All Forum Posts by: Robert Hesselmann

Steven,

No worries, I appreciate your perspective and advice!

You are correct in that I don't have a good exit strategy if the market goes bad.

I'll continue to explore the options.

Rob

Steve and Steven, thank you.

Yes, it is a bit scary...

As I pointed out, it IS a unique situation.

Anything is possible; the deal "could have been" designed to completely take advantage of me...but after 37 years with my former employer, I don't believe there is any intent to deceive or take advantage.

I have been a part of all these rentals for years. Most were SFH homes purchased to prevent specific areas of neighborhoods from being further degraded, in an attempt to protect the corridor to larger properties/investments. Point being, they weren't purchased to be "income producing". They also had other companies to cover repair and maintenance on them. (They did not need to perform)

The intent on their part was/is to help, to offer something to me. Agreed, they are awful investment properties from cash flow and other perspectives, but, at the end if all goes well, the payout is generous.

The reason I'm here asking is to learn the best way to make the best of all this.

I do have an agreement that allows me to sell a home or two before the 5 year mark, if approved.

Decent reason=approval.

I also have the option of doing the second 5 year term at interest only. The unknown of course is what the going interest rate will be.

I believe that if I present a reasonable case for selling 5-10 units, in order to re-invest the money into properties that actually perform, I will be helped to do so.

___

Current best case scenario is $25-30K cash flow per year through year ten, at which point they all are sold off.

End result is $150-$250K plus the potential equity at $350K, so somewhere around $400-$500K for babysitting these homes for ten years.

Of course having 19 units that produced $200-$300 each per month in cash flow would be fantastic... (An extra 450k...)

However, life is like that. It isn't ideal, but it is better than a kick in the tail…

I appreciate your time and thoughts. The “cash flow” method of income is very appealing to me. I am so close, and yet so far.

Rob

Brent,

Thanks.

That thought came to mind immediately when the deal was proposed.

A legit appraiser was used, comps were realistic. I did check them.

I understand and appreciate the thought.

That said, what would you do with a group of properties like this?

Pretty unique as I have very little money invested in this, with a decent profit potential.

Seller will work with me to help finance other deals, or sell and re-invest.

Rob

As a means of helping me with future retirement funding, my former employer set up the sale and transfer of a number of rental units (19 in all) mostly SFH. to me.

The deal is owner financed, no money down, interest only for the first 5 years (4%) and then P&I for the remainder of the 20 year payback period with the rate possibly being adjusted at the 6 year mark. Possibility exists for a second 5 year interest only period. There is a 5% penalty for selling any of the properties before the 5 year mark.

I do have roughly $500 per unit invested in closing costs, etc. ($9500)

The homes were professionally appraised, and then reduced by 15%-17% to determine selling price. The idea was to provide some instant equity.

My plan is to hold the properties for a total of ten years, and sell all or most. I have 35+ years experience with rentals both as service, PM, and landlord.

I have the skill and ability to both manage, and service the units.

I intend to "retire" in 5 years and have the rentals as a "job" for the next 5+ years.

The instant equity at the end of the ten year period amounts to $350K assuming they all sell for the original appraised value.

All good, and much appreciated! A very nice gesture that will help with actual retirement.

However, I would like very much to take on the rentals as a full time job, starting now...

Problem is that the units have a horrid cash flow issue. All told, 19 units crank out $398.00 per month.

That is, all the units combined only produce that total, and this is paying interest only.

Paying P&I, the cash flow is negative $4323 per month.

Most of the rents are below market. I am raising them as I go, but better than half need to be increased by $200+ not something I can do overnight without losing tenants.

Once the rents are where they should be, cash flow, interest only, will be $2681 per month, but will still be $2040 negative when P&I are added.

Worst case, if they don't depreciate is that there is a nice sum at the end.

What would you do?

Continue as is?

Sell and reinvest in better cash flowing properties, something else?

I’m sitting on 2.07M. in property…there must be more opportunities or possibilities…

Thanks,

Rob

Thank you Jeff.

I have a ten year hold, then sell plan.

I've estimated all Cap-ex  projects that could/may come up in that period, including interior and exterior repaints, septic systems, etc, etc.

The question was more about the expenses that pop up at vacancy; such as landscaping touch up, extra cleaning, etc.

In a perfect world, the tenant will leave the home perfect and I'll return the security deposit, and re-rent the home with no more than a months rent lost and some utilities and lawn care...

We have inherited some 10+ year tenants, really love them!

Rob

I'm running numbers on some rentals. 

I'm assuming 1 month a year for vacancy rate, so If the rent is $800 per month I'm dividing by 12 and calling my vacancy expense $67.00 per month.

I realize that there are other expenses that pop up when a rental becomes vacant, such as lawn care, utilities, and some form of cleanup. I note that many people use 10% as a general average for vacancy. At the above rental rate, 10% is $960 or $80 per month, allowing an extra $160 to cover mowing, utilities, etc.

Is this correct?

Then the thought comes to mind that if I divide by 12, but have the rental vacant one month per 12, then I should be dividing by 11, no?

Of course the rental won't be vacant exactly one month per year, so perhaps over the 10-20 year hold time it averages out to only a few months of vacancy, and not 1 in 12.

Is that correct?

Thanks,

Rob

Hi Penny,

Anything is possible!

The third bedroom in question is right next to the existing bathroom. It is possible, but would be strange having two bathrooms side by side...

This thread has given me some great ideas for our other rentals.

We have another similar sized home that had a small addition on the back. It had a half bath, and we carved out a laundry room in the addition and still had space for an eating area.

The layout of the small 3 bed 1 bath, now having an additional half bath, laundry no longer in the basement, and an eating area, has made it very popular. 

First tenant stayed 7 years and only moved because his wife  needed a more accessible home (wheel chair) they actually moved into another of our homes. The new tenant looks like a long timer as well, having already put in a garden and is doing extensive landscaping. I love good tenants like this, and want to do what I can within reason (scope and budget) to attract them.

Rob

Devin,

As mentioned, moving is expensive. 

Moving however is only a small part of the overall expense. It must be prepared for the move; skirting removed, utilities unhooked, the must be raised to install axles and tires. If it has a central air unit, it must be legally disconnected and the Freon or chemical recovered.

Taxes must be paid, and lot rent if located in a park.

Then you are ready to move the "free" home. Once you move it, you will have to have land zoned for it, a foundation built, and utilities present. If not, you will need to find a park that will accept it. Most "nice" parks do not want homes over 5 years old. 

Once you find a park, you have to pay to have it lowered onto the foundation or block piers. Then the utilities connected, the home re skirted. Bear in mind that most of the utilities and skirt will no longer be the right size, so new will be required. The nice steps may no longer fit...

Then you have lot rent each month.

Total cost for a "free home relocated and ready to sell/move into can run $7000 and up.

Flipping mobile homes CAN be profitable, but having to move one rarely is.

The better scenario is buying a home in a park that can stay, for a few thousand.

Pay a month or two of lot rent while advertising, and sell for a profit of 3-5K.

It is currently very hard for the average buyer to get a loan for a used mobile home, so, if you are selling for more than 10k, your market is very limited.

Bear in mind, most decent parks that will attract quality buyers will not accept "anyone".

Your buyer will have to meet the criteria for the park. Income, credit, background, etc.

There is money to be made, but be careful...

There are "book values" out there, but they are not of much use.

What is the value of a home in a 5 star community in California, is not the same as a home in a trailer park next to the city dump in the inner city slums.

Book value doesn't consider these factors.

Rob

Thank you all for your opinions and ideas, they are appreciated!

My grandparents had a laundry chute in their home. It was ever so much fun to throw things down!

As a child, the trips up and down were just child's play :)

As an adult, I still get around fine, but would grow tired of going up and down stairs regularly to do laundry. Our current home is a single level. I can see I must leave personal emotion out of these types of decisions, though the general intent is to offer a better than average value to my tenants to attract and retain quality people.

Rent increases are nice, but not loosing a month or two a year to turnover also adds up...

My wife and I toured the home today, and while she agreed that it would be nice to have the laundry upstairs, leaving it in the basement was okay, as plenty of people are fine with such an arrangement.

So, we've decided to leave it as is and clean up and paint the basement.

We're also going to do exit interviews with all tenants in all rentals, and try to learn why potential tenants passed on a given home to be sure we aren't dropping the ball.

Rob

P.I.T.A. is $621.00 plus $125 per month repair fund over ten years, on a 20 year loan.

$746.00 expenses, and $795.00 rent.

Once 10% vacancy is figured in, expenses are $826.00, rent $795.00- $31.00 negative.

Rob