All Forum Posts by: Sandra B.

My suggestion would be take a hard look at the units first. Do they have in unit laundry, dishwashers, central a/c, and garbage disposals? Start there with some basic amenities that add value to your property and help attract and retain good tenants plus add to qol. Next I'd look at additional property upgrades. Are the water heaters actually big enough for the unit to accommodate hot showers in the morning for all in residence and appliance utilization? Perhaps upgrade to tankless water heaters. Do the units have private outdoor space? If not, do you offer communal space? If not, is there a way to add this by making some improvements to the yard or adding a roof deck? Possibly add a built in grill for communal use. What about storage? Is there an unused space (perhaps a basement) to add storage lockers and/or indoor bike storage? I think your intentions are admiral with a huge BUT. First, you never know how another will perceive your offer of kindness. They might think their English is great and be offended that you think they need to take classes, etc. Not a path I would go down. Also, I would not use a tenant for work on the property. If you don't feel they completed the work to your standards, how does that affect the relationship going forward? You could be stuck with shoddy work and an angry tenant. Not worth the risk. Stick with capital improvements. As a landlord, providing a safe, comfortable space and fostering a relationship of mutual respect is a way to enhance quality of life. Let your tenants seek self improvement elsewhere.

Please do not immediately lawyer up.  I own 2 condo properties and am on the board of one of the HOAs.  The board members are human beings, not irrational monsters.  Their primary concern is protecting the value of their homes.  Go to the next board meeting, hat in hand, and explain your honest mistake.  Be apologetic.  Bring a sample of the material used.  Explain how this improvement adds to the home value and brings in higher quality tenant, which is good for everyone in the community.  It is much harder to draw a hard line with a humble, apologetic person standing in front of you than with a threatening  letter on legal stationary.  

While you feel it is "your unit", that is really not correct.  You agreed to abide by the CC&Rs of the community when you bought and you have very little recourse if they choose strict enforcement.   

One final note, be mindful when screening your tenants.  I'm guessing this is not a targeted attack on you.  However, if you bring in tenants who cause a nuisance, disturb neighbors, or simple don't conform to the general profile of the community (if it is all young professionals and they are 4 college kids sleeping two to a room, etc), you will receive less leniency from the board.  They will perceive that you are adversely affecting quality of life in the community and dragging property values down. Bring in quality tenants and a good attitude, and they will most likely work with you.

You need to reverse engineer the plan. To buy a property for $800k with 20% down, you need $160k for down payment, $20k for closing costs, and for a jumbo many lenders want to see 12 months liquid reserves, which for a 30 year at 4.25% presuming 1.1% property tax and 1000 insurance, is about 4K per month or another 48k. So you need to save $228k in 8 years. That's $28,500 per year. Knowing nothing about your current financial position except that you think you can buy a 300k property, I'm going to presume you have 70k liquid and making 78k per year (.35 dti ratio for 2000 mortgage, taxes, insurance and 250 association fee). After taxes, that is 52k per year in CA, which means you need to save an additional 20k annually over the 70 you have. Living off 32k in Santa Barbara sounds improbable. But I'm sure you can cut expenses (cut cable and go to streaming service, cancel gym and invest in a set of free weights/go on more hikes, minimize dining out, stop buying expensive coffees, etc). Once you have a budget and an idea of what you can realistically save annually, then weigh your options in rei. Please remember, the market doesn't care about your timeline. Be prepared to pivot and make adjustments. A lot can happen in 8 years. Also remember, the monthly payment on this supposed no lose investment condo is $2000 per month for a 15 year plus association fee. $250 is just a number I plugged in. I have seen CA condos with $600 per month association fees. To be conservative, plan another 10% for maintenance and 10% for vacancy. That monthly nut is $2650. Is that a realistic rent in the community? If not, is it even a realistic blended average rent over the next 8 years and can you afford to carry a loss on it for a few years?

@Aaron McCurdy We're in a similar financial position to your family minus the kids. Agree with @Andrew Johnson that you are crazy not to maximize your tax deductions through real estate debt, especially with low interest rates and am presuming stellar credit. In retirement, real estate will be pretty much your only available tax write for what I anticipate to be significant income when you combine ss plus your 401k and other investment streams etc. I look at my businesses as additional cash flow that help to accelerate my rei and do not count on that cash whatsoever to live. In fact, we try live on my partner's income (the smaller one, though our spread isn't quite as dramatic as yours) and invest mine in a combo of equities and real property. I would caution you to tread lightly and do lots of up front diligence before buying a commercial entity and quitting your day job. The two businesses that I bought were from people just like you, intelligent, reasonable, successful and got involved in an industry they know nothing about because it looked like a good deal. The businesses became unprofitable and burdensome, and I was able to capitalize by taking them of their hands at a discount. If you do invest in an unfamiliar industry, consider partnering with someone who knows the business. Or, perhaps the seller would be willing to stay on for 6 months at a salary (even if this puts you at a short term loss) to teach you the business. Find an accountant who has clients in that industry and have them go through the disclosed financials with a fine toothed comb. Also have them do their own business valuation. Don't pay for "goodwill" or provide key money or any other nonsense. Understand if the business isn't distressed in any way, just like in residential real estate, you're paying top dollar and it isn't a great deal. Also be aware, owning a business is not freedom. It is indentured servitude. Everything will happen. Pipes will freeze, people will break in, who knows, maybe a drunk driver will plow into the building. You will get middle of the night phone calls and you have to show up. I'm not trying to discourage you at all. This could be a great opportunity for you family. Just trying to set realistic expectations.

Transaction costs in both your strategies will eat you alive.  The time horizon sounds long but is actually short.  No one knows where the market will be in 3 years or 8 years.  It could double, it could tank.  You're trying to fast track equity/savings by letting others pay down your debt.  The best way to do this through real estate on a relatively short time horizon is to go for a 15 year mortgage.  If you put 20% down on a 300,000 property, assuming a 3% interest rate and 4% annual appreciation (which is simply throwing a dart but based on historical appreciation rates), in 8 years you will sell for $410,000.  Subtract 6% for transaction costs and $125,000 for the remaining mortgage debt, that leaves you with $260,000 in equity on your $60,000 down payment + call it another 10k in closing costs.  That's close to a 17% annual return.  Not bad.

BUT, again, these are a lot of assumptions.  Can you actually break even on a unit with a 15 year mortgage, association fees, and maintenance?  (Yes, its a condo, but water heaters still break, assessments are real, etc.)  Can you carry the unit if there is a vacancy?  Will you have the money to fix it if a tenant trashes the place?  Also, you truly do not know where the market will be.  If there is no appreciation whatsoever and you sell for $300,000, you still walk away from closing with $156,000, but that 4.7% annual return doesn't look nearly as appealing for the amount of work and risk. And there is always the possibility, as many learned a decade ago, that you could have to sell for less than you bought it for. 

Look at Mr. Money Mustache, Dough Roller, Money for the Rest of Us.  Take a hard look at your spending habits.  Create a savings goal, enact painful budget cuts, and if you still cant hit the number you need 8 years after these calculations, then maybe real estate is worth the calculated risk.

Just no. This is not a person to do business with. They bought wrong, have not maintained the property, have misrepresented themselves to you over and over. Other issues will surely arise. Don't let their mistakes become your problem. There are other properties, I promise you. It is not fun to eat the legal and inspection fees, but that is the cost of doing business. We were deep in negotiations several times with not inconsequential money and time invested, and simply could not come to terms for a variety of reasons. It will save you a lot of time and money to know when to cut your losses and move on. Feel free to connect with me if you have more specific questions.

Jesse Levi Kelley - Yes, it is common for these type of commercial properties to sit for many years. I own two bars with two partners. The first fell in our laps in 2010. The owner was losing $10k a month and was no longer interested in running a bar as a hobby. All of us had done business with the owner and 2 of us had previously profitably managed the property. One look at the recent p&ls told us that the expenses were out of whack and by switching vendors and rooting out theft, the place would immediately be in the black. This was a unique opportunity to get in by buying the liquor license and FFE, very little cash up front. After year of making incremental operational changes, we bootstrapped an inexpensive renovation, added a kitchen, and rebranded. A year later, it was very profitable and we were ready to buy another. It took us 4 years of constant searching to find another deal we liked. FOUR YEARS. And they were distressed because they were real estate investors who got in a dispute with the tenant and found themselves in the uncomfortable situation of being accidental restauranteurs. In my experience looking at hundreds of these commercial properties, small business owners constantly overestimate the value of their businesses, paid too much for fit out and are in debt for way more than the property is worth, or simply think they can confuse you with creative financing tactics like those you described. The biggest mistake I constantly see knowing many bar owners through the years, is they overpay on the front end with either buying too high or sinking too much money in high end finishes. These debts can never be overcome with the small margins in a bar/restaurant. You need to nail down your pro forma, not just cogs and payroll, but think pest control, maintenance, capex, linen rental, menu printing, advertising, cleaning, dish washer rental, Hvac repairs, soda and draft line cleaning, utilities, POS system, security system, etc. Once you understand the expenses of the operation, you will know what you can reasonably afford for a mortgage or triple net lease payment. Be diligent. Let the numbers for the business tell you if it is a good deal.

I hate to say this but I just don't think the comps support your price. Everything I'm seeing closed over 300k is either a multi or 5+ bedrooms. Some 3/3s closed in the high 200s but all are at least 500 square feet larger. Currently on market I see another well executed flip at $299k that is a 5/3, larger square footage, and further south (which in my experience is a more desirable location). Check out 385 Tremont Ave. The house looks beautiful. I think you need to pin down the comps and come up with a realistic price. Also, you need to contact Zillow. The property is not coming up on a Zillow search and the Zestimate is $226k. While investors might prefer redfin, buyers generally turn to Zillow.

@Chris C. Nice job on first flip! Just a quick look at the properties available, lots of inventory for sale and not much for rent, so agree that is probably your best strategy. I would pull the trigger on that quickly. Once you get into mid-October, people are in holiday mode and filling a rental could be tough until February. Agree with others about curb appeal and partial staging. A few additional thoughts about selling this property. If you think about the buyer in San Bernadino at this price point, most likely a family and, as others have pointed out, FHA (read cash strapped). I know you don't want to spend another dime on the property, but including refrigerator, washer, dryer could go a long way. When FHA buyers are looking at a house, they are doing the mental math of immediate out of pocket costs. Also putting in low cost window blinds would be one less thing going to a buyer's mental tally. I think I saw a covered patio off the master. San bernadino is hot. Covered outdoor space is a value add. Point that out. Mention central AC and any improvements you made that are not cosmetic (electrical panel, hvac, roof, etc). Is there indoor laundry? If so, mention it. If not, I would consider that in your next flip. That is a modern amenity that people look for in a renovated property. Nice work and good luck!

I just bought a 2 houses on a lot property about a mile from my house and a mile from the beach in an OC beach city. If I share what I paid for this thing, I'll get crucified by the cash flow is king buy out of state folks. BUT, I am going to try a strategy that I think might work. The rear unit is rented. Tenant is solid. Wants to sign a four year lease because he is in the process of divorce and his kids go to a private elementary school two blocks away. The two cottages are completely separated by a fence with their own private yards. Front house has a driveway and attached garage. Back house has access from an alley with a parking pad and carport. I'm going to try to STR the front house. It will be a little more work, but I'm thinking I can make about double the LTR income with 50% projected occupancy plus have it available when family visits. This strategy might also work at the Jersey shore (though obviously your peak season is much shorter). I like the idea of having the stable income just in case but capitalizing on the higher yield of STR. Of course, this strategy only works if you have the financial ability to carry it through the quiet months or be able to convert it back to LTR as a back up plan if STR doesn't pan out. Might be a new set of numbers you can run through using conservative daily and occupancy rates when analyzing deals.