All Forum Posts by: Jason Turgeon

I'm a fan of saving the old windows whenever possible. Sometimes they're so far gone that it doesn't make sense. But replacing them at $200 a pop plus labor just gives you an ugly vinyl window that will need to be thrown away and replaced in 10-25 years. The windows in your pictures don't strike me as especially bad. The trim needs paint, sure, but they aren't rotting out. Put some weatherstripping in, paint them, maybe replace a couple of weight cords if those are broken, and call it a day.

Call Hillery Dorner at Dorner Law. www.dornerlaw.com

Sounds like you've already made up your mind. 

1 I love it when I get 30% returns, but I never bank on it. 

2 if you already have the property lined up, that changes things. If you're going shopping, that is less attractive 

3 taxes are always an issue in real estate. You'll be banking an additional year of income now, but don't get the depreciation until next year. 

Do what feels best. There's no right or wrong answer.

I don't know. Normally after 2 years I'd be considering a rent increase, although for truly exceptional tenants I tend to keep their rents flat for many years since replacing them is so hard. But taking a 10% haircut is tough.  Can you make the mortgage every month without that regular income? Will you make *considerably* more than 10% if you take that money and invest it in another property? Are there tax implications from taking all the rent at once? I would put some real thought into this before I jumped at it.

Just getting started on a BRRRR in Nederland. Figured I would return the favor to the community and document my experiences here.

Key players: @Dave Foster, @Adriel Hsu, @Natalie Kolodij, @Sam B.

Background At the beginning of this year, I owned 2 x 2 unit properties in Boston. Bought the first one out of foreclosure in 2008, did some rehab, lived in one unit and rented the other. In 2016, refinanced with cash out and bought the second one around the corner. Again, rehabbed, live in one unit and rent the other. Kept the 2008 property as a pure rental.

By this year, the 2008 rental was starting to need some work and my cashflow, while OK, was not keeping up with the growing equity. Plus we could take advantage of the 121 exemption and pull some profits out since we had lived in it 2 of the last 5 years. Found Dave and Natalie here on BP and put them to work helping me figure out the business side of things. 

While I was working on getting it ready to sell, started reading about other markets where we could reinvest. Found Sam's post about investing in Texas and got curious. Are the numbers really that much better in Texas than in Mass? Sam was kind enough to connect with me, talk to me on the phone, and eventually hook me up with some of his key players. Seems like things really are better for investors in Texas. I can't say enough good things about Sam, especially since he doesn't know me at all. He's just a genuinely nice and generous guy!

After trying to sell it to our long-term tenant who had become a friend (he bailed when inspection turned up major issues), then to a local developer (he was interested but didn't want to pay our price), we eventually sold it to the next door neighbors who had been renting forever. They really wanted to stay in the neighborhood. We gave them a decent price by Boston standards, and they are rehabbing it while they continue to rent next door. Everyone wins. We could have made more by listing it (I am a realtor), but I wanted to keep it local. We still see these people in the park and our kids will grow up playing together. We're paying it forward from the older neighbor who sold us property #2 because he wanted a family in the house instead of taking a higher all cash offer from a developer. Not everything in real estate has to be about maximizing profit.

OK, we have a contract. Natalie works her magic and gives us a number of how much we need to reinvest in our 1031. Whoa. Never in a million years expected to do that well on that property. Now I have to go shopping. Dave gave me expert advice all the way through, even though I had a million newbie 1031 questions.

The Deal:

Sam connected me to Adriel, who has been wholesaling in the area and is also building his own portfolio. A couple of other local people vouched for him, too. I checked out his profile here on BP. Seems like a guy I'd like to do business with. He brought me a wholesale deal with a pretty detailed list of estimated repairs. He also offered to run the rehab for me using his contractors that he has a relationship with. We negotiated a bit (but I didn't push too hard, since I need him to like me enough to do a good job running the rehab). We closed on it through the 1031 about 10 days ago.

Side note: I had planned a trip down to the area to see this property and several others, meet Adriel and a few other key players, learn the neighborhood, etc., etc. Took the time off work, flew down....and landed in a 1000 year rain event. Saw my hotel on CNN with a river flooding through it on the seatback TV. Floods everywhere. Bridges closed. Airports closed. Pandemonium! Spent 8 hours in Houston Hobby airport, managed to snag a seat on a return flight that same night, and came back home very tired and many thousands of airline miles poorer, without having seen the property or met my potential partners. But this property didn't flood, the roof didn't leak, and Adriel was out there that night sending me pictures of it and in constant contact through the whole day. So I figure I can trust this guy to be responsive, and I don't have to worry about floods at this property (but I'm still buying the insurance). I bought it sight unseen, which makes me nervous, but people do that all the time in this industry. Deep breaths!

Here is the info about the property that Adriel sent me. Some of his assumptions are a little optimistic, but I accounted for a lower cash flow and a healthy contingency fund. We should be able to get some decent equity and cash flow even if everything doesn't work out exactly as he originally envisioned.

Location: Nederland, TX 77627. I'm told this is a good school district.

1250 Sq Ft House - Currently 4 bed / 1.5 bath. Can be converted into 3 bed / 2 bath
814 Sq Ft Garage Apartment - 2 Bed / 1 Bath - Full sized kitchen and living room

3 Car Garage

Financials:
Purchase Price: $70,000
Rehab: ~$71,500 (not including contingency and soft costs)
Closing Costs (Purchase): ~$1,000
ARV: $185,000

All-In Cost: ~$156,000 (including 20% rehab contingency)
Refinance out 80% = $148,000
Net out of pocket: ~$10,000

Monthly Income and Expenses:
Rent: $2150 ($1300 for main house + 2 garages and $850 for garage apt + 1 garage)
Mortgage: $850
Taxes: $170
Insurance: $170
Property Management: $225
Repair Reserves: $215
Cashflow: $520 per month
Cash on Cash Return: 62.4%

Repairs and CAPEX will be very low as everything will have been re-done when you finish up the rehab (foundation, A/C units, subfloor, floors, paint, etc)

Rehab Breakdown (Estimated):

Garage Apartment: 
- New A/C unit - $3,500

- Exterior Soffit/Fascia Repairs - $1,500

- Dumpster $1000
- New Stairs - $1,000
- Sheetrock - $5,000

- Paint - $2,000

- Floors - $2,500

- Doors/Trim/Baseboards - $3,000
- New Kitchen Cabinet Doors - $1,000

- New Stainless Steel Appliances - $1,500

- New Sink/Faucet - $200

- Tile Backsplash - $1,000

- Granite - $1,500
- Shower Tile - $2,500

- Bathroom Vanities/Tub/Faucets - $800

Main House: 

- New A/C - $4,500

- Foundation - $3,500

- Exterior Soffit/Fascia Repairs - $1,000

- Dumpster $1000
- Subfloor Replacement - $2,500

- Sheetrock - $7,000

- Paint - $2,500

- Floors - $3,500

- Doors/Trim/Baseboards - $5,000

- New Kitchen Cabinet Doors - $1,500

- New Stainless Steel Appliances - $1,500

- New Sink/Faucet - $200

- Tile Backsplash - $1,000

- Granite - $1,800
- Shower Tile - $2,500

- Bathroom Vanities/Tub/Faucets - $1,500

- Convert Half bath to Full bath - $3,000

Financing: Paid cash for the property from my 1031 proceeds. Have a friend who is interested in investing and has an inheritance to play with. Borrowed $70k from her at 9% for the bulk of the rehab, will finance any overages with remaining cash from our 121 exclusion. Will pay her back when I refinance out.

Progress to date/hurdles:

• Closed, closing costs about double what I budgeted for. +$920.
• Tenant's son not out as promised, 1 week delay while we waited for him to clean all his junk out.
• Got builder's risk insurance, which wasn't in my original budget. +$860.
• Found a contract on the internet and went back and forth with it with Adriel until we both liked it, and signed that. He is going to manage the budget, I pay him in 4 draws.
• Tried to send him the first draw, my $%^! internet bank froze my account because they didn't like the $70k check I deposited earlier in the week from my investor. Could not wire or ACH transfer the money. Ended up sending a check overnight mail. +$26 in postage. Tomorrow I am going to talk to a real bank about moving all my business there.
• Realized in all the excitement, I forgot to turn on the utilities, got that straightened out this week. Then realized I didn't budget carrying costs for utilities in my estimates. Rookie mistake. +$130 to get utilities going.
• (side note) Holy cow, the people who work for the City of Nederland are the nicest people on the planet. After dealing with the permitting in Boston for years, I never realized it could be this easy. You just call them, and they answer the phone! And they give you an answer to your question! And they send people out to turn on the water the next day! Maybe I should move to Texas.
• While dealing with utilities, realized I probably will be happier splitting them the right way. Had not accounted for paying all utilities in my cash flow projections and don't want to deal with headaches of allocating per unit. Waiting on estimates, probably ~$4-5k unplanned expense for additional water, electric, and gas meters but worth it to avoid paying tenants' utilities forever or dealing with tenants arguing over who took the longer shower. Will also make the property easier to sell down the line.
• Contractors have been in for initial estimates. We'll see how they line up with Adriel's estimates. I believe demo will start this week.
  
  

I've uploaded a few pics. One of the things Adriel did really well was document all the flaws on this property with photographs when he went to visit the sellers. He isn't trying to sugarcoat it, this place needs a ton of work. These are just a few of the dozens of pics he took.

That's it for now, will try to update this every couple of weeks until we're done. Estimated completion is about 3 months.

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Nederland.

Purchase price: $70,000
Cash invested: $85,000

1031 from our prior 2 family. Will be using BRRRR strategy. Plan to document this one via a deal diary.

What made you interested in investing in this type of deal?

Have done a couple of other 2-unit properties.

How did you find this deal and how did you negotiate it?

Wholesaler brought it to me, negotiated for him to manage the rehab for no fee if I gave him his asking price.

How did you finance this deal?

Purchased cash with funds from 1031 exchange. Rehab mostly funded via private money at 9%, no points.

How did you add value to the deal?

Just getting started, plan is to rehab, split utilities, rent, and refi.

What was the outcome?

So far, so good.

Lessons learned? Challenges?

Just getting started.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Dave Foster, Adriel Hsu

Massachusetts has extremely protective laws for tenants. Make sure you follow the letter of the law and keep it friendly. If he decides to fight you, it can take months to evict.

If he is month-to-month, you can ask him to leave with the notice specified in your lease or 30 days. Give him notice today (last day of the month is an ideal time) and tell him to be out by the last day of November.

If he is on a lease, you are probably better off just not renewing the lease than trying to evict him. Wait to tell him until a few months before the lease ends, but give him no less than 30 days notice. But if he is doing real damage and you need to evict him, be prepared for a long battle.

Here are some excellent guides to help you through the process. Do not rely on the advice of random strangers from the internet, Massachusetts does not mess around with tenant protections.  

https://www.nolo.com/legal-encyclopedia/overview-landlord-tenant-laws-massachusetts.html

https://www.mass.gov/guides/the-attorney-generals-guide-to-landlord-and-tenant-rights

If the tenant does not want to cooperate, contact a lawyer immediately to find out how to proceed. Better to spend a few hundred dollars on professional advice than to lose thousands in rent, damages, and fees.

If you put $50k in repairs into a SFH, you should not have 15% of your income dedicated to repairs, at least not for the first few years. You should be able to knock that number down a bit. Let's say 7.5% to be conservative. That's still $112.50 for either repairs or a savings account for future maintenance every month on a house where everything has just been fixed. $112.50 savings.

If you can self-manage, you can save 10% property management fees. I think everyone should self-manage their first few properties to learn that side of the business, anyway. $150 savings. 

You should be able to get a better rate than 5%, hopefully something closer to 4. At 4%, your P&I goes down to $659/month. $82 savings.

You should be able to pull out 75% of the appraised value. If you really get it up to $200k, that is $150k. So you would be able to put $12k in your pocket to go to your next deal right away. Bonus! Doing so would put your P&I back up to $716 at 4%, so you would be at a $24 savings if you go this route vs $82 if you only pull out $138k.

You may be able to do a little better on insurance, but let's leave that for now. 

Not sure if your property tax calculations are correct, but I'll assume they are (1.8% tax rate is high but not unheard of).

Self-managing, getting a better interest rate on the refinance, and not being so aggressive with your repair budget on a newly renovated house get you down to about $1284, or $216 positive cash flow. Or pull another $12k out right away to put towards your next project and settle for $159 in cash flow (I'd do that).

We also don't know if you are being too conservative in your projected rent, but that will have an impact. And we don't know if your $50k rehab budget is realistic, optimistic, or overly conservative.

And 1 point a month on the HML is fine for your first couple of deals, but after you have your feet under you, you should try to negotiate that down or find another lender. 9% and 1-2 points is more common. I pay 9% and no points to a friend who has an inheritance she let me tap into for my current rehab.

You may be looking at properties that are overpriced (this is likely the biggest issue). If you are looking at properties that meet the ballpark 1% rule or 70% rules, you should find that they will cashflow positive in most cases. If you are looking at properties in a high cost area where the market is very hot, you may look for years before you find anything that cash flows well. Go out an hour or two until you get to areas that are more reasonably priced and look there.

Here are some other things that can sink cash flow. You may be overestimating rehab costs. You may be underestimating ARV. You may not have enough money in the deal, which can make it hard to cash flow. You may be paying a lot for hard money, if so consider getting your first deal or two done with conventional bank rehab loans (203k or not, many banks do rehab loans). You may be overestimating costs (insurance, taxes, utilities, etc.). You may be building in for a property manager when you could self-manage your first property.

If you're looking for passive income, an elder care facility is about as far from it as you can possibly get. That's a full-service, full-time business that needs a ton of specialized experience, is highly regulated, and leaves you responsible for people with a huge variety of complicated needs. 

If you want to be in that business and understand what it entails, great. We need more compassionate and well-run elder care facilities in this country. But it's not what I would consider a real estate business. It's a healthcare business with a real estate play. 

I wouldn't consider having anything to do with elder care except as a triple-net deal where I owned the property and rented on a long-term, renewable lease to a very experienced, reputable company with multiple other locations I could check out first.