All Forum Posts by: Justin B.

It's not a red flag by itself.  If the application process yields a good renter, he may just have money and not want to hassle with paying every month.  Just approve or deny them based on your normal process.  If they pass, go for it.

Now, what I would do is account for that money as an "asset" and each month move the month's rent from the asset column to income on the P&L.  That way you won't see it as money you can spend.  That way, if you have to evict, you can return any money that hasn't gone towards rent yet.

If you are taking all that money as income in one month and plan on using it to finance future properties, etc (in other words, you "spend" it), then you are running a risk of not having it if you have to evict in month 3.

If you haven't seen the movie "The Big Short", go watch it.  It's pretty good.  The main cause was subprime market and everything that went along with it.  FYI, I'm not basing that because of a movie.  It was a movie made to showcase that piece of it.  Of course, there were other factors, BUT, to use the airplane example, it's like saying we crashed because the flaps didn't work.  Well, the flaps didn't work because the engine blew up and destroyed them.  The Subprime market is the engine in case that didn't come through :).

I have had this happen to me before (varying lengths of time stayed).  Sometimes it just happens, there are lots of reasons for it which are unimportant.  However, if he left the keys, you're good.  You still need to change the locks just in case.  Get it re-rented.

Now, I've never had anyone tell me they would pay until I found a new tenant but I'd certainly take him up on it while not expecting it to actually happen.  Sometimes, the easy way is just easier.  Hold his deposit as you can turn that into income as a violation of the lease if you let him know that you're doing that by letter.  I'd say do this:  Tell him that you'll take him up on his offer and you'll hold his deposit until you know what the final tally will be and you can let him know if the deposit doesn't cover what he owes, he'll owe the difference (I'd cap it at 2 months total rent.  Any more and no judge would uphold that claim).  You may never get more than the deposit but it's better than nothing. I think you'll find that trying to go after him for more if he doesn't pay isn't worth your time and energy.

In my case, all my leases have a 2-month penalty for breaking them.  I send a letter saying you owe 2 months rent.  I let them know their deposit can apply toward that if they'd wish (if I don't have to use it for anything beyond normal wear and tear).  I then let them know what's owed after that.  After a month, I turn it over to the collection agency. They will take a % of course, but it's not worth my time to be the collector for that.  All I spend is maybe an hour and if the collection agency gets it, great, if not, ok too.

Now, I have a lot of units so if I didn't use that process, I'd waste too much time with very little return (I may collect 1 of 5 if I'm lucky).

Now the caveat is to check all your local laws around deposits and such to make sure what I said is allowed, but it is where I invest.

I didn't read everything in all the replies, but it basically boils down to the time holding it.  When you flip, it's assumed you aren't holding it for more than 12 months.  In that case, it's taxable just like W-2 income.  It's "active" income and is just added onto your tax liability for that year.  Consult a CPA as to whether self-employment taxes or anything else come into play.  If you do hold for more than 12 months, it's capital gains.

When you refi, you aren't selling.  Any income from the refi is "tax-free".  Tax-free is in quotes there because nothing is ever tax-free, what you are doing is just delaying taxes until you sell.  Depreciation recapture and the profit you make when selling is what is used to determine taxes, but refi doesn't trigger a taxable event at that time even if you get cash back.

Accounting is another matter. Flipping and BRRRR have different ways of handling the accounting as with BRRRR, there is a point where things start becoming expenses as opposed to something you roll into your depreciation. typically with flips, it's all the same thing.

And of course there may be things at play that cause what I said to be different, but I'm trying to keep it general for the purpose of your question.

Ok, the logic itself is sound.  The method will differ from person to person.  Getting multiple properties does hedge your bets.  On my first property, it was a house that cash flowed $70/month.  This was great until a $4k AC unit repair 4 months in.  That wiped out cash flow for years.  It was 2.5 years before I could get my second house.  10 years later, I'm at 42 units and no single property is a potential windfall of expenses anymore.  It's a nice place to be in, but it took me a while to get there.  Others may can do it in a year, others it will take longer.

I think 100% cash flow until half is paid off is a little steep.  I'd offer to pay him first though.  Figure out what the monthly cash flow should be.  If it's $1,000/month, offer to pay him $500/month first, then 50/50 on the cash flow after that until half is paid back.  If you can't otherwise afford to do this, that wouldn't be too bad.  You'd get 50% ownership in the property, some cash flow, and then 50% cash flow once half is paid back.

Also, do the math.  If it's going to take 10 years to pay half of it back using any method, it may not be worth it.  But if it's 2-3 years, that's not too bad to get in with $0 and still own half (and get "some" cash flow).

For me, it's simply size and scalability. I did 13 SFR's before I moved into multi-family. If done right, SFR's can be great investments, but you need a LOT to make a lot of money. The thing about SFR's is there is a line where they flip over to not profitable. For example, a $100k house can rent for $1,000/month. A $200k house in the same area, might rent for $1,500. A $500k house may rent for $2,500. You can do the math on that.

In my area, right around $125k is where the math starts to flip (less rent per $).  So the main reason I jumped into apartments is a $500k apartment can garner rent of a lot more than $2,500.  I own one that rents for $6k and one that rents for $10k (The $10k one I did buy at a discount and fix up, so it was more like $600k to be honest).  But again, you can see the math there.  Plus, it's not all or nothing on rent.  that $500k house goes vacant, it's $0 in rent.  A 10-unit has 2 vacancies and you still have 8 units of rent coming in.

Of course, when I had 13 SFR's, I did kind of look at it as a 13-unit complex in my mind (but the time involved is 4x a 13-unit complex because they aren't in the same place). I find I spend less time on an apartment than I would SFR's of the same unit count. I think it's easier to scale up more quickly to more units by going multi-family than staying with SFR's. That said, there are companies out there that own 1,000's of SFR's. It might work for them, but for me, MFR's are the way to go.

Not sure if someone mentioned this or not, but if you got back in touch with Albert, he'd converse with you, start to setup the deal, THEN (and here is the scam part), he'd ask for some payment/fee to setup the loan, then once you send that in, you'd never see him again.  He'd probably ask you to send it via some wire transfer and have a really good reason why you should western union it to him in Europe (he's traveling for a month or something).

The reason you can't find him on the Internet is because he/she comes up with names they've googled themselves to ensure they aren't findable and then when they find one, they use that.  Once it's burned, it's on to the next name.

It's a common discussion I see.  People justifying negative cash flow because of appreciation, etc.  It 100% depends on what your goals are.  I invest for cash flow and look at appreciation at just a bonus.  I don't count on it.  In other words, if I'm saying to myself "Well, the possible appreciation makes this deal look ok", it's already a bad deal for me.

Don't get me wrong, I'm not saying never invest for just appreciation, just make sure you know what you are getting into.  I'm sure there are plenty of "appreciation investors" out there and when done right it can be lucrative.  I was even eyeing a potential deal where the holding costs would be pennies (probably break even), but there was an out that could have potentially brought $100k+ 3-5 years down the road.  After careful due diligence, the potential gains were nowhere near where I thought they could be so I didn't move on it.  Had my initial thoughts panned out, I absolutely would have purchased it for that potential alone.

BUT, if you have limited funds and are putting a large chunk banking on appreciation only, I think that is where people can get into trouble.  Appreciation can be a great thing but there are too many deals that can cash flow and appreciate at the same time, so why not get both?

Just be careful when you calculate the difference in earnings. Earnings in the stock market are pretty exact. You put in $1,000, make $100, you have a 10$ return, no fuss no muss. With real estate, you could have the same "earnings", but you also have mortgage paydown (equity), appreciation, fluctuations in cash flow, etc. Plus, all earnings in the stock market are taxable and with RE typically a portion (if not most) can be tax-free. It's harder to compare because of things like that. IRR calculations are probably the most accurate to get to that number to compare, but even then appreciation can seriously change the landscape over time.