All Forum Posts by: Joe Scaparra

@Greg Friedman, I am going to dive a little deeper into your question and give you something more to think about than just a property manager.  There are still some unanswered questions that could have major implications going forward.   So, I am going to make a few assumptions that could be wrong.  These assumptions greatly influence my answer.

Assumptions:

1.  You have little to NO INVESTMENT real estate experience.

2. Your current home is in a nice neighborhood and is mostly if not all owner occupied (based on your estimate rents $4,500-$5000).

3. You like the idea of being able to move back into the home but sounds like that is not a priority. It is likely you won't be coming back for several years or more.

4.  Part of your decision to rent is born out of easy way to go verse selling.  Normally that means money is not tight and you have some or a lot of equity in the home. 

Ok buckle up if these assumptions are good:

Over the years I have seen a lot of things go wrong and very few right when someone took a primary residence and made it into a rent home, having no experience and the property is not something you would buy originally as a rental property.  Meaning if you had the equity out of this home, and you were looking to buy and INVESTMENT PROPERTY would you be looking at a home like the one you live in now.  MOST OF THE TIME THE ANSWER IS NO.

Renters do not take care of property they don't OWN....by and large.  The risk that you come back to this property trashed is HIGH!!!  I don't see a lot of appreciation in the near term due to the unprecedented run up in property values since COVID.  My recommendation is sell and take up to a $500k TAX FREE PROFIT (assuming your married). If your conservative you can put the profits in a risk free T-Bill paying better than 5% with no phone calls to unclog a toilet.

If you decide not to sell, then let's tackle your question about PM.  If you are confident that you can line up a GREAT tenant before you leave, I would opt to manage it myself.  However, you need to find a very good handyman that you trust to do most anything to your property.  It could even be a friend that you trust to handle the coordination to hire a professional tradesman if needed.  Also, locate a good Real Estate agent specializing in locating rentals looking to rent.  The agent will handle all the issues with acquiring a tenant and then hand them over to you to collect the rent.  Yes they usually charge 1/2 to 1 full month of rent.  If you hire a PM to do it all you won't be happy long term.  Most people are not especially with housing that is NOT a TYPICAL rental property.  Some property managers charge a months rent just to renew the client so read the fine print.  Most keep the late fees ect.  It never cost just the stated 8-10% as quoted.  Be sure to know the exit plan should you want to fire them!!!!!

I have been a real estate INVESTOR for 21 years.  I have small multifamily duplexes that I bullet proof with no carpet and usually 2 bedrooms.  I would NEVER consider renting out a large family home that is generally occupied by owners......not renters as you WILL BE disappoint on the care of you home.

If on the other hand this is a one year trial and you do plan on moving back to it in a year then disregard my advice.

@David Lutz

Lets look at your major cost vs what I would expect here in TEXAS

Major costs over last 3 years on 5 homes:

• $10K in missed rent leading to and waiting for eviction
• $3K Eviction costs (lawyers, travel, writ, etc.)
• Evictions outside the Pandemic takes 4 weeks in Texas.  Cost to file $150, no need for a lawyer, follow the rules.....easy peasy!  Best way to prevent: select better tenants...yes that is not always the case but it helps.
• $2.5K additional lost rent due to 4 month instead of 2 month property turn
• Loss rent on Small Multi-Family properties minimal unless you had to evict.  Evictions usually take an extra two weeks to fix up due to property condition.  In 21 years of managing my 20 properties, I probably have had 4 evictions.
• $3.8K for a new furnace
• $7.4K for a new HVAC
• In Texas HVAC is used, furnace not so much.  Systems cost have risen from 3.5k to 6.5k but last 12-15years.  In Texas HVAC/Heaters are one system 
• $700 for a bathroom re-pipe
• I began recently upgrading my 1980s bathrooms with New Tub, New Bath/Shower faucets, and NICE, NEW tile from tub to ceiling......Cost labor and materials, $1700 per bathroom.
• $12K turn on large home, included new high quality carpet and full repaint
• Here lies the major deviation: Property type matters.....I have NO LARGE HOMES, I install NO CARPET.  MY paint cost is $1-$1.5 per sq foot.  My units rarely go over a 1000sq ft. Hence my cost to repaint $1000-1500 per unit.  Luxury Vynl flooring is my FRIEND!!!!
• $5.5K in unnecessary plumbing issues caused by tenant in eviction (no way to recover costs)
• Hire a handyman when possible, they are cheaper.  Small units have lower cost to repair.
• $1.5K in utility bills during vacancy or owner responsibilities
• My vacancy rate in the Austin area has been less than a week on average, usually a day.  I begin advertising when given 30 day notice that the current tenant is leaving.  Property type matters.
• $900 for a refrigerator
• I replace appliances with used appliances......hence a fridge cost no more than $250
• $4.8K for concrete piers to shore up a foundation
• I haven't bought a property needing foundation repair yet! Yes some settling but nothing serious.....maybe because I buy 1980 year old homes the foundation would show signs of failing before I buy.
• $5.6K for a roof (insurance claim)
• $5.2K for another roof
• Yes my insurance deductibles are 1% of insured value so about 3-4k.
• $1.3K for new AC line set (punctured in second roof replacement)
• Roofers would have paid that
• $1.6 for a water heater
• $1.3 for a water heater
• $2K for a water heater
• My water heaters cost $400-$500 from home depot and $200 labor to install, again I use handyman vs plumber cost less.
• $1.7K for new water line from meter to house
• Haven't had to do a water line.  New construction?  Sewage lines in Texas used cast iron pipes before 1970s and they are rusting out.....hence I don't buy older than 1980 homes.  Property type, location, and age of property matters.
• … this actually isn’t everything but I’m getting depressed.
• Because I MANGE my own properties, let me give you a couple maintenance tips.....Don't hire a CONTRACTOR!  They will double your cost.  Do hire workers directly....find them at  home depot or MacDonalds at lunch time (painters easy to spot).  Driving through your rental property, if you see a remodel going on stop and talk to the workers, head cheese or contractor is probably not there.    Best tip: Go to "B or C" apartment complex, locate the maintenance man, he is jack of all trades, master of none but can do almost anything you need done.....he gets paid at best $15-20 an hour.  Most small jobs he can do in an hour and you give him $50-$100 and you have a friend for LIFE!!!!!

Lastly, don't work harder.........work smarter!!!!!!  Cheers!

@David Lutz, great post!  Some I agree with, some not, but putting your thoughts out there for people to take shots at is noteworthy.  

For me it is ALL ABOUT CASH FLOW!  For me Appreciation is icing on the cake and an after thought as I have NEVER concerned my self about APPRECIATION.  Why?  As a BUY and HOLD investor seeking out cash flow, I have been investing in small multi-family properties that cash flow POSITI◊E from day ONE!  I have yet to sell a property and I bought my first investment property in 2003.  I have come to realize that even though I have not sold, appreciation has really aided me in that it has help fuel my rent increases.....so for that yes appreciation is important even to a Buy and Hold investor.

Yes cash flow positive means net income AFTER vacancy, maintenance, insurance, property tax and interest on the mortgage!!! What about CAPEX....Meh. My biggest CAPEX cost is either a roof or AC replacement. My roofs get replaced with an insurance claim (lots of hail storms in Texas) and I expect AC/Heaters to last 12-15 years so that is usually easily covered in one year of positive cash flow for a unit when I am still paying a loan and covered in 4 months or less of positive cash flow once the property is paid off.

My small multi-family (duplexes) are usually built in the 80s......not NEW! I also self-manage. You are so right that property management will suck you dry!  My vacancy rate is soooooooooo low!  Expecting a unit to go vacancy for a month between renters is ridiculous.  Over the last 20 years, I would guess my vacancy rate averaged NO MORE THAN 2 weeks.  Why is that?  Because PROPERTY TYPE MATTERS!  Small multi-family is in more demand.....why.....because there are more people needing and can afford SMALL MULTI-FAMILY and PEOPLE hate to live in apartment buildings.  

Also, you said you bought $1 million in property with only 100k as if that is a good thing??????  Is that a good thing????  I have been putting down 20-25% down even before 2008 when it was  not even required......why.......because I was seeking POSITIVE CASH FLOW.  

Lastly, where you invest is important. INVEST in a state that is LANDLORD friendly, like TEXAS.  Evictions normally take 4 week once the demand letter is given.  If I used your expense numbers, I don't think I would ever invest.  Cheers.

And now you know the trials and tribulations of RENT BY THE ROOM. Unless you live in one of the rooms to be Mother HEN you will eventually have problems.  If you HAVE TO RENT by the ROOM to make ends meet, you are surviving on borrowed time.    This type of investment, not living there will give you nightmares till the day you die.  Peace is a wonderful commodity.  

@David Shirts, experience is the best teacher, IF YOU CAN SURVIVE!  Losing $800 monthly is going to KILL you if you don't adjust.  Remember this First, CASH IS KING.  Especially for new investors.  Cash is like the blood flow through your body.  If is non-existent you will die!!!

Condos and SFH are NOT solutions for a first time investor. Both have difficulty cash flowing positive in this real estate environment. Avoid anything with condo association fees or homeowner association fees as they DECREASE CASH FLOW with no real contribution to the bottom line.

Lastly, since you are new, when you do get a property DO NOT HIRE A PROPERTY MANAGER.  Do it yourself, learn as much as you can, seek out a grey hair mentor who will advise you for a cup of coffee.  PMs take away from your cash flow that you so desperately need. As as new investor, a PM will take advantage of you and you will probably not see any profits utilizing one!

My property of choice is a duplex!  I don't know much about your living situation but if you are renting now, a duplex is a no brainer.  House hack a duplex.  Rent out one side and if you are serious about FIRE then consider renting out a room on your side too.  Follow coach Carlson on youtube. You can learn a lot from him.  Good luck and Cheers!

@Diya Shenme, a very good summary of the two. However several of the points made were related to life style preferences. Take those out of the equation and view this strictly from an investors point of view and it is NO CONTEST. A duplex blows away a SFH as a pure investment and house hack opportunity.

This is an INVESTOR's website.  Duplex produces more income, easier to rent, easier to repair and in expensive markets has the potential to appreciate more.  Some of you might disagree, so let me enlighten you.

2000 sq ft duplex vs a 2000 sq ft house. Duplex is 1000 sq ft 2 bedrooms 1 bath each side no garage.  House is 3 bedrooms 2 baths with garage.  

Making average assumptions, will vary from location to location but premise remains the same.

Income: Each side of duplex rent $1500 total rent $3000 per month.  House rents for $2100 per month.  Even if duplex cost 50k more, the extra $900 a month income offsets additional cost of duplex. Because households are smaller today vs 20 yrs ago due to delay in marriage and child bearing smaller units are in more demand because of need and affordability.   

Easier to rent:  Two bedrooms attracts fewer occupants (not tenants) vs a 3 bedroom where often that extra bedroom is housing an adult kid, dead beat family or friend.  It is easier to find two $1500 tenants vs one $2000 tenant. More tenants only need a 2 bedroom than a 3 bedroom and are not willing to pay an extra $500-600 for the 3rd bedroom.  When the economy turns sour, lower rents will have less pressure to downside, therefore increase layoffs will affect higher rents than lower rents.  Vacancy will be less affected with lower cost rents.  How many McDonald's go out of business due to a down turn.  Two young people working at McDonalds can easily afford $1500 in rent not so much at $2100. 

Easier to repair: Now this one is debatable only because there are two units vs one, but hear me out. Each duplex unit is 1000 sq ft. Which translates to fewer walls to mess up, fewer rooms to mess up and less repair time per unit than a 2000 sq ft house. You will have a tenant from time to time to mess up your unit/house. You will have more maintenance cost and down time when that happens. A duplex will produce income even when one side is empty, not the case for a house. It is easier to bullet proof a small duplex than a house. When comparing a duplex to a house tenants usually expect a house to be in better condition so your competition is more challenging. It is easy to spend a few extra dollars fixing a duplex up and be the best on the block. Not so much with SFH. When competing on quality; owner occupants vs rental neighbors, owner occupants usually have better properties. Duplexes have more appliances (2 kitchens and two heating/AC units) so that is a disatvantage but a used appliance can be fixed in an hour, a hole in the wall take a lot more time. More likely to fix holes and paint than replace a used appliance. SFH have more wall space.

Appreciation: It is a myth that SFH appreciate faster than a duplex. It is more dependent on location and market. Hear me out. In less housing demand areas a SFH has the potential to appreciate more. However in hot-expensive markets NOT SO MUCH! Why? Because of affordability. I have lived in Austin TX for the last 25 years. 20 years ago Austin was not the hot destination as it is today. 20 years ago duplexes sat on the market, no one was buying them, there were plenty of affordable SFH on the market. NOT TODAY! Homes are not affordable in AUSTIN today! Heck duplexes are problematic too. However a young couple has a better opportunity buying a more expensive duplex vs SFH in Austin because of the income produced from the other unit. More and more owner occupants are considering a duplex purchase than 20 years ago because of affordability. Lastly, owner occupants and investors are realizing that buying a duplex gives them so many more options than a SFH. Let me explain. We live in a fast pace MOBILE society today that ever before. You buy a duplex and then find yourself having to move, you simply get up and go. Rent you side out and probably cash flow even to positive if you have owned 3-5 years. Do that with a SFH and you are probably cash flow negative when you leave and your peace of mind goes away when you have a vacancy!!!!! So many people don't consider buying if they are not sure they will be staying in the area long term. Less of an issue with a duplex.

Lastly one might argue that your tenants will stay longer in a SFH vs a duplex. There is some truth to that under certain conditions. For example, I bought two duplexes in the same cut-de-sac. One had porches at opposite ends and one car garages in the middle separating the units. The other a shared porch and no separation from the garages. Bought both duplexes in 2005. One duplex as had a total of 4 tenants for 19 years and the other probably 8 tenants or more. Still not bad in terms of turnover, mainly due to the quality of my units and the affordability of a duplex over a SFH in the Austin area. My duplexes that have opposite porches act more like a SFH than those with shared porches.

My best advice to INVESTORS:  Buy single story DUPLEX, 2 bedroom 2 baths (1 bath is fine), porches separated with one car garage/carport and YOU WILL BE A HAPPY CAMPER!  Peace.

My two cents.

The PRO: Location is Nice!  Layout and Amenities look enticing!  Includes Garage!

Cons:   Not much demand for a 4k two bedroom property.  

If your property was in a downtown high rise, walking distance to the Action then you would have a demographic willing to pay for it.  Your property appeals to neither a growing family (too small) or the young professional still seeking fun (not within walking).

Here is the MILLION DOLLAR question:   If you were buying an investment property, would this be one you would buy.  So many people try to convert a property they originally never considered as a pure investment property into an investment property.  Sometimes it can work but this is not one of those times.

Ask yourself first who is the target market?  What percent of would be renters make up that market.  You have a high end 2 bedroom and although it is nice it is lacking a wow factor that would sway a decision to pay 4k in rent.

Inflation is killing you.  New car payments are killing your tenants.  Food cost, Insurance cost, Drinking cost, eating out cost are all going up.  People are finally looking at ways to cut back on expenses and exorbitant housing cost is one of the first places that can significantly have an affect on one's budget.  This scenario doesn't bode well for a 4k, 2 bedroom townhome in a nice location but not the hot spot where the action is walkable.

Sell if you can and look for a better opportunity to invest.

I have 20 rentable units.......all considerable lower cost than yours and I am finding it harder to keep the rents I have now.   The environment has changed significantly over the last year.  Be ready to hunker down, more crap coming.

Sorry for the blunt message, but I tell it like i see it and as a  69yr old, ol'fart no sense in trying to tell something to someone that just might hurt them more in the long run.  I hope the best for you.

@Michael M., I am sorry to give you this advice as so far no one has given you a complete picture of what you are up against. 

Before I give you this advice, let me qualify myself  so you can judge if my advice is even worth taking. 

I am neither a real estate agent or a lender OR  a property manager for money.  

However, I am an investor with 20 units I own and I manage another 6 for my kids!   I manage 26 units in total.  I have been doing this since 2003.  Yes that is 21 years doing this and I have seen it
all when it comes to property management.

Most of my units are 2 bedrooms (900-1000 sq ft)  and most of my rents hover between $1500-$1900 per unit.  Big difference from a 5 bedroom 3000 sq ft house.

Here are the cons to renting out your home.

1.  Out of state and no experience with rentals............SETUP for DISASTER.

2. Property is built for OWNERS not RENTERS.  Large home 5 bedrooms!!!! Lots to tear UP!  I have a few 3 bedroom duplexes and they give me the biggest headaches.  Most families are smaller these days, extra bedrooms are an invitation to get UNAUTHORIZED people living in your home. Life is tough, but it is tougher for renters and the people they associate with.  There will be a time that they will invite others to join them (help pay rent) or take in people hard on their luck to house them.  All that does not spell good news for the owner.

3.  Property Manager.......no disrespect to the PMs on this sight, but to put it kindly you won't find any PM that will do a better job than yourself and probably dislike after you hire one.  Yes there are a few out there but to find them is like a needle in a haystack.

4.  Fees that a property manager quotes you are not what you will experience.  8-10% fee is not all the total fees they charge.  Every new tenant they acquire you will pay a half month to full month of rent in addition to your management fee.  Many PMs charge that on a tenant renewal as well.  My vacancy when I used a property manager far exceeded the time it took me to find a client.  But with no experience and moving out of state you are locked in to using a PM.

5. Rental market.  Here is some good news......Since 2003 I have never lowered rents!  Amazing! But my rents have averaged from $725-850 early on; and now average $1500-1900.  However, I am renting to lower income people and when they lose their job there are plenty of renters to choose from.  However, here is the bad news.  When $3000 tenants lose their job due to layoffs it will be VERY hard to replace them, especially at the same rental rate since everyone will be looking for lower mortgage/rents.  It is far easier to find two $1500 renters than one $3000 renter.

6. Your vacancy rate, and your maintenance cost will be higher. Renters do not care about the yard. All of my duplex's yards go brown in the summer.......All of them. Renters will not pay for watering the lawn or Plants!!!! Your curb appeal on your house will decline and if you live in an HOA be ready to get some complaints.

7.  Pets.......yes pets.  70% of renters have pets.  Some disclosed and many non-disclosed pets.  Pets, both cats and dogs leave their marks, smell and scratches!!!!  If you can't be a hands on landlord you will have issues!!!!  Any carpet in your house will be destroyed within two tenants.  The nice thing about duplexes, they are only about 1000 sq ft.  Mine do not have any carpet. My go-to-flooring was tile, but now luxury vinyl.  

8.  Renters do not change out air filters!   Yes, the do not!  Your air ducts and ceiling fans will be full of lint.  Cat and dog hair is not your AC friend.  

I know it is easier to just rent out your house and Hope For the Best.  Don't take the easy way.  Take a loss if needed and move on.  If you were an investor ask yourself this one question:

Would I buy this house to rent out from the start.  If the answer is no then don't do it now.  Yes this is not what you wanted in home ownership, but don't let a tough situation become a disaster.

Take emotion out of the decision and point out the areas that my logic is off base.

I wish the best for you.

@Kelly Stanton, you have given more info than your original post.

Yes you can get your taxes lowered at least for one year.  Protest your taxes this year.  Have your closing statement showing what you paid for the house.  You probably won't need pictures to justify your cost but have them just in case.  

Don't be over zealous and tell them all the improvements you have done.  Your taxes this year is based on the property 31 December 2023.  But since you were past the deadline for protesting they should give you the valuation that you purchased the property.  Usually without any hesitation.

However, be ready for the valuation to jump back up the following year as you will have to prove next year that the house is not worth what they will adjust the property value.  Their software does NOT look at your individual house but they price it by the subdivision/street and adjust for various items, like square footage, permitted improvements ect.  If it is not homesteaded it can jump up as much as they like.  If you have it homesteaded they cannot jump your property up more than 10% from previous year.  Good luck.

@Shwetha Pindikuri Hello Newbie wannabe passive INVESTOR.  

Got your attention.  Ok if you want to be an INVESTOR, you need to start THINKING how an investor thinks.  Since I don't know much about you and since you have not utilized your profile that might've given me some insight to you, your goals, and experience, I am going to have to make some assumptions.

1.  Obvious your new to investing

2.  Goal is Cash Flow over Appreciation (if not I can easily explain why it should)

3.  Limited $$$ to start.

4.  Single or married with one child or less.

5.  Currently renting now.

Realize you live in Texas, not California.   In California most investors HAVE TO INVEST for APPRECIATION.  They don't have the option to invest for Cash Flow, like you do in TEXAS.  Now, Austin is now becoming California, but if you live here and are renting then you have better options as an owner occupant, than as a pure investor in Austin.

If my Assumptions are fairly accurate, then listen up, if not disregard.

Buying a new built house in Austin on limited funds, hoping to sell it in two years so that you can make a tax-free profit, is NOT A GOOD STRATEGY!

Most people who KNOW me already know what I am about to tell you.  But since you don't know me here we go.

Consider buying your first INVESTMENT property.......A DUPLEX.  It can serve two purposes, provide a roof over your head and still provide some income to OFFSET your LARGE MORTGAGE payment, since you are considering putting 5% down.  Becoming an investor involves developing your buying strategy/skills AND learning how to manage your investment (property management). 

Living in a duplex will help you learn how to do both, buying and managing. Buying a duplex will give you more options several years down the road. Should you need to move, you simply rent out your side and with the hope of any rental appreciation you have a good chance that you might be breaking even or slight profit. However, buying a house and having to leave in a couple years will either force you to sale or take on negative cash flow because a SFH will not cash flow positive by putting 5%. With a duplex, you can do STR, MTR, or long term rental on the unit you don't occupy and those options might give you a substantial boost in CASH FLOW.

Yeah living in that duplex might not be as nice as that newly constructed SFH but the VERY small sacrifice now will pay HUGE dividend down the road. Investors are usually willing to let lifestyle living take a back seat while they begin their investment journey so that in the not to distant future they can be living the life style they desire with less stress.

If you want some more of my hard hitting advice, hit me up with a DM and we can do coffee.  

BTW, I'm neither a real estate agent, nor lender, just an O'ld Fart who loves discussing real estate.  Cheers!