All Forum Posts by: Joe Hines

Hey @Vic Wong!

The requirements for property management vary by state.  In California, I believe all you need is to be a licensed real estate agent.  Other states require a broker's license and even sometimes property management certifications.  

This might be helpful:  https://schorr-law.com/when-a-property-manager-requires-a-real-estate-license/

@Ryan Y.

Here's how I've been looking at CapEx calculations. Of course, it depends on the age and condition of the property, but these basic guidelines might be helpful:

• Initial CapEx Funding at property closing: At closing, as part of my 'cash needed to close' calculation, I take 3% of the sales price and set it aside in a separate CapEx savings account. This is a pooled account for all of the properties in each LLC. I may adjust up or down depending on the initial repairs that it will take to get the property online and in production. Generally speaking however, for a property that is ready to go, I will contribute 3%. You'll notice the BP calculator allows you to include custom categories for closing costs and I just include the amount in one of these fields.
• Monthly contributions: Right now, I'm contributing 10% of rent each month to the same CapEx account (again, a separate account for each LLC and not for each property). I've found that might be a little too much, but I'm not inclined to change it right now. 6% might be pretty much on target, but it does depend on the location (some areas simply have harsher conditions and also might be more expensive for repairs) and the age and condition of the property. Whatever number you choose, including it in your cash flow calculations is essential.

@Jim G.

In my experience, the shut off valve was required in order to get the homes insured.  Along with this, the home had to be bolted to the foundation, which many older California homes are not.  I had a plumber install it when he made some other repairs.  It was a pretty straight-forward.

Yes, we absolutely take care of the lawn maintenance as part of the lease.  We like to keep our properties in good shape and we make sure the tenants understand that.  Having a good lawn person is also helpful as they can help keep an eye on things as they are frequently on site.  

From the sound of it, I would raise the rent.  You can always go lower if the demand fades.  Also, screen well.  

@Andrew R.

This sounds so familiar...

Hopefully, you've found over your tenure in the rental property business that these things sort of even out over time.  I think we've all had those few months where it just seems to never stop.  Here's how I've managed to ease that pain somewhat:

• Fund your capital expense accounts:  There is a lot written on BP about this, but I put aside 3% of the purchase price and 5% of rent into an account to deal with the capital expenses.  This helps buffer the hit to cash flow a bit.  I'm not sure that all of your expenses are capital, but if you've got more older homes, you might want to consider this for maintenance expenses as well (I do calculate 5% of rent for repairs).  
• Raise rents: As property tax, insurance and repairs have all creeped up a bit, I've found that I could raise rents. It one meeting with my property manager over the summer, I was able to raise rents across the entire portfolio. This gave me the equivalent of another SFH rental income without buying a new home.
• Ditch the low performers: I've been investing in SFHs for about 7 years now and I've always been reluctant to sell. Now that SFH prices are up, I have started to prune the low performers. I'll hang onto that cash until I find a better performer, especially now that I've learned from my earlier mistakes.

Probably nothing here that you haven't thought of already, but if nothing else, realize that you aren't alone.  

@Jim Norton

I don't know much about all of the factors involved in giving a business a fair valuation, but a few questions came to mind that I'd be probing if I were you (probably you have already):

• You mentioned that it had 250 units under management, but how many owners?  Are the units highly concentrated with a small number of owners?  That might present some risk if one or two major clients bolt after the sale.  
• How long have the clients been with the business?  
• How many of the properties are under a management agreement and what is the average time to renewal for these contracts?
• What does the competition look like in the area?  250 seems like a decent portfolio, but I wonder how it stacks up and what kind of reputation the firm has?
• Can you meet with any of the employees?  They might be able to give you some insight into how stable the business really is.  

These aren't exactly questions that will give you a number for a valuation, but it seems certain to let you know how hard that number may be.  

Sounds like a great opportunity!  Good luck!

@Thomas N.

I've used a clause in my lease to the effect that "tenant understands and acknowledges that the fireplace is for decorative purposes and is not functional."  

For really important clauses, such as this one, I also have a field in the margin of the lease beside the clause.  As we reviewed the lease, I call their attention to the clause verbally, ask if they understand, and ask them to initial that we've reviewed this requirement.   I do this with pets, rent due dates and penalties, etc.  

I’m about to close on number 16, but I think the more interesting question is what do margins look like and in what areas?

@Jonathan Roberts

Sounds like you've got good strategy for to accumulate your reserves. I set aside 3% of the purchase price and 5% of rent each month into a CapEx reserves savings account. Like you, it seems this strategy accumulates cash since expenses are running a little less than contributions. I have a regular job that pays decently, so I don't take money out of my RE business. Instead, I keep in it the business and focus on growth. Here's what I've been doing:

• Do yearly punch lists of capital expense projects needed to keep the houses at the right place in the market.  Sometimes new roofs are on the horizon, bathroom remodels, etc.  I use this money when I think I can get a good return on the reinvestment.  That's what is for and I like keeping my homes well-maintained.
• Buy a new house.  As long as you can keep your reserves at the right level, use the money to expand.  If you can find properties with the right numbers, the returns are solid.  This was a milestone for me:  For the first time, I was able to use the income from the other homes to purchase a new home.  Geometric progression in action!  
• As a last resort, I'd consider pulling the money out of my business and investing it in other investments. I manage my rentals through an LLC, so I'd be making these investments in accounts listed to me personally. No need to keep the money at additional risk in the LLC.