All Forum Posts by: Bryan Montross

Just like Kevin, I start out by using the 5/5/5 rule of thumb. I keep one account for CapEx across my portfolio, one account for each property for repairs, and leave the vacancy in my operating account. Just the way I do it but can be done numerous ways. I also cap each of these accounts. I like to have at least 3 months expenses in my operating accounts. At the end of the year, if I have more than that I take it out to profit. For repairs I cap it at my annual average over the life of the property. At the end of the year, if I am over that average I take out all but 90% percent (I keep playing with this number to make sure I keep enough at the beginning of the year, but not have too much at the end of the year). Finally, CapEx is just a beast. I do estimates based on when I think major items will need to be replaced and how much they will cost and how big my portfolio is, etc. I don't want to cap my account at $20,000 if I know a roof costs $25,000, but I also don't want to go up to $100,000 knowing that if every CapEx item came up the same year it would only cost me $75,000. It does take a little playing around with the numbers and knowing what you are comfortable with in terms of risk.

Sometimes as landlords we try to be nice and sympathize with our tenants. I had this same issue a year ago. I had a tenant who paid me rent late every month, but always paid (including the late fee). At one point I even tried working with the tenant to see if a different due date would help based on when he was getting paid, but he said he was fine and his new job would help him get ahead. Finally, he was a full month behind, and the second month just came due. I didn't know if I was going to get paid or not. This is where I had to look at the laws for eviction, send him his notice to pay or quit, and try to get him out. He left on his own, but when all was said and done, he owed me over $8,000 in unpaid rent and damages to the property.

The lesson I learned was to have my processes in place and treat this like a business. Every time a tenant is late you should be filing the appropriate notices. Even if you know they are going to pay. This helps document the issues and if things go beyond the notice period you are all ready to move forward. It's creating and following processes that has helped my business thrive.

Since you state it is a non-smoking apartment, I would assume it is written in the lease that tenants are not allowed to smoke inside the apartment. It is also good to put in a lease where they can smoke, if anywhere, on the property if that is not already in there. Next, I would send a letter, or go talk to the tenant in person, and let them know that it has come to your attention that they have been smoking "in" the apartment and that per their lease that is not allowed. Just offer it up as a warning to let them know you have taken notice. If they continue to smoke in the apartment, you have grounds to file for eviction due to them breaking the terms of the lease. Just make sure you follow your local landlord tenant laws to follow any required processes.

I do think this is a little bit market specific. Appraisals are based on comparable sales in the area. If the area you're in has a lot of converted 2-unit houses and they are in demand, they may be more valuable than the traditional single-family houses. It comes down to the demographics of the people in the area. If your in an area with a lot of investors who want to maximize cash flow or where first-time home buyers need more income to get into a starter home, they might have a higher value. If you're in an area with mainly young families or maybe an older generation who just want to live by themselves and not be bothered with people living in the same structure as them, then the home is probably less valuable.

One thing I do with some of my investments is to convert it in a way that is easy to be removed. Keep a door between units, or maybe have one wall that is easy to remove that opens it back up. Then when I go to sell, I can either convert it back to a single-family home at low cost, or leave it as two units depending on what the market is demanding.

@Mann Phan First, I want to compliment you on getting into real estate investing and purchasing six rental properties. I think you are experiencing what it is being an investor. From the information you have provided and don't even feel that you have done anything wrong. There might be areas for you to improve, but we all get an investment at some point that doesn't seem to work out.

I feel there are several comments saying you might not have done well with inspections, but even if you had a great inspector come out and say the HVAC was great, that doesn't mean a week after I buy the house that it may not die on me. It could even be only 3-5 years old. There are just expenses that come up. As an investor we just have to minimize our risks and plan accordingly. If the HVAC was only 3-5 years old, I probably wouldn't think it was going out and maybe not have as much cash saved for it, but if it was 20-25 years old I would think it will die soon I better be prepared.

You just need to take a look at your properties, understand the risk profile of each in terms of when certain CapEx items might need replacing, and decide if that is the risk profile you are comfortable with. If it is not, then maybe it is a good time to sell. If it is, great, because real estate investing really is a long-term investment. Don't let your emotions get the best of you because you see your cash flow going down with all these repairs. Follow your strategy and stick with it.

This really does sound like you just need to network and build out your team. Connect with a local real estate agent. They will be able to help you with estimating ARV. Connect with a local contractor. They might be willing to walk properties with you and provide estimates before you put in your offer (sometimes for a fee). The next best thing is just to do. You can read books about estimating and find calculators online, but the best way is just to do a couple projects and see how well you are doing. You can estimate all you want, but you never know how good that estimate is unless you complete the project to know. Go out and have some fun and make some money.

Personally, I don't see this as a good investment. As a buyer I probably would not buy it based on a wholesaler telling me it has more potential if I re-zone it. For me to go through the due diligence myself and then if I did buy the property going through the zoning and permitting process probably takes more time than I would want to take and would rather deploy my capital elsewhere. You're also limiting your buyer pool when it will only make money if the buyer gets creative.

If you do go under contract, I would make sure you have some very broad "get out of jail free" clauses that you could terminate the contract. But from the information I have read, I don't think it is worth pursuing.

First, I would check your local landlord-tenant laws to make sure you know what you can and cannot do, or better yet, spend the money for a 30 min call to ask a lawyer. Second, a lease is a legal binding contract. If this was a large apartment complex do you think they would just let a tenant move and not pursue collecting the money owed? Probably not. So why should we be any different? However, people's situations change and I do think it best to work with the tenant to come up with a solution that works for everyone. You should do your due diligence to get a new renter as soon as you can. The current tenant should keep paying until a new tenant is in place, but hopefully that is before the current tenant moves out and she is not out anymore money. Next, I would not make it a sub-lease and still have your current tenant in the middle. Instead I would look at creating an amendment to the current lease the changes the responsible party to the new tenant and the new tenant just takes over the current lease. I think that would probably get around your HOA rules because it is still the same lease.

In the end, work with your current tenant to come up with a solution that works for everyone, but don't let them off just because they want to leave. If you truly can't find a new tenant or the HOA is blocking you, your current tenant is still on the hook for as long as the lease is. I would pursue action to get what you are owed. Too many tenants take advantage of Mom and Pop landlords because they are willing just to write it off. So to them a lease doesn't really matter because we have made it so it doesn't matter.

I know in Maryland our sales contract states that the owner is not allowed to enter into a lease if they are under contract to sell. If they were already under contract prior to you signing, then the lease is probably not valid. There is also a clause that if there is a lease on the property when they enter the contract of sale, then the buyer has to honor the terms of that lease. If that is the case, the buyer would probably drop out unless they are an investor. Regardless, my advice would be to get out and find a new rental in the next two weeks, cash the check that says lease cancellation (keep a copy for sure as evidence they said they were cancelling), and just move on. I wouldn't want to deal with them as a landlord based on how they are currently acting. I wouldn't even push for any other compensation knowing that the compensation is that you don't have to deal with it. Hopefully it all works out.

If you are house-hacking I am assuming you are living with the tenants or at least in a unit next to them. You've probably gotten to know them pretty well. Just have a conversation with them and see how things are going. You might transition that to a question like, "If your lease ended at the end of the month, would you continue renting and why?" If they say yes, find out what they like and then find out if there is anything you could do to make their place better. If they say no, ask them what is a determining factor for them leaving. If you want them to stay when their lease ends in January, maybe you can fix it before then to make them stay. Having a conversation like this shows them that you care about them and making things better. If you try to just ask them if they plan to leave in January, you might put them on the defensive and scare them out. Wait until you are close to your notification window, and then ask for their decision. It's a very small nuance, but could mean the difference between keeping a good tenant and losing one.