All Forum Posts by: Randall Alan

@Martina Pollard

Hi Martina,

On the surface, this sounds like a great opportunity.  It looks like your seller wants to seller finance the deal to 'be the bank' - which can be great - maybe you can negotiate a better deal on interest rates than what is currently going on in the regular market - which would be awesome.

As for which home first - I would definitely go for the duplex you are already in.  There is no reason to buy your own first for experience purposes - and the fact you already live there makes it 'owner occupied' if you end up going with traditional bank financing - which will give you better rates, and access to more programs. 

So with an owner occupied house and traditional financing you can put as little as 3.5% down on a property to purchase it.  If it were a straight investment property - you are looking at least at 5% on some newer programs, and often upwards of 20% down on an investment property.   Your interest rates are often higher for a non-owner occupied home  than for a personally owned home as well.   

So if you end up doing seller financing - it is your opportunity to try and get either a better rate, or better terms than you can get with traditional financing.  So hopefully that gives you more ways to negotiate your deal with your seller.  You can look at your personal financial situation and figure out your shortcomings and pitch it to your seller.  It's a blank canvas as to terms (at least until he states what his are.)  Maybe you want / need to put less down on the property.  A regular bank might say, "We require 20% down, and that's the way we do it."  A seller finance deal you might be able to negotiate, "We'd like to put 5% down and do interest only payments the first year, and then start regular payments."  You can also try to negotiate things into your sale.  Like if the AC's on the 2 units were 25 years old, but somehow still running - you may not want $10,000 in AC replacement expenses the year you buy your property.  So maybe you negotiate those repairs into the deal to avoid that?

There is really nothing hard about being a landlord (in general).  But you are having to interact with people - and hopefully you do that with the same respect you would want if you were the one renting, versus buying.  You also become responsible for making sure your tenant has a livable space - keeping all the major systems up and going - so hot water heater, AC, the roof, electric, plumbing, etc.  Managing one duplex is really no different than if the whole thing was your house - just that there are usually 2 of everything.  Two refrigerators, two ACs, etc, and also the tenants.  

Hopefully you know your tenants at least a little bit by already living there.  But you will have to evaluate them from a landlord perspective going forward.  Making sure they make their payments on time, etc.  When things go sideways is often when the 'personality' of being a landlord starts to show.  Whether it is loud music at night, or "Hey, our car broke down and we won't have all the money this month to pay the rent" - how you handle those situations.  Generally speaking I would say you want to be understanding, but firm.  You need to develop your rules and policies around late payments; and you have to be able to calmly deal with adverse situations.  On the loud music, you have to be able to knock on their door and say, "Listen, the music is so loud we can hear it through our walls and we can't sleep... you're going to need to turn that down after 9pm... or whatever the right answer is to you.  Your tenants - as long as they are worth anything- will inherently respect your authority as a landlord.  That is something that will take a little adjusting to - that respect!  But your tenants should ultimately know that you control their ability to remain in that unit, so if they become too difficult -  you just let them know at the end of their lease you will not be offering a renewal if things don't improve - whatever the issues may be.  Your lease is a very important document and it should spell out a lot of rights - both for you, as well as your tenant.  So definitely make sure to sign a new lease (ie. your lease) even if you take over an existing tenant.  You can even just re-write your new lease for their same rate of rent and expiration date, but with YOUR terms and conditions that apply to you being the landlord.  This way there is little push-back to get them to sign it (ie. you aren't changing their current rental rate, etc.)

Be sure to consider the thought that there could be a major expense you have to cover at any given time.  We have 37 units, and have had to replace 6 ($5,000) ACs in the past month.  I've been a landlord for 6 years now and never had a run or expensive items like that!!! (Yes, we knew they were old when we bought them, but you just don't expect them to all 'gang up on you' and break at the same time!)    But I don't have a choice - I have to replace them... you can't not have AC in Florida!  Had I spent every penny that came in on rent each month, I would be seriously hurting trying to cover that.  But since we put plans in place for maintenance reserves, we have those funds set aside and while still painful, at least it is not financially impossible for me to cover something like that.  So you too need to develop some reserve accounts - one for repairs, and also one for property taxes and property insurance payments - which are big expenses that are due once a year, but your seller will likely not collect like a bank might escrow for you.

Know that seller financing gives you lots of options to negotiate your deal - but that cuts both ways.  You don't know the financial prowess of your seller.  Is he going to put something into your contract, or leave something out, that you would want to be there.  With that said, I would definitely have a lawyer look over whatever eventually gets drawn up between the two of you.  In fact, a lawyer should be the one to draw something up in all likelihood.  But regardless,  you want to have a real estate lawyer on your side look over ALL the documents that a seller financier wants you to sign.  I can tell you that many a seller literally hopes that their buyer's fail as a landlord, as they can collect your down payment, and whatever payments you make before you default, and then they get the house back that they can sell again.  They can do this more easily if they write in terms into the agreement that make that easier.  So that is one reason why you want someone on your side making sure your purchase agreement is fair both directions, and not exploitive against you.

As to terms - think about your duplex as being fully rented out (even though you will initially live in it).  You want to make sure that whatever deal you negotiate if you were collecting rent on both sides, is a good deal as to cash flow.  So if your mortgage (principle and interest) and all the other expenses (taxes, insurance, and an maintenance reserve) totaled $2,000, but each side of the duplex will only rent for $1,000 in the current market - that isn't a good deal, right?  You are not making a cash flow each month after paying the bills.  You are still gaining advantages - market appreciation where the home is increasing in value; tax write offs for depreciation, and your loan balance is going down each month too.  But you also want your property to cash flow when it is fully rented out.  This is either a negotiation on terms, or price to make that happen.  It's pretty easy to tell a seller - "Listen, we really want the house - but at your current terms - the house is losing $200 a month after paying all the bills - we either need the price to be X or the interest rate to be Y for this to be a workable deal."  

Or maybe it barely cash flows now and you say, "We get rates are high right now, but we want to be able to do an interest rate reset one time in the first two years we own the property once mortgage rates come down and base it on a known market index.  Our commercial loan is based on the 5 year continuous maturity treasury note plus a spread of 2.25%.  So if that rate was 4% when our loan reset, we would be paying 6.25% interest.  Just know that rates in general are high right now, and if you can negotiate a way to get a lower rate in the future without having to refinance with your seller, that would be a good thing.  If not, you can always do a refi down the road.   That also goes towards the idea that you don't want a pre-payment penalty after a certain time period if you decide to refinance your deal to get a better rate down the line.

You definitely want to compare the deal your seller if offering to what else is out on the market.  This tells you a lot about whether you are being offered a good deal on your place.  But be sure to match size and condition of the property to any other properties you might compare it to.

There is much more that can be said - but hopefully that gets you started.

All the best!

Randy

@Noelle Hoyne

I would strongly caution you to be close by your first flip.  They are not for the faint of heart.  Being out of state on a first flip could be a major nightmare.  You want to be able to keep your eyes on the whole process. Did your contractor show up today?  Where is all the new stuff that we had delivered to install?  Did someone steal it?  Hey, that's not the way I wanted it to look (times 1 million!!)  You can't monitor what you can't see, and you can't see it if you are a thousand miles away!

I would suggest doing a very cosmetic first flip.  Even if it is paint, flooring, some new appliances, and some yard improvements.  Don't go off the deep end and get into something that is way over the top in need of repair!  There is a HUGE learning curve with Flips.  It's not impossible... it just comes at you from every direction.  "Hey... I just flushed the toilet and it's backing up into the shower (Sewer / Septic).  "Hey, the AC isn't holding temperature and it's making a funny noise outside".  Are those German roaches? What are all these little wings by the windows (termites).  "I didn't see this crack last time, but look - it runs all the way up to there!" (foundation issue?)  I could go on for hours!  

You REALLY need to keep close tabs on a flip until you are to the point you aren't so green and you know you have trusted vendors and such.  Contractors can be some of the least reliable people on the planet - no offense to the good one (singular) reading this.  Contractors are frequently working multiple jobs - and if they know you are out of town investors - how much priority is your job to them, versus meeting with other customers for their next job or finishing people who have their eyes on them.  Plus - where do you find good ones?  (I think the real ratio is about 50 bad ones to 1 good one!)    

The "small cash" part of your comments is also suspect.  For flips you not only have to buy the house up front -but also be able to afford to do all the repairs - the ones you planned on; plus all the ones you find later once you tear into things.  

Not to scare you - but we made one mistake on a flip - replacing old wooden windows instead of rebuilding them - and it ended up costing us $50,000 to our $175,000 profit margin.  The inspector came in and said - you now have to bring all these window casings up to code.  The windows weren't the problem - it was the framing around them where they weren't strapped with metal at the bottom of the posts - and the framing requirements were totally different in 1908 when the house was built.  All the (already installed) windows had to be removed and reframed, and reinstalled.   Lesson learned - as soon as you modify something - it has to meet current code!!!! The problem was we had already finished the inside of the house and so all the repair work had to be done from the outside without totally tearing up everything already finished on the inside.  Cost us $2,000/window (beyond the cost of the window itself) for 25 windows!  We still made plenty of money... but you don't know what you don't know... and in Flips, that can get very expensive, very fast.  

I'm sure you'll lean towards a General Contractor if you go out of state.  Hopefully that will help.  But just remember - you've been warned - start local, start small!

All the best!

Randy

Quote from @Logan M.:

Real estate investing has its ups and downs, but nothing could have prepared me for my rental property catching fire on the 4th of July. My neighbor’s fireworks went rogue, setting my house ablaze and forcing my tenants to move out.

The Chaos

On what was supposed to be a festive night, I got the dreaded call from my tenant – my property was on fire. Thanks to quick action by the fire department, everyone got out safely, but the house was left uninhabitable.

The Fallout

The damage? Over $200,000 worth. The house is unlivable, and now I’m dealing with the headache of insurance claims, finding contractors, and ensuring my tenants have a place to stay. It’s a logistical nightmare and a financial hit that no one wants to face.

Moving Forward

Despite the mess, I’m determined to rebuild. This whole experience has taught me a few key lessons:

• Insurance: Make sure you’re fully covered for disasters. (Fortunately, we were insured)
• Emergency Fund: Always have extra cash for unexpected events.
• Tenant Support: Keep good communication and support your tenants through tough times.

Final Thoughts

This July 4th was a disaster, but it’s also a stark reminder of the unpredictable nature of real estate investing. Stay prepared, stay resilient, and always expect the unexpected.

 @Logan M.

We've "Been There, done that, Twice!"  But neither nearly as bad as yours - our biggest one was a kitchen fire that smoked out the whole house.  

Hopefully your insurance policy also compensates you for loss of use - where it continues to provide you your rental income.  I can definitely say that while the bigger fire we had was a pain... it actually worked out really well... in the end we had a much improved property, and we stepped in and did as much of the work we could do ourselves that the insurance company was compensating us at  'retail' rates for... like painting, and replacing cabinets, and other simple tasks.  We actually (legally) made more money on our property because of the fire! (trading it for our time and effort though).

Hope you get through it smoothly.  Be sure to check your adjustor's work.  We were able to go back and say, "what about THIS, and what about "THAT" where they wrote us additional checks for things they didn't do right or account for.  With a big fire, it might totally be worth hiring an outside / independent adjustor to review their adjustment work.  Just a thought for you.

All the best!

Randy

@Martin Nesta

I don't have much info for you - but I do know the 'nature of the beast' I can share with you... perhaps something will help...

Most property tax "just values" in Florida - the value they say your property is worth - are intentionally set about 15-20% below market value.  But in Florida, we also have the "save our homes" 'grandfathering' where they can only increase the taxes by a certain percentage each year.  So even though property values may have skyrocketed, the taxing authorities aren't able to jump the taxes as much because of the limits the grandfathering puts in place.

BUT... as soon as you buy a new home, or transfer it to a new entity (think LLC)... all that grandfathering goes away, and the taxing authority will bring you up to that new Just Market Value". This can be confusing to people who will inevitably say, "Why did my taxes jump by thousands of dollars!?" But if the previous owner had hundreds of thousands of dollars if cap differential it can happen very easily!

Here is a screen shot showing this in practice.  There is a $227k cap differential (grandfathering) on this property.  Then there is also a homestead exemption as well.  So while the Just market value is $635,953... it is being taxed like it is only worth $358,356.  But the kicker is that the house has a market value of closer to $750,000 - $800,000.  So if I were to try and appeal the value of this example, I would have to PROVE that my house is worth less than $635,000, when the market says it is worth $750,000... and on top of that, they are only taxing me at $358,000.  See how that gets challenging?

So... with that as a background... if you want to fight the "just value" of your property - you have to show how they have messed all that up - you can't just complain "My taxes are too high!" (that is all of us!).  If you can show several other homes in your immediate area where the Just Market Value is lower than yours and those houses are near by and similar in make-up, you can file an appeal and have your case heard. The taxing authority will actually assist you with that process (ie provide you the forms, etc). It isn’t anything complicated. It’s essentially a board meeting where they look at individual cases as I understand it.  Where this can actually happen in practice is if you perhaps had a fire, or the home is severely dilapidated.  You can justifiably say, "This is not worth the value you say it is."

Your challenge will be that the taxing authority has already take about 15% off the actual market value to achieve a "just value" of your property. So you are fighting an uphill battle.  In essence you have to prove your house isn’t worth what they say it is worth – and since they started 15% below market – you have to be able to justify the argument that your house is worth (say) 25% less to get a 10% reduction in your taxes.  Mistakes aren’t impossible – but the taxing authorities are usually pretty good at their job. So I wish you well!

All the best!

Randy

@Rowan Klecker

For me it’s mostly about cash flow - as real estate is my full time job & income.  So your question translates to “how do I find / seek cash flowing properties.” 

If I jump to the end of this story first, I will tell you that at 7% interest and high market values, very little cash flows well when you take into consideration principle, interest taxes, insurance, and a $100 maintenance reserve… at least where I live in Florida - but we have really high insurance rates.  So you are often looking for a needle in a haystack to begin with.  

But - when looking - you need to know what a “typical property will rent for - so let’s call that a 2/1 house that is around 800-1000sf.  When you see something bigger, or smaller you just know you need to adjust for those factors… more bedrooms, more square footage will rent for a little more.  So go to Zillow rentals and figure out what that rents for… in my area that’s around $1.15/sqft or around $1150/month.

From there it’s a math equation… $1150 minus principle, interest, taxes, insurance and $100 maintenance reserve equals my expected cash flow.  

That same house sells for $145,000 in my area.  If I’m putting 20% down, that’s $29,000 down and I’m financing $116,000.  Let’s call the interest rate 7%.   So Principle & interest will be $772.  You can look up the taxes on your local property appraiser’s website.  Let’s call it $1,500/year.  You can call an insurance company for a real quote, but let’s say $1,000/year on insurance.  So the taxes and insurance equal $208/month, and the maintenance reserve is $100.  All those added together equal $1081/month… giving you a net cash flow (on a good month) of $69.  That’s a crappy deal… and not worth pursuing.  So you log that number in your head - that at $145,000 you have $69 cash flow when rates are at 7%.

But if rates were at 5%, your payment drops to $623 for the P&I instead of the $772.  That’s $149 better - giving you $218/month cash flow.  That’s average /descent in my area… not great… but perhaps worth pursuing.  What if you could get an extra $100/month on your rental because it’s in a better part of town?  Now you are at $318/month.  That’s now pretty good for a financed property. 

You will get good enough that you will be able to run these calculations in less than 2 minutes for a ballpark estimate on a house you are looking at.  So it becomes a quick - back of the napkin exercise as you look at properties wherever you find them. 

So the lessons here are that until rates come down, most houses for sale at current market rates will not cash flow (well) where they are worth buying in todays market.  But rates are expected to drop in the coming few months as the Fed lets up on their interest rates.  The fed meets 8 times a year.  If they cut 1/4 point per meeting rates could come down by 2 points in a year.  (Not that they actually set mortgage rates - but they influence them.)

You now know that as you look at 2/1 houses that anything priced near or above $145,000 isn’t worth pursuing in the short term… so you look for ones that are cheaper than that.  

You can go to Redfin.com and put a search area in “list view” - versus map view and it will let you sort that area by all the table headers in the list - so you can sort them by $$/sqft for instance.  This realistically gives you the cheapest houses in order in that area.  Note that it doesn’t take house condition into consideration, so there is still other due diligence required - but this is a great way to look for the most affordable houses in a given area.  You can then click into any of them to view them further. 

So go and look for 2/1’s that are cheaper than the $145,000 one we already figured out won’t work well right now.  

That’s one path to house hunting.  For more adventurous ones - we have bought houses off of Craigslist, from foreclosure sales, from wholesalers , and even found a seller we were buying her house from had another one she was willing to sell us at the closing table!  There are a lot of paths you can chase… but for market searches, the above is what I do. 

All the best!

randy 

Disclosure - I’m “just a landlord” … but willing to chime in….

the first question is - was this supplemental payment documented in writing?  Or was it just an unwritten side deal where you said, “look, here’s another 10k in crypto” or whatever?!?

legally, as a cost basis of the house, it should have been included in the closing documents because it impacts things like taxes collected by the state, etc.  So you could be opening up a can of worms by trying to claim something that was left off the closing statement.  At this point it’s  probably better to not claim it. That would be my first answer.  You basically divulge your  “sin” by trying to claim it and then you can be subject to the consequences that may come by having left it off the transaction.  

if you did want to claim it, it would be better to revise the closing and get it included - then you are totally legal.

Just realize your actions impact the other party as well.  So is the other party expecting to claim that income on their taxes?

If your seller wasn’t planning on claiming the extra income on his taxes that gets even worse.  A lot of what the  IRS does is cross check things it “sees”.  So if you claim a purchase, and they claim a sale - did the figures match?  If they don’t, it could raise a flag for an audit.  I’m basing that more on things like W2’s being issued by a business versus what was reported by the person who received it - but I imagine it extends to all types of transactions.

you are flirting with danger though.  My 2 cents are duck and run - let the way it was documented be the way it happened.  Otherwise revise the transaction and do it legally to claim the additional payment.

The 3.3% you save on depreciation by trying to retroactively claim extra money you paid probably isn’t worth trying to fix the way you did this. next time include it as a cost of the sale on the documentation. 


good luck!

randy 

@Account Closed

Hi Nick,

Was the short sale house your only business together?  If not, maybe you could transfer value from another project in your portfolio at a “not 50/50” basis to compensate you for the disproportionate outlays on your part?  So as an example - make another project 75% yours versus 50/50.  That same concept could be used on a going forward basis as well.  “The next project we do I am  to be compensated for the excessive outlay on the last short sale.”  perhaps a simple conversation like that could solve things?

A lot depends on whether you want to hold your partnership together, or blow it up?  Without knowing more about the duration and other projects both past and future it’s hard to know what to recommend.  Likewise - what skills & value the other person brings to your partnership?  Are you the money and he is the hands guy for instance?  Is he (or someone like him) necessary to your existence in the business?

Likewise there is an “assets” consideration to think about.  Does he have assets he (or perhaps you) can access to be compensated by - either voluntarily or if you end up in a legal fight. 
Know that lawyers are expensive for both of you though, and they are happy to spend your money at $400/hr or whatever.  

Food for thought…

Randy

@Sean P.

Hi Sean,

I’ve been exactly where you are about to be.  My wife and I were working full time corporate jobs where she made 6 figures, and me a bit less.  

We wanted to find our path to replacing that income and not sitting in a corporate cube 8-10 hours a day.  Option 1 was the 4% rule where you could withdraw 4% of say $1 million - but that is only $40,000/year - which was not going to replace $200k in income.  That’s when we looked to real estate. 

We started buying single and multi-family properties for the cash flow.  We began doing this in 2018 buying 12 properties our first year, 10 the next year, and 9 the next year.   By having the money up front it will be very easy to buy properties.  We financed all our properties to maximize how many properties we could afford.  

There are limits to how many Fannie Mae (personal) loans you can have, which is 10 per person… so if you are married my first suggestion is to buy your properties in one person’s name to maximize  how many loans you can have.  

When we reached our limit there we actually did a consolidation loan with a commercial DSCR loan where we paid off 5 Fannie Mae loans with a portfolio lender which opened up 5 more Fannie Mae slots for us. This is about to bite us though as commercial loans only lock for 5 years - so our 4% commercial loan will reset in the next year and probably increase to the 6% range if we don't pay it off before then. So that's a lesson learned through experience.

While I’m sure MH Parks have there place - the homes themselves are viewed more as depreciating assets by lenders - more like cars, and less like real estate.  So I don’t think you will see the same level of appreciation with mobile homes as you would with brick and mortar real estate - so i would recommend buying traditional real estate. 

There is no need to partner with anyone unless you are lacking something.   partnerships get messy.  You want to go one way - they want to go a different way - then what do you do?

To maximize cash flow - manage the properties yourself.  It’s easier than you think.  Property management can cost upwards of 1/3 of your profit on a financed property.  So PM will definitely take you in the opposite direction of cash flow. 

Utilize a property management platform that automates tasks for you.  We use Rentec Direct - but there are many out there.  They collect your rent, apply late fees,  deposit your monies into your bank account, market your properties, track expenses, screen your tenants, etc for just a few dollars a month per door.  It’s my favorite landlord tool - bar none for how much it makes my life easier!  

The challenge in today’s environment is that properties are far more expensive than  2018-2021, and mortgages are way more expensive as well.  So finding the cash flow you desire will be far more difficult.  So while real estate can be a great vehicle - realize it’s cyclic - and you are in the high side of cycle.  I would always recommend comparing your expected returns on a deal against other non-real estate options and do what makes the most sense.  So if you find you aren’t seeing the cash flow you desire - real estate may not be the best vehicle at the current time until interest rates come back down.  So go into your investment opportunity with open eyes to what delivers the best returns.  

Hope some of it helps!

Randy

@Jacqueline Lee

Hi Jacqueline,

It’s absolutely real.. but I would say there are caveats.  As an absolute beginner… it’s a tall order!  What I mean is that your deal has to be awesome for someone to be willing to front ALL the money - and for that service you will pay ”a pretty penny” as the phrase goes. 

Disclaimer - I just know about it - I’m not involved in it - but can at least advise…

Most of what you are seeking are called hard money lenders.  They will charge you points up front - so say you wanted to borrow. $100,000 - they might say, ok 2 points and 12% interest on your money.   This translates to you will only receive $98,000 ($100,000 minus 2% <points>.  then you will pay them 12% for the time you borrow the money - but will owe the $100,000 + 12%.

Caveats - they usually want you to have some money in the deal too - but 100% financing isn’t out of the question.

The more other assets you have, or the more you have done other deals - the easier it is to do the next deal.

Think about a 16 year old wanting to borrow lots of money - all the questions you would have for a youngster (read - newbie) a HML Is going to have about you! Do you know what you are doing being you've never done a flip before? So if you walk in and say "I have nothing, and I know nothing" it probably isn't going to go great. If you walk in and say - this is my 3rd deal, here are the other two flips I made 6 figures on, I own my own house and have some money to throw in the deal as well… it's a lot easier.

Then there is the deal itself.  It has to make sense.  Which is code for- has a great profit margin after expected repairs.  The people lending you the money will have done numerous deals.  They know what they are looking for.  So a $20,000 profit probably isn’t going to be very interesting to them compared to 6 figures.  You will lose 1/2 that $20,000 just in closing costs. And lots of things can go sideways on a flip - especially for beginners!

Beyond hard money lenders - you could also turn to family members who might know / believe in you if they have resources to offer. 

We know nothing of your skill set, resources, or abilities.  All those things factor into this arena though.  

But fur sure, hard money lending is a thing.  You can google “your state” and “Hard money lenders” and read up on them,  many will put their requirements on their websites. 

All the best!

Randy

@Jorge F Rodriguez

I would make sure you live in it for at least 2 years to avoid capital gains taxes, then sell the property. 

It’s negative cash flowing to begin with, and you will likely have to rehab it to some degree if you put renters into it.  

Presuming you are somewhat real estate savvy you can list it on MLS yourself and avoid giving up the seller's commission you would pay with an agent. Costs about $150 to list on MLS - you can google "your state" and "list on MLS" and you will find a broker (etc) who will offer that service. of course you have to handle the inquiries… but it's pretty easy… we've done it multiple times.

Your 6% appreciation approximation is less than the 7% average return the stock market  does long term - and lately it has been blowing that figure away - though as they say - past performance doesn’t equal future performance.
 

But definitely keep it for 2 years - even if it meant sitting for a couple of months to avoid the capital gains! 

All the best!

Randy