All Forum Posts by: Leo R.

@Mary Jay generally, I'd only consider it if I knew that I could force cashflow.

For instance, years ago I bought a property that would have been negative cashflow as a rental. I lived in it, and while living there, I built an ADU and did some other improvements. I knew that the ADU and improvements would make it cashflow when I eventually moved out. After a couple years, I moved out, and (as expected) the property cashflowed very well right out of the gate.

There's a BIG difference between forcing cashflow and sitting around hoping that rents will eventually increase enough to create cashflow. I'm not interested in speculation or being dependent on the ups and downs of the rental market (which I can't control), but if I can force cashflow through value add strategies, then I'll consider buying the property. 

@Rodney Love repetitive house hacking.  

I house hacked a new place every 12 months for years, living in the smallest (least valuable) room in the house to minimize my expenses. Eventually, I built up enough wealth and cashflow that I could start occupying the nicer spots, and eventually stepped up to nicer and nicer homes for myself. I was pretty much free of the rat race by about age 32. I haven't house hacked in years, but if I was starting over from $0, I'd do it all again.

Making sacrifices in my 20s and early 30s paid off in the long run.

@Sam Booth most investors want to see a spread of at least 30%, but this is an oversimplification because it doesn't consider important factors like: how much money you're putting down, how much the repairs will cost, how much of your time and effort the repairs will require, the appreciation potential, the cashflow potential, and a myriad of other important factors. 

Depending on the property and the deal, an experienced investor may want more than a 30% spread (and in some deals, they may be willing to take less than a 30% spread--for instance, if the property will produce incredible cashflow after rehab, they may accept a lower spread). 

It sounds like after rehab, this property won't be producing much cashflow...and if the ARV is only 200k, it probably won't be producing much appreciation, either (at 2.5% appreciation, you'd only be picking up $5k/yr in equity). So, with minimal cashflow and minimal appreciation, you'd need to make your money in equity via an aggressive purchase.

Personally, if I have to put 25% of my own money down AND also do a lot of the rehab work myself, AND the property won't cashflow much, AND the property won't appreciate much, I would want a bigger spread.

Keeping the math simple, if the ARV is $200k, and IF there were a 30% spread on this deal, that would give you $60k of equity after rehab (not including equity from any down payment). So, I'd be asking myself questions like: "how much of my own money, and my own time, blood, sweat and tears am I willing to put into this thing to get $60k of equity?  What's my return if the house costs $X I have to put Y% down, and pay $Z to finish the rehab?" etc.

As others have mentioned, if you have to spend and borrow approx $200k to acquire the property and bring it up to snuff, and the ARV is only 200k, then there's no equity--not a good deal.

@Alex Clark what's the news?  Are you going for an OOS property? A house hack? Some other strategy?  Give us an update on how it's going!

Hey @Shivam Patel what's the news--have you decided to go for an OOS property? House hack? Something else?  Let us know how it's going!

So, how does this fit with all the recent news that large multifam rents have been decreasing the last year?

I have single fam and small multifam properties, and last year I had my biggest rent increases ever (and I'm expecting this year to also have significant rent increases). Because I saw demand increasing, I decided to seize the opportunity by improving my properties (I went on a tear of cosmetic rehabs, and now my properties are the best in their class, which is allowing me to maximize my rents further and capitalize on the demand)...but, meanwhile, all we hear from the large multifam operators is that their rents are decreasing (I've also seen repots that large multifam supply is becoming over-saturated in some markets)...

So, rents increasing in single fam/small multifam, and rents decreasing in large multifam--is that the dynamic folks are seeing in their markets? 

Do folks think the rent decreases at the large multifam properties will eventually suppress the rents on the single fam and small multifam properties?

@Jaya Laun in response to your specific questions:

Yes, 10% is typical for a PM. 

Yes, inspect the roof carefully (and study up on how much a roof costs to replace).  

ALWAYS scope the sewer line on any property you're trying to buy (a new sewer main is expensive).

I also always do a meth test for any property I'm trying to buy. 

If I'm trying to buy a property OOS and I can't inspect it myself (I have extensive experience inspecting buildings), I have a foundation pro (different than a regular inspector) check the foundation. This could be particularly important in Pittsburgh, because a lot of properties there are built on hillsides (and there's a lot of rain), both of which can cause foundation problems that can cost a small fortune to fix.  

Yes, cold winters (and also all the rain) in Pittsburgh will degrade a building MUCH quicker than in a warm, dry climate. All the rain and the freeze/thaw cycles speed up the degradation of masonry work, wood work, paint, and can cause many other issues that don't occur as often in warm, dry climates.

Regarding your appreciation estimates: in a C or D area, you may or may not get 3% property and rent appreciation--lots of C and D areas depreciate (without a LOT of data and research, it's impossible to know what the future holds...and even with a lot of data and research, it's impossible to know what the future holds!). 

Yes, I foresee many potential issues that you'll want to consider carefully before pulling the trigger on an OOS property in a C or D area (see my previous post for details).

Good luck out there!

@Jaya Laun I'm very familiar with Pittsburgh (lived there for years, and I do regular PGH market analyses).  PGH has some great neighborhoods, but it also has some very, very rough neighborhoods (and some areas that are OK, but which may become rougher over the next 5-10 years).

At its root, your question is whether you, as a first-time investor, should buy an OOS property in a C or D area because the property cashflows well on paper.

This is one of the most commonly discussed topics on the forums; here’s my response taken from a previous thread:

Usually, "new investor" and "out of state" don't mix. This is 100x more true if the property is in a C or D area.

I'd suggest reading up on the topic on the forums, where you'll find many examples of inexperienced investors crashing and burning hard trying to do OOS REI...the story is usually the same--they had no experience with REI, they couldn't find any cashflowing properties locally, but they saw that properties in other states (often the Midwest) cashflowed well on paper.

So, they bought an OOS property (usually a freshly rehabbed A-grade house in a C or D area) because the house looked awesome in pictures, and the cashflow looked good on paper. The PM they found welcoming and happy to get them to sign a contract to take 10% of their rent. Fast forward a few months, and they have non-paying tenants who are wrecking the place, and a MIA property manager who (understandably) won't put in the ENORMOUS amount of effort required to manage a property in a C or D area for a small-time client from another state. Think of it from the PM's perspective: if you were them, would you deal with the significant headaches of a C or D area (non-paying tenants, trashed properties, crime, police calls, etc.) for a 10% cut of a single property (probably just a few hundred bucks a month) ...I wouldn't.

To make matters worse, the property isn't appreciating (because it's in a low appreciation market, or even a depreciating market), and the tenant pool is primarily made up of people with bad credit, low/no income, and a history of property damage at the previous places they've rented. So, now they're stuck with a non-appreciating (or even depreciating) property, that only attracts bad tenants, that no PM in their right mind wants to manage. Not a good situation.

Let's put all that aside for a moment, though, and assume you can avoid all those pitfalls. You find an OOS property that appreciates, attracts good tenants, and is easy to manage. Even then, OOS REI will come with some significant challenges...

Specifically, one of the MANY reasons OOS REI is so difficult (esp. for beginners) is that it requires you to assemble, manage, and incentivize a team of people you'll be completely reliant on from hundreds of miles away (sometimes without even meeting those people face to face). That's a huge challenge, even for experienced real estate investors who understand everything their team needs to do, and who have the money to incentivize their team's performance. But, if you're not experienced with the things your team is doing (e.g.; finding, analyzing, acquiring, and managing a property), then it becomes exponentially more difficult.

Think of it this way: forming and managing a team of real estate professionals (agent, inspector, property manager, contractor, etc., etc.) without any real estate experience is a bit like trying to form and manage a law firm without any legal experience, or trying to establish and manage an auto repair shop without any automotive experience--those would be monumental challenges even locally, but doing it from hundreds of miles away is near impossible. Can it be done? Yes. Are there ways of getting started in REI that are a thousand times easier? Definitely.

Trying to go OOS for your first REI deal is a bit like trying to surf a monster 100 foot wave before you've learned to swim, or trying to ski a double black diamond for your very first run.

Fortunately, there are simpler strategies that are much better suited for a first time RE investor (house hacking, specifically). I've written a lot on the forums about all the reasons house hacking is the best strategy for beginner investors--feel free to take a look at those posts.

I'd suggest starting with a more beginner-friendly strategy, get your experience from that, and THEN (if you want), try the more difficult strategies like OOS REI.

If you're dead-set on OOS REI, then I'd suggest studying up on the books, articles, forum posts, videos, etc. on the subject, and talking with as many OOS investors as possible (ESPECIALLY inexperienced investors who tried OOS REI for one of their first deals). There are plenty of those folks in the forums. In particular, I'd suggest asking those folks about what types of challenges they encountered, lessons they learned, and mistakes they made with OOS REI ...It's a lot easier, safer, quicker, and cheaper to learn from other peoples' mistakes than to make your own...

Good luck out there!

@Ricky Rodriguez  

This is an in-depth response, but I have in-depth experience on this, so here goes...

I've house hacked numerous properties (and also done BRRRR's, STRs, ADUs, and pretty much every other residential REI strategy), and I can say from experience that house hacking is the BEST strategy for new investors getting started (check out my other forum posts about what makes house hacking such a good strategy).

As I’ve said many times before, house hacking is generally easier than the more advanced REI strategies (like BRRRR'ing, STRs, flips, etc.), but that doesn't mean house hacking is necessarily easy. …but, there are a lot of tips and strategies you can employ to help ensure your house hack is a success…

Below are 20 suggestions for a successful house hack.

1. CRITICALLY IMPORTANT: The size of the house. You want a house that can comfortably accommodate the number of people who will be residing there. 4 people crammed into a 1,200 sq ft house with only 1 or 2 bathrooms and a tiny kitchen is miserable, but 4 people in a 2800+ sq ft house with 3 or 4 bathrooms and a large kitchen ain’t so bad. Housemates tend to spend a lot of time in their rooms, so you want a house with large bedrooms. One way to find large bedrooms is to look for houses that have a very large sq footage, but relatively few bedrooms (for instance, if the house is 3,000 sq ft but only has 3 bedrooms, chances are, those bedrooms are ENORMOUS!) …Although they sometimes share food, housemates typically have their own food and make their own meals, so you’ll want a large kitchen with plenty of storage. Keep in mind, a typical 1 br apartment (intended for 1 person or possibly a couple) is usually 600-800 sq ft. If 4 people are going to live in a house, I would usually want at least 1,750 sq feet, and probably more like 2,000-2,250+ sq ft…the larger, the better. Usually, 3-5 people is the sweet spot for a house hack, and 5 people is about the limit for a single fam house (more than 5 people usually creates too much noise and mess in a single fam house hack). If you plan to have more than 5 tenants, you’re probably better off stepping up to a duplex, tri or quad.
2. CRITICALLY IMPORTANT: The layout of the house. You want a house where the bedrooms and bathrooms are as separated from the flow of traffic as possible, allowing for maximum privacy for each housemate. You DON’T want a house where the beds and bathrooms are all right next to high-traffic areas. So, for instance, a bedroom that’s on the complete other side of the house from the kitchen, living room, front door, and all other common areas will provide a lot more privacy than a bedroom right next to the kitchen, or right next to the front door. Same goes for bathrooms—a bathroom that is up some stairs, down a hall and around a corner is much better than a bathroom right next to the living room. Ideally, you also want the bedrooms to be separated from each other—for instance, if three bedrooms are each on three different floors, that provides a lot more separation than all three bedrooms being bunched together on the same floor.
3. CRITICALLY IMPORTANT: The number and size of the bathrooms. Ideally, you want one bathroom for each housemate, and you don’t want more than two people sharing a bathroom. If two people have to share a bathroom, it will be easier if it’s a large double-sink bathroom with plenty of storage. Master suite bedrooms with attached bathrooms get the best rent, so a house with multiple master suite bedrooms is fantastic.
4. CRITICALLY IMPORTANT: Location, location, location. The three most important rules in REI. Location will impact everything from the types of tenants you get, to your rent, to your tax liability. Study up.
5. CRITICALLY IMPORTANT: Screen the tenants thoroughly. A bad tenant can make life miserable. A bad tenant you’re LIVING with can make life 100x worse. So, the stakes are high when it comes to finding good tenants for a house hack. You’ll also need to consider whether the tenants will get along with each other—living with multiple people requires a certain degree of “chemistry”, mutual respect, and consideration, and if the tenants are at odds with each other, nobody’s happy. Study up on tenant screening techniques, and implement them diligently.
6. CRITICALLY IMPORTANT: Too much noise & too much mess are the two most common problems you’ll have with housemates, so be pro-active in preventing those problems before they occur. The two most common housemate complaints are “the house is too noisy”, and “the house is too messy”, so anything you can do to minimize noise and mess will be beneficial. This goes back to the size and layout of the house—A big house will feel less messy and cluttered than a small house. If the beds and baths are all separated from high-traffic areas (like the kitchen), those bedrooms will hear less noise coming from those high-traffic areas. Creaky wood floors make more noise than carpeted floors. Well-insulated walls cut down on noise. Have a policy (in your lease) about noise. Have clear guidelines about who is responsible for cleaning. Hiring a cleaner for the common areas is a great option (and it might not be that expensive when the cost is split between the housemates). Having a policy on how often housemates can have guests is also very important (since guests tend to be a source of noise and messes).
7. CRITICALLY IMPORTANT: Parking. If you have 5 people living at a house, that often means 5 cars. They’ll need places to park.
8. CRITICALLY IMPORTANT: Know your customer. What type of tenants will want to live in this place? College students? Grad students? Young professionals? Tradespeople? Traveling nurses? The type of tenant the property attracts will depend partly on the location of the property (e.g., Is it in a trendy neighborhood, or a more working-class neighborhood? Is it near a college, hospital, or something else that attracts certain tenants?). The grade of the property will also impact what type of tenant you attract--an A grade house will attract completely different tenants than a C grade. As with ANY business, knowing your customer is critical, because it will inform all sorts of important decisions (like the type of property you buy, how much you charge for rent, the types of amenities you offer, etc.). Also, knowing your customer will allow you to anticipate the rental experience and what types of tenant issues you might encounter (e.g., 19 yr old college student tenants are COMPLETELY different than 35 yr old traveling nurse tenants)…and lastly, it’s super important to know your customer, because in this case, you will be LIVING with your customer! Obviously, you want to live with people you get along with, and who have a similar living style to your own--so, think carefully about whether the property will attract this type of tenant. If you’re a 40 yr old professional who goes to bed at 9 pm every night, you probably don’t want to house hack a place that will only attract 19 yr old college students who party until 3 am.
9. CRITICALLY IMPORTANT: Know your market. House hacking is very common in some markets, and it’s virtually unheard of in other markets. In some markets, a simple bedroom will bring $1,000+ per month in rent, and in other markets the same bedroom is only worth $300/mo. In some markets, there are hundreds of thousands of people who want to rent a room in a house, and in other markets there might only be a dozen of potential tenants. In some markets, house hacking might even be illegal. …this is all stuff you’ll need to know…
10. CRITICALLY IMPORTANT: stage the house to attract the type of tenant you want to live with. The furniture and décor in a house speaks volumes about what type of person lives there, and has a huge impact on what types of people apply to become a tenant. For instance, if your living room is filled with beer advertising, black light posters, and beat up old thrift store furniture, you’re gonna attract frat boys. Stage the house with furniture and décor that will be appealing to the type of housemate you want to attract. Also, if you value maintaining a particular look, have terms in the lease that give you final say in what types of furniture and décor is allowed in the common areas of the house.
11. CRITICALLY IMPORTANT: Is the house safe for housemates? Some houses have quirks that make them unsafe for housemates. For instance, some rooms in finished basements don’t have full-size egress windows, and therefore aren’t appropriate to rent as a bedroom (without an egress window, a basement room can be a death trap in a fire). Does the house have a balcony with no railing where a housemate could fall? Is there a rickety old deck that could collapse under the weight of 4-5 housemates and their friends? More housemates means more appliances plugged into the electrical system—does the electrical system have this capacity, or could that start a fire? …these are the types of safety issues you’ll need to consider when house hacking…
12. Moderately important: Storage. Having a shed, garage, unfinished basement, or other spots for housemates to store their bicycles, skis, seasonal clothing, tools, etc., etc. will help reduce the clutter in the house. You don’t want your living room filled with housemates’ bicycles. A typical storage unit costs approx. $50-150/mo, so if you can provide the same type of storage on-site, that’s a big plus for a lot of tenants (and it may get you more rent).
13. Moderately important: Do the housemates share similar schedules? Generally, you don’t want one housemate regularly coming home from work at 2 am while the other housemates are trying to sleep. You probably don’t want a housemate making a ton of noise in the kitchen cooking a 5 course meal while another housemate is trying to concentrate on an important conference call. If every housemate is trying to shower at the same time at 8 am before work, and there’s only one bathroom (or an insufficiently sized water heater), it will cause problems. …a lot of these issues depend on the size and layout of the house—for instance, if the housemate who gets home at 2 am has their own private entrance, and they can get into the house without disturbing anyone, then it may not be a problem.
14. Moderately important: Have at least one “premium” option in the house. When I say “premium”, I mean a room or space in the house that is significantly better than a typical bedroom. For instance, a large master suite with vaulted ceilings and its own bathroom. A large bedroom on its own floor with a skylight. A bedroom that has a private sliding glass door entrance that opens out onto its own patio. Etc., etc. These “premium” options will rent for significantly more than a typical bedroom, and having a “premium” option in a house is sometimes the deciding factor in whether the property pencils out.
15. Moderately important: temperature & HVAC control. One housemate wants to blast the AC until the place feels like a meat locker, but another prefers no AC. This type of issue can be addressed if the house has independent heating/cooling zones (but a lot of houses don’t have this feature). You can somewhat address this issue by having a policy on acceptable temperature ranges for each season.
16. Moderately important: value add opportunities. Are there any opportunities to force rent growth and/or the property value? Value add opportunities come in countless forms—it can be as simple as painting the walls, or as in-depth as building a DADU and sub-dividing the lot. A good real estate investor is always thinking about value add opportunities.
17. Moderately important: have a plan & policy on early lease terminations. The chances of a housemate wanting to leave mid-lease are higher in a house hack than a normal rental. A housemate may become annoyed at the mess or noise another housemate creates, or they may have some disagreement with a housemate, causing them to leave. Househacks also tend to attract tenants who are more transitory (e.g., students, traveling nurses), which increases the chances that a tenant will want to leave mid-lease. So, plan for this by having very specific terms about what happens if a tenant decides they want to leave in the middle of a lease. This issue may or may not be a big problem, depending on your circumstances (e.g., if the housemate who’s leaving was covering 75% of your mortgage payment, that could be a major problem…but if they were only covering a small portion of the mortgage and/or they’re easily replaceable, it might not be much of an issue).
18. Moderately important: anticipate and manage your relationship with the housemate tenants. If your housemates are your friends AND your tenants, they may not be your friends for much longer! Business and friendship often don’t mix for many reasons—for instance, it can be very difficult to enforce lease terms (like late payment fees or deposit retentions) with a friend… and if you do enforce those lease terms, it can easily destroy the friendship. …even something simple as telling your friend/housemate they need to clean the kitchen can cause problems… The easiest solution is to just not rent to your friends (and don’t become friends with your tenants)…you can be friendly (and professional) with your housemate tenants without being their friends. If you do rent to your friends, you’ll probably want to establish very, VERY clear guidelines about what the rules/lease terms are, and what happens when those rules/terms are broken (and even then, enforcing rules/terms will still probably cause friction).
19. Moderately important: having multiple exterior doors can be a big help. If a house has 3 or 4 exterior doors, this can (depending on the layout), greatly reduce the flow of traffic and noise inside the house. For example, if a housemate has a bedroom in a finished basement, but the only way to get to that bedroom is to walk through the living room, through the kitchen, down a hall by every other bedroom and bathroom, and then down into the basement, they’ll be causing a lot of disturbance to everyone in the house every time they come and go. On the other hand, if there’s an exterior door that leads them directly into their basement room, then they can come and go as they please without disturbing anyone else in the house.
20. Moderately important: each room is single occupancy, and there are rules about the frequency of guests. I say this is only “moderately” important because most people renting a room in a house intuitively understand that their room is single occupancy… *most* people. Years ago, when I was just starting (and I didn’t know any better), I rented a room in my very first house to a tenant who, after a couple weeks, had her boyfriend practically living in the room with her. When I told her this wasn’t allowed, she asked what part of the lease prevented it (there wasn’t anything in the lease that prevented it) …needless to say, I changed my lease to clearly state that each room in the house was single occupancy, and that there were limits on the frequency of guests (you live and you learn).

This is by no means an exhaustive list of house hacking tips/tricks, it’s just what came to mind…

It’s also worth remembering that, even with extensive preparation, house hacking can be challenging, and things WILL go wrong (e.g.; inconsiderate housemates, broken leases, furnaces that kick the bucket at the WORST possible time, etc., etc.). But, if you’re prepared to roll with the punches and take the setbacks as the cost of doing business, then house hacking is one of the BEST ways to get started in real estate investing!

Good luck out there!

@Antonio Martinez so, as you know, this property is dirrrrrt cheap, which leads me to assume this property is in a very rural area and/or it's a is D or F grade property in a D or F grade area.   Have you ever managed a rental in a D or F grade area?   ....if not, I strongly suggest studying up on that topic.

I'd also definitely suggest reading up on the risks of funding a rehab with credit cards--especially  if you've never done a rehab using credit cards, and especially if you don't have the cash reserves to stay afloat if things don't go according to plan.  Obviously, I don't know anything about your finances, so for all I know, you may have a few million in the bank, and this project is just a fun experiment that wouldn't even be a drop in the bucket if it all turns south...but, regardless, you'll want to model out what would happen if this project crashes and burns...

As you may know, managing a rental in a D to F area (or even a C area) is usually not recommended (for many reasons), and funding a rehab with credit cards is also usually not recommended (again, for many reasons). ...even highly experienced investors often won't touch anything lower than C grade because of all the difficulties of managing and re-selling them...

If you're dead set on rehabbing the place and keeping it, I'd strongly suggest studying up thoroughly on the local rental market and tenant pool (e.g.; rent medians and lower and upper bounds, typical days on market before securing a tenant, local vacancy rates, tenants' typical income, education level, employment opportunities, credit, and rental history). You'll also want to  thoroughly study up on the many challenges of managing a sub- $100k property. I'd also suggest running some for-rent ads, to see what type of response you get.

It's notoriously difficult to accurately predict ARV on these types of properties, because they're so niche, and the market for them is usually completely different than the market for more standard properties...For instance, a lot of lenders won't provide a mortgage on a property for less than $100k--and if that's the case in your area, that would mean that the only potential buyers for the property are cash buyers, which makes selling the property more difficult. Even if you don't plan to sell, you'll always want to be analyzing all potential exit strategies (including selling). Specifically, you'll want to collect and analyze a LOT of comp sales data (including data pertaining to days on market, price reductions, the buyer pool, etc.) so that you have a very good understanding of the buyer pool, and how difficult it could be to sell this type of property...I'd suggest talking with multiple agents who have experience with this type of property, and asking them what type of DOM, ARV, and sale experience they would predict for the property.

Before you take on $25k+ of credit card debt for a rehab, you'll want to consider all the potential problems you might face with your strategy, and potential solutions to those problems. For instance, let's say you do the rehab and go to rent it...considering the relatively low value of the property, it's reasonable to expect that the tenants will have low or no credit, they may be unemployed or on income assistance, they may have minimal employment options, and/or they may have a very spotty history with prior rentals. If the property is in a rural area, there might not be much of a tenant pool at all... If you have credit card debt from the rehab, you're under the gun to either get it rented, or sell it (and being under the gun usually leads to poor business decisions, like renting to unqualified tenants or forced selling). ...as I always say "the best time to buy a car is when you don't need a car, and the best time to sell a house is when you don't need to sell a house"    ...If renting it is too much of a hassle, and you go to sell it, you may find that it sits on the market for months (because again, sub-$100k properties are usually a very niche thing)...if you have credit card debt from the rehab, and the property isn't renting or selling, that's obviously a bad situation...

It's also worth considering how much this property will rent for after the rehab. Even if you find a dream tenant, a sub-$100k property usually isn't going to rent for more than...what...$500/mo? $1,000/mo? ...after you take out the debt service, capex, and vacancy, what are you left with?  ...moreover, how many of these types of properties, at that rate of cashflow, would you need to make it all worthwhile?

...I'm not saying that your plan can't work, I'm just pointing out that these types of extremely cheap properties usually come with TONS of unique management and sales challenges that don't occur with more run-of-the-mill properties, so you'll want to study up on those issues and have a game plan before proceeding...regardless of what you decide to do, it may be a good idea to consider how you could leverage this deal as a springboard to get you to other, higher-grade properties...

...the good news is that you're only $5k into this thing, so you're not in too deep...yet...

Good luck out there!