All Forum Posts by: J Scott

I have a house under contract that has some decent equity, and I'm looking to rehab and rent/sell it. During my walk-through, I noticed that there is mold in several places -- including the ceilings of two bathrooms and around the frames of most of the windows.

The house has been empty for a while, the windows are not well-insulated, and the bathrooms have little ventilation, so I'm not surprised that mold has started to grow. That said, I know very little about mold remediation.

My question is:

I have a 7-day inspection period on this house (it's an REO, and sold as-is), and I'm wondering what I should do in those 7 days to ensure the mold problem isn't a significant one (or one I can remediate myself)?

I'm planning to get a property inspection, but I don't know if the inspector will know enough about mold to tell me the extent of the problem.

If necessary, I'm happy to get a mold specialist out to take a look? But will he be able to tell me pretty easily how bad the problem is without opening up the walls? Or will he have to get into the walls to determine the extent of the problem?

Should I pass on the deal just-in-case the problem is bad?

Spending $500 to get $300?

It may be business, but it's not good business...

But, based on your comment about having no expenses other than taxes, I'm not quite sure I believe you have a business at all...

Another question (along the lines of this topic) for experienced property owners...

I used the 50% rule for SFH, and I do a much more detailed analysis for any buildings over 5 units, but I'm not really sure how to evaluate expenses for 2-4 unit properties (duplexes, triplexes, quad-plexes).

I imagine there are some economies of scale for multiple units in a single building, but certainly not to the degree of an apartment building.

Do you guys use the 50% rule for 2-4 units? Or some other rule? Or do you do a more detailed (i.e., NOI and cap rate) analysis when determining if a 2-4 unit property is a good deal?

Thanks!

Just to clarify what Mike is trying to point out...

A good rule of thumb for many residential properties is that expenses (including vacancy, maintenance, taxes, insurance, upkeep, administrative, etc) will generally run between 45-50% of gross income. This is more a rule for single family houses than apartments, but still a good rule of thumb for apartments as well.

You can argue whether an experienced landlord in specific locations can ever get expenses lower than 45% on-average, but I think 99.9% of experienced landlords would never honestly believe you could get expenses anywhere near where you have them (25%).

You can take Mike's advice and plan for 45-50% expenses (he has dozens of data points to support it), or you can stick with your own estimates, and consider it a learning opportunity a couple months down the road...

Good luck!

Have you successfully run any other mutli-unit properties with OE of 25% or less? If so, you're likely one of the best landlords in the country, and I would recommend buying much larger apartment buildings/complexes where you can make a LOT more money...

My biggest concern based on your answers is that if you're doing all the work yourself (leasing, maintenance, turn-over, landscaping, evictions, etc), you're probably spending at least a third of time time (if not a lot more) on this one property, and this one property is only earning you $20K per year.

So, you basically have created a job for yourself, that's earning you less than $60K/year. Wouldn't you rather be creating a business where you can be using your abilities to acquire and operate property to build a much bigger portfolio? You can't do that if you're busy mowing the lawn and spending time in court evicting tenants.

You should take your talents and go make millions...not thousands...of dollars...

Both LLC and LP can be good entities for holding real estate, but there are a lot more questions that you need to ask/answer before determining which is correct...

What kind of real estate will you hold? What is your hold time? What is your exit strategy? Will there be partners? Will you be an active member of the partnership? Etc...

If you create an LLC, you have multiple choices for how you want that company taxed, and the answer isn't always a simple one...

You should consult a CPA/attorney with experience in RE, and they should be able to help...

Well, if those are the real numbers, I'd say you're getting a hell of a deal...

Looks like you'd be buying with a near 17% cap rate, 30% COC return, and 31% total return...in fact, if you could turn around and sell it as a 9-cap, you could immediately turn a $250K profit (even after selling fees!)...

Now, that said, the only way that would be the case is if:

1) the seller didn't know how to determine the value of his property, and was ripping himself off;

2) you had the ability to reduce expenses to a point where very few owners can; or

3) the seller is extremely motivated for some reason and is willing to practically give away his property.

I'm guessing it's none of these, and that you are actually being too conservative in your pro-forma estimates. First, if expenses are coming in at much less than 40% of gross income, that should be a red flag. And it looks like yours are coming in at less than 25%.

Some questions:

- Is the 10% vacancy the total income loss? For example, if you have 10% vacancy, and 10% of your tenants don't pay (and have to be evicted), that's actually 20% loss. Too many buyers don't figure total loss when considering vacancy;

- $1000 per year in total maintenance seems *very* low. Does this include deferred maintenance and reserves for capital improvements (new roof in 10 years, HVAC replacements, etc)?

- Do you plan to spend any money on unit turn-over? What happens when someone moves out? Don't you need to get the carpets cleaned, the walls repainted, the bathroom scrubbed?

- Is the water sub-metered for this property? If not, you'll be paying for that.

- What about trash/sewage? Are your tenants paying that? Probably not, so you need to factor that in.

- Who is going to do the general upkeep of the property? Will you be picking up trash, mowing the lawn, landscaping, etc? It's not factored in, so either you're doing it or it needs to be free.

- Are you going to advertise the property to find tenants? Or will they magically find you and come beating down your door? If you plan to advertise, there will be a cost associated.

- $25/month in accounting fees seems low, but let's assume it's correct. I imagine this doesn't include tax consulting and tax preparation fees. Are you a tax professional or do you plan to hire one to help you keep some of this money?

- Will you be consulting an attorney to handle any contractual or legal issues (evictions, leases, purchase agreement, etc)? If so, factor that in.

- The insurance estimate seems low to me...have you verified this yourself, or are you trusting the current owner's pro-forma?

- Will you be doing the property management yourself, or hiring that out? If you're doing it yourself, do you have the time/energy/skills to do it successfully? What if you decide at some point in the future that you want to hire out the PM role...you should factor in those costs now, just in case.

I could be wrong, but it looks to me like you're ignoring a lot of costs associated with this property, and will be in for a big surprise when you start actually writing checks. My first question to you would be whether you put together this pro-forma yourself (based on actual numbers and experience) or if you just listened to the current owners description of the expenses.

All that said, it may still be a great deal, just make sure you do your due diligence before pushing ahead...

What makes you think that an LLC can't provide benefits?