All Forum Posts by: Cory Binsfield

My best tenants have high credit scores and make at least 3 times the monthly rent.

The next best ones are engineering or medical students with parents that have high credit scores and incomes. The latter are the co-signors on the lease.

From a unit perspective, 1-2 bedrooms attract graduate students, young professionals or couples. While the turnover may be a bit higher, it forces you to keep the units up to date and mine rent fast due to location and price point.

For instance, my 11 unit building is across the street from a class A apartment building. My rents are 40% less due to age of the building. However, the units have hard surface flooring, new tile showers and other updates that make em look nice.

Number one rule of property management: Nice properties in nice locations attract nice tenants.

Rule number 2: Be patient and wait for the right tenant.

As long as you screen properly, you will have no problem landlording-except for the occasional blip like a boiler going out when it’s 16 below zero.

Welcome to Minnesota!

My all time favorite tenant has been with me for 14 years. He pilots a boat in the summer and lives in the unit once the shipping season ends in late November. He is back to work in May. While he pays late periodically, I can’t complain.

Todd,

Thanks for the inspiring story. Real estate is a long game and your hard work and perseverance has paid some nice dividends.

As you contemplate early retirement, here are couple of ideas you may wish to explore.

Being a high wage earner, I’m assuming you pay a fortune in taxes. If you could structure your life around your rentals, you could qualify as a real estate professional and substantially reduce your tax burden.

I’d run your tax situation by your accountant to see what would happen if you could qualify. This may reduce your freedom number substantially.

I’m sure you are already doing this, but just in case. Are you flipping properties within a S Corp? That’s another angle to reduce taxes.

In terms of health care expenses, I find a lot of people stay in soul sucking jobs without exploring what it would actually cost to buy their own coverage. Having been self-employed my entire life, I find the cost for health insurance with the recent ACA improvements to be a bargain versus working for someone else.

If you decided to pull the rip cord on work, you may want to look into converting your tax deferred retirement plan into tax free retirement plan via strategic Roth IRA conversions. You could do this when your earned income drops or when you qualify as a real estate professional.

Finally, could you make a pivot to a real estate related career where you not only qualify as a real estate professional but make money as a real estate agent or as a syndicator? Your sales manager and flipping skills would be in high demand.

Just some thoughts. Good luck on sorting this out. You have a nice problem to solve!

Whitney, 

I mention a house of cards because you are 95% leveraged in a cyclical market. 

The difference is I'm in a linear market. During the big sub-prime bust, my market only fell by 20% or so. Leverage is far less risky in my market due to strong rental demand and high barriers to entry when it comes to the new housing stock. 

Yet, I knew I was juggling a house of cards as I continued to scale up with 5-10% down. I just want you to be aware of the risks and consider trying to create stronger cash flow so you won't have to carry large reserves or feed the Aligator with out of pocket cash.  

Check out this chart. 

I don't know your exact PITI, but I'm assuming it is around $5,500 per month on 30-year fixed. At 4 years (no vacancy, no CAPEX, management, maintenance) how do you come up with a 4-year cushion?

Again, nothing wrong with leverage. This is how I got started and your reserves are much higher than when I started out!

You started like I did. Just be careful.

During the housing downturn, I had ample access to credit lines and cards. Once Lehman Brothers cratered, Amex sent me a letter stating my $25,000 credit card limit was being reduced to $500. I was like, what’s the point?

Banks quit lending during downturns. It doesn’t matter how much equity you have to pursue a refi and roll strategy. No loan, no leverage.

Do you have 30 year fixed loans on these properties? If so, you will be fine as long as you make the PITI. 30 year conventional loans are not callable.

As others have mentioned, you need to get your debt coverage ratio to 1.25 or higher if you wish to expand and quit owner occupying properties. The FHA program was never designed for investors and you will run into issues with this strategy soon.

In terms of reserves, 6 months PITI would be ideal as you scale. Worse case, if the market turns, you only have 5% skin in the game. Hand the properties to the banks and learn a valuable lesson.

If market advances, refi into a better debt coverage ratio or into properties that cash flow. At this point, you are building a house of cards where I'm assuming you don't cash flow after PITI, CAPEX, maintence and management fees.

Kyle, 

In my experience, too many new investors focus on the wrong things when starting out. Things like a LLC, business cards, website, etc. Go find a screaming deal first and then worry about a commercial loan versus a residential loan.

You can always place the property in a LLC later.

As others have mentioned, small banks are better than big national banks when it comes to commercial financing. While the terms are not as good as residential loans, they are way easier to obtain. Loan approval is fast and if you build a good relationship with the commercial banker, you can use creative financing on future deals.

Your challenge will be no experience. This is where the residential loan comes to the rescue. I’d narrow your search to a 4 unit with 30-year traditional financing.

Just make sure you buy for cash flow in a decent area that will attract the ideal residents.

It all depends on your long term goals. Are you looking to build and scale a passive income portfolio?

Or, simply buy, rehab, and sell for a profit?  

Next, what would you do with the cash? Are you able to reinvest at a higher return after you factor in all the selling costs, income taxes and depreciation recapture?

The latter becomes a mute point if you are doing a 1031 exchange. Just make sure you are exchanging into something better. I’ve seen a lot of 1031 deals go south as people rushed to hit deadlines and ended up with a dud.

Refinancing offers the best of both worlds. You keep a tax favored cash flowing asset while freeing up more cash for reinvestment.

I’m a buy, rehab, refi and hold forever investor since it takes so much work finding the right deal and rehabbing it to a condition where it requires minimum property management.

Currently, I’m in the process of refinancing two 8 unit multi’s that I’ve owned for the last 6 or 7 years. Despite receiving numerous unsolicited offers, I can’t imagine trying to find a new deal in this market that would replicate my future returns.

There is a lot of stupid money in my neck of the woods right now! Thanks to these buyers, sales comps are plentiful. This make refinancing a breeze.

Oh, the refi proceeds are going straight to cash reserves as I build up a large opportunity fund. Plus, my bankers like seeing a cash hoard on my balance sheet.

Glad I could help!

If you are looking for inspiration, check out my recent blog post They All Laughed When I Bought An Income Property While the Nasdaq Was Hitting An All-Time High

I ran the numbers using the same software I mentioned on a house hack 19 years ago versus the Nasdaq and Amazon. 

David, nice job on the house hack! My first one was in 1998 and have been hooked ever since.

If your goal is passive income, I would hold it. My original goal was 10 duplexes in ten years and I’m glad I never sold. After hitting the goal, I shifted into small multi’s from 5-13 units.

In terms of the home owner tax exclusion, you can always 1031 the property to something bigger if the opportunity arises. I wouldn’t get too hung up on losing this benefit if your goal is $10,000/mo passive income.

If you are looking for easy software to model returns and CAPEX, I highly recommend Real Estate Tools.

Here is the link Real Estate Tools 

I use the iPad version of the property evaluator App to model all my new and existing properties.

For instance, I just completed a large refi and roll with this tool and the banker literally requested this program at the beginning of the process since it makes his life easier when he pitches it to the loan committee.

I’m not affiliated with the company. Although, I should hit ‘em up since I’m constantly raving about their product.

Now go buy one property a year over the next ten years. Your future self will thank you.