All Forum Posts by: Michael Rossi

MyPetSlug,

To answer your question, there are VERY FEW people who will sell you their house subject to the existing financing. The only people that will do that are DESPERATE sellers who have no other choice. In a subject to deal, they are giving you the deed to their house and you are promising to pay. If you don't pay, there is nothing they can do about it (except sue you) and THEIR credit is ruined if the bank forecloses because their name is still on the mortgage.

On the other side of this deal, you have a lease option "buyer" who is paying more than market rent; paying a higher than market price for the house; and in reality will never buy the house because they will never fix their credit. What also frequently happens is that this lease option buyer doesn't do the maintenance that they are supposed to do and in a year or two, you'll get the property back in bad condition. The vast majority of lease option (and land contract) buyers never buy the property because they're really nothing more than renters to start with.

While you're waiting for the lease option "buyer" (someone with bad credit but a big pile of cash) to show up and "buy your house", you could have simply been renting the house to a tenant. While you're waiting, your expenses and mortgage payment continue. Often, you will lose more in lost rent than you make by getting the option premium.

That's the other side (real world) of lease options and subject to. It sounds better at a seminar than it is in reallity.

Mike

Manufactured homes can be a great investment. I currently have 2 doublewides (on a permanent foundation) in my rental portfolio. I would love to have a mobile home park and have been actively been looking for one. As with everything else in the rental business, it's all about the numbers.

Mike

Minna,

You could accomplish the same thing by going to Open Houses in the neighborhood. The realtor will be there anyway and you would not be inconveniencing anyone.

Mike

Yes, it is wrong to waste someone's time (unless you tell them what you're really doing). How would you like someone to treat you like that?

Mike

I agree with Ryan and Biggerpro, but would add one thing. Operating rental properties is ALL about the numbers (money). It is a critical mistake to over-rehab rentals. The rental game basically consists of the landlord fixing up the property and the tenant tearing up the property. This is repeated over and over again.

I would consider the income level of the tenants. If this is a low income property with low rents, I would not remove the popcorn ceiling or do anything except making the property clean and safe. In our low income apartment buildings, we don't even put in carpet (we simply paint the floors). Frequently, the walls sustain a lot of damage (holes) and when they get bad enough, we texture the walls so that all of the patching isn't visible! We also only put in used appliances.

For better rentals, we do install CHEAP (but nice looking) carpet from Lowes. We still put in used appliances.

If I had property at Hilton Head that rented at a premium price to the very wealthy, I MIGHT remove that popcorn ceiling and put in new appliances.

IT'S ALL ABOUT THE MONEY!

Mike

Charles,

I understand what you are saying, I just don't understand the rational of intentionally doing bad deals. Learning everything from the school of hard knocks is a sure path to failure.

When I first started my rental property business about 3 1/2 years ago, I realized that there was little room for error. The majority of new businesses (of any kind) fail and real estate is certainly no different. Therefore, it made sense to me that I didn't want to make any mistakes that were preventable. To that end, I read many books and joined my local REIA. At the REIA, I met a woman who owned about 50 rentals (which seemed like a lot at the time) and had been in the rental property business for many years. I already knew the basics, but not the CRITICAL real world aspects of the business. I asked her questions and considered the answers to be gold (which they were). They have allowed me to build a rental property business with several dozen rentals in only 3 years with VERY few mistakes. I was not able to accomplish this because I am a genius, but rather because I followed the path that other successful investors had already paved. There was no reason for me to repeat mistakes that others had made. There was no reason to pay too much for my properties and have an insufficient cash flow that would doom my business to failure. Those that had gone before had already made all the mistakes and been gracious enough to tell me about them. To have repeated those mistakes anyway would have been....STUPID and I would have deserved to fail.

That's what's so frustrating for me. People ask questions and when they don't like the answer (because it's too hard or inconvenient), they ignore it and condemn themselves to failure. THAT'S CRAZY!

Mike

I have two ideas.

First, you could join your local REIA (real estate investor's association) and make friends with some SUCCESSFUL investors in your area. Meeting actual people who are making a living in this field might help alleviate his fears.

Second, you could wholesale a property by yourself and make some money with very little risk. When he sees what you have accomplished, that may help.

I'd wait to do a rehab until he is onboard.

Good Luck,

Mike

Peter,

Yes, you will want to get a loan and put as little down as possible. Unless you have an unlimited amount of cash, putting a lot of money down will mean that you can't buy many rentals.

More importantly is that you should ensure that any rental property you buy will have a positive cash flow using real world expense numbers. Do a careful cash flow analysis.

Good Luck,

Mike

Gary,

There are a few specific expenses that increase the costs to an absentee landlord. In addition to their management fees, many management companies charge extra to place tenants. Typically this is one month's rent. Unfortunately, that one month's rent can be nearly half of your positive cash flow for the entire year. Ironically, this placement fee also is negative incentive for the management company to do a good job. The more tenants you need, the more money they make!

Maintenance also typically costs the absentee landlord more than a local landlord. Management companies will typically charge a fee for arranging maintenance. Then, they have no incentive to find you a good deal, so you will often pay a high price for maintenance. These maintenance fees can again steal a high percentage of your cash flow.

Beyond these tangible costs, there are a lot of intangible costs that can increase your costs. For example, management companies have no pride of ownership and may allow your rental to become run down. Management companies also may feel pressured to fill vacancies quickly and will therefore take any loser that applies. This can result in increased evictions, legal fees, court costs, damage, etc.

All of this adds up to a lot of extra expense and risk for the absentee landlord.

Hope this helps.

Mike

Ryan,

I'm not saying that all expenses are applicable to all properties all the time. Quite the opposite. What I'm saying is that it is impossible to know what expenses any given property are going to have in any given year.

The extensive damage done by some tenants is a perfect example. Fortunately, this is infrequent, but it does happen. I own several dozen rentals and have had damage in excess of $2,000 (materials only) occur twice. A friend of mine recently had a tenant do $10,000 in damage to one of her rentals. Chances are that when you only own a few rentals, you won't experience this very often, but let's look at the result.

Let's say that you buy a rental that only has $15 positive cash flow per month ($180 per year). Things go exactly as expected for the first 5 years, but then you have a terrible tenant and he does $5,000 of damage.
In this instance, your entire profit for the entire 5 year period is wiped out and it will take you an additional 22 YEARS to make up the loss (assuming that you don't have any further losses - which is very unlikely).

Now, contrast that to someone who bought right and has a positive cash flow of $100 per month ($1,200 per year). If the same person has a $5,000 loss, he will be able to cover all but $200 of the loss from the cash flow of the 1st 5 years. Then, during the next 22 years, he would make $26,400 with which he could invest. Multiply that by 50 or 100 properties and you're talking about the difference between a failed business and a successful business.

I believe that the opposite is true. The 2% of gross rents IS possible in the great majority of markets, although that does not include the coasts and bubble areas where a lot of people live. If you want to see where these prices exist, take a coast to coast flight and look out the window. Flyover country is where prices are sane and great deals can be found.

I'm not saying that finding these deals is EASY in any area. It requires knowledge, networking (I hate that term), and a lot of work. With work, patience, and persistence you will find these deals in most areas (forget California, Florida, NYC, etc). In addition, it shoudl be remembered that in the rental business we're not flipping houses, wholesaling, or running a business that requires doing 5 deals a month to survive. If it takes 2 or 3 months to find a single deal, then so be it. It is better to buy one great deal for a rental than 10 bad ones.

There are currently several posts on this site where people have bought marginal deals and paid the price for doing so. Shouldn't the newbies learn from these instances, instead of learning everything the hard way?

I do get frustrated seeing newbies screw up things that should have been learned the easy way. The information is available in many forms (from books, from successful investors at their local REIA, from this forum, etc). To simply ignore the experience and advice of successful investors and intentionally make mistakes (all the while trying to rationalize it or attacking the messenger) is crazy. Of course, that's why the vast majority of newbies fail and I guess there is little you or I can do to change that (even though we continue to try).

Mike