All Forum Posts by: Shane Pearlman

@Brian Payne that is brutal. The crazy thing you see from the picture is how high the roots lift. I didn't show the picture of the neighbor's property (as it isn't my place to post it online) but the roots from the tree lifted their shed and deck nearly 15 feet into the air. They may be worse off than I am. =)

Got a hold of PG&E - @Arlen Chou & @Wayne Brooks were right. They won't help much. Still waiting for them to bring the power back online. Its been over 48 hours. Feeling bad for the neighborhood.

Also got ahold of the owner. She was super friendly. @Tim Lindstrom - I'm so with you (& matt) on the offer. I debated hard bringing it up right away, but decided to build a touch of rapport first. Her insurance company is coming out Tuesday and I'll coordinate with mine tomorrow.

I'm pretty darn sure it is eucalyptus, but I could be wrong. 

I'll let you all know how it pans out. Thanks for the support.

It would seem that this year needed to go out in a bang! Last night we had a severe windstorm which brought down a giant eucalyptus tree in our neighbors yard, taking down the power lines and landing onto my duplex. Thankfully no one has been hurt and overall, the property withstood the hit remarkably well. 

PG&E + the fire department came out quickly to deactivate the live wires. Then they left.

The property from which the tree originated is also a rental and I am in process of working with the tenants to track down the owner. It would appear that the managing owner died about a month ago and we are trying to get a hold of his estranged wife who inherits control.

I have called my insurance agent and she said they are happy to help, but that if I can get the other property owner's insurance, then it saves me the deductible as it should be covered under their policy.

Right now, I have a giant tree sitting in the back yard, intermingled with power lines, pushing up against the house / on top of the shed. I am not quite sure what is the next step. 

I have not been able to get through to a PG&E person yet due to the impact of the storm. Clearly PG&E comes at some point to restore power to the neighborhood. Do they trim and remove the tree at that point, or just clip the minimum and put the poles back up?

I sat down with the tenants today and they feel safe / are being cared for. The house is livable (once power resumes) and my rents are safe.  I know I need to get someone's insurance company out to review the damage. Do I bring out my own contractors or wait for insurance to assess?

Is there any value in the wood? Is it worth trying to sell it for firewood or furniture wood?Where in the process do I get an arborist to come clean out the yard if PG&E doesn't do it? Do I do it or try to wait for the other (absent) owner to deal with it?

Has anyone been through something similar and is there anything I should know / do / avoid from your experience? Thanks ahead of time for all the smarts.

Garden is gone. Shed is buried and upper branches leaning on side of house / roofline. 

Back porch took the brunt quite gracefully. Power wires intermingled into the branches.

Hey @Jim Adams. That is such a good question and a tough one. We own two duplexes in a city where multi-family rarely turns over. Years can go without a decent comp. This is a A- / B+ class area (sounds like your town too) and there is substancial competition any time a property goes to market. We were able to get this one before it went on the MLS as it is 3 doors down from our 1st rental. The price was basically the most I could pay with the current loan environment and rents (the rents were far under market).

The purchase price was 635k in Feb 2013. Taking a look at the appraisal, they used three different approaches:

Sales Comparison Approach: $ 654,000 

He picked comps. Looking at them, it was a stretch. He has a 4plex in there, a triplex and a duplex from 2 years before with an additional 1,000 sq ft. He then did his best to adjust for the difference. Kind of B.S. honestly, but that is how it was done. They factored in number of bedrooms, square footage, garage / parking, quality of property, heating / cooling and other large ticket factors.

Cost Approach (if developed): $ 651,160

He took the square footage and multiplied it time a cost of construction per square foot. It so happens that price points at the moment have come back into alignment with building costs, so for the short term, depending on your burgh, this could be an option. He assigned a value to the land based upon comps / local knowledge, then multiplied by a $191/sq foot build cost, then factored in depreciation and some of the site improvements (built in shed etc).

Income Approach: $ 699,300 

The appraiser put together an operating statement + a capex statement. They used a GRM of 189. I was expecting to see a cap rate but it seems GRM is the magic ratio.

Hi Ivan,

I've done a number of remodels on properties and found that all my best contractors came through referrals. I also "date" them. I keep a list of smaller projects which I intentionally try new people on. I like to keep 2-3 active and qualified handymen / contractors to pull from.

I'd recommend you hit up the oakland BP meetup (http://www.biggerpockets.com/forums/86/topics/106912-east-bay-meetup---dec-10-in-oakland) and ask around. I'm not sure when @J. Martin will do the next one. He is a great person to ask for referrals though.

Should you worry about it? Only if that was not part of the plan. 

Ideally, at some point the two of you have (or will) established a working pattern and expectation. Personally my property manager in Seattle (we are in CA) sends a report one a month along with financials. We did calls for a while, and then found we had trained each other about what was expected. The calls moved into an email summary. @Francisco Nieves had the big ones. I personally like to know about my tenants as well as the market. I also want to know about turnover plans. I want to discuss and Cap Ex. And I regularly ask about any deals floating in his network.

If I don't get the report, then I call so we can chat. Even with the written updates, he and I talk at least every 2-3 months.

Hey @Reggie Maggard 

Are you asking for tax deductions or for life expectancy? I'm assuming you mean the second. I have found a few factors define the actual life.

Quality: it goes beyond just the money. Some types of carpet and some colors survive trampling and stains better than others. We've had the best results from mid grade berber with a dark cream + spotted pattern. It is about 20% more expensive, but it has outlasted the cheaper shags we got by 2-3x. The spots are supper important as they hide small issues really well. I also like to pick slightly nicer looking carpet as we have A class properties and it helps rent better + if I decide to sell, I don't need to ditch the cheap renter carpet.

Use: tenants are SO different. A family of 6 with 2 two pets is a carpet lifecycle shortener compared to a single widow in her 60s who spends most of her retirement on cruises.

Cleaning: I've noticed that regular professional cleaning really extended carpet life, even with the turnover impact, compared to my messier long-term tenants. Not so with my neat freaks. We have been debating offering carpet cleaning every 2 years for our long-term tenants. I'm curious to find out if that ends up netting positive or negatively.

So Far: I had one carpet get replaced after a single 2 year tenant. Only the opposite, I have a thick berber in one of my duplexes that is now 9 years old and you can barely tell it is used. If i had to make a WAG, 5-7 years middle ground, 7-15 for the good tenants / higher quality.

Ditch the Carpet: with all that said, I now try to avoid carpet.I have a significantly better track record with mid quality laminates. People love how they look and even dogs can't seem to destroy them.

What is the project?

@Jeff Greenberg 

I was not aware of a net worth requirement. Having been blessed with a degree of success, and still doing loans about a million and under, perhaps I just passed muster that has not been brought to my attention. A bit of googling confirms that you are in fact spot on! Thanks for pointing that out. 

As for liquidity, I have been asked to show 6 months on my last two deals, although perhaps as my loan size gets larger they might ask for more. Curious what you have had to demonstrate recently.

@Account Closed 

You are right, they will want rent rolls balanced by their own rent appraisals. In one of our duplexes though they had no rent history as it was owner occupied (family on both sides), and they went with an appraisal entirely. As a personal note, the last few appraisals I have had recently where stupid wrong. I'm not sure how these appraisers do their homework, but the one I got 2 months ago even referenced one of my other buildings (clearly not realizing I owned it) and stated the rent for that building as 20% under what I have it currently leased. 

If the building has extremely low rents, the upside potential is great, but the bank will only loan based upon current leases. I had a building that I was in love with in Seattle this summer, but would have needed to bring over 1M cash to closing table just to get the bank to loan. The 12 units were gorgeous and 50% under market. In 3 years, I could have developed substantial cashflow, but simply didn't have the liquidity to buy that day. Some all cash buyer scored big. 

Hi @Justin Sandall .

I personally used Quicken for our first 4 units. I eventually moved to Quickbooks as the bookkeeping became more nuanced and I wanted to track basis properly as I executed 1031s. You can probably use quicken for quite some time. 

I create a class in QB for each property and then can run P&Ls + Balance sheet reports easily. The one challenge I personally have is in setting up the books. You can either set them up to match tax concepts, or cashflow concepts but not both. For example, principal mortgage payments are not considered an expense from a tax perspective. They don't show in your P&L. From a cashflow perspective though, it is money out the door. Same problem with depreciable capital expenditures (appliances, roof....). In the end I found a balance. I put everything into the P&L in expense accounts until the end of the year, then I do a journal entry to shift all the necessary items over to the balance sheet before tax time.

I used buildium for quite a while to manage tenants and gave their finance tools a try but found I was simply more comfortable with quickbooks.

Hey @James Phillips. You just won't know until you perform you due diligence. 

I'd start by walking the neighborhood and the property. What state are the homes in within walking distance, what are the neighbors up to (talk to them), any improvements happening or have things been getting rougher. 

Then I get someone to show me the inside. What condition is it in? That will have a drastic impact on your price point. Is it a tear down or livable at all? Need minor cosmetic fixes?

Next I try to figure out WHY they are selling. What is driving the price down. Sometimes, life provides legitimate opportunities. Divorce or death can lead to people wanting to dump solid properties quickly. Other times, it could be just an incompetent real estate agent. In plenty of cases though, it is a non-confirming, red-tagged or dysfunctional property. Just ask at least 3 times in different words, "why are you selling?"

Lastly, check with a bank that the property would qualify for a loan. I have seen properties priced quite a bit lower when they can't get funding. This happens for a wide variety of reason (zoning, violations, defunct..).

Then run the numbers. If it works for you personal investing plan, then lock it down.

Hey DJ,

This is a great question! There are some key details lacking, but I'll make some assumptions, and you can fill in with more questions.

Small Multi-Family

Loans are very different on 2-4 unit buildings Vs 5+ unit buildings. 

Smaller Multi-Family loans, which includes duplexes, triplexes and fourplexes, fall under the residential umbrella and are often the same banks and similar process to your traditional single family loan. What you need:

* Downpayment. The amount will depend on a wide variety of factors. Perhaps you can finagle some crazy FHA 3% down, but more likely, you will have to pay a minimum of 20%, often 25 - 30% down depending on location, loan amount and history. The owner occupancy will affect this quite a bit.

* Income History. How much and how long. Fundamentally they want 2 years of tax returns (and average the amt). I've seen people get away with less, but typically with higher earnings and a good story. The amount you earn matters. There is a debt to income ratio they will allow, after which you get cut off. I think 43% is the highest ratio they will allow someone to have. Want to get bigger loans, earn more!

* Rental Income. Initially you will need to show that you can carry the entire loan with you own earnings. Once you can show 2 years of tax returns with a schedule e (rental income), then they cut you a break and allow 75% of the property income to be added to the bottom line of your earnings in the debt to income ratio calculation. 

* Reserves. You can't spend ever penny, they won't let you. For these size loans, they want to see 6 months of expenses. You can use retirement accounts if you have them, but they won't give you the money unless you can point to those reserves somewhere.

Commercial Multi-Family

When you hit 5+ units, it isn't just about you anymore, the property has to pass muster on its own. So what does that mean?

*  Debt Service Ratio. The bank is looking at your apartment and thinking, if you newbie investor screw up and I have to take ownership of this asset, do I want it? The way they do this is to conservatively fill out their own property analysis and determine a ratio. There was a straightforward blog post om BP last year explaining it: http://www.biggerpockets.com/renewsblog/2013/09/09... . Banks like to see a 1.2 ratio or higher. Now this is all about choosing the right deal.

* Experience. The bigger the deal, the more you have to show that you are likely to succeed at a deal. The bank actually had me create an investor resume when applying for a 9plex a few months back. They wanted to see successful experience with similar sized deals, or a progressions that showed you were ready for the next step and this was the right match.

Timing and a thought.

You my friend have a great adventure ahead.

* Be Patient and Strategic. You need a couple good tax returns. That just takes time. That said, there are things you can do to help you once the time is right. Be careful of lowering income. One year I had to carefully time deductions from my business to increase my net income in order to qualify for a bigger home loan. 

* Get Experience. Find an opportunity to get hands on property management. Be a caretaker in an apartment. Take a small part time job at a PM company.

* Romance a Bank. That said, not all banks are filled with faceless paper pushers. You can begin a relationship with a local portfolio lender who might be willing to take a risk with the right property on a young man who has shown accountability.

* Find a Partner. Right now, you have time and energy. There are other people with money. Some people are good for loans. My third rental property was bought mostly with someone else's cash. I had a great deal in hand, experience managing / running a remodel, a team on the ground with a good track record, and I was willing to absorb some risk if things didn't pan out. They had cash earning negligible returns, no time and saw an opportunity but needed a active person to do all the work. Often you simply need to find out what problem they need solved and find a way to be of service.

Good luck and vote it this comment up if this helps. Happy to reply to any followups. Probably an overkill when the answer you really wanted was "2 years" but there you have it. =)