All Forum Posts by: John Koster

- For what it is worth, the first year of owning a property has tended to be the most costly year with my rentals as far as routine maintenance goes.  I don't know why.  Perhaps renters nit pick a little more when they first move in?   I have also found that duplexes have much more maintenance calls than SFRs.  

- Property management can be expensive.  I was recently charged $50 because my PM company had to do a return trip to take off the lock box after renting it out.  I asked, "Isn't taking off the lock box a part of the whole leasing process?  And wouldn't that be covered with the leasing commission fee?"  It took me a few emails to get an answer on that.   A change of the guard has happened at the company and apparently I will be reimbursed for this.  Fingers crossed.  

My favorite fee is the $35-75 fee (depending on the company) for checking the outlets during a turnover.  An outlet tester at Home Depot costs $6.68 and how long does it take to plug in to a handful of outlets to see if a red light comes on?  10 minutes maybe if you have had a recent leg injury? 

That fee would be acceptable if the PM company drove to the property specifically to do that single task, but they are doing a series of small tasks at the same time and billing as if they all taking a 1/2 hour to an hour of their time.   

I routinely see pro formas that pencil in 5% of rent for repairs.  That is laughable with older homes in C neighborhoods in the midwest, especially with 1920s duplexes.   I factor in 10-15% for repairs, knowing that some years will be worse than others.  If you can't do your own repairs, it's a part of the game.   If you buy right, you will still come out okay.   

Good luck!

All of those condition factors affect the appraisal price, but the amount of the difference can vary depending on which neighborhood you are in.  

Cracked driveways and missing garages are not a rare thing in Cleveland, but out in the burbs that is less common and potential buyers may be put off.  And obviously, in either area the presence of a garage will affect price.

The presence of tenants is not much of a factor, but the condition they are keeping the property in may be.

Buyer purchases the appraisal to satisfy their lender's requirements.  It is for you and your lender's interest.

Appraisers will go back 6 months in a heavily populated area and may go further back in time for a more rural area.  Haven't bought during Covid, so I would just ask an appraiser how they are going about business.

During normal times you can get a ballpark estimate based on comps online on sites like Zillow, Redfin, Realtor, Trulia etc, but you need to keep the comps close to your property location within the last 6 months and really factor in how the comps we're purchased.  Neighborhoods can vary street by street in Cleveland and there can be vast differences in prices in certain areas.  If I were you I would pay for a BPO from a realtor that really knows the area.  There are plenty of rookie mistakes to be made on factoring comps when you are unfamiliar with the area.  I know.  I've made them, and I grew up in Cleveland!

Good luck!

I would echo would Chris has stated, but better terms are possible.  I know a few investors who have negotiated much better terms.  Better rate, low down payments and longer terms are all within the realm of possibility.  

Hi Kellen,

I have a few 3/1.5 properties in the CLE area. Costs definitely vary, but you can count on insurance being $55-75. As for utilities, in the last few months my lowest SFR water bill was $23 for water and $30 for NEORSD, while my highest water bill was $78 and my highest NEORSD bill was $88.

John

I know that at the right price there are examples of deals working in any area, but with the current economic situation and an uncertain near future, I would avoid investing in a D area right now, especially if you're an out of state investor.   Section 8 payments are a nice guaranteed income, but in a bad economy, a D neighborhood can become an F neighborhood quickly. If that happens, then you have:

- A neighborhood that a single mother section 8 tenant won't want to stay in.  

- A property that requires a lot of maintenance that many Property Managers won't want to work in.

- A property that is worth next to nothing that will be very difficult to sell.

In the last downturn, properties in B neighborhoods in Cleveland were selling for what C-/D+ areas are selling for now.   Many investors don't believe in timing the market, but I would rather be safe than sorry right now.  

Good luck!

Hi Fady,

I would reconsider your estimates based on the % of the property value for repairs, insurance & utilities.  Home prices can vary widely in the same counties and even towns.  One house could be worth 350K and another 75K.  When a water heater breaks down, it will cost the same amount of money in either house.   A one thousand dollar repair like that is 0.28% of the 350K house and 1.33% of the 75K house.  Same thing goes for water and other things.  $80 per month is a much bigger percentage on a 75K house than it is on a 350K house.  I would try to find out what the average repair & utility bills are like in your area and be more specific with your estimates.   Miscalculating these items can be the difference between having a healthy cash flowing asset and a nuisance/ liability that you regret pulling the trigger on.

John

@Jonathan K. 

I have had a few duplexes in the surrounding area over the last few years.  From my experience repairs and Cap Ex have generally been15-20% of rent.  Water & Sewer which include waste collection have been $180-230.  Insurance $70.  Electricity will be on the tenants except during vacancies and will run no more than $20.  Also I would factor in 10% for property management.  8% usually is only attainable with larger multi-family buildings.  If you have that arrangement, great.   Also, PMs will charge a month's rent for filling vacancies, which raises that 10% figure upwards.  

Also 5% for vacancies was fine last year, or even last month, but I would figure a higher percentage. I have heard some people recommending 25% or even 30-40%.  I was not a landlord at the beginning  the last downturn, so I am not talking from experience on this, but vacancies will definitely be higher in the next two years.  

Good luck! 

@Chris Martin What's striking to me about the graphs, is that peak unemployment occurs right AFTER the recession is officially over.   Also, until this past month, the record for weekly unemployment claims was around 650,000.  We have now had 4 straight weeks of 3 million plus!  3 straight weeks of 5 million plus!  8-10x the record.  Every week.  Yikes.  We have a long way to go.

https://www.marketwatch.com/story/jobless-claims-might-top-5-million-for-third-straight-week-push-unemployment-to-15-2020-04-15?reflink=mw_share_email

The economy was weak for a full year after 9/11 and initially that event only affected the travel industry.  Wall Street overreacts to earnings reports that are only 2% off of projections.  Now imagine how they are going to react next quarter when projections are off 50% or more for almost EVERY SECTOR?  The bloodbath has just begun.  

Stocks, Bonds and Real estate were bubbles set to pop or correct without any external event.   

It took 274 days for the market to turn into bear territory (-20%) in the last downturn.  It took JUST 24 DAYS to do so this time.   I will be shocked if this isn't worse than 2008-2009 and not surprised if we have a lost decade like the 1930s.   Hoping to be wrong!

With conventional financing still at crazy low rates, if you are buying anywhere near market value, I would go with conventional financing. There are banks that loan on properties under $50K. I have one for $30K. If you you are able to buy/rehab at less than 70% of market value, a HML is good tool to buy quickly and rehab. Then you can refi to a low rate loan shortly thereafter. However, many conventional lenders won't lend to LLCs. Some allow you to quick claim deed to an LLC after the fact without enacting the due on sale clauses. Others don't. If you are dead set on buying in an LLC, private/commercial lenders are the way to go. Their rates fall in between conventional and HMLs. A common rate is currently 7.25% for a long term loan. These lenders are also usually easier to work with the traditional banks. Good luck!