All Forum Posts by: Randall Alan

I will respect your experiences... you are exactly right... HOAs  control the situation... and generally speaking for the good of the community.   However, as a landlord, they typically aren’t in favor of renters to begin with... having occupancy rules, etc.  To me they are just a civil version of code enforcement that you get the privilege of paying every month! Lol! 

I'm just one that doesn't like to be controlled with regard to my properties... that's probably a lot of the argument here... I want to have the freedom that all typical homeowners have.. and you give some of that up with an HOA... you would argue for the greater good... and I won't necessarily disagree with you... but from a business perspective, they have the tendency to get in the way and present another layer of oversight / restriction that I say is easier not to have to deal with IF YOU HAVE THE CHOICE.

As for me, I have the choice, so choose not to go there.  

With regard to turnover, we have such a tight rental market where I’m at that we can literally dove-tail renters to not miss any rent (unless we are going to renovate).  We give the moving in tenant the option to clean the unit themselves for a discount on their first months rent. It’s the same amount of dollars we would pay the cleaning crew.  95% of our tenants take us up on it.  

All the best!

Randy 

I work with wholesalers, but don’t do it myself, but the short version is this:  you are basically a marketing operation... advertising by one way or another (snipe signs, online, direct mail, phone calls, “whatever”) to find people looking to sell their properties.  You are frequently dealing with somewhat desperate people in bad situations... divorces, deaths, probate, etc.  but in the end your objective is to get the property under contract to buy at a price that lets you sell it to someone where they will still think it’s a good deal, and have a profit built in for you.  You then take that contract to other BUYERS and say, “I have this great deal on a property for X dollars which includes your profit.  Presuming your buyer jumps at the deal, you do an assignment - which is a one page document that goes to the title company that gives the new buyer the right to transact your deal. That assignment also directs the title company to give you whatever your profit is at the time of closing.  I did one last week where I paid the wholesaler at closing $10,000. Bought a property that has a Zillow value of $114,000 for $44,000 - which included their $10,000.  I would do that every day of the week!  And if it was you doing the selling, you would be making $10,000 every time we did the deal.  You never own the property... you are just the “man in the middle” of the deal... so doesn’t require the high capital costs of having to buy the property.  But you do usually have to put some good faith money up to write the contract... but could be as little as $100-$1,000, which if you don’t get the property sold you would forfeit to the seller... so you do have “some” skin in the game. 

The challenge for the wholesaler is mostly finding the deals that the seller will sell with enough margin to make it a good deal for the buyer... which is where the highly motivated sellers comes into play.  We bought another one where the seller was about to lose their home to foreclosure, but had $70,000 in equity in their property mostly though market appreciation.. so they could have sold it themselves through a realtor (and probably kept more), but ended up going through a wholesaler, so we picked up the property for less and ended up with $50-60k in equity in our column for when we sell it down the line.  So that is sort of the flow of things with wholesaling.  Lots is written on the internet about it, and there are a lot of variations of how it goes down... but the gist is what I have written.

Randy 

At the end of the day you have to either charge for, or absorb that fee. If you charge for it, your rental has to rent for more than surrounding (non-HOA) properties. If you absorb it, it takes money off your bottom line.

Some things they charge for, a tenant could usually do themselves, like mow.   

I can understand they bring their pluses, but the lack of control will always frustrate me, so I avoid them.

Randy

Without rewiring the unit, you would probably just have to build the utilities into the rent.  You can call your utility company and ask them what the utilities average.  The only way to split them would be to re-wire the 4 units with 4 electric meters.  Likewise for the water.  Probably all very impractical.  I would base your split on bedrooms.. which translates roughly to how many people are living in each unit and consume utilities.  Keep in mind there is no incentive for your tenants to be conservative on resources when its all included.  Who needs to turn up the air when you leave when it's free?!  So I would aim high, and adjust them yearly based on actual expenses.  Probably build that into your contract - that utilities are subject to change.  

Well, depends on how much you know. You are going to need 20-25% down to buy a rental property. You are going to need income to qualify for that loan... enough to be able to pay the mortgage in the event the property sits empty. You are going to need cash reserves in place for the same reason that you can show the bank. If you are going to rent the property, you are going to need some other reserves to cover repair expenses... like "what if the AC blows up and you need to spend $4,000 to fix it?". You are best setting up a corporate structure of some sort... LLC or Sub S to be able to maximize tax deductions. You are probably going to net $300 - $500 a month on the property if you buy it right... so thats $3600 to $6,000 a year you will make - before any repair expenses or other overhead. You will need an accountant to file your taxes, you will need to be able to resource repair people when things break... which they will. Its a lot to start out. Starting out at 18 is a tall order. If you have support its possible...if you don't, you may want to consider another avenue to make money in real estate until you are more on your feet. Wholesaling comes to mind - where you market and find deals that you can sell to other more established buyers. You can make $10,000 a deal there, without hardly any cash required, you never own the property, and get paid by the title company when your buyer closes on your property.

Wish you all the best!

Randy

Many banks right now are really restricting cash-out refinances, because of the added risk that COVID-19 has brought. My primary bank has stopped writing the product (for the moment). My other one told me values are compressed... they usually loan to 75% LTV, but with the current lending situation, they have lowered that number... its like 65 to 70%. So I hope the refi works well for you, but wanted to prepare you for the potential feedback you might get from your lender.

My personal opinion is to Rent and move on without further rehab.  Its probably unlikely that the rehab would warrant a significant rent increase.  BRRRRing the property is going to cost thousands of dollars itself.  Sure, you can probably build it into the loan, but if you are only recovering money you invested into the rehab... why do it?  Some is just going to depend on how much you could get out, and what it's worth to you.  If you have the money to move on, I would just ride out the current lending situation and refi later if you need to for the cash-out.

Randy

First rule of dealing with an HOA... you don't buy a property with an HOA!! (It's as close as I can get to the fight club reference that it is begging to sound like!) Lol! Seriously... they are always run by people with way to much time on their hands to stick their nose in your business. My suggestion... and you will likely agree already... make this first purchase your last one with an HOA! They just cut into your profit margin with their monthly fee and get in the way of ANYTHING you want to do... rent, paint, remodel, you name it, they will have a rule about it!

Best of luck! 

Randy 

So let’s dispel a few myths... if you are deep into real estate it really isn’t as passive as most make it sound... the main reason being that to maximize cash flow you will do as much yourself (ie. Manage your properties) to keep as much of the profits as you can.

Once you get past that mental hurdle I would suggest there are several avenues to achieve $50k/year... but I would second the poster that said that you can do it for well under 1.5-1.7m dollars. I'm generating over 200k free cash flow /year on 40 doors... 19 properties... that's just rentals. 75% financed, 25% free and clear. Average net after PITI and reserve: $527/door/month. Approach: buy for under $75k / door, rent for $1,000 plus per month. Best deal so far: bought for $50k, renting for $1,400/month. I'm 3 years into real estate, generating 4x your 50k target, so I would say you could get to $50k with probably $300-400k investment if optimized for maximum profit... and can easily do it in 6 years as long as you can line up your equity. You are going to need 10-12 great properties... that's 2 a year across 6 years.

It’s obviously going to take $$ to achieve your goal.  So you have to look at your resources... savings? Family (as a loan, or an investment Possibly)?  Friends with money looking for a better return than the bank potentially?  A hard money lender might be tough starting out... definitely network with others at local real estate investor meetings! Pick up their contacts, their resources, partner with them on a deal that you might find and split the profits possibly?  It’s all about how dedicated you are.  

I went to a seminar when I got started and their mantra was “Flip, flip, flip, buy a rental”  It’s a good way to finance your rentals.  I can tell you that the first flip we did we netted $50k before taxes.  Bought for $70k, invested $30k, sold for $174k in about 3-4 months.   There is your 50k in one deal!   Sure, you would have to repeat it once a year to keep that income up, but it’s a great way to get enough free cash to buy a rental to start your “passive” cash flow journey.  

Oh, and to the poster that was jealous because he was 28, and you are 21, I’m 50, so way more jealous of you both!  Lol.  The secret is TO START!  Don’t just keep thinking about it.  Lay out concrete steps... pick up the phone, talk to your family... someone you might not even be thinking of may have the $$ where they are willing to front your venture... you won’t know until you ask / take an action!  My mother literally has to take minimum distributions on her retirement accounts... people in that situation (in your circle) might say, hey, I’m willing to take a chance on you?!  It takes about $20-$25k to buy a $75k house (financed).  How fast can you source that money will determine how fast you start achieving your goal! 

All the best! 

Randy

It seems you have competing priorities... nice home for kids versus wanting to start buying investment properties.

There are some things we don’t know... like where you are leaving to... will it be around the corner where you keep the same job?  How much is housing where you are going, etc.

Banks will want to know how you will pay whatever loan you take out, and changing jobs would worry them from a continuity perspective.  

Banks work off of debt to income ratios to qualify you,  among many other things.  If buying investment properties they also look at reserves as well.  

Most banks sell there loans and so they have to write them to Fannie Mae standards... the good thing is that you can look up those standards real easy.  Here is the link to the qualification standards (hopefully bigger pockets allows link sharing.)

https://singlefamily.fanniemae...

If no link appears, google : “Fannie Mae Eligibility Matrix” and you will have a very good idea of what a banker is going to tell you.

With that said, if you are doing this on your own, your easiest way into an investment property is going to be living in it first... this means either buying a property you are capable of splitting in two and renting out the other half, or buying a house for your family, then at some point moving and renting the property.

The biggest difference between buying a home for yourself, versus a true investment property is the down payment... 3-5% for a personal home, versus 25% or so for an investment property.  With your $18,000 to purchase it pretty much dictates a personal home purchase is your avenue available if going it alone.

A couple of other options  come to mind.  One is that you could try to get into wholesaling properties, where you find a deal and sell it to another investor for a commission and grow your reserves this way.

Another variation of this would be to find a great deal and partner with someone and split the profits.  You gain experience and ride their better coattails on the money side with some skin in the game too. 

You really want to be careful if being a landlord on a limited budget.  Ask yourself... if the AC goes out and you need to spend $4,000 to replace it like I did this week... can you afford it?  If the answer is no, you need to take a close look at what you are thinking about doing.  Most really affordable properties are affordable because they need work.  We typically put $3-5k into our average property for it to be ready to rent... perhaps this is replacing the carpeting with tile, or painting the unit, or replacing the water heater or AC,  etc.  

I could go on,  but hopefully you get the picture.  Your debt load is probably going to be an issue... so I would say work towards paying that down first... along the way you could wholesale to raise money and pay down more debt. 

My personal feelings are that you are attributing too much emphasis on what you can prepare for by  learn from a book and the internet, etc,  and calculate from a spreadsheet.   All the things you mention are great!  There is absolutely nothing wrong with “cat-scanning” a deal (analyzing every slice from every direction).  I think that’s what you do when you don’t know what else to do. 

My fear for you is that there is so much that all that preparation can’t prepare you for... so I fear you could  forge ahead with a false sense of over-confidence.  Do you understand what level to rehab different properties to?  What’s important to different categories of buyers?  When certain finishes matter, and when they don’t, etc. 

Then there are the bad things... We’ve all watched rehab shows where things go sideways... permitting, unexpected expenses, unexpected damage, thefts, fraudulent contractors, etc, etc. 

My best suggestion for you is to make sure your first deal has a big margin... so that if and when any of these things happen, your deal can absorb them and you still come out a winner!   For us, a deal isn’t worthwhile if we can’t net $50,000 before taxes - as taxes may take 22-24% of your net profits after you close and pay 6-8% sales commissions / closing costs.  There are of course ways around all those types of expenses, But the point is, your deal has to be a really good deal going in to make it worth all the effort and risk.
 Our first flip looked like this:

Bought the  house off the county foreclosure site for $70,000.  After fees we paid $71,500.  We knew the septic was shot and the AC was missing... so that’s $10k right there.  The interior rehab was about $12,000 including appliances, carpeting, new windows, bathroom makeover, etc.  We painted the exterior, and did landscaping as well.  All in we put $30,000 into the property.  We sold the house for $174,000... after closing costs we netted $54,000 - BEFORE income taxes.  In the 22% tax bracket we anticipated about $12,000 in taxes on that profit, so a net profit of about $42,000.  
Fortunately for us, we had other properties whose depreciation helped offset some of those taxes, but you can probably get the point that for our $101,500 investment we netted $42,000 in about 3 months... with everything going pretty much perfect... no unforeseen major malfunctions, and we got our asking price after paying some of the seller’s closing costs.  But a $10,000 cost overrun would have meant 25% Less profit.  The smaller the margin, the bigger a hit any overrun has on your bottom line.  What if you don’t get your asking price?  Profits go down again!  So just be really picky about your first deal (and every deal really) to make sure you have a good margin to begin with, and I still say, be local for the best outcome possible.  Another suggestion would be to partner with someone you know and trust where you not only get your feet wet with the help of an experienced flipper, but also protects you a bit by only having half the investment yo risk.  You will both work to make sure it’s a winner.  


All the best!

Randy