All Forum Posts by: Mike Roy

@Shiloh Lundahl Don't beat yourself up!  $1 Million net worth puts you in the top 1% according to Google.  I would caution though against assuming that wealthy people spend freely; rather, I think the poor are more likely to be fiscally irresponsible and that the wealthy have money because they are much more intentional with their spending.  Lots of good reading out there about the habits of the wealthy.

I would also offer that the size of the pile of money is much less important than the return on it.  If you have $5 Million in the bank earning 1%, you have $50k in annual income.  If you have $500k in multifamilies earning 15%, you have $75k in annual income.  I contend that millionaire status is not necessary for permanent financial freedom, certainly not $5 Million.  

I would look at where your $1 Million net worth is invested and what it is earning.  Perhaps there is opportunity to reposition your assets for better returns. 

The last thing I would say is that wealth is the result of mindset.  No matter how much income you have coming in, you must always consume less than you earn in order to have something leftover to save and invest.  Lifestyle inflation is okay to the extent it's proportional to an increasing income stream.  It sounds like your increase in spending was not related to an increase in income, just a realization of current net worth.  Just think of all the broke celebrities out there - I think they basically did the same thing but much more recklessly.  

But again, you're a millionaire and must be doing more things right than wrong.  You're also very honest and humble to share - thank you!  

I would say that being able to offer W/D hook ups is a tremendous way to increase rents, but I don't think you necessarily have to provide the appliances themselves.  This will depend on market and property class, but I can tell you that hook ups alone are attractive in my small market where many units do not have them.  

To me, hook ups represent a one time expense that enables you to increase rents without the ongoing maintenance that comes with owning and replacing machines.  I do own inherited machines in one of my units and just paid a $235 dryer repair bill within the first 3 months of ownership.

I would say that a "good" cap rate is anything that is higher than the market average for like property classes and types.  To simply buy an above average cap rate means you have to buy an asset at below market value.  Much easier said than done. 

However, beating the market cap generally means a value add that increases NOI via either an increase in revenues or a decrease in expenses. This often means that the best deals are often very low cap rates to begin with because NOI is starting out low relative to the purchase price.

Just remember than you cannot demand a particular cap rate; rather a cap rate is an expression of how a market generally values a particular asset based on it's income.  It's far less important a number when you buy but critical to know ahead of time if you're strategy is to add value and resell.    When you buy, especially for long-term holds, I'd pay more attention to cash on cash.

@David Greene posted a nice article about house hacking yesterday:  

https://www.biggerpockets.com/blog/house-hacking-c...

The key is to realize that every market is different with respect to the best house hacking strategy.  Where I am from in Small Town, New England, there is a big supply of triplexes and 4-plexes, and if you look hard enough, you can find one that achieves the 1.5% rule and allows you to live for free. 

However, I lived in Tampa for five years and know that Florida is a different animal altogether.  Multifamily is scarce, and the ones you do find tend to be high end with numbers that just don't work.  In the larger cities of Florida, I'd look more toward finding a deal on a single family or condo, provided you don't mind having roommates.  However, I'd be careful with these highly cyclical markets given the run up. 

If you don't want roommates and have the down payment, there is no rule saying you can't buy a cash flowing asset of any kind and use that cash flow toward rent.    That would allow you to buy that multifamily in Any Market, USA and live more comfortably and privately in Florida.

I'm with @Ryan Murdock on the Rinnais, though you may also have to add some electric hot water heaters and split the water loop into multiple loops in the building.  That could be the challenge depending on access to the water pipes.  We've gone this route on a couple of 4-plexes, and it's been an RIO no-brainer.

I agree that electric heat scares renters in Maine and represents some value add opportunity for you.  For what it's worth, we purchased a "9 unit" in 2017 that was actually 3 triplexes.  Each triplex had an oil fired boiler for HWBB.  We were able to keep the oil boiler in each building and add two new propane combi boilers, so six total.  Our cost after rebates from PGANE and Efficiency Maine was $33,500, but we estimate that we're saving $10k per year on heating fuel.  Yes, there now 9 systems to maintain, but we think it's worth it.

I know some say to include heat in a higher rent and focus on efficiency, but I only had to walk a unit once with the heat full blast and windows open to think otherwise.

One word of advice is to install propane fired units rather than oil and consider having the propane company do the work.  They may get a little more aggressive on their pricing if they know they have the fuel revenue to look forward to.

Good luck!

@Brandon Turner and @David Greene - You guys are a huge inspiration! We started investing in buy-and-hold multifamily properties in Maine in 2015 largely because of BiggerPockets.  In a very short amount of time since then, and on fairly modest salaries, my wife and I have achieved Level 1 Financial Freedom for our family of four.

Brandon - What are the Top 3 Lessons you've learned from real estate that you want to teach Rosie?

David - I can't seem to find any good advice about health insurance for people without an employer-sponsored plan.  Does the Hack Master have any good insurance hacks to share?

You guys are awesome!

This may be semantics here, but I consider the monthly fee "management" and the one-month lease up fee "vacancy."  Either way, the lease up fee represents a month of lost income, but I like to factor it into my vacancy rate because I only pay it when a unit goes empty.  By doing this, I think it provides a more accurate representation of the actual vacancy rate I will experience.  

As an example of how I think this helps us, we own 20 units in a market with approximately 5% vacancy.  20 units X 12 months = 240 rentable months.  If we experience the market vacancy of 5%, that's 12 months of total vacancy across the portfolio.  

We also know that it can take as long as 1.5 months (45 days) for us to turnover a unit from the day one tenant moves out to the day the next one moves in.  That means we anticipate 12 months vacancy/1.5 months per turn =  8 units that we anticipate to turnover in a given year.  So, if we have 8 vacant units in a year with 1.5 months turn time, plus a month's lease up fee, we really have 8 X 2.5 = 20 total vacancy months.  20 vacancy months/240 rentable months = 8.33%.

So, in a market with a 5% physical vacancy rate and a 1 month lease up fee, the actual vacancy rate we expect is 8.33%.  

In reality, I would be a little surprised if we turn 8 of our 20 units in a year, which means I think 8.33% total vacancy is a pretty conservative number, and I like to use conservative numbers when looking at deals.

The idea here is that your market's vacancy rate will impact how often you pay lease up fees.  I think calculating it this way lets you measure the impact of lease up fees more accurately.  Hope this helps!

If you want to earn $50k per year on a $350k investment, what you're really saying is that you're $350k needs to yield 14.29% annually.  A leveraged multifamily bought well by a knowledgeable investor , operated well by an experienced manager, and located well in a growing market could produce a return like that.

With a 3 year time frame, and assuming zero experience, I would spend the first year educating myself about multifamily, the second year identifying a market and building a team, and the third year identifying and closing on property - roughly speaking.

"I was hoping to take up shop and learn as a realtor but I guess if I am being 1099'd the insurance thing could still be an issue."

Not sure. I think that members of NAR and agents for some of the large brokerages (ReMax, Keller Williams, etc.) may have access do decent pricing through their group plans. Not totally sure, but I would start asking some experienced agents about how they handle health insurance.

Hi Chris - The way I see it there are a few options when one loses access to employer-sponsered health insurance.

1) Obamacare - There are significant federal tax credits available for those earning less than $100k.  Perhaps the advantageous tax deductions of real estate enable you to show a low enough income to qualify for an attractive tax credit and, thus, low net premium cost.  Healthcare.gov is your resource to price this out.  If your income is low enough, you may even qualify for Medicaid, and your kids may qualify for CHIP.

2) There are healthcare sharing ministries, such as Liberty Healthshare, that you may want to research if your earn significantly more than $100k.  These organizations pool like-minded individuals, usually on a religious basis, to share each others' medical costs.  The net effect is that they operate much like regular insurance, but usually at much lower costs.  There are some downsides to these organizations, so I would suggest doing some in-depth research.

3) Self-Insure - This option probably only makes sense if you are both healthy and wealthy enough to carry the risk and absorb the costs.  

I too would be curious to know what others think are the best insurance options for the full time real estate investor.