All Forum Posts by: Michael Gansberg

Kudos, Kyle. You've discovered an affliction called "wholesaler's remorse." I actually just invented the diagnosis based on your symptoms, so why don't we say we co-discovered it.

We both run a rental property business. I can say with great conviction that I love providing residents with a safe place to live and a beautiful home, all at an affordable price. Not only does it let me sleep well at night, but I wake up with enthusiasm, eager to confront the challenges that each day brings. In the rental property business, I believe I can make the world a better place. I rehabilitate unloved and foreclosed upon homes(with my capital and my brain- sadly, my home repair knowledge does not extend much beyond a plugged toilet.) The neighbors often bring free lemonade to my rehab experts. Sometimes they'll call  to thank me for removing neighborhood blight and making the neighborhood a better and safer place to live. What they don't know? I install energy-efficient lighting and heating, and low-flow water fixtures, so I reduce the carbon footprint of my properties, making the world a better place. I almost forgot- I make money too!

I've purchased two properties from wholesalers, and I can truly say that they added no value, and I popped them like zits. Don't be a zit. You run a rental property business which puts you in an excellent position to improve the lives of people, the planet AND to build wealth, all without engaging in value-less behaviors. So...why don't you do that?

Congratulations on your realization, sleep well tonight(and well into the future,)

Michael

Be humane. Let her out- she sounds like she has quite a few problems, the last thing she needs is someone chasing her for money. And what are the alternatives? Telling her she has to pay when she likely can't, or would have to move back in because she couldn't float two apartments simultaneously? Do you really want her living there?

Another alternative would be taking her to court- but if you have enough experience, you'll realize that it's a total waste of your time, and nobody will benefit in the end. 

Good luck and I hope you do the right thing,

Michael

Hi Joe,

I have a ton of residential experience in Troy(and some commercial experience.) Feel free to direct message me if you need something specific, or I'd be happy to discuss over this thread.

Hi Kara,

One of my property managers- an extremely talented and trustworthy guy- manages a few properties in Amsterdam. He tells me there's a problem with the water quality there that causes seals in toilets(think the flapper) and other such seals to fail prematurely. This can cause undetected leaks that will occasionally result in water bills well into the thousands of dollars in a single quarter for a two family home. He manages about 90 units for me in the Troy/Waterford/Mechanicville etc areas, so I trust his opinion completely- he mentioned this when I asked him about an available property in Amsterdam. It was enough to drive me to greener pastures- I have a strong preference for cheap(er) surprises!

Good luck with this one,

Michael 

Hi Bob,

I started out in the same way- I live in NYC, but the prices here are pretty crazy.

My first investment property was in Hudson, NY- bought it for $60,000 in 2003, and I still own it. But the days of sub-$100k properties there are long gone, unless you're into doing a substantial rehab.

My current epicenter is Troy, NY, where I own and operate properties mostly in the two to ten unit range. I highly recommend it, as it functions as a bedroom community to Albany, has plenty of higher education facilities, and it's a cool spot to be. Affordable rentals and home prices, along with cafes and architecture from the 1800's- what's not to like?

If you're willing to plunk down about $80k-$90k, you can expect a two family in good shape, and rental rates ranging from $18k-$20k per year. You'll need good management; I'd recommend trying to secure that before making an investment. Of course you can pay quite a bit more for a property in excellent shape that requires nothing for awhile, and there are some homes available for less than $50k- but those generally require a good deal of rehabilitation. As this will be your first investment property, it's likely best to buy something in very good to excellent shape.

You can do similarly well in Albany or Waterford, both adjacent to Troy, but the former requires quite a bit more skill to navigate, and the latter has a rather demanding local government(and higher initial prices.)

Good luck with your first investment,

Michael

Hi Max,

It has been my personal experience- tenants are often horrified by the heating bills caused by electric heaters, and I've also heard the same from various property managers. I checked on Energy.gov (http://energy.gov/energysaver/electric-resistance-heating) - they have some decent info, I copied it below. It's difficult to make a quantitative comparison, as there are so many variables involved.

However- I'm editing the first post- I just found a site with estimates for heating costs according to the type of heat used. You can click the link below, but spoiler alert! Electric baseboard came in at a bit more than double the cost of an 80% efficient natural gas furnace. Of course this varies with the cost of gas, the price of electricity, and some other variables. Here it is: http://www.energysvc.com/the-real-cost-of-heating/

"Electric resistance heating is 100% energy efficient in the sense that all the incoming electric energy is converted to heat. However, most electricity is produced from coal, gas, or oil generators that convert only about 30% of the fuel's energy into electricity. Because of electricity generation and transmission losses, electric heat is often more expensive than heat produced in homes or businesses that use combustion appliances, such as natural gas, propane, and oil furnaces.

If electricity is the only choice, heat pumps are preferable in most climates, as they easily cut electricity use by 50% when compared with electric resistance heating. The exception is in dry climates with either hot or mixed (hot and cold) temperatures (these climates are found in the non-coastal, non-mountainous part of California; the southern tip of Nevada; the southwest corner of Utah; southern and western Arizona; southern and eastern New Mexico; the southeast corner of Colorado; and western Texas). For these dry climates, there are so few heating days that the high cost of heating is not economically significant.

Electric resistance heating may also make sense for a home addition if it is not practical to extend the existing heating system to supply heat to the new addition."

Thomas,

That's very good to hear- go crush it!

Michael

Thomas,

I sympathize with your plight. As a veteran buyer in the eight to twelve unit space(I'm in fact obsessed with that property size- it's generally too large for the mom and pop buyers, and always too small for institutional money, so the cap rates tend to be rather sweet,) I've experienced what you're dealing with several times, and I wrote something in my recent book on this point. 

Sellers are incentivized to inflate numbers to you for the best selling price, but it's your job to be a savvy buyer.  A seller will not tell you about any substantive defects related to the property, and it's your job to find them- bring your property manager along for the building inspection. Ignore the pro forma, it's meaningless. Base part of your analysis on the leases(I'm assuming those have been provided to you,) verify that the leases are essentially market rent- if they are under, you're actually in luck as you'll have future upside, and you can factor the below market rent into your purchase offer- and if they're over, that may signal that some desperate tenants signed leases that they'll break at the first opportunity. I'd rather be in the former situation than in the latter. The rest of your analysis should focus on the usual issues- local occupancy rates, mechanicals, utility expenses, taxes, building condition, etc.(remember- what you spend on the building may be very different than what the last guy spent. Maybe the roof has neared the end of its useful life at the time of your purchase? What if he replaced everything 10 years ago- his capex could be very low, but the building may need a big refresh upon its sale. Don't count on the seller to do your figuring, that'll make you very poor, very quickly.)

The suggestions to insist upon the schedule E or the tax returns are interesting- most investors can figure out what a building needs(in terms of capex and operating expenses) and what the rents and vacancy rate should be(as those are functions of area, the economy, curb appeal, management skill, and so on,) so if I were selling a 10 unit and a buyer insisted upon my seeing any part of my tax return, I'd consider that buyer to be an irritant and I'd find one who was capable of doing their own proper due diligence. Further, if someone buying a 10 unit can't figure out what a building needs, they have no business buying a 10 unit. 

Good luck with it!

Michael

Hi Austin,

It's so nice to see an investor considering the environment. As a rabid environmentalist, I applaud you. However, all of my discussions with people regarding geothermal retrofits have suggested payback times over a decade, which is simply abysmal.

You'll likely do better with solar power- I'd discuss it with a few of the big names in the industry(Solar City comes to mind, but there are many others as well.) I tried to put solar on several properties- one issue I ran into was that the electric service is seldom in my name, other than for the hallways/common areas, which didn't justify the cost of installation. The solar companies are figuring out ways around this, but the I deemed the hassle(and the small return on my time) to be too high a hurdle.

Some properties can benefit from the installation of air source heat pumps for heating in the winter and cooling in the summer as well- they typically look like large air conditioners. If your property is in Iowa, it is likely too cold for air source heat pumps to be very sensible. A state or two south, however, and you'd be very smart to install these- it would put the heating bills in the hands of the tenants, and would give them control over how hot or cold to make their apartments in the winter.

So now to the recommendations. If I were you, I'd install a high-efficiency gas furnace(they can reach the mid-90% range for efficiency.) If you're replacing an old one, its efficiency is likely in the low-mid 80% range. If you could break it into four zones(one for each apartment,) you might do even better- sometimes when you only have one or two zones(for four apartments,) the hottest apartment may crack a window to regulate heat, and that is money down the drain. The payback time you'll experience(you should calculate the cost as the difference in price for a minimum efficiency boiler(around 80%) and a high eff. boiler) will slaughter the payback time you'd experience with a geothermal retrofit.

But why stop with heating? If you're using incandescent lights(or even the swirly compact fluorescent lights,) you'll save a bunch of money and labor by switching to LED bulbs. This is especially true in common areas which may be lit 24/7. I've linked a 100 watt and a 60 watt replacement bulb below. These bulbs generally last for many years in an always-on state, or a few decades with regular household usage, and I recommend using them in your apartments even if you're not paying the lighting bill so that your tenants save money(and can pay rent more easily.) In an always on state, the payback for these(relative to incandescent bulbs) is usually under 3 months.

100 watt replacement: GE Lighting 13909 Energy-Smart LED 16-watt, 1600-Lumen A21 Bulb with Medium Base, Soft White, 1-Pack

60 watt replacement: Feit Electric - 60 Watt Replacement - Omni Directional - LED Dimmable - 3 Pack

And why stop with lighting? I've had great water savings on the installation of low flush(1.28 gallons per flush or less) toilets. I highly recommend using these, along with faucets with the WaterSense label(here's a link to aerators which accomplish the same thing without high installation costs. These things cost a few bucks apiece but can have pretty meaningful impacts: Simply Conserve Two Pack of Low Flow 1.5 GPM WaterSense Standard Faucet Aerators) You'll save on both water costs and the cost of heating the water as well. Low flow shower heads can be trickier- if your tenants aren't happy with the shower quality, they may become unhappy with their apartment- so be careful with low flow shower heads.

Finally, I'd make sure your insulation is up to snuff. If your attic insulation is degraded due to age, or has too low an R value due to lower standards from prior years, fixing that can have a very rapid payback time. 

After you've made many of these energy improvements, don't forget to let future tenants know that they're renting in a building with high-efficiency fixtures- the yuppies go wild for saving the earth and such(translation- cha ching!)

Best of luck!

Hi Rusty,

You mentioned that about half of the properties you visited would be vacated at the time of sale. If that's a concern, why not pursue the half which won't be vacated?

I agree with Joey Nakayama, finding tenants in the winter is much more challenging than in the warmer months. Another consideration- once your offer has been accepted, make sure the seller keeps you apprised of any changes in occupancy. I'd insist on being alerted regarding any new tenancies, and being a part of the screening process, so you don't get stuck with an under-screened tenant that you have to evict shortly after purchasing the property.