All Forum Posts by: Jack P.

How did you find your house/apartment while you were in med school?  That would probably be where to start.  It's difficult to target a specific demographic, unless you offer lucrative incentives, which cost you money.  It's like selling something at a bargain price; you only reduce the price because you can't sell it for the original price.  

Point is, it's probably better to simply find a good tenant with a good credit score and job than one who meets certain criteria (i.e. med student).  Limiting your advertising to certain subjects reduces exposure, and in the end looses you money.  There are plenty of other reliable tenants who pay their rent on time who live around hospitals that you don't need to target med students.

Just my two cents.

Can you rent out the house?  If so, I'd probably do that as long as I can cover all my costs.  Ballpark, if you can rent the place for at least $1800/month, that might be the best option.  Here's why:

-selling the place now only results in a loss, after agent fees, etc.  Hold onto it for while, and have a tenant pay off some of your mortgage balance. Plus, while you're waiting to relocate, you can start collecting some rental revenue.  

-Search for multi-family homes that have good numbers, and put in an offer for one of those. If you are living in one of the units, then you can use an FHA loan and buy for 3.5% down. That gets you in the door for minimal down, and a lower interest rate. If you already live in your first house, you'd be bending/breaking some rules by using an FHA loan to purchase a second house in the same area (assuming you don't sell the first one). If the first one is rented, then you wouldn't have the option of occupying that home, thereby opening the opportunity to use the FHA loan on your primary residence. Check into the requirements for FHA loans, and with your lender.

-When you are ready to upgrade to another SFR, now you have 2 properties that are (ideally) cash-flowing. Or maybe you just move back into the first house and keep the Multi-family as a rental. Over that time, you've also gained some experience in being a landlord, and built a small portfolio, demonstrating to future lenders/partners that you know what you're doing.

Buy it. Cash. Now! Figure out the rest later.

Echo the other points above and figure out what your goals are as far as keeping it for a rental, or selling it quickly.  Only you can answer that.

As far as the rest, with minimal holding costs (no mortgage!), you have the luxury of taking your time in the rehab.  Here are a couple options, in no particular order:

1. take out a personal/home equity loan.  Usually around 10% interest, depending on your credit.

2. use a credit card.  higher interest, and harder to pay contractors.

3. Get a Home Depot/Lowes card and use them for as much as possible, taking advantage of the no interest financing for 6-24 months.  They'll do roofs, flooring, HVAC, appliances, cabinets, windows...etc.  Credit score and income will dictate the limit on the card.

4. Refi immediately.  They may be more apt to lend you money if you already own the property, but then you'd have to pay closing costs, which may be more than the financing costs associated with a credit card or personal loan.  

5. stretch the repairs out over a period of time and DIY, paying cash along the way.  

6. any combination of the above.

Again, only you can determine which is the best option for you, depending on your situation.

Jason,

I agree with the above responses.  I've tried it both ways, and had limited success self managing.  In the end, I wasn't very talented at putting quality tenants in the units, and I paid the price with several evictions.  I reluctantly hired a manager to deal with the day-to-day, and am more than happy with my decision after a couple of years (and I think my tenants are too).  It was just too hard and stressful to deal with problems, maintenance, and complaints from afar, while still working on my other full time job.  

My relationship with one property manager convinced me to buy other properties in the same area, and continue their service, which got me a discount in management fees for having multiple properties.  I plan on doing the same in the future.  

David,

Refi, or raise the rent.  Those are your only two options.  $87k is about $450 for P&I.  Don't know what your taxes are, but assume insurance at $50/mo.  If you buy the property from your aunt at $90k, then you could potentially be cash flow for ~$50 per month with the same tenant.  After you factor in maintenance, than might drop to $0, with the tenant only paying off your mortgage as a return.

Keep reading the blogs and forums on BP and you'll see a lot of references to the 1% rule, which means the rent received each month should be at least 1% of the purchase price of the home.  In this case, if the market rate for rent of that home is $650/month, then you should pay no more than $65,000 for the home.  

On the other hand, the market rate for the house may be much higher, and you're just giving the current tenant a great deal.  If you could rent the house for ~$900/month, and purchase at $90k, it may be a worthwhile investment.  Otherwise, I'd pass on purchasing the property.  

I would, however, advise your aunt to refi, unless she's more concerned with paying down the balance on the mortgage for the next 8-22 years.  

Hi Karen,

I'm a big fan of the HD black friday sales.  I've used it several times to purchase appliances for my units.

Q1: Each appliance needs to be over $498.  So, if you purchase a fridge for $800, a range for $500, and a dishwasher for $300, then you only qualify for 2 appliances, and get $50 back.  

Q2: the kitchen suites are package deals that HD bought in bulk at a discount, so you have to buy the packages to receive the discount on your end.  

Having just gone through this earlier in November, depending on if you're purchasing for yourself or a rental/flip, it might just be better to find the cheapest appliances that fit your needs, rather than hunt for the discount.  

I have rehabed each unit independently during natural tenant turnover, and not forced the issue.  My philosophy is that if the tenants are generating income, why would I upset that?  Plus, they signed the lease for the apartment "as is," so I am not obligated to upgrade the unit while they live in it.  What you lose is the economy of scale when doing everything at once, but you don't artificially create 100% vacancy.  As as exception, big ticket items that won't displace the tenant or their belongings are free game.  I've done HVAC system replacement with occupied units because I got a huge discount by doing all of them at once.  Plus, it didn't take much effort or inconvenience the tenants too much.  

I've had tenants request new carpet or paint for their units, and basically told them if they are willing to move all of their furniture out of the building to do the work, then I'd consider it.  That usually stops the conversation fairly quickly.  Same with things like kitchen cabinets, countertops, etc.  Most tenants don't want to go through the inconvenience of dealing with contractors roaming their apartments.  

As for tenants rights, generally speaking, when you purchase the property, you purchase the existing leases along with it.  Check the terms of the existing leases and see what you need to provide them.  I agree with @Peter Bowen in that I've never had a complaint when rehabing an adjacent unit.  I've offered the rehabed unit to existing tenants, but none have ever jumped on it because they don't want to go through the hassle of moving furniture or updating addresses for everything.  Plus, the rehabed unit will be priced at a higher level than the others.  

Agree with the others, pass on this property, especially considering the placement fee by the property manager.  That should be counted in your vacancy rate.  At $1300 each time you turnover, it's a huge expense.  You would have to average like 3 years per tenant to make up the lost revenue.  And raising the rent each year on the same leaseholder is motivation for them to move out when the lease is up!  

Dan, I still think there are a lot of variables to throw in it.  If you consider the roof and the septic as part of the initial investment, you're probably still well under the 1% rule.  

Thinking again about the well, that opens up a whole new can of worms.  It may be good that you don't have to pay for water, but anytime you have a problem with the well, it's a huge expense.  You have to worry about a changing water table, seismic shifts, water quality, etc.  I've known several people who's wells eventually produced water that did not meet FDA standards for quality (high arsenic or uranium content), which isn't fixed by the filtering process.  Long story short, you probably need to have a professional take a look at the well and have a water inspection.  The well might scare me away from this deal, but it may be much more worry-free than I suspect.

As for capex, I use a conservative planning factor of 10% for my multi-family properties (built in 1984), but that's probably on the high side since I'm in the process of upgrading each unit as tenants turnover.  You're going to be the best estimator of that since you know immeasurably more about the property than any of us.  

I would say it may be worth the risk if you are self-managing, have a talent for finding good tenants, and are handy with repairs.  Otherwise, your margins are very small, and don't leave you any room for significant repairs.  If I read that right, you will have to replace the roof in a few years, which is another added expense in the 5-figure range, and will wipe out 10 years worth of profits.  

I don't really know anything about septic, but you probably want to get a quote on replacing the system just so you know what you're getting into.  Also, the utilities kill your profit.  I can see collective water in a multi-plex, but paying for tenants electricity is just nuts, especially in TX, where they'll run the A/C 24/7 because they aren't paying for it.