All Forum Posts by: Kevin Lutz

I am currently living in SF and given where the RE market is here I am looking at out-of-town and to be clearer out-of-state deals.  Given this I have been focused on more turnkey type properties but wondering if others have had positive/negative experiences in opportunities requiring more substantial initial rehabbing.  What have you done to make things go as smoothly as possible while not being local?  Or what should you have done differently in hindsight?  Thanks for taking the time to chime in.

We've built this into our financial model. They are very minimal. My co-worker is currently paying the utilities as well for his unit which is something that we could potentially pass through to renters, but we've budgeted for this as well in our model to arrive at a 7-9 CoC yield in a "normal" year.

 Thanks David.  Good insight.  The rent premiums for being closer to campus certainly seem to coincide with higher RE values.  By being in a neighborhood about a mile away from campus, closer to the highways (where this opportunity is) seems to reflect lower RE prices and also lower rents so net-net you seem to end up in a similar place at least from the pro formas we've looked at.  Have you experience home appreciation with your rentals in the last 10 years there?

 Appreciation would obviously be optimal but the reality is it hasn't happened in places like Lincoln for a lot of reasons.  The neighborhood itself has issues like it's across from a small mobile home park (the owner there is old but unwilling to sell, we looked at buying that out as well to have the original RE developer do the same type of housing across the street, potential for this to happen down the road but that would be a nice opportunity to see appreciation through gentrification).  Maintenance of 1% of the property value seems like a fairly standard rule of thumb.  Certainly in some years you will be above or below that but for long-term pro forma purposes it seems reasonable.  The homes were built brand new 15 years ago and cosmetic updates have been happening on a pretty frequent basis so the need for major improvements/capex isn't really there.  Although at some point new water heaters, roof, etc. will have to be considered but the timing of that should still be some years out.  The management company is a necessary evil given we are not local and my co-worker has utilized the same company for the last 12 years.  They seem to do a reasonable job and are paid 7% per year.  I'm not sure we can move them from that but it's certainly worth asking if they were to see their revenue go up by 6x.  But you're right it's not necessarily the place we want to skimp if they are good operators.  In my experience (speaking from my day job of investment management) property management is a C+ business model with C+ providers so if these guys are a B or B- it feels like they're worth paying 7% for.  I fully understand that low cost does not always mean best long-term value in RE but keeping an eye on expenses is as important as the revenue side to make passive RE investing work, from my perspective.

Thanks David! How has your experience been with the area in terms of opportunities, vacancies, etc? 

North of O street and east of I-80. Current renters and prior renters have all been small families or young professionals. A little too far from campus for college kids and also not really interested in having them as tenants. 

I have a 9-5 job, make good $$, but looking to get started into passive real estate investing to build cash flow away from my portfolio which consists predominantly of index equity funds (I am in investment management so I have a lot of exposure already to the stock market).  My co-worker who is in a similar boat as me has a townhouse rental property in Lincoln, NE (we are in SF) he has owned for 15 years.  The original RE developer recently bought the remaining development properties back from another investor and is looking to sell his 6 units (3 townhouses, with 2 units in each, each are 4BR/2BA).  My co-workers experience has been a good one, about 3-4% in annual maintenance costs.  About 2-3% in annual rental increases.  Vacancies have been about 4% per annum over 15 years.  Here is the math that I've worked out:

Cost to buy each unit: $125k x 6 properties (my portion is 50% of all of these numbers).  Home appreciation over the last 15 years has effectively been 0-1% so we're not factoring in any home appreciation in our analyses.

Rent: $1225/mo per unit

Management fee: 7% (looking to work with them to get a volume discount down to 5-6%)

Financing: 25% down, 4.75%

Closing costs: about $3k per unit (looking to work with a local lender that can be more flexible and reduce closing costs)

Cash on cash return (not include tax benefits): 7-9% (assuming current tax rates, 1% of unit values for maintenance, and average utilities for last couple of years)...obviously this can change wildly if stuff really goes well or poorly as it relates to vacancy, maintenance, etc.

I feel like we're in a little bit of analysis by paralysis given our day jobs has us over analyzing and saying no to most investments, however, we both want to establish some cash flowing RE investments as we look to further diversify our portfolios.  We can make the math work or not work depending on how conservative or aggressive we want to get with our assumptions.  Given this is really my first foray into passive real estate I guess I'm looking for tips on how others get over that initial inertia.  I also want to sanity check that this is an interesting opportunity.  We are open to looking elsewhere (suggestions welcome) but we are really looking for turn-key, passive investment opportunities matching or besting long-term stock market returns.