All Forum Posts by: Joe P.

It's not in Philadelphia.

Hi @Susan H., they ended up moving out. As a reminder it was a younger couple who clearly had fallen on hard times. The young lady did not have a high-income producing job but was helping to support their finances, and the gentleman was a contract-worker for a mid to high end furniture crafting business. Needless to say, their income wasn't always guaranteed and was always supplanted by some sob story about how they had to send money to parents, the dog was sick, etc.

A long story short, I think the gentleman had a bit more pride than the young lady and started to feel the pressure of missing payments. We had a conversation about the lease coming up and that they would need to be vacated by that time. There were a few things that I asked him to take care of but honestly, they left the place a mess. They had a dog and I'm fairly certain they stopped providing good care for him, and he would poop in the house. This attracted flies and mice and ruined hardwoods put in only a few years ago. Even after cleaning the place well, repainting, etc., I could never fully get the smell gone.

At this time I had become more in tune with BP and realized that I was supporting this property with very little cash flow and too many headaches. Even at optimum rent (~1500 per month) I had purchased the property for 190,000 on a FHA loan -- I was barely covering my PITI payments with full occupancy. I decided to cut my losses and sold the property for a small amount of proceeds, which I am using for the next purchase (under contract for a duplex with 1750 per month rent, but 103,000 sale price) - truly a better performing property.

And if anyone is interested in some advice on the ordeal, I have tons:

• Pre-screen your applicants as well as possible. Try to get as much detail as you can on their income and previous tenancy. I thought I screened them well but in hindsight, I should have settled for someone with more income, and no dog.
• Don't settle for any lease documentation -- think about the worst possible scenario and build a lease to protect yourself. My lease had a 3 day "grace period" before following the city of Philadelphia maintained "notice to quit" period. This means if they didn't pay on the 1st, I gave them to the 4th with a late fee. Then if they didn't pay by the 4th, I'd deliver a notice to quit or pay that lasted ten days because I didn't specify the period. By the MIDDLE OF THE MONTH, when they still haven't paid and only owed me an extra $50, I was filing for eviction! I was subsidizing their tenancy and it was MY FAULT. Consult with a lawyer, spend a few hundred dollars on something that says you pay or you're out, and any judge will see the agreement and think its reasonable. I made the lease my reference document for tenancy, which worked great, until it was used against me and it was MY FAULT.
• I love pets, but if you can help it, don't bring in tenants with pets. Their like little tenants who can't help themselves. They can cause as many problems as people.
• Low-to-mid-end finishes are key in rentals. I purchased hardwoods for my own benefit 2 years before moving out, and between 3+ years of tenants (two years with a dog), they were essentially ruined. Perhaps they could have been redone, but next time I will go with waterproof plank vinyl, cheap tile, or laminate.
• Money suddenly appeared when eviction was filed, as @David Michael referenced. Again, every decision I made had a little piece of fraying to the overall tenancy, giving them the upper hand. Never. Again.

Hope all of this information is helpful to you and others.

I suspect you are concerned with these tenants coming back after their 60-day period? Frankly in order to avoid any potential litigation, and if you aren't concerned with a potential return post the 60 days, I'd wait until all their stuff is out. It's very easy for a judge to side with them if some of their belongings are unavailable post the period, and you could be liable in small claims or landlord/tenant court in those situations.

Alternatively you could notify them that the property is being "turned around" post the 60-day period and they would need to call you for any needs thereafter. Verbally and via e-mail would probably hold up if needed. 

Curious to know what other landlords think. You asked "legally" and my thinking is that if their stuff is still in the property and they haven't returned keys to you -- in a tenant-friendly Philadelphia -- that could come back to bite you.

@Mike B. appreciate you weighing in. I'm having trouble finding any better deals and even with the new addition (flood insurance, wasn't expecting it) I feel like I can add some value to increase COCR. If I can't add value then it might be an option for resale in the future since I think the sales price is lower than market value.

I originally posted this a couple of weeks ago with some updated numbers. My initial cash-on-cash seems low, but I can't tell if I have too many dollars allocated towards property management (I'll be managing it myself), CAPEX, maintenance, and vacancy. I am leaning a certain way on the deal and I'm curious to see if other investors align with me or not.

Sales Price: 102,900, 25% down (assuming 5.625% interest rate on 30 year fixed)

C Unit in C Neighborhood, increases in quality could improve rent by $100-$200 p/m, estimated.

Income:

• 2 units, total rent is $1750 per month / $21000 per year

Expenses:

• PITI: $856 per month (444 mortgage, 67 insurance, 345 taxes)
• PM: 10% / $175 per month (I will be managing for the foreseeable future)
• CapEx: 10% / $175 per month
• Maintenance: 8% / $140 per month
• Vacancy: 8% / $140 per month
• Water: Average is $129 per month
• Flood Insurance: (Damn AE zone) is $57 per month (backed by private insurance)
• All other expenses covered by tenants

The numbers

• Cash Flow Per Door of $39 per month / $468 per year
• CF of $78 per month / $936 per year
• COCR of 3.03%

Value Add/My Questions:

• Rents are low for this area -- rentometer, Craigslist, and 2 BR comps indicate 2 bedrooms should be in the 1000 to 1100 range per month. So even raising rent with some sweat equity to say, 925 a month, brings total rents to 1850 and the COCR to 5.5%
• My estimate, perhaps foolhardy, is that PM expenses go back into the cash flow since I am self managing.
  • COCR becomes 12.71% and cash flow goes to $3,924 per year.

For those kind enough to review, I cannot tell if my underwriting on CAPEX, maintenance, vacancy, and property management is too conservative? Is the initial COCR without any value add too LOW to make this worth it?

@Andrew Kerr made some great points and I've (sorry, Andrew) stolen his thoughts around CAPEX, maintenance, etc. for other folks in a similar boat. When rubber meets the road, these low-cost/low-rent properties only make sense if you're turning and burning them, or are adding them to an existing portfolio where you have sufficient reserves already.

I've got a property I am looking at that rents @ ~1750 for 2 units, so taking 10% for CAPEX -- which is an estimate on my part, good, bad, or indifferent -- sets aside $2,100 per year just for CAPEX. Is this a good number? Don't know. If I need to replace the roof on this property, chances are I'll need 2-3 years of that CAPEX number set aside to do so.

If you're only socking away 10% of 500 rent, that is $600 a year. I think most properties you want to sock away a few thousand dollars, at least, to have a reserves account. Then you pay back the reserves account with the CAPEX "expense" you've (hopefully) set aside properly.

$20 says the roof on my property will probably cost the same as yours. So assume $5,000 for a new roof. Setting aside $600 per year means you'll need to go 8+ years without a single CAPEX expense to have the reserves ready for that $5,000 roof. Is that likely? Probably not. My last property in 2 years I had to call a plumber twice, a heating/AC technician once, and my handyman 3 times. Bad management on my part, perhaps, but nonetheless the problems do come up.

My initial thoughts:

• You are not accounting for closing costs. I am about to purchase a property for ~103k and my closing costs are 5k. You should account for this.
• Your insurance cost per month is dangerously low. I don't know any property, 100% tenant occupied, that would be less than 600-700 per year, or closer to 50-60 per month.
• Do you really think 76.25 per month stashed away will pay for CAPEX/maintenance? Because I think that is also a tough assumption. If you saved 76.25 per month for 5 years straight, that amounts to $4,575. What if you need a new roof? I bet that entire 5 year reserve is gone in one fell swoop.
• You did not account for any other expenses, e.g. water/sewer/trash. Most municipalities require owners to pay for this, so I'm curious to know if that's a part of the rent income or just omitted? Also consider gas/electric as well.
• We don't know the overall quality of the property (back to CAPEX) and the neighborhood (if this is a good deal).

My approach in these is pretty conservative, but I see some gaps that might bite you in the end. If you have extensive contracting experience and are not concerned about plumbing, electrical, roofing, or maintenance issues, perhaps the values make sense.

Curious to see what other folks think -- I'm looking it at this from a high-level spreadsheet mentality. 

Education is worth something different to everyone.

I'm someone who feels like he has good advice to share although my successes are extremely modest. I let people know how modest before I speak, generally, so they can decide if the advice is worth anything to them. :)

@Account Closed makes a great point that its worth a lot, but people may not pay as much. If you're interested in "selling" your knowledge, I think that personally I would want to get involved with someone like you if it was a partnership. I would value your expertise in the business in all aspects of RE and would seek to partner with someone like you to help us both. I bring something to the table, you bring something to the table, and any other partners would need to bring something to the table. And we work to achieve our position collectively. 

That to me is worth more than paying someone to tell me how to do something, personally.

Hi all - want to make sure I'm not missing something.

I am a resident of Philadelphia, PA but I am going through the process of buying an investment property in Gloucester City, NJ. I've heard from two different people -- "Why would you do that? You have to file NJ taxes!"

Well my first thought is, DUH, yeah, so what? But I spoke with my tax guy about a year ago and indicated I was looking in NJ. He didn't mention the fact that I would have to do a NJ tax return.

So what do these folks know that we don't? I'm sure I'm not the first out-of-state investor, and certainly not the first PA resident to invest in NJ. So you have to file with NJ, so there is a cost to file a state return, obviously. But what am I missing?

Some of the responses in this thread are absolute gold.

Investing in real estate is not a new hot fad, by any stretch. In fact, its one of the oldest professions out there, I think.

Just like anything - a hobby, a sport, a calling, or a profession - you can have all the knowledge in the world but execution is success.

Opening the doors are sometimes better than slamming them shut. I think inside every person exists some kind of deal. What if someone has a house they no longer want, and they need to sell to do the next chapter in their life - if you can come to an agreement you can pick up their property. Or, maybe someone is a handyman by trade and wants to learn your side of the business - work with them to show them your knowledge, and they in turn can show you theirs.

There are 6 billion people out there. Your primary business is your tenants. Start slamming doors and it'll catch up to you. Open them to open opportunities.