All Forum Posts by: J. Martin

I think it depends on how quick you think you can find a deal, and how fast the market is moving where you're at.

When the market is increasing quickly, I don't like to be waiting on the sidelines for cash when there are good deals available, and then kicking myself in the a** later.. You can probably just get a little HELOC on the future value then, even if you tap the equity that you have now.. I don't think it's an "either/or".

Thanks @Rob K. . You're right I would not have any asset price exposure. But I also would only have about a $5K deposit tied up. It's just a "side deal" that would give me some extra income. Although it would not necessarily be perpetual.. Most of the risk is in my credit risk - could be more than the $5k. But for $17K in estimated cash flow.. I shoot for about a 15% ROI. So on a property, I would have to invest about $113K in this case w/ a loan for about $225K on a $340K purchase, to get the same $17K cash flow (approximately.) But instead of putting down $113K on a property, I'd put down a $5k deposit.

If there were an eviction, I would absorb that cost by paying for a lawyer out of my gross spread (or paying thousands for the person to walk - I estimated $1k in legal fees and $5k to the tenant to leave plus $2k in damage in a bad year in the scenario in my original post. I think the $17K in annual projected CF allows me to absorb that cost, if/when it arises...

I am an owner and landlord of several units, and have a unique proposal for the landlord of another building. I'm looking for feedback for anyone who has done this before, or from others that want to weigh in on the pros and cons of the situation. I'll start with a quick summary, then much more detail down below.

The low-down:
The owner of a multifamily (I have a connection with) is willing to take below-market rent from someone he can trust (me) to pay rent and treat a unit kindly (for personal residence - just signed the lease). I'm considering offering the owner of the building the same below-market rent on other vacant units that come up, paying the monthly below-market rent every month to him so he doesn't have to worry about it, then subleasing it out, and absorbing the vacancy and turnover expenses myself. Essentially, I would be taking all the monthly payment risk, vacancy, turnover, and deposit/damage responsibility from him, in exchange for a deal on rents to compensate me for that risk. Has anyone done this before?

Here were the owner's motivations when he rented me a unit for personal use, at significantly below market, as stated by him:

1) He wanted to be able to collect rent every month from someone he could trust (I came on a fantastic referral from a friend and former "pupil" in our college economics classes who is the landlord's cousin). And have strong financials.
2) He didn't want to have to worry about the unit being treated poorly, as they were remodeled - and there are some sketchy people who still live/move in to the neighborhood.
3) I think he also wanted to give a little "gift" to a friend of a family member. It's unclear how much, if any, this might play into it..

So my proposal seems to fit into what he is looking for.
1) He gets one monthly check for all his units (he seemed relieved to be able to do it on this unit, so maybe he's happy to do more.. maybe he just doesn't like the landlord risks).
2) He doesn't have to worry about vacancy or evictions, because I'm responsible for it (I would also propose giving him a big deposit for good faith, and my personal credit and cash flow, which is substantial..).
3) The rents would also be at a much higher level - which will help so he's not bound by low rents under rent control in Oakland. That's good for value when he's refinancing, which I know is also on his mind.

Risks & Rewards
I've thought of a few of the pro's and con's. But I would like to hear from others about their perspective, or other considerations I haven't thought about yet. Many I have not put down here because it would just be too extensive, but I appreciate any input. The building is in a highly desirable area with rising rents and low vacancies. Should be able to get good tenants that want to stay.

Now let's talk numbers..
Monthly

Owner rents units to me at: $1,000

I rent them out at market: $1,600

Gross Spread $600

Vacancy Allowance from owner $42

Total Monthly Gross $642

Actual Vacancy $133

Other turn costs $42

Net Profit per Unit/mo $467

# of units 3

Total Cash Flow $1,400.00 /mo

That pencils out to just under $17K net annually to me if there are just regular turnover costs, without any "blow-ups" like drawn-out evictions, significant damage, etc., which I would expect to be rare, given the tenant I believe I can pull due to the desirability of the area. Maybe even an extra $100 or $200/mo rent/unit. So this seems to give lots of cushion. I would ask for a small vacancy allowance from the owner (included), although my vacancy costs would probably be slightly higher than his would have been at lower rents.. I may also ask for a "turnover" allowance, but that is not included yet.

So let's say I have an issue beyond normal, tenant does $2K in damage, $1K in legal fees, and I end up paying them $5K to leave the unit by end of month. That's an $8k haircut, netting me just over $8k for the year. Not a homerun exactly. But I don't expect those kind of blow-ups on an annual basis by any means (I have more than double the units in a less-desirable, lower-income area nearby and haven't had any of these problems over a similar time frame.)

Thoughts?
Opinions?
What am I missing here?
Sound good?
Am I crazy?

I have never heard of any such thing as negotiations after the sale.. I would tell them to pound sand at that point.. But in our area, which is very competitive, I have got a price reduction after the original contract. We get in contract, typically 10-17 day inspection period to cancel contract w/ no penalty and get deposit back. Found items deserving $20K reduction on original $265K offer price. I thought $245K would also be about as good as they would get with a very firm offer (probably others higher, but suspect financing situation and newer buyers who might get scared off..). This was during the inspection period. It is not common to lower the price though in this market at the time. But that's why there's an inspection period..

The best leverage in negotiations is being ready and willing to walk away. I was ready to walk if they weren't willing to accept $245K for the 2 houses on 1 lot I was buying, and I told them so. They accepted it, and I closed on it. I also pointed out all the problems, of course..

I hear lots of "jargon," but I think I'd really have to more fully understand this before opining whether or not it would be valuable for me as an investor. Predicting vacancy rates and lengths? Already market reports on vacancy rates and turnover out there. And it's so locally and QUALITY/area specific.. Sometimes, I think more information is not necessarily more useful information.. unless you're talking about big multiple big multifamily projects and have a big law of averages on your side..

Process:
Step 1: Input massive amounts of data
Step 2: Algorithms
Step 3: Awesome money-making output, appropriate to your specific area, condition of your unit/property/street, how well managed/marketed the unit is..
Step 4: Make money!

I just don't fully understand what's coming out of #2 and #3..

@Account Closed seems to like quantitative analysis and "data" in general.. any thoughts Minh? Do you understand the value of this better than I do?

I have the exact same question, and nice to see brilliant minds think alike @Joe Fairless ;)

@Kyle Zaylor , @Erin A. , @Daniel S. , @Charles Ma,

and any other friends/investors you would like to bring.

Looking forward to it!
I'll also be scheduling a meetup in Santa Rosa in the next few weeks since I'm working up there if anyone from up North is interested, but can't make it down to Oakland..

@Sam McClellan , @Jaren Barnes

@Andy Kaufman , @Arron Sweeney , @Sarah Lam , @Michaela G. , @Pete Tam , @Sam Magi , @Chris

@Chris Music undefined

Thanks for everyone who posted so far, and looking forward to seeing everyone there. There are a few other people who may want a head's up, so I'm going to do some tagging..

First of all, I'm hoping @Account Closed would be able to make it to one of these meetups if he's in town..

and...