All Forum Posts by: Matt Maurice

Congrats on your recent purchase, glad you picked MKE! Definitely check out Brew City and don't be shy to reach out to the locaL REI Community for help!

If there were to be a spark to light the fire, I'd say it would come from the low - middle portion of the investor market.  Most local commercial lenders that I know of cut off lending to out of state investors in 2018.  There was rising concern in the lending community that the over-leveraged, hard to appraise, investor boom was happening all over again.  

The prices that out of state investors have been paying for Milwaukee real estate has been (in my opinion) significantly bloated.  Now sure, you can argue the cash factor and the affordability of the MKE market... but I've yet to find an investor that is counting on Milwaukee as an appreciation play.  We receive 5-10 OOS investor leads a week, and NOT ONE in the last 6 months has identified Milwaukee as an opportunity for anything but the entry price point.  

The unfortunate math that most forget to calculate... those construction costs that @Marcus Auerbach reflect renovation work too;  just becuase your unit rents for under $1 / sq ft doesn't mean your paint, carpet or finishes cost any less.  And in fact, there is a direct corelation between rent price and maintenance cost... or an inverse corelation I should say.  The lower your rent, the higher your maintenance/unit turn costs.  There is a happy equilibreum that most of our clients settle on, but it's not that 2% deal you brag about at the bar.

C and lower properties have a very predictable cycle.  Someone buys them cheap, rehabs them and rents them.  Eventually that turn will come and costs more than the OOSI expected and collecting the rent has been more challenging that expected, so they sell to get their capital back to the next OOSI to do it all over again.  When prices keep rising and new OOSI keep coming to the market, the cycle flows just fine.  When the prices stagnate or drop, then you see inventory start to climb.

Hey Merritt,

Any specific questions you have?  Ironically enough, the piece you are missing I think is one of the easier pieces to get, albeit you need 2 years of experience with a sales license prior to getting your broker license.  There are a lot of low-fee brokerages to hang your sales license on though, so that shouldn't slow you down.

The construction piece continues to get more difficult every day, and the turn-key market tends to be on the lower end of rentals in MKE which cuts into any attempt at margin in the model.  Most people under estimate difficulty of scale on the management piece, how long have you been doing it?

Matt

Thanks for the mention Pete!  

Jake happy to discuss, depending on size and location we may not be the right fit for you but if that's the case I"ll point you in the right direction.

Hey Pete,

Let's start with what you can and can't charge... The state of Wisconsin allows you to charge your real cost to process a "credit check", up to $25.  If you state this as an "application fee", you can get into trouble.  As a landlord, this means whatever you pay for the credit check is what you can recoup from the applicant, up to $25.  Some property managers extend this further to state their time they are charging to the client is a true cost to the landlord, and thus try to charge for their time above and beyond the cost of the credit check and the $25.  It is my opinion that this is poking the bear and not worth litigating semantics.  

Tenants who can provide you a recent credit check should not be charged the credit check fee (although I would still highly encourage you to do your own due diligence).

Now getting to your real question which more or less related to the business practice and outcome of requiring an upfront fee.  I wouldn't do it any other way.

There is an implied value when something has a cost associated with it, particularly when most landlords/managers are charging the same fee.  The opposite is also true, by not having the fee you can actually discourage potentially qualified applicants who perceive your unit to be a lower value.  Having a very structured process exudes professionalism which will attract higher quality tenants.  

The requirement of an upfront fee will also weed out some of the folks that are aware they won't be approved when background & credit are a consideration.  It also provides you with a level of commitment from that applicant, which will help keep them engaged during the application process.  If somebody has no skin in the game, it's easy for them to continue their search then leave you hanging at the last minute.

Our checks are handled within our PM software so unfortunately, I have no familiarity with Zillow's service.

Welcome to Milwaukee Justin!  There is a great Investor Network here to aide your growth, best of luck!

Thanks for the mention @Account Closed!  

Happy to chat property management in Milwaukee any time.  

Provided lending practices haven't overly loosened up, which I'm currently purchasing a home with a traditional mortgage and can tell you for certain this bank has not, then I see the majority of the market continuing to rise at a reasonable rate.  Historical median home prices increase 5.4% annually, so while we are currently tracking above that rate I don't think prices will go backwards again like 2007.  The market crash was fueled by poor lending practices; homeowners biting off way more debt than they could afford with adjustable products that increased the debt burden above their income.  In the retail market, I don't see the adjustable products or the increase of rates blowing up like they did 10 years ago.

What becomes interesting to me is when you apply the same trends of the market collapse to commercial investors, specifically the SFR and small MF markets that are selling for 50-100% more than just a short time ago. Volatile markets like these (houses under $75k) are being over paid for with commercial notes lasting 3-5 years by investors drastically underestimating unit turn costs. Tenants generally average 3-5 years in most SFR and Duplexes, coincidence? The writing is on the wall for a market reset in the near future for these types of properties.

If or when this market reset happens, what will be the outcome?  Well, as pointed out in this post, inventory is historically low and construction costs are historically high which creates significant value for existing housing in the middle even low end of a market.  It's entirely possible when these investors find out their cash cow is a cash black hole they will still be able to sell on the retail market to a homeowner willing to do the necessary renovations.  Option B, the market gets saturated with this type of inventory and the locals that have been building cash for 3-5 years will be able to scoop up houses at numbers that makes sense again.  

I think either option result has little effect on the retail market as a whole, it will be relatively isolated to the under $100k market (Milwaukee specific).  One thing I haven't been able to figure out is the effect on rent prices for these properties but also MF buildings.  With the quick and massive expansion in Milwaukee of higher end apartments (can't build new to rent for middle prices due to construction costs) how will that affect the small investors rent?  Not sure.  The big players don't discount rent traditionally, they can't afford to.  They can afford to sit on vacancy until their building fills up, but the volume of available high end inventory has to make a dent to the little guys and median prices... right?

@Account Closed thanks for the plug!

The fact the company stayed on for 6-months after the sale shows they are at least somewhat concerned with the quality of their product.  Many turnkey rental provider operations do cheap renovations, place any tenant to prove the proforma and leave you holding the bag after the sale.   If things have gone well after so far (Tenant has paid and maintenance issues have been low) you might be in ok shape.

I think the big question here becomes does this company flip houses first and manage only when they have to second?  If property management is a secondary thought, you run the risk having a company not acting ethically, legally or properly licensed operating your property.  The systems required to manage property on a small level can be covered with hard work and some brainpower.  When things scale systems become required to effectively manage property, and if it's not a focus of the company the investor will eventually be the one hurt in the process.

Obviously I have no clue who you used to purchase the home and/or manage the property... just my 2 cents on the topic.   And of course I'm happy to discuss our services if you'd like.

Matt

@Marcus Auerbach Thanks for the mention and @Mike Lowery Glad you've heard good things about us!

I'm going to chime on the "good property management" piece of this thread as I think it's the most relevant & hopefully helpful.  

You can't mitigate risk by pushing it onto your property manager.  If you are buying in riskier areas, "good" management is going to cost you WAY more because there is more work to be done.  Most PM's are % based models, which means an $800 / month rental brings in less revenue than a $1,200 / month unit, but in all likelihood that lower rent unit is 2x or even 3x the amount of work for the PM.  Many PM companies that strive to provide great service end up in these locations because the business is so easy to get.  When they realize this type of business is 2x the work for 1/2 the revenue, if they are good at what they do, they move where the financial model works.  We did this 12 - 18 months ago and I can 100% say, you cannot provide a quality product for the long term managing in these areas for even 10%.  We lost money bringing on these types of properties and subsequently removed that portion of the business.  If I had to guess, for a PM model to be successful in these areas we would need to charge 20% or a minimum of $150 / door.  At scale the call volume, maintenance needs, rent collection and turnover is back breaking. 

PM's can make these types of properties financially work if they are willing to sacrifice the level of service they offer to their Tenants, their Clients or their Family (let's be serious, the tenants get the brunt of this issue).  I've seen examples of companies that don't answer the phone, only have 4 hours a week that Tenants can come into the office, practice just horrible screening practices, take weeks to respond to maintenance issues... the list goes on.  

For this reason the never ending conversation of "it's so hard to find a good PM that works in these areas" will always exist, because it's impossible to do at a "reasonable" rate.  The "good" PM's will always eventually find out it's not profitable and either close up shop or relocate to profitable areas.

I'd be happy to go round and round with anybody that disagrees :-).