All Forum Posts by: Anant Lal

@Sam Horton

Thanks for the response. 

I realize it wasn't clear from my initial post. I tried putting a new lightbulb into the garage door motor and it didn't work. I don't know how involved that process will be, but I replaced the entire system less than a year ago. 

I think I might just buy and ship them a $20 microwave to use until the technician gets out there. 

You're right about the shower. I probably should just get a plumber to go out there and look at it. Can't be too careful with water issues. 

I just had a new set of tenants move into my rental. Their initial move-in form noted a few conditions that they asked to have repaired. Although I was able to fix most of the issues, there were one or two that I couldn't fix or didn't feel needed fixing. 

I have 2 questions. First, are these issues I need to take care of? Second, how do I respond to a tenant insistent on getting these repairs? 

There was a set of blinds with one of the blinds missing a section towards the very end. I told them I wasn't replacing it and that I would take into account the initial condition when they move out. 

One of the three showers doesn't fully switch from tub mode to shower mode. I tested it and the water pressure and is pretty good and there is nothing wrong with the temperature control. I'm not sure how to fix it short of replacing part of the shower and redoing the bathroom. I'm don't really want to make the fix unless I really have to. 

One of the light bulbs in the garage door motor isn't working. There are 3 other bulbs in the area and the area is still well lit. 

There's a crack in the microwave door, and the tenant is worried about radiation leaking out. I've tried to tell them that a piece of plastic isn't going to affect anything and that I'll have a repair technician out there next week to look at it. I'm still getting nasty emails. 

What would y'all do?

$3000 for my 3/3.5 townhouse in Houston, Texas

Johnny,

The model that you should be looking at is IRR.

Ben Leybovich has a pretty good article on it here:

https://www.biggerpockets.com/renewsblog/2014/07/08/irr-use/

If you're 30 miles out from Houston, I'm guessing you're talking about somewhere like Richmond/Rosenburg/Mont Belvieu/Rosharon?

1) Are you planning on self-managing forever or giving it to property management in the future? I planned on self managing, but then I had to move away for work. I also discovered I'm a terrible property manager, and I turned it over to someone who hopefully knows how to run it a little better than I do. You force yourself into a hole if you don't account for property management upfront.

2) I don't think you can assume 3% housing price appreciation per year. A lot of the chatter I'm hearing is that winter is coming for a few reasons.

A) The fed is increasing interest rates which leads to lower housing prices (as peoples payments go up, they can afford less house).

B) Markets are cyclical, and we're close to the longest we've ever gone without a downturn. Even if prices don't go down and we don't enter a downturn, you can't assume that there will be sustained 3% growth. Nationwide, there hasn't been 3% inflation in nearly a decade. Will the deal still make money if you don't have appreciation, or a have lower rate of appreciation?

3) Rents may or may not go up. Even if they do, it may not be enough to cover the big capital expenditures. Your risk on this probably depends on how long you plan on holding these houses.

4) Have you accounted for all selling costs in your IRR? There's more than just the 6% seller fee. Taxes (on your capital gains from 3% appreciation per year), Title.

5) How are you doing your IRR calculations? It seems to me like you should be getting more than just a 12% IRR assuming 3% appreciation per year. Assuming you break even everywhere else, 3%/20% down payment gives you a 15% return. Between principle pay down, depreciation + mortgage interest on your taxes, cashflow, and everything else you should be getting more than just the basic 15% you're getting from appreciation and leverage.

There's some decent chance of an upside, but its risky to be counting on there being appreciation in the area. If the deal can't sustain itself as it currently is long-term, then I would stay away. There isn't enough potential upside (I would want more than 12% IRR for a speculative appreciation play) to take on the potential downside, but that's just me.

I've done something like this before, but as the tenant.

Corporate housing can end up working out pretty well. The rents were significantly higher (something like 50-75% higher than normal), and the place never got torn up.

On a more concrete basis. 

You bought the place for $260,000. Let's say your down payment was $20,000 leaving you with $240,000 remaining on your loan. 

You get the bank to appraise the value of your house again and it comes back at $300,000. They allow you to refinance at 80% of that or $240,000. 

Since the amount they could loan you is the same as the amount you have left, refinancing would net you $0. 

If your down payment was >$20,000 then you should be able to get any of the extra amount back. If your down payment was <$20,000 then you can't refinance it to get money out even at the higher value. 

Again, this is all dependant on the house re-appraising for $300,000. Just because it might be possible to get $300k in a sale doesn't mean that's what an appraiser will think it's worth. 

Amadeus, you're missing one of the R's from BRRRR, and that's the rehab part. When you buy a distressed property you can force appreciation that is >$1 appreciation/$1 invested. When you refinance you're pulling out the extra money in the deal due to the forced appreciation. If you have a good enough deal where you were able to force enough extra appreciation you can refinance to 80% of the after repair value and get all of your initial investment back.

Just my opinion, 

You should do what you are comfortable with, but you need to evaluate each deal through the lens of what your goals are. 

Like you said, if you have no desire to learn construction and you just want to diversify your portfolio/ create passive income then turnkey works great. If your goal is to get into to rehab, then you should go ahead and buy a rehab property.