All Forum Posts by: Paul Witte

The suburban market I live in is primarily single family homes.  But like many suburban communities, it has diversified a lot in the last 15 years and I think there is a real shortage of affordable multifamily housing.  I'd like to explore whether buying a house and then modifying to maximize the number of bedrooms to rent out individually.  I know this is commonly done for college-type housing, but maybe not in my sort of market.  

To explore whether this might work, I have all sorts of questions... How are common areas managed?  Who controls how many residents per sqft/bedroom/bathroom are allowed?  Etc etc.  Are there any resources out there to give me a primer on this strategy?

Thank you!

1) ask around and find recommendations for a good real estate agent in your area.  Get to know them, and let them get to know you.  Ask them to explain the whole process to you in details, and take notes.

2) Get a mortgage pre-approval.  You can ask your agent how to do that if you don't know.  If you have some savings and a salaried job (or a part time job with good income you've had for at least 2 years), that should be pretty easy.  If not, your agent can help you think through other options.  If he/she can't do that, find a different agent.

3) Determine your investment strategy. Flip? Buy and hold? BRRRR? Something else? Know your exit strategy options. Consider the market in your immediate area, as well as anything else withing maybe an hour drive from you. Some markets are better than others for different strategies.

4) Your agent can set up a search for you based on your criteria.  Walk through lots of properties and run numbers on a lot of deals before even considering making your first offer.  Get in the habit of running your numbers conservatively.  Assume costs will be higher and expenses will be less.  Ask your agent about what extra fees and costs there will be associated with pursuing a lead until you have keys in your hand.

5) BEFORE making your first offer, post a summary of the deal on the forum here and ask for input.  You won't be able to share all the relevant info, but others can tell you whether it seems like you're on the right track or not.

6) Offer!  Your agent will help you.  It's intimidating at first.  Low ball your first offers to get in the habit of them getting rejected--or you end up with a great deal! 

7) Be willing to walk away during the inspection period.

Again, cultivating a relationship with an agent at your stage is key here.  Best of luck!

I'm not trying to take a position on whether small multifamily investors should use a PM or self-manage, just generate discussion. This question came out of the analysis of a duplex I just walked away from because expenses were just too high for rents I could get from it. I realized that if I would have been able to self-manage the property, my estimated CoC (theoretically) could have gone from 8% to 11.5%--a pretty handsome increase.

The property managers here will point out all the extra benefits of a good PM, but many of those are hard to quantify precisely except for rent and vacancy.  For the sake of discussion, I asked just this narrow question: How much less vacancy and more rent would a PM have to generate to recoup a 10% charge on collected rents?

Here's the specific scenario.  I assumed a self-managing landlord who could get $1200/mo each for 2 units of a duplex (gross of $28800 annually).  I compared 2 different vacancy rates, one with a very proactive self-managing landlord who keeps vacancy costs at 2%, and another at 6%.  I assumed that a good property manager could keep vacancy at 2%.  

What I found was that, according to this analysis (which does not take into consideration the value of time, potentially being able to get maintenance and repairs done better and for cheaper, the benefit of a PM insulating an under-informed landlord against avoidable mistakes, and all the other benefits of a competent property manager), was that if a landlord can keep vacancy as low as a PM (at 2%), they would have to bring in an extra 11% of rent to offset a 10% PM charge.  And if the self-managing landlord has vacancy at 6% and the PM could also bring that down to 2%, then the "break even" point is 7% more rent than a self-managing landlord could bring in.

Calculations are below.  Interested to hear everyone's thoughts.

Great discussion here.  I really appreciate the initial question and follow up questions/thoughts by others.  

I agree with the last poster--the end-game will help you answer this question.  I just went through this process in excruciating detail for a duplex I walked away from during the contingency period.  Here was my situation:

This was a 100 year old duplex with all but essential maintenance deferred for the last 40 years.  It was in a good neighborhood, but the building was in bad shape, and rents reflected that.  The market for a 3BR/1.5BA in the area was $1100-$1500, and these units were rented for $900 each.  So I ran numbers on several scenarios: keeping the condition and rents the same, doing a medium renovation and fetching maybe $1150/unit, or doing a complete renovation and fetching up to $1400/unit.  Then I worked backwards from there and estimated costs associated with each level of rehab and how much rent I could get back from it.  In my scenario, because I was estimating pretty high capex and repair budgets because the building was so old and poorly cared for, the most $1400/unit rent level seemed likely to generate the best return.  I surveyed other units in the area renting for that level, and the decided on a scope of work to bring it up to that condition.  

In the end, I walked away because (estimating conservatively), my cash on cash return would have been only 8%, and given the amount of risk involved in such a big job, I didn't think that was worth it.  But the process was really valuable to me, and well worth the time investment.

In your case, as others have pointed out, you should first figure out what needs to be done, and why.  You don't want to under-rehab the property, but you don't want to over-rehab either.  Once you have that figured out, only then can you (with the assistance of collaborators or partners) estimate the expenses involved.  There may be different scenarios that are workable, depending on the property and your situation, and you will have to figure out what in your case is likely to provide the best return.

 Ha, very true.  I'm a physical therapist in my day job.  Often patients of mine will end up in the emergency room because they need their toenails trimmed, or something similarly inane.  I wonder if it is human nature (which would be maladaptive, I think) to not be able to discern well when something is an emergency or not.  

I applaud your efforts to learn about real estate investing from such a young age.  I was an idiot at age 15 (actually for a long time after too).  If I turned off the TV and spent even a fraction of that time connecting with people and learning--about real estate or anything(!)--I wonder what I could have accomplished.

At age 15, learning the basics of personal finance would be the best start.  As you get closer to graduating from high school, start learning about "house hacking".  It is probably the best strategy for someone like you to just get started.  All the lessons you learn will build over time.  

Avoid the gurus, and focus on the basics of doing well in school, learn how to build solid relationships with people of diverse ages and professions, use your time purposefully to accomplish achievable goals, and get a humble job (one you turn 16) that gives you some income so you can learn to manage it well.  Invest where you can and spend it carefully, but especially learn how to save and give, and learn how not to waste.  

You're on the right track, young man.  Kudos to you.

Question for self-managing landlords:

I'm just getting started managing rentals.  To me 10% of rents to PM seems like it would be a weight off my shoulders, but I also have trouble justifying the expense for the limited amount they do when things are going smoothly.  Probably I'll use a property manager, but as I look further into the future and consider self-managing, I'm curious: how do you keep tenant and building issues from intruding into every area of your life?  Most things can wait or systems can be set up to only send/receive messages during business hours, but what about when you're away for a while or an off-hours emergency comes up?  

Ok use a PM is what I'm hearing.  Thanks for the input all.

I close on my first BRRRR next week--a duplex in need of 40k of repairs over the next 6 months. Both units are rented through next year (including one to a tenant with an ankle bracelet who hasn't paid rent since April and is not going to be super cooperative with anything). Anyways, I live 2.5 hours away from the property, and going down there is possible but a headache.

I am considering options about how to manage the rehab process.  I've got a number of processes figured out, but I can't figure out how to inspect contractor work before paying them without relying (and paying) a PM to do it.  Having a reliable handyman helps, but they are busy and work all over and can't just run over to a site whenever a contractor calls and says they're done.  Relying on a contractor to send photos seems like a bad idea.  

https://www.housingwire.com/ar...

This isn't new news really, but I haven't cared much until recently when planning the end game of a BRRRR I'm involved in. Refinance fees are up and as I was comparing fees and repayment terms for home equity loans, I realized that it wasn't as easy to get one as it used to be. Are banks just trying to shore up capital reserves so they stay solvent in the event of a mass foreclosure event like 2008? What's going on here?