All Forum Posts by: Joe P.

@Jacob A. thanks for the feedback!

 All good here, the expense is factored in.

I'm asking what self-managed properties DO with that money set aside. If you have a property management expense of $2000 per year, but you are managing it yourself and not paying yourself, doesn't following hold true:

A) you can do whatever you want with your money (I assume most put it back into the business)

and, more importantly...

B) isn't the cash flow analysis BETTER to start with? If the financials work with the expense, but are even better self-managed, don't you use the self-managed cost to start?

Hi all,

Just wondering how other investors see this information -- I am trying to purchase a property and have built in a 10% PM cost (of rent) per month. I would do this for any property.

I am planning on managing this property on my own for as long as possible (several years); so how do other investors treat this "expense" if they are managing it themselves? Do you see it as a cash flow windfall that was "unexpected but appreciated" at the end of the year? Do you actually pay yourself per month for your time? I assume most people just invest this back into the available funds for the next property, right?

I get the long term aspect -- you should build this as if you would pay someone to execute property management for you. And we should always value our own time. I get all of that...I am just trying to see what investors do with this "expense" when self-managing and how it affects the property financial analysis, how you handle that expense throughout the year, etc.

I was thinking the same, but then there are some real estate statistics provided earlier suggesting some folks are getting in on the ground floor. But agree, it is a warzone. People said the same about Kensington and Fishtown, and look what has happened there. Grad Hospital was a disaster 20 years ago.

The first question to ask is: what is the goal of this process for you? Do you want to buy and hold for passive income? Do you never want to work again? What's the aim out of this?

My goal is simple and I sort of remind myself of it often: I want to buy and hold properties for passive income, build my portfolio on strong cash flow returns over the next 10 years. I would like to replace my salary + 100% in passive income in order to leave my job and become a FT real estate investor.

That's a goal, with a plan, and a timeline. Nearly every investment decision I make is centered around that entire statement. I won't be able to reach that goal today, or tomorrow -- but the decisions I make now are with that in mind.

If your goal is to have 3 properties by the end of next year, for instance -- what's the best way to achieve it? Are you able to rent out a room in your apartment to quasi-house hack? Can you work more hours, get a second job, etc...to help build available funds? Could you take out the 10k you have now into a high-risk MF and see a return of 10% in one year? I don't know the answers to these questions or your goals, but I will tell you the #1 decision I made was to create a goal, a timeline, and now I frame my decision-making within that structure. Things tend to be a lot more clear when you do that.

William:

I don't have a lot more to offer/add than the others have, as you can tell the people on BP are awesome and informative. I wanted to let you know that your line of thinking is sound and you are far and away ahead of most people your age. Nothing wrong with that at all!

I'd offer some words of advice and encouragement -- the properties and neighborhoods you are looking at are important. Kingsessing is pretty rough and it sounds like your numbers barely squeak by to make it a good cash flow option, but if anything goes wrong you need to cover it as part of your calculated expenses. What if someone breaks into the property, or neighbors make it undesirable as a place to rent? My point is not to turn you off from this, but sort of lay out what could happen beyond the numbers.

As someone else suggested, a househack might be a better way to start. Lets say you can increase your available cash via a second job and buy a similar property in a better neighborhood, maybe in the Northeast; thinking of a 2 bedroom/1 bedroom duplex. You live in the 2 and rent out a room, as well as the one, have people cover your mortgage AND provide positive cash flow. In the interim, you still save for retirement and continue to put money aside for your next property. You also have a roommate sharing expenses and you are in front of this house 24/7. You would be far more involved in the property, seeing how tenants and wear and tear take a toll on the property, and can also be involved as a resident in community affairs should you choose, and help to keep your neighborhood safe and vibrant.

Personally, this strategy at your age seems like a safer investment. You get into a better neighborhood (a place you would live -- I think its incredibly important to invest where you would choose to live, or could live in if needed) and get 24/7 hands on training of a property (versus showing up after the problem has occurred, e.g. a roof leak, crime, etc.), and STILL make your numbers on cash flow.

I never encourage anyone to pump their brakes -- if the numbers work and it looks good, ACT -- but for someone in your situation, I think you would be better served taking a househack approach versus buying a mediocre property in a bad neighborhood, and hoping a lot of things go right.

Good luck young man -- I only bring up the above as a Devil's Advocate. If you've accounted for it all then you are far more prepared than most!

@Casity Kao thanks for the info -- but if you are reviewing the lease with them, isn't it already too late? Or is this a precursor to both sides signing off?

To me it sounds like you have evaluated them financially/criminally as a tenant and they meet the criteria. Do you then visit with them to review lease guidelines to answer any questions? Wouldn't they be expecting to sign on the dotted line at this meeting?

Peter -- I think you might be making a mistake in calculating your numbers for cash flow (which is ultimately the important number here). You are executing a rental on your current property, and wish to take liquid cash and purchase another property. All well and good.

You are then saying for property A, my PITI is 1930, my expenses (vacancy/maintenance) is 350, so total expenses is 2280. You are renting for 2700. Your cash flow is 420 per month. However, what about capital expenditures on property 1? Does the furnace, roof, flooring, appliances, etc, in need of replacement soon? What happens if you're hit with a 10k bill for something like that in the near future? Would you have the reserves on hand to take care of that? Some landlords build that into their expenses and divert money per month for that, which eats into cash flow, but covers you when the bill actually comes. What about other expenses, e.g. utilities the landlord has to pay?

Assuming you've covered those in your expenses, if you truly made $420 per month cash flow and the property is a SFH, I'd say its a good deal. What did you purchase the home for? You can find your cap rate by dividing your yearly income by the purchase price. 10% cap rate seems to be standard for most folks, but ultimately not the only qualifying number.

Based on what I am seeing you have no intention on renting out property B, it is a home for you to live in, correct? So you're trading up so to speak, on a more expensive property, utilizing liquid cash for a new home?

Ultimately, could you do better by staying in property A, buying a multifamily property using liquid cash, and making far better cash flow per month? For instance, if you found a multifamily property with the same PITI, add in your expenses and capex, to the tune of say, 3000 per month...and then rent it out for 4000 per month? Now your cash flow is $1000 per month, 12,000 per year(versus $420 on property A), you've kept the same monthly payment that you have now on your current property (cash that stays in your pocket), and you can far more easily calculate COCR, Cash Flow, Cap Rate, ROI, etc, on a property that's working for you far better than renting out your existing property.

By the way, I don't talk about this like I don't know where I am coming from -- I rented out my first home (property A) for meager cash flow while my wife and I purchased our "forever home" which has a higher monthly cost via PITI. Long story short, I rented out property A for 3 years and just sold it for a bit of profit...to do exactly what I told you to do. I'm investing in a cheaper multi-family property that should net around $500 per month cash flow, my cash on cash return is 10.5%, and my cap rate is 21%.

While I think people invest for many reasons, one of mine is the right numbers and cash flow. Property A did not have the right numbers and cash flow, long term, at least for me.

@Casity Kao interesting thought -- I never would have thought to physically visit the tenant in their current residence. Do you require this for every potential tenant and do you outright say why you are visiting? I'd like to know more about your process there. I ask because I'm attached to the idea, but also want to walk that tightrope of not being a helicopter landlord, but actually being a helicopter landlord :)

I like some of your other suggestions as well, including the home buyer clause. Getting the right mix of tenants is important.

Back to my central point, do you physically go into the homes as a "site visit" on a regular basis? I was thinking of putting this in my leases and making it a focal point -- I want the property to maintain as best as possible and will conduct interior visits once per month to ensure it, or something along those lines. That's what I'd like to understand from other landlords, if they do this and how they do it.

@James Wise great point about living a certain way -- personally I think I struggle in this area because I would live a certain way, and then encounter tenants who don't and it gets concerning.

As an experienced PM, where do you draw the line? I think this current case is settled (tenant has paid late, has multiple disallowed pets, other tenants have complained about the noise, and the disallowed pets are defecating/urinating all over the property) but I'm curious to see if you have any preemptive information/clauses you give to tenants to help mitigate the major items?