All Forum Posts by: KC Pake

Quote from @TaRa Mehta:

Hello all,

I've a tenant who has been paying her rent late each month (along with the late fee). This month, however, she has not paid the rent so far.

Here is the sequence of events that happened.

1. Issue #1 - a rat entered the house and caused damage to the pipes which caused a massive leak - This issue was addressed properly and promptly. The rat was trapped, and the leak has been fixed.

2. Issue #2 - She lodged a maintenance issue asking for the ceiling tiles to be replaced which had water stains from Issue #1. We have not yet addressed this issue since we incurred a lot of expense from issue #1, and don't consider this as urgent.

After several attempts to contact her, she replied back saying that she has "taken" some of the money from the rent to pay and get the ceiling tiles replaced herself. She says she will pay the rent late. There's no indication of when, or how much of it she is going to pay.

We have been very courteous with her and been very reasonable and patient with her so far. What is the best approach to handle this situation?

Thank you in advance ! 

Tara

Hello Tara,

Navigating tenant-landlord situations, especially regarding rent payment and property maintenance, requires a delicate balance of legal obligations and interpersonal communication. Here are some ideas about how to approach the situation:

Review the Lease Agreement: First and foremost, check your lease agreement. It should have clauses regarding rent payment, late fees, and responsibilities for repairs and maintenance. This will guide your actions and ensure you're acting within the contract's bounds.

Understand Tenant Rights: Familiarize yourself with local tenant laws. Tenants often have the right to withhold rent under certain conditions, such as unresolved significant maintenance issues (doesn't sound like this is the case). This varies by location, so it's important to know the specific laws in your area.

Document Everything: Keep detailed records of all communication with the tenant, the issues reported, the repairs made, and any expenses incurred. This documentation is crucial in case of any legal disputes.

Open Communication: Reach out to the tenant for a calm and constructive conversation. Acknowledge her concerns and explain your situation regarding the expenses from the first repair. It's important to listen to her side as well and try to reach a mutual understanding.

Negotiate a Solution: See if you can negotiate a solution that works for both parties. This could include a timeline for the ceiling repairs and a payment plan for the rent owed.

Legal Consultation: If you cannot reach an amicable solution, consider consulting with a property lawyer or a local landlord association for advice on the next steps, which might include official notices or mediation.

Act Proactively in the Future: To prevent similar situations, consider setting up a maintenance reserve for unexpected repairs and clearly communicate maintenance priorities and timelines to tenants.

Remember, maintaining a positive relationship with your tenant can often be more beneficial in the long run than strict enforcement of rules. A fair and empathetic approach will likely yield the best outcome for both parties.

Best of luck,
KC

Quote from @Scott Reigns:

I am new to the space, I have been offering my services for a while now to many real estate agents which sparked my interest in investing in real estate, I would appreciate any help!

Hi Scott, Welcome!

Here is a short list of resources that might be helpful -

"Rich Dad Poor Dad" by Robert Kiyosaki - This book offers fundamental lessons on the importance of financial education, investing, and building wealth. It's not exclusively about real estate, but it provides a strong foundation for thinking like an investor.

"The Millionaire Real Estate Investor" by Gary Keller - This book is specifically tailored for real estate investing. It offers insights from over 100 millionaire investors and covers strategies, myths about money and investing, and how to build a successful real estate investment portfolio.

"Real Estate Investing for Dummies" by Eric Tyson and Robert S. Griswold - Ideal for beginners, this book breaks down the basics of real estate investing in an easy-to-understand manner. It covers various types of properties, strategies, and tips for successful investing.

"The Book on Rental Property Investing" by Brandon Turner - Focusing on rental properties, this book provides practical strategies for creating wealth and cash flow through real estate. It's especially useful for those interested in long-term property investment.

"The Real Estate Wholesaling Bible" by Than Merrill - For those interested in real estate wholesaling, this book offers a comprehensive guide to the strategies that can lead to success in this area of real estate investing.

"Investing in Apartment Buildings" by Matthew A. Martinez - This is a great resource for those looking to invest in multi-family properties. It provides strategies for finding, financing, and managing apartment buildings.

"The ABCs of Real Estate Investing" by Ken McElroy - This book demystifies the process of real estate investing and offers insights into finding, financing, and managing a successful real estate portfolio.

Happy Reading,
KC

Quote from @David F.:

I have a tenant who didn't have access to 1 room because of repairs that needed to occur.  As a result they have requested rent to be pro-rated for that month.  They are required to have a renter's insurance policy in place.  I understand renter's insurance policies reimburse tenants if/when they are required to be fully displaced from a residence, would a typical renter's insurance policy reimburse a tenant in this situation even though they never had to fully move out, just out of the one bedroom?  Thanks in advance.

Hi David,

Here are a few thoughts, from my perspective...

Legal Aspect: As a landlord, you may be obligated to provide a habitable living space. Pro-rating rent for the inaccessible room could be seen as fair, depending on local laws and your lease agreement.

Renter's Insurance: Typically, renter's insurance covers situations where the tenant must relocate entirely, not when just part of the unit is unusable. Your tenant should check their specific policy for coverage details.

Communication is Key: Discuss the issue with your tenant to understand their perspective and work towards a mutual agreement.

Remember, resolving issues amicably can benefit both you and your tenant in the long term.

Best of luck, 
KC

Quote from @Youngwoon Han:

Hi Bigger Pocket community,

Assuming I should consult a tax/mortgage professional, I'd like to ask y'all for knowledge a guidance here. 

About me: I own a 2-unit house that I have been house hacking. I have a conventional 30-year mortgage. After the expense, it had $500 cash flow shown on my tax in 2022 (annual haha). For 2023, I supposed it'd be similar. I did move out of state where this property is located due to a job that my spouse got. I'll have my first property converted into a full rental investment unit in 2024 with both units occupied and a little bigger positive cash flow.

My spouse made an insignificant amount of money in 2022 and she only worked since August 2023 (Appx. $35K), I'd like her to have one more year before we get serious about purchasing a house in the newly relocated city (Columbus, OH) for multiple reasons. This means the soonest we are shopping for mortgages/houses would be sometime in 2025. My spouse does not own a property and if she becomes the only person on her mortgage, it'd be her first mortgage. I have also been thinking about buying a property on the same schedule -- let's say I'm looking for a 2-unit while I live in one. It would be my 2nd mortgage. I assume I should probably go conventional since I am not a first-time home buyer. I believe she will make enough in 2024 for her to get a loan that would allow her to purchase a house within her budget (Her DTI right now is 0%). On the other hand, I project my DTI under 30% with the current rent in Columbus + payment for the first house. Idk if it is relevant, but we probably won't be able to do the full 20% on downpayment.

Questions:

1. Is this realistic/viable?

2. Does this mean we should file taxes married but separately? Would either option make a difference (married filing jointly vs separately)

3. Anything I should be aware of?

Thanks

Hello Youngwoon,

It's great to see you actively planning your real estate investments and considering the implications of your taxes and mortgage options. Here are some insights based on your situation:

Realism and Viability: Your plan seems realistic, especially considering your experience with property management and understanding of cash flow. It's a good idea to continue monitoring the performance of your existing property and project future incomes and expenses as accurately as possible. Factors like market trends in Columbus, OH, and the impact of owning multiple properties on your overall financial situation should be considered when thinking about purchasing another property.

Tax Filing Status (Married Filing Jointly vs. Separately): This decision can significantly impact your tax situation. Married Filing Jointly often offers more tax benefits, such as higher income thresholds for tax brackets and more deductions/credits. However, there are situations where Married Filing Separately can be beneficial, particularly if one spouse has significant medical expenses, student loan payments, or potential tax liabilities. Given the complexity of tax laws and their continuous evolution, consulting a tax professional who can consider your entire financial picture is the best option for this question.

Considerations and Awareness:

Debt-to-Income Ratio (DTI): Lenders will closely look at this ratio. Keeping it below 30% is generally favorable for mortgage approval. Your current rental income and expected income from the Columbus property will play a key role in this calculation.

Down Payment: Less than 20% down payment typically requires Private Mortgage Insurance (PMI), increasing your monthly mortgage payment. However, loan programs are available for first-time buyers or buyers with lower down payments without PMI.

Interest Rates and Market Conditions: Keep an eye on interest rates as they will impact your mortgage payments and the overall cost of the loan.

Rental Income Reporting and Expenses: Ensure that all rental income and associated expenses are accurately reported. This impacts your taxable income and can also affect mortgage eligibility.

Future Plans and Liquidity: Buying a new property ties up a significant amount of capital. Ensure you have enough liquidity for emergencies and other investment opportunities.

All the best,
KC

Quote from @Don Konipol:

Quote from @KC Pake:

Greetings All -

I'm reaching out to this knowledgeable community to gather insights on a real estate topic that's somewhat new to me: property trading. I've been involved in numerous buy/sell transactions in the past, but recently I've encountered a different kind of proposal.

A few recent inquiries have come my way asking about my interest in trading some of my vacant land for "like-kind" vacant land in a different location. This concept is intriguing, yet I'm treading carefully as it's unfamiliar territory for me.

I would greatly appreciate hearing from anyone who has experience or thoughts on this matter. Have you ever engaged in a real estate trade, specifically involving vacant land? How did you find the process compared to traditional buying and selling? Were there any unexpected challenges or benefits?

Thanks in advance,
KC

 https://www.secounselors.com/
https://www.ncexchangors.com/

Check out the two organizations linked above 

most exchanges are now done to take advantage of deferring capital gains tax.  When interest rates were double digits exchanging was a method of sale when financing wasn’t available.  Mortgage non assumabulity limited that. 

Don,

Fantastic info - Thank you very much!  

Regards,
KC

Greetings All -

I'm reaching out to this knowledgeable community to gather insights on a real estate topic that's somewhat new to me: property trading. I've been involved in numerous buy/sell transactions in the past, but recently I've encountered a different kind of proposal.

A few recent inquiries have come my way asking about my interest in trading some of my vacant land for "like-kind" vacant land in a different location. This concept is intriguing, yet I'm treading carefully as it's unfamiliar territory for me.

I would greatly appreciate hearing from anyone who has experience or thoughts on this matter. Have you ever engaged in a real estate trade, specifically involving vacant land? How did you find the process compared to traditional buying and selling? Were there any unexpected challenges or benefits?

Thanks in advance,
KC

Quote from @Ross Hayes:

Quote from @KC Pake:

Quote from @Ross Hayes:

Quote from @KC Pake:

Quote from @Ross Hayes:

Hello

First time poster...

We purchased our first investment property a year ago, and we are working to prepare to purchase our second.  I'm trying to educate myself better on the analysis to analyze deal, as well as key metrics to monitor performance of a property once you own it.  We feel like we made a good purchase on the property last year, but with rates higher and prices inflated, I want to make sure our analysis is very tight.

1) What key metrics do you recommend to analyze a potential deal, as well as after a deal is made?

2) For our existing property, how do you calculate return on investment?  How does mortgage payments (interest and/or principal) impact any analysis?

Our interest and focus in long term holds of residential rental properties.  Beyond ensuring that they cash flow, we are most interested in validating that the return on our cash put into a deal is yielding a good return, as well as overall return on the deal.

Thanks in advance!

Ross

Hello Ross,

Congratulations on your first investment property and on preparing for your second! Here are some insights to your questions:

Key Metrics for Analyzing Real Estate Deals:

Net Operating Income (NOI): This is your total income from the property minus operating expenses (excluding mortgage payments). It's a crucial metric for understanding the property's profitability.

Cash Flow: This is the net income after all expenses, including mortgage payments. Positive cash flow indicates that the property is generating more income than expenses.

Capitalization Rate (Cap Rate): This is used to estimate the investor's potential return on investment. It's calculated by dividing the NOI by the current market value of the property.

Cash on Cash Return: This measures the return on the actual cash invested. It's calculated by dividing the annual pre-tax cash flow by the total cash invested.

Internal Rate of Return (IRR): A more complex metric, IRR calculates the profitability of potential investments over time, taking into account the time value of money.
Calculating Return on Investment (ROI) and Impact of Mortgage Payments:

ROI Calculation: ROI is typically calculated by dividing the net profit of the investment by the total amount of money invested. For a rental property, your net profit would be your income from the property minus expenses, including mortgage payments.

Mortgage Payments: The principal portion of your mortgage payment is a reduction of liability (your loan balance), while the interest portion is an expense. The principal payment increases your equity in the property but does not affect your cash flow, whereas interest is an expense that reduces your net income and thus impacts your ROI.

For long-term residential rental properties, focusing on cash flow and ROI is a good approach. However, also consider the appreciation potential, local market conditions, and your property's location, as these can significantly impact your investment's long-term success.

Remember, each property and market is unique, so these metrics might need to be adjusted based on your specific situation and investment goals. Consulting with a financial advisor or a real estate investment expert can also provide tailored advice for your situation.

Hope this helps - Best of luck with your investment journey!

KC 

 Thanks, KC! Very helpful. A few follow up questions and clarifications:

On NOI, can you help me understand why mortgage payments would not be included? As I think about money going out each month, the mortgage is the biggest "expense".

For ROI, when you say "total amount of money invested", does this include cash down, cash put into updates/repairs, and also the mortgage amount? Or, does it only include actual cash out of pocket (i.e. money down at time of purchase plus any other expense for updates/repairs)?

So for calculating ROI on a rental property, the full mortgage payment (both interest and principal) is included in the expense?

Thanks again!

Ross,

I am glad the above information helped.  Here is a little more detail on NOI and ROI...

NOI and Mortgage Payments: NOI is designed to measure the profitability of a property before financing and capital costs. This is why mortgage payments are not included in the NOI calculation. It focuses on the property's ability to generate income from operations, not how it's financed. NOI is calculated by subtracting operating expenses (such as maintenance, property management fees, taxes, insurance, and utilities) from the gross rental income. Since mortgage payments are a financing expense and not an operating expense, they are not included in NOI.

ROI and Components of Investment: When calculating ROI for rental properties, the "total amount of money invested" typically includes all the cash you have put into the property. This encompasses the cash down payment at the time of purchase, any money spent on updates and repairs, and other direct out-of-pocket expenses. However, the total mortgage amount is not usually included in this calculation. ROI is intended to give you an idea of the returns on the actual cash you have invested, rather than the total value of the property including borrowed funds.

Calculating ROI on Rental Property: For ROI calculation, you generally consider the net income the property generates (which is after deducting all operating expenses but before mortgage payments) and then compare this to your total investment (down payment, repairs, updates). It's important to differentiate between ROI and Cash Flow. While ROI gives you an annual rate of return on your investment, Cash Flow is the actual cash you earn each month after all expenses, including mortgage payments.

 Thanks again, KC!  Very helpful.  I'm now building out my own dashboard using some of these metrics.  

One last question - for Cap Rate, what is the difference in using the purchase price of the property versus the current market value of the property?  Do you ever consider using both?

Thanks again.

Ross

Ross,

Please see the details below.  If anybody else has information to add, feel free to jump in.

The Capitalization Rate (Cap Rate) is a key metric for evaluating real estate investments, calculated by dividing the Net Operating Income (NOI) by either the purchase price or the current market value of the property.

Using Purchase Price: This method assesses the return on your initial investment and is useful for comparing the profitability of different properties at the time of purchase.

Using Current Market Value: This approach evaluates the current performance of the property, considering any changes in value or income. It's beneficial for assessing ongoing performance and making decisions about selling or refinancing.

Using both methods can offer a comprehensive analysis:

Comparative Analysis: Comparing both Cap Rates can show how the property's performance has evolved, indicating changes in value or income efficiency.

Decision-Making: It helps in making informed decisions about holding or selling the property and evaluating the impact of improvements made.

In short, the purchase price gives insights into the initial investment return, while the current market value reflects the current and potential future performance of the property. Both approaches are valuable for a well-rounded investment analysis.

Regards,
KC

Quote from @Jordan Moorhead:

The biggest owners I know employ the parking lot model and only own the land

 Many thanks, Jordan!  This helps narrow down my search.

R/
KC

Quote from @Logan M.:

There is significantly more work when you own the home. If I own homes I work to seller finance them as soon as possible. 

I own way too many homes like probably somewhere around 60 units of mobile homes that I own and have to fix constantly.

Hi Logan,

Thank you very much for sharing your experience.  This is EXACTLY what I was wondering about.  Thinking I know what to focus on now.  Much appreciated!

R/
KC

Quote from @Mike Romano:

Hello,

We've received an offer on our flip, and it's a VA loan offer, which is a bit new for us. The buyers seem really keen on the property, but the offer isn't as strong as we'd hoped. They're offering the full asking price with a $1k escrow deposit, and they're also requesting $10k for closing costs. I'm a bit concerned about the appraisal, given the full rehab we've done on the property. How do you suggest we counteroffer to ensure we're covered in case there are any appraisal issues or financing?

Grateful for any insights. Thank you!

Mike,

Lots of things to consider in this scenario.  Below are a few ideas to think about.

Appraisal Concerns: Include a clause in the counteroffer to address any potential gap if the appraisal comes in lower than the offer price.

Closing Costs: If the requested $10k seems high, propose a lower amount or adjust the sale price to cover some of these costs.

Escrow Deposit: Counter with a higher deposit to ensure buyer commitment.

Financing Contingency: Make sure there's a clause that protects you if the buyer’s financing falls through.

VA Requirements: Understand and prepare for the specific requirements and inspections associated with VA loans.

Professional Advice: Consult with a real estate agent or legal professional for tailored advice.

Communication: Maintain open communication with the buyers for a smooth negotiation process.

Best of luck with your sale,
KC