make a mistake with the first property, only to realize it after you've purchased your second and third property, and not given yourself an opportunity to learn from your mistakes.  

Had a lady in a four-plex who stopped paying rent, and gave every excuse in the book why she couldn't pay on time.  After the 3rd notice to pay rent or quit, I finally got fed up with her and decided to through with the eviction...or so I thought.  She was a paralegal at a local law firm, and well-versed in tenant rights.  I hired an attorney who specialized in real estate law in that town, and he said she was the most clever evictee he had come across.  Took 5 months to get her on her way.  As payback for me evicting her, she turned on the water in the laundry room, stuck the hose down the drain, and let it run...for 3 months. 

@Christopher Hand

All of my rentals are out of state, and I rarely get the opportunity to check in on them, but I'm perfectly comfortable with that.  Absolutely key is finding a good property manager and market that is friendly to an out-of-area owner.  With up to $200k cash available for a down payment (maybe more depending on how you want to handle your LV house, which I'd sell if I were you...its under-performing), you're looking at being able to afford an $800k property.  

Here are some considerations:

-Use whatever resources you can to identify good markets for properties in that price range.  

-When you identify a couple market candidates, do some intense research on property managers in the area.  I mean take a look at the listings that those managers currently offer, check their management rates, read reviews, etc.  I'd stay away from markets where managers collect a tenant finding fee.  In my experience, that's regionally based.  It's really annoying to pay 10% management fees, then another $500 just for them to find a tenant.  Two of my three managers don't have finders fees, and the one that does is really frustrating when there's turnover.  

-Call the office and speak to the manager to see how they are set up.  The larger offices have several employees, and usually someone who takes time to go out and inspect their properties periodically.  If it's a smaller office, they may only be content on taking your 10% and not be very hands on.  Do they have a handyman on staff, or contract out to another company?  That makes a big difference in cost for the little things like when a tenant breaks the handle on the toilet, you're only paying $25 for the service call vs. $100 for the plumber.  How user friendly are they, and how convenient is it for tenants to pay rent?  Can you pay online? With a credit card?  Is the office a block away, or across town?  The easier you make it for your tenants to pay, the fewer issues you'll have, and more likely they'll renew their leases.

-See if they have a coordination fee for contracted work.  One of my managers charges 10% for any invoice through another company.  So, when the UPS driver ran over the mailbox, I paid $300 to have a guy install another one, and $30 to the management company to find the contractor (they made all the phone calls).  If you're out of state and doing a lot of repairs, those expenses can add up.  If they have a dedicated guy who coordinates larger projects (rehabs after bad tenants), he can be worth his weight in gold (if he's good).  

-If the manager has a vested interest in the property, that helps too. For 3 of my properties in the same neighborhood, my property manager is the HOA administrator too. I did that deliberately because they have a stake in ensuring the neighborhood doesn't go to crap, and in effect are looking out for my interests as well.

I just realized this is much longer than I anticipated, but hope it helps.  

Bottom line, before you buy, figure out how you're going to manage it.  If you can't manage it effectively from afar, then it's not a good investment.

Nothing that they'll teach you can't be learned for free here, or through $30 in used books on Amazon.  While I'm sure some of the success stories they pitch are true, I'm also sure that the vast majority of people who spend the $27k don't reap the benefits advertised.  Those companies have capitalized on the popularity of cable TV shows to sucker people into thinking they have the answer to "get rich quick" schemes.  Like everyone above stated, you're motivation and experience will make you money...not some scam investors.  

My two cents: Sell the Indiana property.  While you could have it payed off in 8 years, you're losing almost $5k cash over that time ($50/month x 8 years, not assuming any vacancy or other costs).  It's a $240k property, which has a max potential of $1600/mo.  If you follow the 1% rule, you're way under-performing.  

Instead, 1031 that property to something in TX that performs better.  $120k (you're current equity in the IN house) can potentially get you a down payment for a $450k property.  Using all the basic assumptions for that theoretical property:

1% rule: $54k/yr in rent

50% rule: $27k/yr net after costs

finance on $330k note: ~$19k/yr

cash flow: $8k/year

So instead of loosing $5k cash over the next 8 years, you could be making $64k with a better performing property, and still building equity in the new property.  

I don't know enough about the Chicago market to give you good advice there.  You could sell it today, and see the value triple over the next few years, or see it collapse.    

@Matthew Ries, understand your point about the equity, but I'm not significantly better than the 75% LTV ratio right now, so need to build some equity first, hence the 10-year plan. They're solid producers, and won't be able to find an equivalent property for the equity we have in these ones.

@Kurt Jones, I'm tracking the protection benefits of an LLC, but that comes back to the financing question. Moving the property to an LLC would result in the lender calling in the loan. At this point, we're comfortable with them being in our name, managed by another company, and protected by a healthy umbrella loan.

Agree with everything already written, but want to add the following:

1. I just did the roof on one of my 4-plexes with the tenants in place.  Home Depot, and they were done with all the work in a day.  I honestly don't think any local contractors can beat their prices.  HD was at least 30% cheaper than the other bids I got, and it's warrantied through HD, so don't really have to worry about them not being around for the life of the warranty.  Plus, you can finance at 0%.  

2. Based on what you described,  I'd make sure they pay rent this month first, then tell them they have to be out by February 1st.  However, check your local laws to make sure 60 days is enough.  It doesn't sound like either of your two tenants are worth keeping, and you want an excuse to rehab the property.  Just rip the band-aid off and get it done with.

3. Contact an electrician and see what the cost would be to put each property on its own meter.  It may cost a couple $k, but will save you from paying the tenants electricity, and you'll recoup your money in a couple years.  I agree with @Ray Harrell, splitting the utility bill between tenants is just opening up a can of worms.  If you can't put them on separate meters, I've seen several BP posts where the landlord charged the tenants a "utility fee" each month to recoup the cost.  It's not advertised in the rent price, but may scare off some tenants.  

You might want to look into phasing the build, if it's allowed.  Not sure what the layout of the lot is, but it may be possible to build a 5-unit using your cash available (~$500k).  Once you start cash-flowing on that one, refi, and use the cash-out to build a 4-unit building.  

Again, shooting from the hip here because I don't know the restrictions, but it seems like you're a little short on cash without investors, so you may have to get creative, unless you can finance 90% of the build costs.  

@Dave Foster, thanks.  Yep, this is just one leg of my "retirement" plan.  My other endeavors make up the bulk of it, and it's flexible.  So when the time comes, I'm not completely reliant on the real estate market...it's just icing on the cake.  Point is, I was just seeing if there are any decisions I need to make in the next couple years which I would otherwise regret not making when the time roles around later on down the road.