All Forum Posts by: Milton Rivera

Hello BP,

I have been running into a recurring trend in searching for deals.  Two properties located in a single lot.  The primary issue with this is that financing sources (traditional and hard money lenders) are having a hard time quantifying a valuation.   Example: 

• Two (2) duplexes on a single lot (four (4) doors total)
• Sales price - $250,000
• Assume the properties require $50,000 worth of updates
• All in cost - $300,000
• We can pull some comps for a  single duplex going for about $150,000

The strategy would be to split the lot in two and have a duplex in each.  This process does take time and effort (going through the city/county to seek a variance, complete a survey, file the docs with the correct jurisdiction) but not impossible.   This would satisfy the parties by showing a single dwelling on a single lot and get the appraisal.  Sellers typically do not want to go through the splitting process and incur those costs.  

The problem I am having is identifying the initial funding sources.  I am putting money into the deal (20%-30%) but would prefer not to fund all of it.  Please advise.   

@Shaimeir Lesane

The simplest way is to look at resources like Zillow, Trulia, Redfin, etc.  These will only give you a ballpark number and are about +/- 20% but at least it will give you a starting point.  Once you assemble your team including a broker/agent this should take them about 2 minutes to do. 

@Kyle M.

The effective tax rate will not come into play as much as you think.  The primary reason being is that unless you own the property out right you will most likely show a loss for a single property (you will want to consult your CPA).  Take a look at Schedule E of the tax return.  One of the big benefits of real estate is your ability to take depreciation on the asset.  If you are collecting a total of $100/door/month in cash flow (this is after all expenses including debt service) you would have an additional $1,200/year in revenue however, depreciation of the asset may be well over that depending on the value of the home.  One example off of foxbusiness:  "The tax assessor's estimate of the land value is $75,000, and the building value estimate is $125,000. Your depreciation expense that you take each year againstrental income would be $125,000 divided by the IRS allowed 27.5 years of useful life (residential real estate) for a depreciation expense each year of $4,545."

If you total revenue is 1,200 in pricipal you have a net loss of (4545-1200)= $3345

@Nigel Witherspoon

If this is a straigh forward residential acquisition, the answer is yes.  

It also depends what you were looking to do with the land.  If your strategy is to re-zone the parcel and change its use to higher density usage than you may have needed to demo the home.  You may want to take a look at the county's tax appraisser website to see how they value the home vs. the land to at least get a starting point of the values. 

@Chinedu Akunne

Overall, I would still do the same in a quad.  You are transferring the risk to the tenant and hold them accountable for their on utility consumption.  You may also want to consider what are other apartments are doing in the area.  Any new construction is going to be metered unless it is a 55+ community where tenants want convenience.   

I would not necessarily provide a credit.  Consider doing the work when you may have one or two units vacant so that you make it part of the turnover process and possibly inconvenience fewer tenants.   The more notice/time they have, the more time they have to get ready for the event and cannot claim it as a surprise.  If you have an average credit score most utility companies do not require a deposit. 

@Chinedu Akunne

I would target option B. A five-plex is technically commercial property (anything over four units is) and should be evaluated via cap rates. Cap rates being determined by total Net Operating Income, by lowering your expenses you, in essence, increase your NOI, therefore increasing the value of the property.

I can appreciate you being mindful of how the tenants will handle it, but in the long-term is your decision.  I believe the key element here is how you communicate it to the tenants.  You can give them a 60-90 day notice that this is going to happen and remind them every time rent is collected.  Keep them informed when the contractors will be out and how they should go about setting up their accounts with the utility providers.  Re-iterate this is a fair process and that now they will only pay for what they actually use.   

Good luck, 

@Patrick Fraire

Be mindful of mixing business and family.  

There is a real scenario in which you could be the one bad guy in this equation.  Explain the facts and break down the data to your girlfriend.  

She will be writing checks every month to pay the difference.  Does she clearly understand that?  California is tenant friend state and has she considered if things go south.  Does she really want to go through an eviction with a relative?  What happens if the relationships dissolve?

Looks like @Karen O. has hit all the points.   

Good luck,

@Account Closed

If this is truly apples to apples (say the apartments are in the same building and cost the same) then the cash flow would be the prudent play. 

In this case, it sounds like there may be some upside to the first unit if:

• You can get a reduce price to account what ever updates are required.
• You can convert into a "real" two bedroom from a den. 
• These "upgrades" may increase your cash flow making it a more attractive investment. 

Most investors value cash flow since the goal is to have another steady source of income.   

Good luck 

@Jeff Duford

One way to structure in a single lease agreement: 

1. You will have a baseline lease say one (1) year.  Depending on local laws, the tenant/landlord must give the other party certain notice - 60-90 days before the lease expires.  An auto-renewal clause can be in the lease with a percentage increase (say 2- 5%).  If you do not receive any notices, then give the tenant at heads up the rent will be increasing to $X on date Y. The auto-renewal clause can be exercise a couple of times (say three years in total).   This will ensure that you keep the property occupied and also take advantage of rent increases.  
2. At the end of the final auto-renewal year, you can let the lease go to a month to month term.  Notify the tenant of the new terms (month to month, rent rate and notice requirements).  This allows you again to keep the property occupied and take advantage of rent increases.  

If you find a good tenant, you want to make sure you keep them as long as possible and make it easy for them to stay (hence the auto-renew). They can always call you as the lease expiration approaches in case they want to ask for concessions (free rent, carpet steam cleaning, etc.)

Good luck, 

Milton 

@Bobby Burches 

Each jurisdiction is different.  I would reach out to them and post the question as a hypothetical.  

One way to handle is to hire your own MEP contractor to do an inspection and confirm the installation is code compliant.  You can also request a courtesy inspection from the local jurisdiction.  You can then determine what if any deficiencies there are and create a scope of work to address. 

The county/city may impose a penalty and/or request that permit be pulled retroactively.   In general, if the work was done correctly it should not be very expensive and more of a dotting the "i"s and crossing the "t"s exercise.  This will give you peace of mind and sell the property without issues once everything properly addressed. 

Good luck,