All Forum Posts by: Robert Quiroz

You have to keep in mind there is a calculation when it comes to increasing rents.

On my last tenants of three years, I only increased once. The reason is the increase in rents wasn't significant enough to justify the risk of vacancy. For example:

Let's say current rent is $1,000/month

Market rent is $1,100/month

Cost of turnover between renovations and VACANCY: $3,000.

So it would take over 3 years to make up the difference. What I've done in the past is raised rent but still kept it under market rents. It becomes a win-win.

On my most recent tenant, I experimented with a built in rent increase. No push back. Let's see how it goes when the one year anniversary comes.

But in general what you are seeing is very common. I suggest submitting offers where the numbers work today. If a Seller pushes back based on the "potential rents" then just use the excuse of the cost of turn over needs to be factored in. 

@Robert Quiroz

When you take over, it can be difficult to get rents to market if they are very suppressed. Once unots come available, the best recourse may be to non renew.

Gino

Could be a business decision based on keeping long-term high quality tenants rather than risk the costs on turnover. The turn will typically cost at least one 1 month rent and then the freshening/repair costs. In most cases you will loss money (in the current year) if you need to turn a unit for a 10% rent increase. The operator may trade off the longer term benefits to keep a high quality tenant in place.

@Robert Quiroz, to finance or not at the time of acquisition has several variables to it.  Let's assume you are only looking at deals that you could buy cash.

The biggest factor that goes into the decision is whether you are taking on positive or negative leverage.  If a mortgage is going to cost you 6.5% and your going in yield on the asset is 5.5%, then you are diluting your returns by buying cash.  For simple math, you are paying 6.5% to make 5.5% on your money. 

Now if you can buy at a 6.5% return and borrow at 5.5% then, yes, borrow as much as you possibly can and get more assets.  

The other factor to consider is less tangible, but comes with mental security.  Having loans out will mean you owe money every month, no matter the current status of the asset.  Maybe just lost two tenants, and have to come out of pocket for the mortgage.  When you talk about replacing income, the safety of that cash flow is much more imperative, since presumably you are living on it, too.

And then you combine both thoughts: safety in income stream to live off of, and cap rates/yields from assets.  Most Class C/D areas will pencil to positive leverage, if you use generic underwriting assumptions.  But there are many things that are fixed costs, that if you buy in lower rent areas are a higher percentage of your rent each month.  The actual cost of any maintenance/repair/capex is a higher percentage of rent to reserve, the lower the rent levels are.

Additionally, and this is just my personal experience, if you buy in a Class C area, you will get a Class C tenant.  To me, this meant longer vacancies between tenants to find a qualified tenant.  It meant more frequent turn overs (cycling tenants every 2-ish years versus 4-5 in my nicer properties), which came with turnover costs.  And these tenants, typically, were rougher on the property during their tenancy, so those more frequent turnovers cost more each time.  When you factor all those into your underwriting, I would say, yes, you CAN make higher cashflow from Class C rentals, but it is a bigger risk.  Again, if you plan on retiring on this income, that is a risk you need to consider.

Lastly, as another posted noted, you can buy cash today, and if there is opportunity to renovate and increase your yields on the property, refi later, once you have the property stabilized. This would be a way to get into a better deal without diluting your returns with negative leverage.

@Robert Quiroz

Buying with cash offers higher immediate cash flow, no interest payments, and less risk, but limits your ability to diversify and leverage. Financing provides potential for exponential growth, tax benefits, and diversification but introduces risks like negative cash flow and interest rate fluctuations.

Since your goal is to retire quickly, a balanced approach—using some cash for immediate income and financing for long-term growth—might give you the best of both worlds. Consider liquidity needs, inflation, and your risk tolerance in deciding the mix.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

@Robert Quiroz I need to correct your notion that the MFH is "better", as is stated in a manner that seems to be a type of state of permeance. 

Just as there is times of buyers market, sellers market or level market, there is times where it's a SFH market, Small Multi market, and MFH market.

For the most part, today, is NOT a good time for MFH, not at all. It's a whole other thread to get into but do some research on the issues with commercial real estate, Ben Mallah is a recent high-profile additional person to come out publicly on this and who is putting his $ where his mouth is. 

Today, acquisition wise, best opportunity is in SFH, specifically below median. Again, speaking in generalities as there is several niche and MSA specific opportunities as well.

 It is with mathematical certainty that soon coming will be opportunity to best acquire commercial residential properties, I am speaking in very near term, under 18mnths and it's currently looking to be making this shift somewhere in Q1 '25' and well into it by Q2 '25'. 

The BEST acquisition today is positioning for the soon coming FTHB "make it rain" party. Which will inflate market prices int he segment seemingly over-night. Stoking a new run on inventory, and even greater equity growth potential. Long story short, all roads point to significant equitable returns in that segment in a near term (under 18mnths). Which profits can than be utilized to carry forward into the then "good" MFH acquisition timing of things.

Buy low, sell high, it's really that simple. Buying high hoping on higher, higher, higher doesn't work too well. Just ask any MFH operator who did an acquisition in last 18-24mnths. 

Backs are against the wall on the inventory issue, and there is no way around it. Fed's can talk all they want about "creating" however millions of homes, it changes nothing unless Harry Potter comes into office and shezams them into existence. 

Fed's "create" things by "making it rain" to create the actual producers to produce. What happens when you add purchasing power into a product shortage environment? Prices go where? Yes, up, it's simple obvious supply demand metrics. 

Or, acquiring in satellite markets at sub replacement cost values. Again, SFR's and small multi's.

Next year there will be regional lenders and various operators all too happy to move on things, and pressed to do so. Especially as maintenance bombs increase in there detonations, the opportunities to acquire from failed operators is at the door step. 

@Robert Quiroz

If I could only give you one piece of advice, it would be to buy the property you want to own the most 10 years from now. Most folks forget and/or do not mention rent appreciation. Good properties/locations will see values and rents grow at a greater rate. We all chase year 1 cash flow in the beginning, but it's not a good goal; and you don't really make any money in year 1 regardless of the property. It'll take a year-ish to stabilize the property and to work out the kinks/maintenance that you did not know about when you bought it.