All Forum Posts by: Randall Alan

@Sarah Marium

Being able to buy a property with 25% down is definitely do-able.  If you live in it too (think duplex, etc) it can be as little as 3.5% down.  I can't speak to Chicago, but just buying a property in general.

I think the thing to know is that the typical rental property cash-flow's about $300/month on a good day (after principle, interest, taxes, insurance, and a maintenance reserve).   Your numbers may vary based on where you are buying. That should be read: "Many places don't cash flow at all because when buying at 7-8% interest too much of your payment is going to the interest on the loan.  But buying in a cheaper location it is possible to cash flow $300/month today if you find a descent deal."

So take whatever cash-flow number you come up with and and figure out if that is worth the investment you are making.  You are picking up the responsibilities of being a landlord... placing tenants, maintaining the residence, dealing with fixes, etc.  Also think about capital expenses... like if you needed to replace an air conditioner, or a roof etc.  Those things do eventually come up, and if they come at the wrong time can 'soak up' a year or two's worth of cash flow. 

I'm not trying to argue against your plan... we have 37 rentals and do really well with them... but just starting out there is the thought (sometimes) that "Hey, I can quit my job in the next couple of years..., etc" and when you do the math and you only have say 2 units, you are going to be netting $600/month on those 2 units.  This will help frame expectations and the size of the 'lift' it will be to get to scaling down your job.  

For what it's worth, we worked full time until we had 20 rental units.  It took that many to replace the income we needed to replace on a monthly basis. (Managing rentals while working is really pretty easy as long as they are local to you).  You would normally expect to hear from a tenant maybe 1-3 times a year outside of receiving their rent.  USUALLY most units are pretty low maintenance as long as they start off well maintained.

So while I applaud the direction you are heading, just know that real estate investing is more a long term strategy to wealth and replacing your income.  You will make far more money on holding your property and on the appreciation you gain when you one day sell it than you will the cash-flow (typically).

Also, as contrary as it may sound, if you are looking for the cash flow, the last thing you want is the property manager you mentioned (if you are local to your property).  The reason being that the property manager takes 10% of the monthly income for the rental, PLUS they take 1/2 to 1 month of the first month's rent.  This works out to about 70% of the yearly cash-flow on year's where you have a turn-over in the property that is financed.  So if you were going to cash flow $200 on say a $1,200/month rental, your property manager will take $120 of your $200.  He made more than you did on cash-flow, with none of the risk!?!   So I always encourage people to self-manage their own properties to maximize their cash-flow.  It is really easier than you think (overall).  Filling a property is as simple as listing your unit on Zillow.com. Priced right, you will have a renter very quickly.  We are able to market our properties through the rent collection program we use (rentecdirect.com).  There are a lot of those types of programs out there, so definitely find one that works for you and let it help you manage some of the daily tasks.  It collects our rent, deposits it into our bank accounts, applies late fees, tracks expenses, screens our tenants, markets our properties, and a whole lot more.

All the best!

Randy

 @Orlando Scott

 We likewise switch pest control over to the tenant after delivering the unit pest free... but there could / possibly should be exceptions there.  The 30 day thingis more or policy for roaches, and bugs that a tenant can attract if they don't keep their place clean (leave food / trash laying around, etc.)  Mice and rats are in a bit of a different category... because that is more about "how are they getting in the unit" - which to me is more a landlord issue.  We have had to put 1/4 inch wire mesh around the base of more than a few units to control mice / rat issues.  You also have to look for any other access points... the AC chases where the freon lines run into the house are a favorite path as well... as well as roof vents, etc.  So if that is a recurring issue, I think it falls on the landlord to remedy access for rats / mice.  Just like termites also fall on the landlord. 

As it sounds like you live in a cold weather state, your lease should definitely cover snow removal and whose responsibility it is (and perhaps your state dictates that through their landlord-tenant laws).  We don't have that issue in Florida! :)

I am of the opinion that the length of a lease doesn't matter when both the tenant wants to go, and they are being a major pain in the butt!  I will gladly let them out of the lease as long as they are not behind on rent.  

The security deposit is sort of a 50/50 call.  The best win/win solution we have come up with is this:  We will tell the tenant that is still under lease, "We will immediately place the unit up for rent and you will remain responsible for rent until we get the new tenant in place. The existing tenant can stay and pay rent until then to dove-tail the two leases to where they aren't out any money (and neither are we)... and at that point we would treat them like their lease was completed... meaning refund whatever security deposit they were owed less any damages, etc.  This has worked really well for us for tenants that need to break their lease.  But in your particular situation where there are rodent issues, I would probably be a little more sympathetic to the tenant given he isn't having the anticipated experience with the rental unit.  In my mind you can't blame a tenant for mice for the reasons stated earlier.

All the best!

Randy

 @Sophia Johnson

Hi Sophia,

Greetings from Lakeland, FL!  A lot of your answer depends on what direction you want to go in.   The cheapest way into real estate is buying a property you can live in.  First time buyers can usually do 3.5% down, which is way cheaper than the typical 20% required for a typical investment property.  from there you can decide how many families live in the unit… will it be a single family home with just you living there… or a duplex or triplex, etc where you earn income from the other tenants?

BRRRR probably isn't a great approach for a beginner because usually you are buying a dilapidated property that needs renovation. It can sometimes be difficult to get financing on those types of properties as a beginner. Many times they have enough issues that they may not qualify for traditional financing… and there are rules that say if you finance a property you have to wait a year before you refinance it to get cash out. It will likely be hard enough to buy a property like that, much less having more money to pay for the fixes. Plus there is a learning curve with being able to estimate a renovation, as well as a lot more risk in the event something went sideways.

If you are interested in working in real estate becoming an agent could work for you, and it would give you more exposure to the field.  But I would tell you there isn’t a huge advantage to being an agent versus just being an investor.  Sure there could be some savings on commissions by doing your own deals…. But I would look at the bigger picture of deciding if being an agent interests you as a career path or not?

I would tell you that real estate is often a get rich slowly process.  If you are looking to replace your W2 income with rental income it usually comes at about $200-300/month per tenant you have.  So some simple math there would tell you how many houses you would have to buy to replace your income.   You also gain appreciation as property prices increase… but that only happens either when you sell the property or cash-out refinance it.  
I would suggest to you that you do something that interests you for your job and use money you save from your job to begin to invest in real estate.   Maybe that thing you love is real estate… maybe it’s not.   But you can be in any field and do real estate investing… so don’t think that becoming an agent is a requirement if you want to be involved in real estate. My wife and I didn’t get into real estate until our mid 40’s… but by having resources later in life we were able to go at it hard and we bought 21 doors in 8 transactions our first year… so pretty aggressive.  It essentially became our retirement plan… and today we manage 37 doors and have done 8 flips.  

I would encourage you to get connected to a local real estate investing group.  We belong to 2 in Lakeland, but I’m sure Tampa has many! 

Bigger pockets is a great resource for you.  One thing people don’t realize is that these forums are searchable and have some  3 MILLION+ posts you can browse through for previous conversations on most any topic you want more information on!  

I wish you all the best and all of us here are happy answer questions you may have.

Randy

@Kenya Glenn

Paying cash is always going to be cheaper from an expense perspective, BUT the trade off is the opportunity costs of investing all that money in the property.  In other words, if you only put 25% down you could do other things with the other 75%… like buy 3 more similar properties and make WAY more money than just buying the one property outright.  This of course presumes you can find multiple cash-flowing assets to buy at a reasonable price.  

When we got started in real estate in 2018 we financed every property we bought so that we could maximize the number of properties we could acquire.  Keep in mind it goes beyond just the down payment.  Lenders want to see cash reserves as well.  In fact Fannie Mae (the entity that typically buys most housing loans from the lenders) requires 6 months of reserves once you reach a certain number of properties to help ensure you will be a successful borrower and not default.

The challenge is that at 7% interest it can be difficult to find properties that will cash flow.  But that wouldn’t change my opinion that it is better to put as little down as you can… especially if you will be renting out the other rooms (in essence having others pay your mortgage!)

All the best!

Randy

 @Dhirendra Sharma

Your question is one of trade-offs.

You get the best rates and lock offerings buying on your own name.  When buying in the name of a company you will usually be paying about 1/2 to 3/4 of a point more for your money.  In addition, your loan is typically amortized over a shorter term… often 20-25 years, instead of 30 years like a typical personal mortgage.  So you will be paying a higher interest rate, and have a higher payment due to the shortened term of the loan.  In addition, most commercial loans typically have a 5 year lock period… meaning that in 5 years they reset to the current interest rate.  This can be good or bad depending on when you took out your loan.  We took out a commercial loan in 2020 and had 4.1%. This year that rate lock expired and it rose to 6.22%

The advantage of being in an LLC is mostly around liability issues. The LLC is a separate entity and if you were ever sued over something that happened at your property, the liability is typically limited to just the assets that entity owns, versus your personal assets.

The one other thing to keep in mind is that you had the idea of buying in your own name, and then deeding the property to your LLC, there is a slight risk of your lender calling the loan because it was transferred to another name. But if you are the sole owner of the LLC many lenders will allow that transfer without calling the loan.

The other thing to know is that if you transfer the loan from you to the LLC (or vice versa) it is considered a sale of the property front the perspective of the taxing authorities. So all the transfer taxes, etc, would be due again upon the transfer.

In Florida where I live there are tax increase protections on properties where taxes can only go up by 3-4% per year. Even if property values increased 20% in 3 years, the taxes could only raise by 9-12%… creating a grandfathering effect. However, if the property changes hands (ie. To the LLC) that grandfathering goes away and the taxing authorities can raise the taxes to the current value of the property… so food for thought there.

If you don’t have too many properties, you can offset some of the risk of buying in your own name by purchasing an umbrella policy where you can have additional liability protections from being sued through that umbrella policy.  But as your portfolio grows, so does your risk, and so eventually you can out-grow the amount of coverage the insurance company is willing to write and they will drop you (ask me how I know!)

All the best!

Randy

 I have less of an answer for you and more of a comment. Typically property appraisers tax a property  at 15 to 20% below market value specifically to avoid people protesting their taxes.  

What this means is that in order to win a tax appeal, you have to show that you’re being taxed by more than 15 to 20% over what the properties fair market value is… and that is just to get to break-even… not any savings.  That’s a pretty tough proposition usually if the county is doing their job right.  

Also keep in mind when looking at comps of other properties that sometimes there’s grandfathering that is going on… In Florida there is a state law that prevents counties from raising property taxes by more than 3 to 4% per year. This creates a grandfathering effect where if you’ve owned your property for a long time and prices have really risen that they are not able to tax you at its fair market value or that 85% of fair market value.   Those properties can have significantly lower taxes just because they haven’s sold recently.  So you have to look for comps that have sold since your property  sold last for them to be a similar comparison where I live.

So not saying it can’t be done… but it isn’t always an easy task to win. 

all the best!

Randy

@Sara Ramirez

I don’t live in New Jersey, but a lease agreement is for a preset amount of time. At that end of the lease agreement the owner has the right to withdraw the ability to re- lease the unit to the same tenant if they so choose.  In other words  once the lease is up, you can reclaim your rental.   Usually there is a notice required to do this… in Florida is a maximum of 2 months, but depends on the length of the lease.  

I would suggest googling landlord  tenant laws, and New Jersey, which should take you to the statutes surrounding your state. In Florida it’s about a 10 minute read… and is very straightforward.  It should spell things out for you.

Hope it helps.

Randy

@Steve Balinski

If your property is financed the check will be made payable to you AND your insurance company.  No choice to taking the money and running. 

Personally I would redo the roof because insurance will come behind you and make you do it if it’s damaged.  

All the best!

randy 

@Travis Darnell

Try this to help locate the house that will work for you:

#1  Figure out what (generic) property will cash flow for you.  This involves estimating taxes and insurance for your area for the type of property you want to buy.  You can look up the taxes on your property appraisers website for several properties of the size that you were looking for. For Insurance, you can call insurance agency and ask them to give you a ballpark quote for a particular house… Even if it’s just one of the reference houses you were talking about.  Just explain to them that you are looking to buy a house and are trying to have a rough estimate of what insurance is going to cost. They will usually be nice and run you a quick quote in hopes that you will come back to them when you’re ready to do a real transaction.   From there, run your principal and interest numbers as many times as necessary to determine what price point you can afford to purchase at to still make a free and clear profit that is acceptable to you. My personal line the sand is about $300 per month after principal interest, taxes, insurance, and a maintenance reserve. Any less than that and I probably wouldn’t be a buyer.
# 2 Then go search for that house. My personal favorite way to do this is to use Redfin.com.  It will let you organize all of the results within a search area and a table view. The table view columns are actually sortable, and also include “dollars per square foot” as a  column. By sorting on that column, you are arranging all the properties from cheapest per square foot to most expensive per square foot.  This pretty much gives you the most affordable properties within the area.  (One hint… I think this column is only sortable if you are zoomed in enough on the map… so if it doesn’t sort for you, try zooming in to show fewer results.)

Of course that sort tells you nothing about the condition of each property. So from there, you have to go through and look for ones that are actually in rentable condition that would meet your other buying requirements.  But it is a great way to try and find value in the market. 

You can also sort by price, obviously, and use the calculations you did and step one to limit your search to properties at that price point, as all the other properties that were more expensive would likely not cash flow.

Hope it helps! 

Randy

We use Rentec Direct and love it!  It does everything we want.  It collects our rent, deposits it into our account, advertises our units, screens our tenants, has full accounting / reporting, etc.  it also has a tenant facing portal where the tenant can login, check their account, report, maintenance issues, etc.  we pay a couple of dollars a unit per month for it.   It’s our favorite landlord tool!   we manage 37 units with it.

There are many similar services out there… but we have been very pleased over the 5+ years we have spent been using it. 

I would suggest doing a few demos and compare features and ease of use.

all the best!

randy