All Forum Posts by: Randall Alan

 @David Kanarek

Just an FYI, there is a much longer thread about this topic in the forums that you can search for using a magnifying glass at the top of the page.

Randy

 @Brandon White

I too received an inheritance.  I felt a fiduciary duty to respect the gift I was given (and the person who gave it to me).   I saw it as an opportunity to create generational wealth for my family.  In 6 years I have seen it quadruple in value… so off to a very good start!

You are right though… you / your mom  have to get to know yourselves on a new different level if you have never been in such a situation.  Determine if you have the discipline to manage cash, or want to be a  landlord.  The 5% easy money in the HYSA will begin to drop later this year when the Fed starts cutting rates.  Then where do you turn?  the buzzword  is diversification - but with the purchases I made at the time - real estate far outperformed the stock market.  I have about 3/4 of my investments in real estate.  Today though - I’m not sure the same advice would necessarily hold as to that percentage.   I think it boils down to looking at the performance of any investment consideration.  The long term stock market return is 7%.  Run the numbers on your investment.  If you can get $1,500 net per month on your $200,000 house - that is a 9% return ($1,500 x 12 / $200,000).  But you are also getting many other benefits - appreciation and depreciation to name the  bigger ones - so your long term return is even better.  The difference for me was that at prices from 2018 - 2021 I was averaging a 23% return up front because both houses and money were way cheaper!  That’s not to say it can’t still be done - but it’s just much harder to find those that perform to that level.  So the percentages today for me might very well have been more towards the stock market side of things. 

BTW, There is nothing wrong with your mom buying herself something nice with a portion of the money if she does liquidate the house.  In some since, it can settle you down to be more disciplined with the balance of the money.  But don’t squander a huge portion of it on a depreciating asset (think sports car, jewelry, etc).  And if your mom does not have a house for herself she owns  (ie. if she currently Rents )- then that would not be a bad place to start in my opinion with some of the money she might gain from selling the house.  That could be her personal path toward an appreciating asset and not wasting money on rent.  But I would say to finance such a house  (maybe when rates come down) and leave the other money as a resource for investment purposes.

We cannot tell you the best path forward.., only point out tidbits and point you in directions which you must then weigh against your personal circumstances.  

Another thing to know is that there are many people who will be more than happy to assist new investors like you - but with less than fiduciary intentions.  You have to turn on possibly a new skill of protecting your new found assets.  

You need to learn that a broker who charges you 1.3% a year to manage your money can cost you upwards of 1/3 of your future gain on said money from that 1.3% fee over a long period of time.  Some can argue that they will hopefully earn you more than that - but few can beat the average return of the stock market or everyone would be flocking to them in droves (inside secret - most don’t).  I split the money I had invested in the market between a broker and self managing it through Vanguard and did a 1 year comparison.  I out performed my broker by $50,000 by investing in 6 ETF Index funds - the ones Vanguard said were performing best if you want to know what my secret was!!!).  I showed it to my broker and pretty much said - tell me why I should leave my money with you and pay you for the privilege when you just cost me $50,000 in one year!!?!  I then moved all my money to be self managed.   So even those you  may see as professionals aren’t always the best option.  But that is not to say they don’t have their place for those who can’t do it for themselves.  It was a little scary investing myself the first time…. But easy enough to work through that now it is no different than  buying something on eBay or something similar.  

You just have to learn the process and follow some  broad pieces of advice such as - don’t invest a lot in individual stocks because you are subject to much higher variances in performance.  ETFs and other index funds divide those ups and downs  across hundreds - if not more stocks to protect you from that volatility.  Pretty simple concept - that even my old broker didn’t follow - which is very much why I out performed him in my opinion. 
Likewise, in real estate there are Mentors by the dozen that all have “the secret to your success” available for purchase ranging from $289 to $50,000 (no joke on that upper number).  Many will swear by them.  Just know that most of what they will package up for you in a fancy seminar (or whatever) is available (albeit unpackaged) on this website through your own due diligence and inquiry.  So be careful as a newbie not to get suckered into losing too much money that way either.

Enough soap boxing on my part! lol!

All the best!

Randy 

 @Brandon White

What I would tell you is that now is the best time to sell your property if you were thinking of going that way.  It’s fresh, no wear and tear, etc and the market is high right now as to home prices, etc.

I think you need to ask yourself if you want to be a landlord or not.  Just beause the house dropped in your lap doesn’t mean you have to go that direction.

If you do want to be a landlord, it doesn’t have to be with that house.  You could cash out, buy a cheaper house using just 1/4th of that money (financed) and have options with how you utilize the rest of those funds.   If you really got into rentals you could buy 4 of them for the money you have tied up in the one you inherited.  If you run the numbers you will make far more money with 4 than the one you currently hold - even financed.  Plus you get depreciation on 4 as well, as well as market appreciation on 4 - which long term is where you can make a lot more money.  We have 37 doors that we bought between 2018 and 2021.  The have pretty much tripled in value in 6 years.  In retrospect - great timing!  But even at 3-5% market appreciation - which is more the long term norm, that is $3,000-5,000 a year increase in value.  If you owned 4 - $100,000 properties - that is $60-100k in market appreciation in 5 years.  It’s way better than 5% on your money in the bank!… but takes effort to run the properties, etc.  

all the best!

randy 

 @Brandon White

Yes - if you go to the county clerk's website,  you can usually see the 'dockets' - which is all the filings associated with whatever activity was being transacted.  So everything from a traffic ticket, to a drug offense, etc.  Bankruptcies are likely confidential - so you might see the bankruptcy - but wouldn't be able to see the documents inside of it.  But for most types of public records you can actually click and read the documents.  So if it were a drug offense you could follow it from the person being pulled over and read the police report, all the way through adjudication where you can see if they just had to pay a fine, or went to jail, or whatever.

What I can tell you is that you want to be picky about placing a good tenant.  And "good tenant" is sort of a multi-layered concept.  Does the tenant fit the house (like a family of 6 for a 2 bedroom/1 bath apartment) isn't a good fit.  Too many people - not enough beds, and such.  Income, payment history, etc.  Choosing the wrong tenant can be costly if for some reason they quit paying rent, they fall behind, then you have to evict them, etc.  You can be out 3 months rent real quick - plus have to pay court costs to solve you problem.  3x the rent is a tall order for many people - but not all people!  There are a number of red flags for the tenant you are considering - the bankruptcy, the charge offs - all of those indicate they aren't handling their finances well - and YOUR RENT is about to become the biggest part of their future finances... so that should give you (and your mother) pause.  

What I can tell you is that it is easy to latch on to a tenant out of convenience factors (bird in hand).  Then, another tenant comes along and they are SOOooo much better.  So your mom might be just wanting to go with them because she found them and has them in hand.  But that isn't a great reason to go with a 'just ok' tenant.  

One thing to know is that everyone has a background.  For instance, have you ever bounced a check?  Gotten pulled over by the police, etc.  The ticket created an entry with the clerk's office. But the items that are specific to financial performance and the safety of yourself and the neighbors, etc should be the ones you pay more attention to.  A bankruptcy that is years old is less concerning than an eviction that is 2 months ago.   The currency of such an eviction tells me that type of person is not financially stable - which would be disqualifying for us.  Theft, armed robbery, domestic violence, etc are safety concerns that would cause me pause..  If it was years ago - I could look past a minor drug offense.  If it was 6 months ago and it was something violent, not so much. 

Randy

@Brandon White

There is a lot to unpack there.  

First - realize that AirBNB usually makes a lot more money than a long term rental (based on having a good occupancy rate <# of days rented per month>) ... but that all comes with the responsibility of continuous turn-over - where you likely need a cleaning service, etc as a support staff - unless you are going to do that yourself.

Second - When looking at renters - the reason many renters rent is that they DO have poor credit scores.  So in my opinion a credit score isn't the greatest indicator on a renter.  It's definitely an indicator - but unless you are dealing with a white-collar person who just doesn't want to own a home - it's more common than not to see a lower credit scores.

I'm not a huge fan of out of state renters.  You can often miss the bigger picture there.  The bankruptcy tells you something about their finances - that they had issues at least at one point.  I would try to look them both up on the county clerk's office website for the county they report to live in... and maybe a few of the surrounding counties.  You can see felonies, evictions, drug offenses, etc. by doing that.  It gives you perhaps a more thorough view of the type of person they are. 

Wanting to move "immediately" is often code for "We are about to be kicked out / evicted from where we live, so we desperately need somewhere to go."  I would definitely want to know about their future income.  If they are moving out of state - do they already have jobs lined up? What is bringing them to your area?   If they are operating under the "We'll figure that out once we get there" approach - that is a bad sign.  One of the big things we use for qualifying tenants is their income.  We usually want to see 2.5 - 3x their income as compared to the rent.  So if you were renting the unit for $1,500/month - we would look for income of $3,750 to $4,500 at a minimum.  This is pretty much how banks do things too - the idea is that not only do you have to afford your rent - but also your electric, your food, your car, your insurance, your gas, internet, etc.  You also want it to be VERIFIABLE income.  Paystubs and / or double check their offer of employment with their employer.  If they were down at the 2x income level, I would almost consider that disqualifying by OUR standards.  There just isn't enough income left to make someone's world go round.  This later translates to - We decided to pay the electric and phone bill, instead of our rent.  

As you sort of infer - we look at mitigating risk by how much security deposit we require.  The more iffy we are, the more deposit we want.  I can tell you that 3 kids can do a number on a house - especially if you add in a dog as a 'bonus'.  We find our units with kids need far more rehab at turn-over when there are kids involved.  Think crayons and dirt smudges on walls, spills on carpets, etc.  I would say First and last month's rent, plus a matching security deposit that is equal to the rent.  So if you were renting it for $1,500/month - that would be $4,500 to move in.  That puts you in a pretty secure place.  It can be harder for people to come up with though... so it can cut both ways.

As for rental rate - try going to rentometer.com and put in your rental address and see what it tells you it thinks the rent should be.  Just like with appraising a house, you want your rent to be close to the rents of the properties surrounding it - so that you aren't under-renting your property.

As for contracts - you will not find a lease at Walmart I'm betting! - but you can find them online by googling for them (if no better option).  If you are a paid member of Bigger Pockets I think they have landlord forms as well - so that might be an option.  But if nothing else you could start off by googling "your state" and "Lease" or "Residential lease" - something along those lines.  Then read through the results and choose carefully.  Some would say a lawyer should draw them up - which makes sense.  But many people I know take one they found, and modify it to fit their needs.

You mention your mom "paying the bills every month" and that it's a newer house - but you don't mention whether it is financed or not?  If so, given everything you have described - another option might be to cash out of it and take the money and run.  Sure - this is bigger pockets - so if you are interested in being a landlord and such - great - but it doesn't really sound like that interests YOU that much from your "migraine" comment.  So I would ask yourself, who is it that is up for this?  

You could always start off one way, and then go another.  I sort of lean your direction and say, "Why don't you try the AirBNB for a couple of months - see how you like it - and then reassess.  You also need to verify the requirements of the city you live in as to AirBNB and such.  Some cities require permits and have other restrictions, etc.   If the constant turn-over bothers you, but you like the idea of rental income - maybe the long term rental is the way to go.  Or maybe you decide that, "This is not my gig" and you bail out and sell the property.

Hope it helps a little!

Randy  

@Tiffany Da Silva

Hi Tiffany,

Just for clarity - when you say $3,300/month cashflow - that is $3,300 more in income than expenses for the property?  That number seems high if those are financed properties; but possible if they are paid off I suppose.  

Not having done your 2023 return will in all likelihood 'hurt' you somewhat in the short term because lenders will want to see it.  But since you are still within the range of the first extension, you may be alright there.

I'm not sure what you mean when. you say, "Since I declared smaller amounts since 2022".  Are you working?  Are you just living off rental income?

I would encourage you to read up on debt to income ratios (DTI for short). Usually lenders want to see you making more income than your expenses by at 20%. So that is written as a DTI of 1.2.

Here is an explainer from a lender:

https://www.rocketmortgage.com/learn/debt-to-income-ratio

So if your goals clash with your DTI, you may have to lower your debts before a lender will lend you more money.

You mention 1 mortgage, but then you mention having cash from a cash-out refi on another property - which sounds like another mortgage floating around.  Without all the details it's hard to tell you how to proceed.

What I can tell you is that BRRR is more costly than a rent-ready from a "how much money does it take to pull it off" standpoint. Not only do you have to buy the house, but you also have to have the money to fix it up before you sell it. You don't mention if you will live in one of the units you want to buy or if you have a house yourself. If the BRRRR is not a property you will live in, you will need at a minimum 20% down. The 5% program is for owner occupied multi-unit properties -and I'm pretty sure it isn't intended for BRRRRs... but I don't know all the in's and outs of that. So you mention the $30k in cash. So going with the idea you aren't going to live in it, at 20% this would mean you could possibly buy a $150,000 rent-ready house if your DTI and credit score are good. But then that leaves no money to do a BRRRR - so if you were looking at a BRRRR - you would likely need to lower the price of the house and find one that didn't need much fixing - which is probably a good idea for a beginner BRRRR experience. It gets more complicated if you then need to borrow even more money to do the renovation. My personal suggestion - given what I know of your finances would not be to try and do a BRRRR - especially if you have never done one. There is a much larger learning curve for a renovation project than there is a straight rental - especially if you are not doing the work yourself. It is SOOOooo easy to get ripped off by contractors. The big "rule # 1" is to not pay them all in advance. But there are so many nuances to that topic I can't even start to delve into it here.

Your 2-4 unit theory will be tough.  I live in Florida as well, and a typical duplex these days is probably at least $250,000 in Central Florida.  It can vary based on condition & size... but that is sort of a going rate for an average unit here.

Hope some of that helps.  With more feedback we can improve our answers.

All the best!

Randy

@Kenny Banuelos

This may sound counter-intuitive…. But I would say “Consider your timing.”

Real estate is expensive right now, and money is expensive right now (APR wise).

The fed is expected to start cutting rates later this year.  Waiting a year might not be a bad idea versus pulling the trigger sooner and having to pay to refinance later.

Also realize it may be tough starting off as a 17 year old.  Could be somewhat hard to command respect from someone much older when you are much younger.  So that may be a challenge… but not one that can’t be overcome.  

The house hack approach makes sense otherwise.

Think about cash reserves.  if the renter’s AC croaks, do you have the $5,000 it will take to replace it?  So it is beyond just getting the house, it is having the resources it takes to be a landlord as well,  I have 37 units.  I LITERALlY replaced 5 AC units in the past 30 days  ($25,000 in capital expenses!)  Random stuff like that can happen.  Be sure you are prepared for it by having adequate reserves.

Part of me says that house-hacking when you don’t need to (because you could live with your parents longer)  seems a little weird… but if you are doing that to get the 3.5% down I guess I get it.  But in a year you could move back in with your parents and rent out both sides of the duplex… just a thought for you.  

Hope some of it helps!

Randy 

@Brice Connors

I calculate your add ons to be $475/month, and the P&I to be about $825… so about $1,300/month presently. 

If you can take in $1750/month, it seems like it would be worth keeping… at least in the short term.  I get you have to pay back the $8,000… but that is just an opportunity cost at this point. 

The other consideration is capital gains taxes. If you lived in the old house for 2 of the past 5 years you have no capital gains taxes if you sell within 5 years because it would be exempt.  Thats a 15-20K savings.  So that is something to consider as well.  On the flip side, you get market appreciation if you keep the house.  At 3% a year (guesstimate) that is $4,800 more the house is worth each year.

So the optimal play might be to rent it out for 2 years, make $9,600 in rent, gain $9,600 in market appreciation, then sell it and save the $20,000 in capital gains.  You also pay down your mortgage by 2 more years… so that is probably another couple of thousand dollars you make as well. 

You could then use that money to go buy other properties. 

Another alternative that gives you quicker access to cash would be to borrow against it now.  That woukd be a move to make if you were going to keep the unit long term.  But then you miss out on the capital gain exclusion after 5 years.  So you have to balance out options with your short term / long term objectives / need for the cash. 

So there are a couple of thoughts for you. 

randy 

@Francisca Mac
You will inevitably run into Tenants who cannot pay for some reason or another, as “life happens” in real time.  You want to develop a plan for how to handle that in advance.

In our book, payment history & longevity play a “first factor” in how we respond.  So if “they are never late” and they are late, we will tend to roll with them to try to help them out if the reasoning makes sense. We may waive the late fee to try to help them etc.  

If they are “always late” we'll let the late fees stick to compensate us for having to put up with their inability to manage their finances.

But at the end of the day you need “outer boundaries” that you stick to.  There is a slippery slope syndrome that can occur.  Maybe they lose job and they tried to pay but couldn’t pay everything this month, so they are behind by say $500, but the next month it continues and now they are behind by $1,000.  Two things need to happen… one, get caught up, and two, get back on track with the upcoming rent as well.  It’s hard to do for paycheck to paycheck people.  

You have choices though… from being the butthole landlord who tolerates no being behind… files eviction at the first drop of the hat, to the softy that gets exploited.  We have ended up being the latter a couple of times in 7 years because we started off trying to be helpful, but have put policies in place to avoid it:

Our rule of thumb is that you can’t be behind by more than your security deposit.  Obviously the security deposit is meant for a different purpose (towards damages and repairs)… but it acts as a goal post for us.  

Once you are behind, we require forward progress towards catching up - which looks like this;

Let’s say you are behind $750.  We will advise the tenant that in the coming month we need rent paid on time and within the month we need 1/2 of the back rent paid as well.  If it has slipped too much, we may make it 1/3 of the back rent paid. And if this is not accomplished and they exceed their security deposit we will advise them we will have to file for eviction.  

The secret is that you can’t continue to let it slip further and further behind.  Where we have gotten busted in this is that they set a payment, then 4 days late it bounced, so they say, “Oh, so sorry I’ll set a new payment” and then that one bounces too.  That is the slippery slope to watch out for. 

So develop your policy, whatever it is up front, and stick to it.  We try to be flexible, but firm, because no one really likes a butthole landlord.  

All the best! 

Randy  

 I think you will find once you get over the initial “doing something for the first time” jitters that managing your own properties is pretty easy overall.

 If I had to guess, I would say maybe we have 1-2 contacts with a tenant in a given year… on average… meaning for 4 tenants… you might have 8-10 interactions in a year for a ballpark “amount of effort it takes”.  Usually when something quits working.  Sometimes you will have “frequent flyers” who like to bring up every little thing and seem to have more issues… but they are more the exception.   

I would also suggest to you that you search up your state’s landlord “rules” where they spell out your responsibilities.  In Florida this is about 3 pages in the state code.  You can literally google “your state” and “landlord statutes” and it should take you right to it.  It’s good to familiarize yourself with your state’s legal obligations.

All the best!

Randy