All Forum Posts by: Randall Alan

@Stephen DeFalco

We take a slightly different approach… We also advise them that they are on the hook for the lease, but instead of putting the burden on them to sublet it, we tell them that we will turn on our marketing and fill it as quickly as possible, and that as soon as we can get someone moved in, they would be off the hook (as it was). 

Typically given 30 days advance notice we can find a tenant and fill the unit within less than two weeks of the old tenant exiting. It’s usually a win-win for both sides.

Our goal is to not have any lost income due to them breaking their lease, and not so much penalize them for a change in their circumstances.   Personally we wouldn’t want the tenant trying to find a new person to fill the lease, as we think we have a better idea of who we want from screening applicants and we have a way to advertise for them. It’s very likely a tenant would have limited resources to be able to market the property.

hope it helps!

Randy

@Carlo D.

We have a separate account for both maintenance, as well as escrows for taxes and security deposits.  We transfer a preset amount of money into the maintenance account at each month - usually about $100-125/unit.  For us this works out to about $4,000/month.  We also track all of our self-paid insurance and property tax expenses for paid off properties and also transfer 1/12 of that money every month as well for the year.  That way when it is time to write a $40,000 check for property taxes in November, the money is sitting there waiting.  Likewise, with insurance policies for paid off properties the money is always there.  If you leave it in your main account, you don't really have any idea how much of that is not spendable at any given time.  By having the repairs & maintenance in a separate account it gives us a gauge of how much we are spending on repairs.  If the account is growing, we are spending less.  If it is shrinking, we are using it faster.

All the best!

Randy

@Account Closed

Your DTI definitely factors into things, but presuming you have rental income from your houses, that gets to be applied as a credit to offset that debt. Sometimes they require a certain time frame to be shown on that. But DSCR loans can be a little more forgiving on that. It is up to each lender to some degree. Portfolio lenders - ones that don't sell their loans to Fannie Mae have more leeway.

Another thought is to build a 4plex - so it is one purchase with 4 doors.  

You only have to put 20% down… so if you are talking smaller cheap homes you can get away with $25-30k down, depending on where you are looking at.  

7% interest is crappy no matter how much you put down.  But when you run the income numbers including  the other write offs 4 will outperform 1 every time.

A 3% gain on 1 - $100k house is $3,000/ year.  On 4 it is $12,000/year.  3.3% depreciation is similar numbers - usually almost eliminating all your taxable income from financed properties after repairs and maintenance is factored in. 

Truth be told, very little cash flows well at 7%… so timing also factors into your plans… but rates are expected to start dropping later this year and into next year. 

Randy  

@Account Closed

Hi John,

I probably wouldn't recommend foreclosures as a starting point.  While you have enough money to probably buy into and repair one foreclosure, your money would go farther by financing properties and putting as little as possible down.  The short version of that is if you can buy 4 houses financed, it will make more money than 1 free and clear house;   especially when taking into consideration all the benefits that come with each house - your tenant paying down your mortgage, 3.3% depreciation on 4 houses, market appreciation on 4 houses, plus the rental income on 4 units.  

Foreclosures also come with A LOT of inherent risk - you don't know the condition of what you are buying until after you have bought it.  We have bought 4 foreclosures - 3 went great - the other one literally wreaked of cat urine so strong we had to wear respirators to walk into the house.  We ultimately sold that one to a handyman and only made about 1/2 the profit we could have made on it - but we were worried about being able to sell it on the open market with how bad it smelled.  So point being - you never know what you are buying there.

I also probably wouldn't touch the money in your 401k.  That has a different purpose in life and you should leave it alone to be there for you down the road (especially since you have other money and income available).

Just know that the whole "stop working my job" thing is a long term goal.  We have gotten to that goal post - but we were at 20 units when we decided to do it where we were replacing about $200k worth of W2 jobs.  We are now at 37 units and our full time job is managing those properties.  It's not quite a passive as the RE world makes it out to be (we self manage our own properties)... but it is a very nice lifestyle.  No alarms to wake up to and as many vacation days as we want in a year! 

So presuming you are on the "add one rental a year plan" after maybe buying 4 with the money you have, I would think it would take a number of years to achieve that retirement goal - but your mileage could vary depending on how much income you need to live on. 

Flipping houses is good for big chunks of cash... but it comes with lots of questions - Who is going to do the work?  You while you are working?  Do you have the skill set to do that?  If not, managing contractors and not getting exploited in the process is a whole different set of skills as well.  It's really hard to pay retail prices on renovations and come out ahead on a flip.  We went the "Do what we can do ourselves" route, and then worked with more handy-man type people for the things we didn't know how to do.  But we never had a shiny truck show up with people in monogrammed shirts.  It's was all about maximizing every dollar spent and minimizing every expense we could to have as many dollars left over for profit for us. 

All the best!

Randy

@Koen Ballantine

I'm not quite sure if you are talking about a house for yourself, or an investment property.  On the presumption it is a personal house, I would say to do it as soon as you can afford it, presuming you are looking to stay in the same area you are at for at least several years.  Home ownership is the number one way to build personal wealth.  It is easy to underestimate what a 3% increase in a large asset does over say a decade!  But between you paying down your mortgage, plus the tax write offs, plus market appreciation it sets you up for having tens of thousands of dollars in tax free gains when you eventually sell it.  All this with only having to put down 3% of the purchase price of the asset!  (Wall Street doesn't even come close to offering that deal!)

If you have the money, and are asking the question, I would say you are ready.

The only other question might be - are you timing the market right?  At 7%+ interest - and rates expected to drop in the next year, I could see an argument to maybe wait for the rates to come down a bit before pulling the trigger.  But on the "Are you ready?" side, it sounds like you are to me 

All the best!

Randy

@Jacky Fan

 Here is some more information on whether you can 1031 a personal house:

https://www.1031exchangemadesimple.com/personal-residence.ht...

The general theory seems to be that if your home wasn't used for investment purposes during your ownership, then 1031 doesn't apply.  But the 2 of 5 rule for excluding up to $500,000 in taxable gains might (we don't know how long you have owned it.)

We also don't know your equity position in the property, or how much you are thinking to taking out of it.  

Presuming you think your house would make a good rental, it wouldn't be a bad thing general.  I still have my first house from 20 years ago as a rental today.  Is worth 3x what I paid for it back then as well as the rental income it generates.

The zero cash flow part is concerning though.  At zero cash flow I would ask myself the benefit of holding it.  Zero cash flow translates to negative cash flow in the short term because you have to maintain it.  You would still get the tax write offs, the depreciation, and the market appreciation.  So part of the question comes down to how comfortable are you being able to hold onto a zero / negative cash flow property.  If you had to come out of pocket for a water heater for $1,000 in a given month, or a $300 plumbing call, or an AC call, can you comfortably do that type of thing with your finances?  If not, I would probably consider selling it.

If you do hold it, once rates came down by maybe 2% you could refi it and hopefully see cash flow where it was worth refi-ing it.

Hard to give a solid answer, but hopefully helped point you through a couple of the hurdles.

Randy 

@Marc Young

What catches my eye in your post is this:

“I don’t want to have to wait a long time to save more money to buy my second one.”

Rentals don’t meet this requirement of yours.  Rentals are a $300/month gain on your investment type of proposition.  Each one you own gives you some quantity of positive cash flow, plus tax write offs, plus mortgage pay-down / equity gain.  Plus you get market appreciation as well.  But the only liquid one of those (until you sell a property) is cash flow.  The faster track on rentals  (cash-flow wise) is to do short term rentals like AirBnB, etc…. Presuming your location would be filled enough days a month to support that.  

I went to a real estate seminar where their ‘mantra’ was Flip, flip, flip, buy a rental”. That strategy lets you make chunks of cash on each flip, which also gives you cash to buy your next flip, and then eventually you have enough money to buy a long term hold you can rent out for more passive income than flips.  So that is a strategy for you to consider.

The challenge is that flips for a beginner can be daunting.  There is a large learning curve to not only know what to look for, but also finding people to do the work reasonably, as well as to manage them, etc.  the challenges with flips  is that there are so many angles to try and cover / consider that it is somewhat like spokes on a wheel… even if you just take it system by system… roof, plumbing, AC, foundation, subfloors, electrical, appliances, septic, materials expenses, holding costs, taxes, etc.  What you don’t know or check, can come back and bite you in your estimating & repair.  

The other big thing is that you need a project with a lot of profit potential each time.  Those are harder to find in the past couple of years.  You may find an ad that says $45k profit potential.  But keep in mind that things like closing costs (where you have to close twice - once to buy the flip and once to sell it) may eat up $10k of that profit before you pick up a hammer to repair something. How about capital gains where you will lose 15-25% of your profit to taxes when you finally sell it?  Then there is inevitably the cost overruns that come when you tear into something and realize “oh, this has to be fixed too!”  For us, we don’t do a deal where we don’t think we can walk away with at least a $50k profit after repairs,  it just isn’t worth the time and risk for us.  But everyone has a different tolerance level for risk. 

So my suggestion if starting with a flip is to find one that needs simple things… paint, flooring, appliances, landscaping, and such.  Don’t jump into a 6 figure renovation - you don’t have the budget for that anyway, but just start simple to get your feet wet.  

Which brings the conversation to finances. $30k is probably barely enough to let you buy a flip if putting 20% down.   Maybe if you buy it and live in it where you only have to put 3-5% down you could pull something off… but we bought mostly C class properties back in 2018-2021 and our dollars to close were usually in the high 20’s to low 30’s just to buy the property with 20% down. Today those numbers would certainly be higher… so your funding is a big concern to me on the ‘flips” side.

I sort of point you back toward the old adage that real estate is not a get rich quick scheme.  In today’s high interest rate, high priced homes market, just trying to find descent cash flow is seriously challenging.  While the urge for a beginner is “I just want to start”… I would tell you from having been in the market for about 6 years (but at 37 doors today) … now isn’t the greatest time to try to be starting.  Can it be done today?  Yes, maybe.  But will it be a whole lot easier with interest rates in the 5% range though?  Most definitely!  Timing is an important factor in real estate... both when you buy and when you sell.  But the funny thing is that you often don’t know at the time you’re doing it where you are at on that timing question.  I guess what I’m suggesting is that you aren’t coming in at the optimal time in today’s market.  Very little cash flows at 7% interest when you factor in all your costs.  So run your numbers and if your deals are upside down… or cash flowing poorly (say under $150-200/month) they aren’t great deals and you should think about what that is telling you. 

All the best!

Randy 

@Nick M.

We have been through that situation several times.

It depends on your objectives with the property, but my first thought for you is - “are you sure you want them to leave?”

We actually rented the unit back to the existing tenants for as long as they wanted to stay because we didn’t have to do anything to the unit to start generating income.  
Also - presuming you paid more for the property than was owed on the mortgage due to competition on the auction (several presumptions there) - the previous owners are entitled to those excess funds from the court - which gives them a resource to be able to afford our rental rates.  this worked out well in the short term for us.  Or,  it also works out well to give them money to move on if you want them to exit.

As far as the basic question goes though, I just went to them and said,  “Hi, we bought your property in the foreclosure auction and you have a few choices…. You can either rent the unit from us at $X per month, or you can exit within the next 7 days, or we can have you evicted.  We would obviously like to avoid the last scenario if possible for everyone’s sake”. If no one answers the door, you can put that in a letter / notice and post it on their door.  

Worst case you can post a 3 day notice and just begin the eviction process if you can’t make contact with them.  Eviction is really your only legal option if they are not communicating with you.  

All the best!

Randy 

 @Oliver Powell

Hi Oliver,

Welcome to Bigger Pockets!

While multi-family is a perfectly good place to start, I would tell you that it is often more competitive than single family homes… maybe just due to there being less of them in general, and being more desirable by investors.  
When we first started we began there as well because we liked the idea that one side  could pay for the mortgage if there was a vacancy.  But we soon came to realize that we could re-rent a unit in a matter of days as long as we had proper notice from the tenant.  So if we were given 30 days notice we could turn on our marketing, screen applicants and almost always dovetail  the new tenant’s move-in to within a few days of the old tenant exiting.  By being open to single family homes as well it really increases your choices, and for us, reduced the cost per door of acquiring our properties.  In short, the vacancy concern was far less of a concern than we thought. 

Just a thought for you as you begin your journey.

Randy 

@Sara Wylder

Different locations operate their auctions in completely different ways. 

In Florida, most counties use the Real Foreclose website.  You have to deposit cash up front in your bidding account to be able to bid.  You are required to have 5% of your bid deposited into the account.  So if you were bidding $100,000 on a property - you would need $5,000.  If the bid jumped to $101,000, and you only had the $5,000 in the account, you would not be allowed to bid again - you would be out of the auction.

But say you won the auction at $100,000.  You then must submit the remaining $95,000 via certified funds within 24 hours of winning the auction.  If you fail to show up with the $95,000, you forfeit your $5,000 bid and the property would be auctioned off again.

So your bidding money is at risk until you pay the balance.

After you win the bid, there is a 10 day redemption period in Florida where the owner can more or less "claw back" the property by paying all the money that is owed to the lender that is foreclosing.  There is a tactic that I have heard about where (rather unscrupulous - but still legal) investors will contact the owner after the close of an auction and will offer them cash on the side to let them buy the property from them during the redemption period.  The owner gets cash, the investor signs a sales contract with the owner, and then proceeds to redeem the property and takes possession through a regular sales transaction.  So that is more a way you can still lose the house, even though you thought you bought it.

We have had an owner declare bankruptcy on the day of the sale, but the sale went through due to the late filing.  We had to petition the court to get our money back since we had already paid it to the court the next day.  Took 4 weeks to get our money back.  Basically - any legal filings that come into play during that redemption period could cost you the house - but you wouldn't lose your money as long as you didn't default on your obligations to the court / auction.

In Florida there is no inspections of foreclosed properties.  You can drive by them, you can maybe press your nose against a window to look and see what you can see if the property is abandoned... but you don't know what you don't know about the property.

We have bought 4 properties through foreclosure.  3 worked out about as we expected.  One had the owner still living in the property with 5 cats, and 10 litter boxes that had never been changed in years.  The entire house was essentially one big litter box.  Once we had the tenant out, we had to literally wear respirators to enter the house.  We stripped out all the carpet and pad, and the unit still wreaked of cat urine.  We had already done exterior repairs to the house including a roof, and an AC.  We sold the house with no carpet, no appliances, etc to a handyman who wanted to refinish it.  We were set to make about $100,000 on the property.  We chose to walk away and let him take it off our hands for about a $40,000 profit after expenses.  We were concerned about being able to sell it at retail with the defects.  So it wasn't a complete loss.  But as previously mentioned - if you didn't know the roof was rotten, and the inside is completely mold infested because of leaks, you could quickly be in for way more money than you expected and you could lose money if your repair costs exceed the value of the property, for instance.

Liens work on the basis of seniority. So any lien filed prior to the one that is foreclosing will survive. So if it was a Home Owners Association suing for their HOA fees, any primary mortgage would survive. Also tax and municipal liens typically survive foreclosure (so think code enforcement liens for not mowing the lawn). We have seen code enforcement liens upwards of $100,000 on a property where they added on weekly for years. Code enforcement in our area will settle those for 10 cents on the dollar if you bring the unit back into compliance - so it would be a $10,000 instead of $100,000 or what have you.

Hope some of it helps!

Randy