All Forum Posts by: Joe Scaparra

Jeff and Rodney make excellent points.  I can tell by your questions that you are very new to investment RE.  No problem, we have to start somewhere.  However, you are looking at a property that should only be considered by a very savvy, experienced investor.  If you look at the investment from an altitude of 50,000 ft it looks crazy good.  Buy at 80k and annual rents are $28,800.  That is a 38% cap rate.  Something is not right!  So now we get a closer look at the property from 1000 ft above (sorry I'm a pilot).  1st thing we discover is that it is mis-classified as a duplex when it really is a 4 plex.  Why and how did that happen?  What could the legal consequences arise because of this?  By your own admission you are in serious "bad" debt situation.  If a miscalculation in buying this property occurs it could put you in a worse condition than you are now.  Once you buy the property, you have to manage it.  If your property is not up to code and is not legally a 4 plex the tenants can use that to their advantage and have leverage over you and any policies you want to enforce.  I am not saying you should just walk a way from this property. Hell, you might have come a cross a deal of a lifetime, I doubt it, but anything is possible.  I would proceed with EXTREME caution.  Until you understand throughly why it is listed as a duplex with the county but really is a 4plex, I would not buy it.  If you proceed to buy it, make sure you have a comprehensive inspection.  One last thing, I just notice reading your post.  They are only accepting cash offers. I suspect why is because it could be next to impossible to find a lending institution to fund this deal.  That also means less oversight for the seller.  

I'm one that likes the "Simple Stupid" method. If its not broke don't fix it. It really goes back to what is your goal? Additionally, lets assume that not everyone on this board is a 15 million dollar investor like Liewelyn or someone like Diane who can afford to cash flow negative $12,000 per year, per property, for 3-5 years on the hopes of making money on the sell 10 years later. Good for them, if it works then go for it. Remember a broken clock is still right 2 times a day. For the rest of us "simpletons" cash flow positive is a big deal, especially to newbies in RE. Take advantage of what your market gives. For me, i live in Texas. Texas (Austin) advantage is that 157 net people are moving in the Metro Plex a day, property values compared to the nation are relatively priced low (except in downtown Austin rapidly approaching California pricing), and we still have LOW INTEREST RATES. Rental market is booming. Back to the goal (why), I want to retire someday. I will need predicable, sustainable, income to do that, and the more the better. 1% rule works great for me, here in TEXAS. Been utilizing the 1% since 2002 when I bought my first duplex. It has been a great ride!!!. The BIG REASON multi family RE works is because you can reasonably figure out rental rates before you buy. Looking at history it is hard to find low end rents ($1200 or below) where you might expect a 40-50% decline in rents. Can easily happen in RE prices almost in any market. But low end rentals, especially in population increasing locals have greatly built in protections. Also, if you have strong cash on cash returns you probably are going to experience a good IRR as well. At least with the 1% rule or the ConC return figures your not having to make assumtions of what the market might return. You are using real time numbers. Now don't get me wrong, I'm not saying you should not rule out IRR, its just us simpletons need the cash flow to keep us in the game so we can get that good IRR. One more thought, before 2008 you could buy investment RE with 3-5% down, but no more. Having to put 20% will keep a lot of investors solvent in down times. That alone will keep MF values steady if you are buying with the 1% rule.

No problem, I do see your point and it is generally valid, but maybe with a caveat that breaks down the percent of each category comprising the 50%.  If you notice, property taxes are high in Texas and even estimating 3000 per year in maintenance only get me to just over 30%.  The other discrepancy is that the more your rent increases the higher your expenses.  In theory, if you call that inflation then you might think taxes, insurance and maintenance cost also will go up but I don't find that the case necessarily. Most first time real estate investors, might do their own PM duties to save money.  Experience real estate investors should do a more comprehensive analysis on the profitability of an investment.  The 50% rule to me is too broad a stroke to get any real value.  I've never used it but I do use the 1% evaluation on every property I consider.

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!!