All Forum Posts by: John Schmiesing

Hi Inam,

The acquisition process when you're just starting out is more analog than digital...by this I mean it will be challenging for you to know some of these things until you experience them for yourself, so you will sometimes take two steps forward and one step back. Don't get discouraged. Eventually your steps will be much more forward....

Some things depend on your background, connections, and the "team" you already have in place. Team = accountant, lawyer, partner, GC, plumber, handyman, home inspector, etc.

Here are some general things I can say:

1) choose strategy and your goals. Above you noted the 2% rule, 50% rule, and the 70% rule. The 2% and 50% apply to buy/hold, while the 70% is for rehab/flip. Take your pick. It's hard to be a master of all.

2) know your market. this is HUGE. Not knowing this can lead to costly mistakes that come back to haunt you. Drive around, talk to agents, join a REIA, talk to people in the neighborhood, research prices, tax history, school districts, you name it. Once you know this you can really hone in on opportunities and jump when the time is right.

3) talk to a lawyer now regarding personal asset protection and how to buy the properties....so whether you will buy them using your personal name or in the name of a company. Do not wait to do this until you already have a property in mind. My $0.02 on this: buy in personal name. LLC not needed yet until you get big. There are various reasons for this, and I have done both. This topic alone consumes much debate.

4) know your analysis cold. This ties into #2 above. You should try to know your market so well that you can immediatley weed out the good deals from bad.

Once the above is complete...

1) are you handy? Do you know anything about construction / rehab? Have you read JScott's book on rehab ? :) If any of those are no, then find a qualified GC or Home Inspector who is willing to be paid by the hour to walk through a few houses with you. To achieve this, you will probably need to treat them like gold, as they are likely very busy people.

2) get a good relationship with a realtor. Tell them what you are looking for. This may turbo-charge your market knowledge by osmosis. Lean on them for the market knowledge (to some extent....but always remember, YOU are the one bearing the risk, so it is YOU that need to have the understanding). Be selective about your RE agent. Ask them questions to be sure their expertise aligns with your investing strategy.

I will try to write some more later, I am running short on time. Hope this helps!

happy investing

John

Yong, congrats on the contract and getting into the game. Good stuff!

I fully agree with Bill on his list of contractors...this is vitally important if you want to succeed. When I first started investing, I did not have this team in place but quickly learned having the team is a very wise move.

What I want to specifically point out is to add a HANDYMAN to Bill's list above. This person should be a jack of all trades but master of none (OK, maybe a couple...).

I found mine through a local REIA. He is consistent, reliable, clear and is extremely communicative. Bear in mind these are traits that most contractors do not exhibit. To me, communication is one of the most important elements because a good communicator means I worry less when I am working hard at my 9-5 job and spending precious time with my family.

Recently, I literally forced myself to NOT go to one of my units and perform an 'easy' repair for a tenant. I forced myself to use my team to take care of the entire issue, start to finish. This is what you will need eventually as you grow.

Do yourself a favor, get the team in place!

happy investing

-John

Hey everyone,

Closing on my latest rental property in a couple weeks. It's a 2-unit in a good local school district and is ready to go. Should cash flow nicely at around $140/month/unit.

Unlike my prior purchases, this unit will not be owned by an LLC. I am using this strategy to get attractive amortization rate and better cash flow.

The seller has agreed to do my requested repairs so providing that goes well, it's another 2-units in the portfolio :)

Only work on my end is getting tenants and installing a furnace. The building has 1 furnace serving both units, although there there are two gas meters. So the only item needed to have completely split utilities (paid completely by the tenants!) is a new forced air unit.

wish me luck closing!

John

Hi Yong, there's always room for price negotiation if you are still within the contingency time limits on your offer contract. When a property is sold 'as is', I take that to mean the seller will do no repairs. Therefore your only recourse is price negotiations. Make sure your statement regarding the repairs contingency is submitted by your RE agent and is signed by you.

I just did this for a MF I am purchasing now. Luckily, the seller has stated they will perform all of my requested repairs (crosses fingers)....

John

Hi Kevin, I agree w/ the above statements. The price does not substantiate the costs and corresponding NOI. Couple things regarding the 'income statement' of a rental property:

Revenue - vacancy = Gross Operating Income

GOI - all expenses except debt = NOI

NOTE: NOI is a key benchmark by which ppties are judged, especially multi-fam cash-flow ppties. You're not doing SFHs, so you need to fall in love with the numbers :)

NOI - debt service = Cash Flow Before Taxes (CFBT).

I have a nice clean spreadsheet I made recently to do these things quickly and shows a income stmt. I can send it to you if you'd like. I have not tried to figure out how to upload files here yet...but this offer is open to anyone here :)

Here are common expenses to analyze:
insurance
lawn/snow (seems you have none)
professional services (accountants, lawyers, etc)
township / borough / city (costs of landlord license)
repairs (I use 10% revenue)
Taxes
utilities (water, sewer, trash are common for LL to pay even if electric & gas are already split to each unit in MF properties)

Here are some common ratios to use:

DCR, debt coverage ratio = NOI / debt service. Lenders typically want >1.25

GRM, Gross Rent Multiplier = Purchase price / annual revenue (assume 0% vacancy). This is market driven.

Cap Rate, see others comments. Typical is above 8%.

It is also useful to see cash flow per unit per month. This can vary a bit depending on the revenue of the unit, but $100/unit/month is a goal, but perhaps not always achievable). The variance would be if all units in a building are efficiencies, for example, and therefore have less revenue per unit than other properties. Therefore their contribution to your CFBT on a per-unit basis is lower.

Finally I really recommend reading one of Frank Gallinelli's books. Pick up the one about Cash Flow. Is an easy read.

Happy Investing!

In my market we have a lot of alley space with garages that landlords typically rent separately from the property to gain additional revenue.

Seems easy enough, but what do you do if the tenant goes south and stops paying? Can you evict a tenant from a garage? I imagine this is a different process altogether b/c it's really not a 'living space'. I imagine this would be similar from 'evicting' a tenant from a storage unit.

Any advice would be appreciated,

John

Hi Joe, the garage will be easy to rent. The above-garage storage units will be a challenge b/c the existing staircase leading to the garage is about to fail structurally b/c it was not lagged to the garage properly.

The neighborhood is great, I already own a property just up the street.

The biggest issue I have with paying more is that the numbers just don't warrant a much higher offer price in my opinion. Again, though it's a "4-unit", the revenue is equivalent to 2.7 units I own in another location. In other words, the average revenue per unit at the 4-unit is low, and yet you still have all of the same issues like mechanical items, tenant / lease issues, etc. Finally I feel that efficiencies may be subject to higher turnover.

All in all this is my reasoning for the $60k offer vs. his $99k ask price. Hoping seller would at least counter.

I may up the offer to $66k, but that is it.

Would love to hear additional perspective on this one!

-John

Hi everyone,

Wanted some feedback on this deal in York PA.

Property is a 4-unit with a garage and storage space above garage w/ separate entrance, ie could be individually rented to 6 tenants of ~6'x6' storage units. Each unit is efficiency, however, so commands lower rent.

Currently 4 units rented, only 3 with written lease. 1 is verbal. IMO, this one is useless to me from standpoint of making an offer. Do you agree? Garage and storage spaces are not rented.

Here are current numbers (have included 4th unit rent for illustration purposes and assumed 10% vacancy):

Ask price: $99k

Revenue annual: $18,360

Non debt exp: $13,111 as I assume ppty management later, and the owner's electric meter serves garage and storage units also.

NOI: $5,249. Therefore @ 10-cap, ppty values at $52k.

debt svc (30 yr fixed @ 5.375, 25% downpmt) annual: $3,024 (this assumes I use cash for downpmt instead of HELOC so have one debt to pay)

CFBT: $2,225, therefore $~47/unit/month

There are definitely issues w/ the property that would need to be address although have not had inspector into the house. Est'd costs $4k

Future re-positioning:

If I increase rents and rent out the garage and the storage spacese I feel annual income can increase to $22,140 (10% vacancy incl).

This brings NOI to $8,651.

However of course this would take some effort, money, and re-management.

I have offered $60k and been rejected.

Seller is apparently in California and has hired ppty management group here to manage. I wonder why they haven't taken care of the 'verbal' lease...? Seller paid $92 in 2001 and refi'd in 2005 I believe. My guess is they are upside down now and my offer does not cover his debts. I feel that in the long run this property will under-perform and will become painful for the current owner.

Any thoughts / advice is appreciated! Thanks all,

John

Jon, great to hear from another York County native! I think the city still has this program as an architect friend of mine has mentioned this. I would definitely like to explore this in the future; haven't yet taken on a project as ambitious as this. I think this is largely a function of not finding contractors I can rely upon (yet).

Although I like being handy, I have 'forced' myself to try and be hands-off with my properties recently....this forces me to find good handymen and contractors....something I will undoubtedly need as I grow. Part of the kitchen reno made me realize I only have two hands, and 24 hours in a day....and my time is not best spent doing the work. I enjoy it, but it's a limiting factor to expansion IMO.

John

Hi Yos,

First off, you're on the right path!

Regarding the HELOC, be sure to run your numbers thoroughly if you're planning to use it to support part of your investment...the downpayment for example. I like to think of this as financing almost 100% of the property...because effectively that's what you'll be doing. Just make sure the ppty cash flow can support the debt service necessary for both the primary lien and the 2nd lien (the HELOC).

On the LLC, I started an LLC when I began. Two years later I wish I did not make this move. Why? Because the financing terms are advantageous for an individual vs. a commercial loan (comm necessary for LLC). Moreover, I bought residential units...why do a comm loan?

Good insurance is the ticket. I am in the process of buying my next investment ppty in my own name instead of LLC for the reasons mentioned above.

Best of luck

John