All Forum Posts by: Joe Scaparra

Ok, l've read this thread and it reminds me of a political debate that has no chance of changing someone's opinion.  

From my experience, there are two basic ways to make money owning real estate. Buy and Hold for the objective of positive cash flow.  Or, buy and either hold or flip for capital appreciation.  To over simplify, I call it the Texas method or the California method.  I live in Texas so I subscribe to the buy and hold method for cash flow.  It works best FOR ME.  Can you flip in Texas for capital appreciation, sure but if your looking to cash flow, it is certainly easier in Texas than California.  That being said if your objective is to cash flow then -$100 month is not a positive cash flow situation no matter how you rationalize the investment. 

Now to this 50% rule.  If it works for you in evaluating property then keep using it.  Here in Texas, I'm either applying the rule wrong are it doesn't help me evaluate my deals.  I'm afraid I would be leaving good deals on the table by applying that rule. 

 I went back and applied the rule to properties I have owned from the beginning of 2002.  For me the biggest expenses I have for my duplexes (all my properties are multifamily) are Taxes and Insurance.  Occasionally the A/C unit needs to be replaced and roof replacement is the other significant expense I have had in Texas.  Even the roof is not bad as you usually can wait for a hail storm or strong wind storm to help you out.  Let the insurance company help pay for that expense.  

Take a typical duplex getting $1000 a side $2000 a month, $24,000 a year.  Taxes and Insurance is about $4500 a year and if I spend $3000 a year in maintenance in a year that would normally be high.  The 50% rule would say I should be spending $12,000 a year.  I come no where close to that.  My experience is about 30% expenses a year but that includes taxes (high in Texas) and insurance.  I don't pay property management as I do it myself so that might be an issue for some.  My vacancy rate is extremely low.  In fact the first duplex I bought in the Austin area in 2005 has both renters in each side since I bought it.  Also, the rents were $725 each side and now $1000 and I am still $200 below market.  I own 17 doors, so I am a small fry in comparison to some of you.  But for the last five years I may of had a total of 3 months vacant of ONE UNIT.  Now I know many of you won't believe me but the rental market is crazy strong along the HW 35 cooridor around Austin, TX.  So think about the 50% rule when my rents were 725 X 2 = 1450/mo $17,400 yearly.  So my expenses (50%) would be $8700 and those expenses should now be $12,000 because my rents have increased?  So my rents could go up another $200 per side a month if I wanted to raise;  that is additional $2400 a year so by raising my rents I am raising my expenses $1200.....really?   I guess I could see that logic if increase rents caused additional delays in renting here in Austin, but that just hasn't been the case.  Here in Texas I use the 1% to decide if I am even going to take my time to further evaluate the property.  The 1% rule keeps me out of trouble and the numbers seem to work here in TEXAS.  

Thanks Patti, everything you said makes sense to me but the affordability confuses me greatly. Here is why. Here in Texas in Bryan Texas, if someone holds a 2 bedroom voucher their standard is over $800 but that includes estimated rents and utilities. So the HUD office tells the voucher holder that they should stay below $750 in rent so that they have allowance for utilities. Got it! So it matters little how much money they make. HUD will make them allocate 30% towards rent regardless if they rent a 2 bedroom for $500 or $700. So someone making $1000 a month will contribute $300 towards rent and HUD will pay the rest up to the standard. I know it is not that simple but I understand it to be close to that. So much so that I plan on raising rent each year that HUD increases the standard. The rent inclusive of like properties with water included makes sense but I find it difficult to match property to property in a 5 mile radius since there might be little to evaluate.

I am not sure I find a correlation with FMR and payment of a water bill by the property management. For example Apt, homes, or duplexes that are individually meter don't seem to charge less due to the water bill is charged to the tenant. I think little consideration is given to the fact that the water is paid by the property or vise versa when signing the lease.

I have a question for those in the know. I own a 4plex that has only one water meter. I pay the water. If I rent to Section 8 is there a way to pass some of the water cost to the tenant? My water bill ranges from $150 to $200 per month. Can I have a lease and then a separate contract charging a nominal fee for water like $30 per unit. That still won't cover the entire water cost but will help offset the cost. Rumor I am hearing is the HUD won't allow a separate charge for water unless each unit is meter. Has anyone tackled this issue with HUD??

For a new RE investor, I would not recommend Section 8 for your first investment.  Shea is in Texas, the rental market is strong throughout most of Texas.  The biggest advantage of Section 8 is payment from the govt.  In Texas that usually is not that big of a deal.  There is so much more issues to be dealt with renting to section 8 and a more seasoned investor will be better equipped to deal with those issues.  Most section 8 tenants are on a shoe string budget and have very little room to make ends meet.  I have many duplexes and have avoided section 8 with them.  However, I bought a 4 plex in a predominately section 8 street and I rent section 8 to those tenants.  Usually once a property accepts section 8 then the entire property of street turns to section 8 housing.  Is that  a bad thing....can be.  If you accept Section 8, I would recommend you only accept tenants that have a job.  If your section 8 tenant does not work then they are home all day long, attracting other non job holding people to visit them and may even move in with them.  I know, Section 8 only allows approved occupants but that certainly doesn't mean they abide by those rules.  People not working, still look to have additional income and that can come in the form of illegal activities.  

However, once you get some experience as a landlord and you want to try your hand at Section 8 then learn the rules.  Make the rules benefit you.  My four plex was only receiving $625 a unit for a 2 bedroom 1 bath unit when I bought it.  I was told that was the maximum Section 8 would pay for that locale.  However, after learning the rules and what was required I was able to get $725 approved.  Suave investors can find properties undervalued in some Section 8 areas due to not maximizing Section 8 rents.  When you come across those situations, Section 8 can be a winning strategy.  

Hi Travis, I love talking investment real estate and especially MFR. I've been investing in MFR since 2002. I would be happy to sit down and talk with you about MFR. My email scrap @ austin.rr.com

joe

Intersting discussion to say the least. I think Brian's advice is spot on. I live in Austin, and consider myself a small time MFR buy and hold investor. Over the last ten years of looking and buying I have been lured into the Killeen Ft. Hood area due to unusually lower entry cost into MFR. There are new subdivision going up all the time. Being a 20 year Air Force Vet I understand the VA loan process and I think with the high concentration of soldiers there is a lot of individuals buying homes there that shouldn't. Therefore someone looking for appreciation should be concerned. I feel that the market is over built. Buy and hold for cash flow is safer but has its perils as well. Ft. Hood will not close, too big to do that but the troop strength stationed there varies wildly at times. Just last week, the base just announced they are renting on base housing to civilians because they have too many houses vacant. That should be a big warning to all real estate investors!!

Corbin,

I don't think I'm what your looking for but I am a small time buy and hold investor in duplexes. I own several around town.  I always enjoy a good conversation around investment real estate.  PM me if your interested.

Joe

Bought a duplex Feb 2015 there.  Rental market strong.

Good Job Huy.  When you ask  a question: good idea to sell or should I keep it long term, you are bound to get all kinds of answers.  

To clear up a few comments.  1031 can be a good idea but you have to identify property to exchange for and you must accomplish the exchange is a specific time period.  Additionally, you CANNOT TAKE POSSESSION of MONIES transacted from the sell, you must use an intermediary until the 1031 is complete.  

Now to your question Huy.  It depends on your objective.  If it is your goal to keep building cash to buy more properties maybe selling is the best course of action.  However, even with that goal there are options to get cash out and still keep the property.  However, if your goal is to create continuing source of predictable and sustainable cash flow for something like retirement planning or replacing job alternative then keeping the property as a rental would better meet those needs.  

As for me, I am 61 and looking to retire soon so I am extremely focused on creating cash flow from multiple sources.  BTW it doesn't matter the age, the earlier we start solving retirement cash flow the earlier we can either retire or do the things we want to .....its called Financial Freedom.  It is hard to get risk free yield today.  Real Estate is not risk free but when you are renting out at $1200 or below,  those in needs are increasing thereby reducing your risk of finding a qualified renter.  Lastly, you can always take a cash out refi on the money you personally put in the deal and keep moving down the road with none of your original money invested.   

Don't look back, keep moving forward, and keep making good decisions!