All Forum Posts by: Ken Dunn

If your goal is to create $10K in cash flow so you  can have financial independence, I would definitely hold and rent it long term. As you mention, you can refinance later and pull out some equity to go buy more projects.

You can get rich flipping properties, but you will not build Wealth…in my opinion.

“Wealth is an income stream”.

Want to build Wealth faster? Then build MULTIPLE streams of income, the type of income where you earn even while you sleep, month after month, year after year.

Top that off with the power of compound interest, the ability to leverage other people’s money and the multitude of other benefits of owning cash flowing real estate and it is easy to see why real estate is responsible for creating more millionaires than any other asset class.

BUT (and this is a huge BUT)…many of these benefits are almost exclusively reserved to those who actually OWN (or at least control) the real estate.

I’m sure others will have differing  opinions. My vote would be to acquire as many cash flowing rental properties as you can and hold them long term, 10 - 15 - 20 plus years.

Cheers, 

Ken

I definitely concur with @Joe Splitrock. Great advice. 

I will often print/include the most current Zillow “Zestimate” showing what your particular property address could rent for, according to Zillow. To soften the blow, you could even print a recent article that explains why rents across the country (or your particular area) are increasing at such a high rate.

This gives you 3rd party verification and shows you are not just pulling numbers out of thin air.

I imagine the tenants will not be surprised, and will likely be wondering what took so long for the rents to increase over the years.

I read a recent news article about a lady in Plano, TX that got an increase notice of $750…yes $750 on top of existing rent rate. She has lived in the house for 3 years with no increases and is on a month to month lease.

If any tenants do decide to move out (not likely since, based on your last post, they will still be a few hundred dollars below market rent) that is a great time to do some renovations and raise rent even more.

Hope this helps.

Ken

I would say that having existing tenants on a month to month lease is NOT a red flag. In fact, it would be a good thing when you purchase a rental property, be it single or multi-family. As @Jonathan Greene pointed out, it is much easier to evict for upgrading units to re-rent at a higher rate.

Like most landlords, I have a one year Lease agreement. I also manage my rentals. If I am not sure I want to keep a tenant after the one year is up, I often let the Lease automatically default to month to month (at month 13) so I have greater flexibility. Of course, they also have flexibility to move out on shorter notice.

If I KNOW I want them out after 1 year (too much drama, not getting along with neighbors, etc) and they have not violated the terms of the Lease, I simple do not renew the Lease when it expires in month 12 and give them proper advance notice.

If they refuse to move out, they are “Hold Over Tenants” and can be evicted.

If they are great tenants, sign a renewal for 12 months (but be sure to include a rent increase, even a small amount, so they come to expect it every year).

I try not to have my Leases expire in the months of Nov through February. If they do, I can let it automatically default to month to month and wait until March or later to renew. That way, I avoid trying to find a new tenant during the holidays and Texas winter months.

By having 5 of the 9 tenants on month to month, you have the flexibility of raising rent on just one or a few of the 5 tenants at a time. I would not do all 5 at the same time since you do not know if some or all will move out and wreak havoc on cash flow.

If you are going to remodel and then raise rents, you can space out the projects / tenant move out dates to suite your cash flow and rehab budget.

You mentioned that the numbers work at a slightly lower offering price. What happens if some/most of the rents increase by $25 to $50 each? Is there potential to raise rents even more due to deferred maintenance / lazy landlord not adjusting rents to market rates?

I recommend taking a good look at each of the units and compare their condition/amenities to comps close by to get an accurate rental rate.

For example: I purchased two 4-plex properties in N. Texas last January, just as Covid was taking hold. The buildings are next to each other. There was a lot of deferred maintenance with 4 units vacant and 4 units with rents too low and 8 months left on their leases. The previous landlord got leases signed in preparation to sell, but he did little else. He was about 78 years old and owned them for at least 20 years, paid off, free and clear.

I was investor #4 to walk the units. I guess the first 3 just saw too much work/repairs/headaches or did not realize the potential to raise rents in a big way. They may not have thought to negotiate a large discount on the purchase price by documenting/hiring property inspector/taking own photographs and presenting findings to listing agent and owner who had not walked the property in over 3 years.

The 4 units that were rented were, $600, $700, $700 and $800, with both of the $700 units being 3 bed 1.5 bath at approx 1,100 sq ft. The two others were 2 bed 1.5 bath at approx 925 sq ft.

Once the existing leases were up in Sept 2020, I raised rents by $200 each on two and $225 each on the other two for an extra $850 per month in cash flow. Since the original tenants were still in these 4 units, I did not rehab, just regular preventative maintenance. I recently bumped them again in Sept 2021 by $25 - $30.

In Jan/Feb 2020, I renovated the other 4 vacant units and quickly rented them in Feb/March for $900 to $925 each. 

I am about to renovate one of the 3 bedrooms (original inherited tenant just moved out) and expect to rent it for $1,150 to $1,250 (depending on how much my wife allows for renovation budget). Rough estimate is about $9,000 remodel.

I plan to hold these properties for the long haul, at least 15 to 20 years, unless I do a 1031 exchange into something bigger/better. 

Hope this gives you some helpful ideas.

Best regards,

Ken

@Jonathan Greene

Another thought would be having any funds held in escrow put on hold (so the owner does not get paid) until the owner has the tenant vacate the property. You would contact the escrow company to explain your situation and ask about this…or have your lawyer do it.

Hi Erin - sorry to hear you are having difficulties with the tenant. 

I would review your purchase agreement to see if the current owner made any guarantees about handing the property over to you vacant. It would be ideal if the current owner or his property mgr would handle this for you.

I would also get a copy of the current lease for your records/review.

You may want to discuss with a lawyer about what recourse you have with the seller. Just the mention of a lawyer may light a fire for the owner/property manager to make corrections ASAP.

The property manager should be well versed in evictions. If the tenant stays past the term of their lease they would be what’s known as a “Holdover Tenant”.

You can research online about how to handle a holdover tenant.

You may end up having to evict them and also file a separate suit for damages/cost of not being able to move into your new home - like staying in a hotel or having to put your belongings in storage.

Another option could be “Cash for Keys” where you or the current owner agree to give $1,000 (or some other amount) for the tenant to sign a legal agreement stating they will move out by X date. They should leave the property empty and “broom swept”. Obviously, they get the cash when they hand you the keys. You then immediately change the locks and secure the property.

This may sound crazy, but if you add up the inconvenience of your situation, plus the costs of eviction, plus costs I mentioned earlier, plus the increased probability that the tenant will damage the property out of spite….it makes Cash for Keys sound more palatable. I would insist that the current owner pay for this since it is not your fault they failed to get their tenant out.

Hope this helps and hope you and your fiancé get to enjoy your new home in the coming days.

Best regards,

Ken

Highly recommend you read some books on personal finance, like “The Richest Man in Babylon” by George Clason - published in 1926.

Or, “Set for Life” by Scott Trench. 

He talks about The Seven Core Tenets of Investing:

1) NEVER spend the principle.

2) REINVEST most investment returns.

3) To invest, one must have capital.    (you can get the book for the other 4 tenets.)

With interest rates at historic lows (such that we may not see them this low again in decades or even our lifetimes) I would not count on refinancing in the coming years due to higher interest rates. I would lock in a FIXED rate now, if you can.

Obviously, whatever money you pull out and spend on living expenses is money you cannot put to work and invest in real assets.

So, using the equation Assets x Return = Lifestyle, you should consider if paying for living expenses now is worth delaying financial independence in the future.

Wishing you all the best in your future endeavors.

Ken

 I let a tenant convince me to allow them to pay using Google Wallet about 4-5 years ago. It worked great for about 6 months, then the bottom fell out. My tenant paid rent of $1,700 and had a receipt showing his payment. It did not credit to my bank account. I spent many hours on the phone making about 15 or more calls and speaking with a different rep (with a heavy Middle East accent) each time. It took about 45 days for “tech support” to figure it out and finally credit my account. Now all 18 of my tenants go to my bank to pay their rent in person. Thankfully 17 of them have a branch within a 5 minute drive. The other one has about a 10 minute drive. They can set up ACH / direct deposit if they want but currently they all pay in person.

David - congratulations on paying off your revolving debt! It is late evening and I’m about to call it a day so I will keep this short.

If I were starting off as a real estate investor I would “become a student” by collecting a library of good books from authors like Robert Kiyosaki, Brandon Turner, George Clason, Gary Keller and Robert Irwin to name a few. 

I would also invest many hours listening to podcasts (I really like the BiggerPockets podcast with Brandon Turner and David Greene). 

You can review the podcast title list and focus on those that have short term rentals.

I would also listen to CD’s on RE investing while I drive.

If you can invest closer to where you live it will make things easier. All my rentals are within a 25 minute drive from my home, but I do not have any short term or AirBnB rentals since my area does not attract tourist.

With all of its benefits, I think House Hacking with a duplex or triplex would be a great way to get started investing in real estate. You may want to consider it along with your short term rentals.

I wish you and yours the best of luck on your investing journey.

Ken

Katie - I concur with what others have already said - House Hacking is the way to go in your current situation. Just continue your real estate education to become comfortable with being a landlord and managing your rental. I recommend building a “success library” of books and listening to podcasts.

When asked if they wished they had done anything differently along the way, most (older) successful real estate investors lament “I wish I had starter sooner” or “I wish I had bought more”.

If you are in it for the long haul (20+ years), real estate can be very forgiving. Heck, with appreciation over 10% even those who sell in just a few years are doing well….but I prefer to buy and hold for the long haul.

I wish you the best of luck in your future endeavors.

Ken

Justin - I must say I’m impressed to hear that you are buying your first investment property at such a young age. The numbers look solid to me. With purchase prices outpacing rent growth, it is becoming increasingly difficult to find a deal that has decent cash flow.

Getting a good to great tenant in the property is critical. I recommend that you focus your short term learning efforts on how to properly screen and manage tenants. 

Evictions are not cheap. Tenants being evicted may damage the property on their way out.

Do not rent to your friends or relatives. 

MUST have proof of income that is 3 times the rent. 

When replacing the roof, avoid the cheapest roofers in town. Find a roofer that has been in business at least 15 years. If they are dishonest or have poor workmanship/leaking roofs they very likely will not be around that long.

Wishing you success in all your future endeavors.

Ken