All Forum Posts by: Scott Trench

So far, I haven't met anyone investing in real estate because they love owning and maintaining lots of properties..  We are in this to build wealth.

I believe that given the goal of building wealth in the most rapid and manageable manner, that the advantages of buying a multi-family property, living in one unit, and renting out the remaining units far outweigh the advantages of buying a standalone investment property as a first investment.  

I bought a property of this type and here are some of the advantages I've experienced so far:

1) I am the property manager.  When something goes wrong, I open my door, take 5 steps, and fix the problem.  That's a huge cost and time savings.  While it might be different if I had a wife and family that would not put up with having tenants to be managed next door, I think that from a wealth building perspective, the advantage in property management is clear.

2) Financing.  In every case I can imagine, you will have better access to financing (lower rates, less money to be put down, easier qualifications, etc) if you occupy the property yourself.

3) Tax advantages.  If you continue to rent, you will pay both your rent AND the mortgage on the investment property.  If you move into the investment property, you will only pay the mortgage on the investment property.  That interest will be tax deductible, and will replace your rental expense.

4) General handiness.  This may differ for you, but I was a spoiled pansy as a renter.  I did not own tools in any serious fashion (a screwdriver and hammer do not count), and could not make any basic repairs.  Now I do a ton of work myself.  This is a huge boost to my ego, and my wallet.

5) Care and attentiveness.  You are going to do a MUCH better job screening tenants and showing the property when your potential renters are not only going to be your tenants, but your neighbors too!  This again is good for both your sanity and your wallet, in my opinion.

Hope this helps!

@Michael Woodward

Thanks for this suggestion!  We'll keep it in mind.  

@Micki M. as well!

Excellent advice everyone.  I appreciate it.  I will be saving my money to use towards additional equity in the property, and will be improving the property cosmetically as much as possible based on what I've heard so far.  

Oh, and I'll do my homework on local appraisers, and make my case easy for them ;)

Very grateful for the advice!

Hi everyone,

Thus far, my first investment has gone well (fingers crossed).  I've got a wonderful tenant in the other side, a safe, stable place to live, and in a wonderful surprise, prices in the neighborhood have risen dramatically in the six short months that I've lived in and owned my duplex.

Here's my situation:

I bought my duplex in November for $240,000.  As of today, similar properties (less square footage, smaller lots) are selling just a few blocks away for over $300,000.  I've talked to my banker, agent, and other investors, and they all agree that there is a decent shot at a re-appraisal coming in at over $300,000.

Why a re-appraisal helps me:

I currently am financing the property with an FHA loan. I was entertaining this possibility of rapid appreciation when I first made the purchase and put down just 5% ($12,000), got an adjustable rate mortgage, and pay mortgage insurance.

Refinancing this same property with conventional financing at 20% down will remove my mortgage insurance ($240 per month) from the equation. This will significantly increase cashflow, and more importantly, free me to use another FHA loan to purchase a second property by the end of the year. I'll also get a fixed rate mortgage to lock down low interest rates over the next 30 years.

So.  My question for the community is this:  What actions can I take to give myself the best chance to get a very high appraisal value?

Here are some of my options:

1) Landscaping - Putting in a nice fence and replanting the lawn will be great aesthetic touches and I can do them at low cost (less than $3,000 and a few weekends of solid effort).  I plan to do this under almost any circumstance.

2) New roof - The property has a flat roof that's about 15 years old.  I know I need to put on a new roof in the next few years, but think that I can push it out another 2, maybe 3 as things stand.  I'm considering putting a new, sloped roof on the property (~$17,000).  This would have the added advantages of lasting longer, and reducing my insurance payments by about $80 per month.  A new flat roof is ~$12,000 based on recent quotes.

3) Electrical - I haven't really done much with the electrcial, but could potentially increase the power to the property and update all the systems.  This would add longevity to the system, and hopefully increase the appraisal value.  There are also a few issues in my side of the unit that I've ignored (outlets that don't work).  I'd need to get these repaired when I moved out for the next tenants to inhabit the unit.  The basic repairs are likely to be about $500.  Not sure what a full upgrade would be (maybe $5,000??).

Can anyone give me some advice on which of these steps are necessary/likely to pay off in an appraisal?  Is there anything else that I can do to give myself the best possible chance at increasing the appraised value of the property?

A win is getting an appraisal above $300,000.  Anything beyond that is gravy that I may be able to use as purchasing power towards other investment properties.

Thanks!

If I were going to make a list of top  PF books, here's mine:

1. The Richest Man in Babylon

2. Rich Dad, Poor Dad

3. The Four Hour Work-Week

4. The Millionaire Fastlane

5. The Millionaire Next Door

6. Think and Grow Rich

7. One up on Wall Street

8. The Intelligent Investor

I'll have to knock out some of the titles in the huffington post to see if they make my cut here.

@Joel Kadlec

I live in Denver, and recently bought my first Duplex.  While this is a personal choice, I would say that as an investor actively looking for a next property, I would not purchase yours.  I guess that extrapolating that means that I would sell.

Here's are some of the key variables and why I would sell:

1) Based on the numbers you provide, your Cash on Cash return is about 6%, assuming that you net about $5,300 in free cash flow on your $85K in investable cash (the money you COULD be investing elsewhere). Personally, I'm skeptical of this cash on cash return. Will the tenant pay all the utilities, including water, trash, sewer, etc? Will you have vacancy and repair costs? Will CapEx need to be spent at any point? Assuming that these come in at 5% of rent each, you are looking at another $350 per month in expense on average, bringing your cash on cash return to a mere 1.3%. I'd try plugging the property into the BP calculator and seeing if you've really covered all the expenses.

My duplex (also $240,000) rents out for $2250 per month currently, and produces free cash flow in the ballpark of $450 per month so far. The duplex rents for over $500 more per month than the one that you discuss, and I manage it myself, with the greatest tenant and property manager of all time (me) working on it for me.  

2) This is your only rental - do you have a property management firm that you know and trust very well?  You will be hundreds of miles away, and will no longer have the luxury of checking this place out or taking care of simple repairs yourself.

3) HOT HOT HOT.  The Denver Market is hot right now.  I know it's tempting to ride the train, and I'm definitely a passenger riding with my duplex, but my biggest downside for me is that I'm stuck living in the duplex a few extra years, with my roommate and tenants paying the rent.  Your downside is a loss of $85,000 in investable equity.  Very different stakes.  You also have win in hand.  

4) You've got an HOA. That's unfortunate to deal with.

All that said, I'm looking to reinvest here in Denver, but in cash flowing properties that I'll manage myself.  That's because I love this city and want to live and invest actively in the community.  I don't plan on moving to Tulsa, but if I did, I'd be selling all my Denver stuff at a nice gain, and picking up a couple of nice stable cash flow properties in Tulsa.

Not sure what's going on there - that might be a question for @Robert Perry

 Your best bet here is to study the laws and behave legally.  In some states, those anti-discriminatory practices apply to other units in the same building.  For example, you might be able to rent to people in YOUR UNIT while disregarding those laws, but the other units are subject to anti-discriminatory laws.  

Personally, I think that if the tenants qualify, I wouldn't discriminate against them for any of the reasons banned by the federal government on a moral basis - that happens to also cover you legally.  The reason I used that example in the post was to show that there is often advantages like that that come along with being an owner-occupier where you may be exempt from certain laws that apply only to true investment properties.  Tread carefully and consult a lawyer if you are unsure on these matters.

If I were considering this property, I would want to ask the following followup questions:

1) What are the rents?  $1200 - $1500 is a pretty huge range for condos in a complex and result in a 75% swing one way or the other in your cash on cash return from the low to high end.  Compare the rents for condos of the same square footage and bed/bath.  I'd expect that with some more due diligence you could get much more specific than with that range.

2) Per my understanding, it would be very unusual for the tenant to pay the HOA fees. Those fees are usually incurred by the homeowner. I would definitely want to double check that.

3) If the ARV is $80K and you are buying it for $70K with the expectation of putting $10K into it, that creates little value. Do you expect to create value in some other way?

I've found it so difficult to find strongly cash flowing condos in the Denver area that I've stopped trying.  Aside from the lack of cash flow, there are other factors at play, which I believe put the intrinsic value of condos at risk over the next decade or so.  Those issues have been debated extensively, including in this thread here:

http://www.biggerpockets.com/forums/311/topics/188984-denver-condos-and-construction-defects-law