All Forum Posts by: Michael L.

Hey Ray,

In hindsight, I have two observations:

1. Go with flat

2. Pay for a better paint.

In terms of the flat, I really love how easy it is to touch up. I had tenants living in the unit for 2 years, and they had 2 cats and 2 dogs. Needless to say, the walls looked "lived in" - nothing abnormal, just typical wear and tear. I picked up a gallon of the paint, got out my roller, and was able to "erase" all marks on the wall in the whole unit (2 bedroom) in under an hour. It literally looked like the day it got painted again. It's so nice to be able to present the unit that way without having to actually paint everything again.  A gallon was plenty to roll over all of the walls in high traffic areas.

The reason I would get a better paint is because your time is money, and the color place just does not have great coverage.  It needs more than 2 coats if the base is dark.  I would *definitely* stick with the pre-fab colors though, so that you have the option of doing what I did above. You need perfectly matched paint for that.  I think HD and Lowes sell 5 gallon buckets of standard colors and I would probably go with something like that for better coverage and easier application.

Hope this helps!

Thanks to everyone for their replies. I just thought I would provide a couple of clarifications:

-As several have noted, this is a decision centered on time and stress. I am not claiming SFR B&H investing does not work. My numbers show that it does, even without factoring taxes and appreciation. Even if I didn't pivot, I think that continuing on this path would produce excellent wealth.

-Many have suggested other routes (besides SFR). I think these will be in my future. I would love to hold larger scale commercial real estate and plan to in the future. Lending could be an option as well.

-Not sure why 10% in the stock market is criticized here; that is the historical S&P500 return with dividends reinvested. What is not factored in for many of the calculations above are both time involved for real estate deals and significant transaction costs that can erode profits significantly.

-Taxes delayed are not always delayed forever; I'm not going to bother with a 1031 for a $10k capital gain and depreciation will have to be recaptured.

Finally, I will say that it does scare me a little bit the way I hear people talking on the forums; we are on an unbelievable 10 year bull run on the real estate market, and some are commenting like the market can never go down, property will never be sold for less than it's purchased for, and leverage is always a good thing.  Obviously time will tell but it's easy to be lulled into feeling this way when things have been so good. This is probably another topic entirely, but something that strikes me as concerning.

I do appreciate all of the support and suggestions here. As usual, most of the feedback is spot on and has given me a lot to consider. 

Sorry in advance for a long post; I want to write a detailed post on how I got started in RE investing a few years ago, the lessons I learned along the way, and why I'm thinking about stopping now. I want to be as specific as possible so that others can potentially use this post as they determine what is best for them.

I became an accidental landlord in 2014 and had to learn a lot of things the hard way. Fortunately, I found BP and got an amazing education. The learning curve was steep, but eventually things fell into place. What I realized was that my former home was not an ideal rental; I set about finding SFR's that would be better.

Over the next year, I checked on nearly every home in my area that was listed. I was looking at grade A townhouses in my local area. My goal was B&H for cashflow and high IRR. After running the numbers on dozens of potential deals, I ended up purchasing a nice townhouse for $110k, about 5-10% below market value. It needed some light rehab, and it really turned the place around. We got a great tenant who lived there for 2.5 years and there has been very little in the way of maintenance. It just turned around and we got another tenant that has been very good so far; there was only 10 days of vacancy in between.

So far, sounds like a success story, right?  Further, I have said that I love this rental unit and had been saying for years that I would gladly buy more just like this one if I could get a deal.  However, I just ran the numbers for 2.5 years:

Cash flow $5000

Principal paydown $3500

Net gains $8500 (excluding taxes and appreciation)

I compared this to what I would have gotten if I had invested the $29k in the stock market as a lump sum at the time of my investment:  $7500.  So for all the extra work - scouring deals, inspections, rehab, managing it myself, paperwork, etc -- I have gained an extra $1k - a terrible return on my time. If I had hired all of these activities out, it would put me significantly behind in terms of overall return.  More importantly, I have found owning the unit to be very stressful for me. Doing the work myself is difficult, and I don't have systems in place with people I trust to get things done.

If you add $10k in appreciation, the numbers look stellar. But that completely belittles the sheer number of hours that go into one unit. If the same amount of work went into a 10x larger investment, it would seem worth it. But because I am doing a lot of the work myself, the investment does not scale.

So the following lessons have been learned (at least in my case):

1. Know yourself, and be honest if things stress you out. I find being a landlord stressful, and more than anything, this is probably the biggest reason I'm probably going to be getting out of the SFR game. I spend too much mental energy on it.

2. Understand that some of the gains come at a cost - the cost of your own time.  This is opportunity cost. For me, I think I would have been much better off investing in truly passive vehicles and spending the time on my career or on earning more.

3. Make sure the extra gains from real estate are worth your time in absolute dollars. I love the idea of getting 25% returns YOY on my money.  However, this might result in only another couple thousand dollars, which at the end of the year does very little to move the needle for FI.

And lastly, how might things have been different (or who would have been better suited to SFR's than me):

1. If I was buying significantly below market value. These deals are tougher to come by today, and take even more time.

2. If I was able to not feel stressed about being a landlord.

3. If my opportunity cost of my time wasn't so high (my regular job does pay very well)

4. If I factored in the cost of management into all of my pro formas, and only did deals that still made sense with 3rd party management (Josh must have said this on every podcast and somehow it still didn't get through my skull!)

5. If I did not feel as comfortable with stocks as I do. I can accept historical 10% rates of return over the long haul; volatility bothers me much less than rental property headaches do.

I'd be remiss if I didn't say how extraordinarily helpful BP has been over the years. I think RE investing is a great thing; it turns out it just might not be the thing for me, and I'm okay with that.  My only hope with this post is to share my experience and why sometimes RE investing might not work out as you anticipate.  Acknowledging that for myself, I just sold one of my properties and will probably sell the other one within the next year.

Dominic, welcome to the forums!  Best of luck to you. Be sure to check out the monthly meetings at LBC.  If you are willing to hustle at this point in your real estate investing career, it will pay off later. Stick with it!

Welcome to the community!

Jon,

A lot of investors in Lancaster county will focus on the city because there are cheap properties to be had which look relatively good on paper. Many have had success there as well. When running your numbers though, just keep in mind that most of the houses are 100 years old. The only property I have in the city is over 100 years old and even though it has brand new copper plumbing and electrical throughout, it still ends up having far more problems than my units that are newer builds just by nature of its age. 

Other things to consider:  veeeery high taxes in the city. Also, remember that lower than median rents for the area are prone to bring more headaches, and increase the hassle factor of being a landlord.

Always do your due diligence and don't forget to include CapEx on these old homes! Best of luck to you.

It's worth repeating though Mark! Also account for CapEx - it's really easy to leave out, but a major repair or new roof could easily wipe out 1-2 years of cash flow.

Believe it or not, those are actually quite low for this area. I have a rental unit in the city which is worth about $130k (a SFR) that has taxes of almost $4,000.

The taxes in the Lancaster city district properties are extremely high, one (of many) reasons why I don't buy in the city anymore.

Max,

Welcome, I also am from the Lancaster area. 

While you should always run the numbers yourself, my guess is that this proposed property will not get anywhere close to $1000/month in cash flow.

The "back-of-the-napkin" equation BP'ers use is the 50% rule. By that rule, you would spend half of the rent on expenses, with the other half left as NOI, or about $1400 per month. You would then spend $1100 per month on your mortgage, yielding about $300 per month.

Of course some months you will cash flow $1000, but this does not take into account your months with vacancy or a major expense.

A realistic goal in this rent range ($700/door) is to net after expenses and mortgage payments about $100 per door. Note that this also fits with the 50% rule above.

Good luck and always do plenty of due diligence!

The truth is that in this area it is very difficult to find a good deal for a flip. The margins are small, which make it more likely to not get a profit (or lose money). It's very easy to lose money on the first flip.