All Forum Posts by: Mariah Jeffery

I recently formed an LLC and want to transfer my properties to my LLC via quitclaim deed. I have two mortgage companies. One said no problem, the other said I will trigger the due on sale clause if I do that. Do you think they would really call the note due? How would they find out? I recently changed the autodraft of the mortgage payment to come from an account in the name of my LLC. I'm waiting to see if this arousing suspicion. I'm basically thinking that in 2-3 months if I haven't heard anything, I'll go ahead and file the quitclaim and just hope they don't notice. I would hate to give up my 4.75% rate, though! (I bought this one as OO and later moved out).

By the way, the property is in my name and my husband's, and the LLC is owned by my husband and me 50%/50%.

I'm financing them all with 20-25% down. The prices range from $60K-$94K so far. The $94K is for a 4-unit. They average around $30K-$35K per unit.

My father in law is my property manager. He does an excellent job for the most part, but I do worry about him being organized enough to handle this many units. I have the tenants mail a check to me and half of them get their rent paid by the county, so he's only in charge of collecting if someone's check doesn't show up. If he starts to feel overwhelmed, I'll hire an outside property manager.

Cash reserves are ok now, but after the 21 units I will have to take a serious pause and build them back up before buying more.

I bought my first duplex in March '07. It's in South Dakota and managed by my father in law. The first one worked out well, so I kept looking for deals, but couldn't find anything that met my cashflow criteria. Finally, this year I found a motivated seller. He is '87 and wants out NOW before he dies. He has 65 properties and will sell be any of them at about 25% below market value. They already have tenants in them and are in good but not great condition. I have bought one per month for the last 3 months (a 3-unit and two 2-units). I just made him an offer on a 4-unit and he said he would accept it if I buy another 2-unit from him at the same time, also at well below market. The 4-unit meets the 2% rule and the 2-unit is at about 1.5%, but is an incredible house in a very nice area, which will attract great tenants. I also met another motivated seller this week and made an offer on two duplexes, which I am waiting to hear back on. Additionally, I found a potentially fantastic deal on an REO fourplex that I want to make an offer on, which would also meet the 2% rule. I'm finding the kind of deals that I only dreamed I would find, but if they all work out, I'll be at 21 units in a few months. This is a big jump from two units! Two units is a hobby and 21 units is a regular small business. Am I setting myself up for failure by growing so fast?

Originally posted by MikeOH:

That is a great question. I was just wondering that myself. I don't use square footage or anything like that, but I break things down more than the 50% rule, as follows:

-Maintenance and repairs: 20%
-Vacancy, advertising, turnover: 10%
-Property Management: 6%
-Use actual taxes from country records, estimate insurance costs.

What do you use for all the expenses you didn't include? Utilities (even if only during vacancies? Legal fees? Evictions? Lawsuits? Damage done by tenants in excess of the security deposit? Advertising? Capital expenses? etc, etc, etc?

You're at 36% without any of these additional expenses (or even taxes)! 20% is too high for maintenance - where did you get that number?

Mike - I was including advertising in the 10% vacancy/turnover expense and the other expenses you mentioned are rolled up under the 20% maintenance bucket. I guess it would be more appropriate to label it Maintenance/repairs/capital improvements/legal/misc. This 20% came from a book a read on RE investing. I can't remember the name of it now. For utilities I have to pay (water/sewer/garbage), I use the previous 12-month average for the property. I guess I have left out the ones I have to pay during vacancies, but they're usually not much.

Do I really need to have a factor for lawsuits? I have a $1M umbrella insurance policy.

Taxes and insurance tend to run around 15-17% of rents in my area, so I guess I'm at 51%-53% even with a low PM fee. I may be being too conservative.

Robert,

That is a great question. I was just wondering that myself. I don't use square footage or anything like that, but I break things down more than the 50% rule, as follows:
-Maintenance and repairs: 20%
-Vacancy, advertising, turnover: 10%
-Property Management: 6%
-Use actual taxes from country records, estimate insurance costs.

Exceptions to this are as follows:
- If the property was built within the last 20 years and appears to be in good condition/well maintained I will use 18% for maintenance.
- If the property appears to be in excellent condition/very well maintained regardless of when it was built I will use 18% for maintenance.
- If the property was a foreclosure or seems to have been poorly maintained, I will use 22% for maintenance.

These are not scientific at all. I am by no means an expert. I also have a family member as my property manager, so he doesn't charge much for labor when he has to make repairs.

I've had one property for 3 years and the actual maintenance costs have been well below 10% of rents. However, I have not yet had to replace a roof, replace any appliances, or paint the exterior. This is a duplex built in 1950 that rents for $1,270.

I'm really interested in hearing what the experts have to say about maintenance costs for multi-unit vs. single family properties or those with higher vs. lower rents for a given square footage.

- MJ

Thanks, all. The realtor estimated ARV at about $160K with huge upside potential, since this is zoned commercial. There are four houses right in the middle of a bunch of business. It's also within walking distance of a college. It was last purchased for $110K in '97.

Units are 2 bed, 1 bath 590 sq. ft.

I mentioned my educated guess on the rents, and the realtor agreed with me. I have other units of similar size about 2 miles away, so I feel fairly confident about the rents. I don't feel confident on fix-up costs, since I've never done a major one. That's why I'm trying to be conservative.

The $22K is roughly as follows:
$5K - new shingles (this is a quote from a contractor)
$5K - conversion cost to separate utilities + new water heaters (will definitely either separate the utilities or buy efficient, tankless water heaters)
$4K - plumbing
$2.5K - new carpet and paint (needs carpet in 1 unit only)
$2.5K - 4 new tubs, toilets, sinks
$1.5K - sheetrock
$1K - landscaping
$500 - new fixtures, misc.

Some of these costs are low because all of the work is being done by my father in law and/or his friends, who give us great deals on labor.

I just viewed a 4-unit REO property that will come on the market tomorrow. It's in good shape structurally except for frozen pipes, which is a pretty big deal. Cosmetically, it needs a lot of work. I estimated $22K worth of work, so I'm factoring in $35K to be safe. It last rented for $600/unit including gas and water. This was over 1.5 years ago before the foreclosure. I was planning to put in electric water heaters or possibly even get it metered separately. Since it's been vacant for so long, I can't get an accurate rent or utility bill number, but I think the $600 with gas could be raised to $625, since this is a strong rental market. I think they could bring $550-$575 w/ no utilities included. The agent expects a list price of between $60K-$80K.

It's a cattle ranch. I guess that would have been important to mention.

The land is divided into 12 plots. All of the plots have water, but some have it in an inconvenient way. The owner wasted something like $30k on a dry well right by her house and then paid to run a line over to a really good well a couple miles away on a different plot (that she owns). I'm not sure if this water issue could cause problems if we try to sell it in 12 separate plots rather than all together, since some of the individual plots do not have water. I'm not sure what exactly you mean by "water rights", but I'm assuming it has to do with having access to water.

A elderly family member has a 1,300 acre ranch that she's looking to sell. She claims it's worth at least $1M, but she's willing to sell for $750K to family, in exchange for a minor concession (i.e., another family member gets to keep his job there for at least 3 more years). I have looked at a few commercial listings of similar land in the area, and based on price per square foot of the *list* price, it looks like the land should conservatively be worth anywhere from $1.5M to $7.5M. However, I admittedly know nothing about ranches. How do I go about finding a better estimate of the value? How do I find out if it can be divided and sold in smaller increments.

I obviously have a lot more research to do. Where do I start?