All Forum Posts by: Michael Hayworth

Cleburne has potential. You have to be careful of the houses there, though. We were in one last week that had the roof framed with 2x4s, when based on the spans, it should have been 2x8s or 2x10s. I actually own one in Alvarado that has the same situation. Lots of janky plumbing and electrical, framing shortcuts, etc. in the older homes. Johnson County is pretty much "redneck engineering" central.

When I started real estate investing, I had also recently launched a new business startup. I only had $20-30K cash on hand I found financing, flipped two, and used those proceeds to buy a third that I could keep.

Kept that strategy for a couple of years. As my assets and income increased, which also meant a higher tax bracket, I moved to a strategy of "delayed flips." I'll always have 25-30 properties in my portfolio, but now that I'm in the highest U.S. tax bracket, I focus on houses where my reno can add immediate value, and which are in areas likely to appreciate over a 2-5 year timeframe. I make them rentals for a period of time, and several times a year will sell one that I've owned for 2-3 years, leaving those proceeds taxed at long-term capital gains (20%) instead of regular income + Obamacare tax (44%).

Whatever I buy, I buy with an eye to appreciation. Cash flow is nice income, but it'll never make you wealthy. Appreciation can.

Tenants are like children: some of them will test every boundary to see how you react. So far, you're acting like the accommodating parent, and you're getting spoiled brats as a result. You may be wanting to be a "nice guy", but sometimes it really is true that nice guys finish last.

Tenants like that have to be trained. They're testing you. You need to respond to emergencies, but refuse to jump through hoops for things that are not emergencies or are not your responsibility at all. Be sure you know your lease terms - under mine, roaches are the tenants responsibility. If they don't leave crumbs and such around, they don't get roaches. Enforce their lease responsibilities.

 I had a nightmare couple like this early in my landlord days, and after spending thousands on phantom mold complaints and all kinds of ticky-tack repairs, I finally just gave them notice of non-renewal. It was a huge weight off my shoulders when they moved out, and I got a great tenant after that.

You're getting good advice above from @Matthew Olszak, @Leslie Cambre & @Kyle J. But honestly, you've been accommodating for so long with this particular couple that it's going to be hard to reset their expectations and establish clear boundaries. You're probably best off just giving them notice, and finding a new tenant at market rate, with whom you get off to a polite, cordial, but all-business relationship.

Yeah, except that's kinda investing-guru nonsense.

Cash flow will not make you wealthy. Appreciation can.

If you've got 10 properties cash flowing $200/mo apiece after you pay the mortgage and all expenses AND set aside a repair reserve, well...great. You've got an extra $24,000 a year.  And after 15, 20, or 30 years - whatever term you finance for, you'll own 10 properties outright - maybe a million or two on the average rental portfolio. If that's meaningful money to you, that's great. You can keep working your full-time job and pay for an extra vacation or two a year, maybe pay for the kids' college, and have a decent retirement. There's nothing wrong with that, but it's not going to drastically change your life.

I keep about 30 properties in my portfolio at any time (I sell 10-12 a year, buy a similar amount), so at $200/mo cash flow each, that's $72K/year. But I buy for appreciation, so I have maybe a million dollars of my own cash in those properties to finance what was $4MM in real estate when I bought them over a period of 8 years, but today they're worth $6MM. I still get cash flow - maybe less than if I bought for pure cash flow - but I've tripled my actual cash invested. That's a huge difference.

Cash flow is for people who would otherwise be investing in mutual funds. It's steady, and it's fairly safe. But saying it's "King", which we hear a lot, is nuts - you could put your money in mutual funds and save yourself all the work that goes with being a landlord.

Appreciation investing is for people who have a higher tolerance for risk, but can also reap far greater rewards.

You sound like those good-hearted people who confidently proclaim that "many people are homeless through no fault of their own." People who actually work with the homeless know that's rarely true.  To really end up on the street, you have to have burned every bridge and rejected every chance from family and friends, over a period of time. (I've been financially supporting and volunteering for homeless shelters since the 80s, although over the last 15 years, I've increasingly found it better to spend my time and money helping people who will make positive choices with the help they're given.)

The same is true of evictions. You don't just get evicted "through no fault of your own." To actually end up evicted, you have refused to pay your most important bill over a period of time, and you have refused to leave peacefully. Landlords don't just waste money on court fees and evictions in order to screw somebody over - if a nonpaying tenant will leave peacefully, very few landlords are going to go thru the time and money of a court process. If you get evicted, you made choices over a period of time that put you there.

And @Nicole Obregon, you've mentioned several times that, in this applicant's story, it's always his roommate's fault. That's common with sketchy tenants - it's always someone else's fault. I tend to believe what people tell me, so it was hard for me to wrap my head around this as a newer landlord, but applicants lie - not just to you, but to themselves. Everyone is the hero of their own story, and they all want to believe their problems are someone else's fault. Just because he says it was his roommate's fault doesn't mean that's the case.

@Nathan Gesner's answer is kinda blunt, but it's a good one if you're going to hire a PM. As he points out, the PM sending you tenants to approve is trying to transfer responsibility to you, BUT they don't really give you the tools to do it, because PMs are subject to all kinds of restrictive laws (most of which had good intentions, but are easily abused). When I was new, my worst tenants came thru realtors or property managers, like the 9-person family who only put two adults and two kids on the application, but the PM only provided me the written application to review because the applicant belonged to a protected class and the PM was afraid of getting sued.

For only owning/managing one rental, I wouldn't hire a PM. An individual, renting his/her own property without use of a broker, is not subject to the Fair Housing Act, so most of the things Nathan mentions aren't an issue. (That's federal....check your local and state laws). One big advantage of that is that you can more easily deny nuisance tenants who claim their pet is some sort of service animal, but have no certification of that except a certificate from an internet site. 

If rentals are in demand in your area, you can advertise the property on Zillow/Trulia/Hotpads, set a couple of open-house showing times for the property, and take the best tenant, not just the one who applied first. Running their credit or background check is fairly simple - there are numerous sites that can do that for you over the internet. And if the house is newly renovated, having a handyman on call is a lot cheaper than 8-10%/month to a PM for handling repair calls.

Once you get to where you have quite a few rentals, a good PM is quite valuable, but I'm not sure it's the best thing for just one.

When you're dealing with a licensed trade such as plumbing, a complaint to the governing board is often more effective than a suit in small claims court. A small-time contractor may well consider themselves judgment-proof, due to lack of funds, but they need their license to remain in good standing to be able to continue to pull permits. I see Missouri has a State Board of Plumbing Examiners. They will have a complaint process.

Do you want the house?

Would you be OK with buying the house if you ended up actually paying your offer price?

We all have thoughts on what we think a home is worth. Reasonable people can disagree over that. An appraisal is still just an opinion (hopefully a well-informed one), but it's what the lender will work with. 

The advice that you make your money when you buy is absolutely right. But at the same time, I've walked away from houses when I was new at this over a few thousand dollars, only to look back later and realize that the person who "overpaid" made a ton of money on it. For a personal residence, I wouldn't overpay ridiculously, but I'd certainly give it some consideration if I really wanted the house and inventory is limited.

When I was newer and more naive, I once let a group of college students all sign separate leases. Then one of them stopped paying, so we were getting 3/4 of the rent every month, but not full rent. Texas is a pretty landlord-friendly state, but even with that, it seemed really complicated doing an eviction for one tenant in a group situation.

Now, I ask them to choose one to be the primary tenant, with the others as additional residents. We set them up for payment (we do it electronically) from one of them, and tell the others to make their payments to the primary tenant. Simpler for us, and the one making the payments to us is (theoretically) motivated to make sure she gets her money from the others.

I'd be shocked if you could get 5-10%. I spend $300K+ at Home Depot every year, and I get their top-level Pro Rewards discount, which is 3%. Now that I have a personal rep, I also get rebates of 1-2% (can't recall exactly) in HD Gift Cards.

The bid room can be helpful, depending on what you're buying. It's definitely not a guaranteed 10% discount as someone stated above. It completely depends on what you're buying and what their margins are on those items. On some things, the discounts are really good, but I've submitted $10K orders and seen it only come back with $300-400 discounts.