All Forum Posts by: Travis Hughes

https://www.biggerpockets.com/forums/311/topics/39...

Repairs and CapEx look a bit low IMO. Net $170/mo is just over $2k per year = 0.6% of the property value. I think 1% - 2% is more realistic.

More importantly, it's kind of hard to analyze an investment without any income figures. 

Once per year is fairly typical.  

In my opinion, the type of tenants who are going to fully destroy your carpet and paint will cause that damage within the first six months of their occupancy.  This will vary by your location, property type, etc, but in the homes that I've managed I would guess maybe 1 in 10 tenancies are like this.  If a tenant destroys your carpet and paint (and if they aren't otherwise damaging other parts of the property), then you might as well leave them in the property as long as possible, collect as much rent as possible to offset your rehab costs, and defer the turnover as long as you can. 

 I use similar rewards - Fidelity visa.  They provide 2% cash back on everything, but you can route the funds directly into an investment account.  I let my 2% cash back (free money) start working for me.  You'll never notice the difference in your checking account from the cash back, but you'll notice the difference in your investment account after a decade of compounding. 

If you spend $25k per year on the card, that's $500 cash back per year.  Over a 10 year period, that's $5,000 principal cash back.  If that money were invested passively in an index fund, figure about 8% return annually (fairly typical for US stock market, IF performance was uniform), in a 10 year period you would have over $8,000.  

Over a 20 year period, that becomes $25k on only $10k of principal cash back. 

@Tyler Helton I would also point out that there is a difference in the mortgage products that you can obtain as an owner-occupant compared to an investor.  As @Reggie Wright pointed out, it is necessary to live in the home for a minimum amount of time.  This is if you are purchasing the duplex as an owner-occupant.  The reason that you might want to do this is because you can put a lower down payment on the table, and because the interest rate is likely to be lower.

As an investor, most lenders will require 20% - 25% down payment minimum, and the interest rate will be about 0.75% - 1.00% higher. As an owner occupant, you can put a much smaller down payment - as little as 3.5% with FHA I believe. An owner occupant also gets a lower interest rate. The tradeoff is that you have to live there for a minimum amount of time.

As always, consult your mortgage broker for the best options. For example, I would never want to own a home with less than 5% equity, so the 3.5% down payment FHA option isn't important to me. Also, if I am not mistaken, an FHA loan has permanent PMI (can't be removed), whereas conventional with minimum 5% down payment the PMI will be removed at 20% equity.

In this situation, you are the Tenant, correct?

Not really sure what the lease / renewal terms are since you didn't describe.  The situation should be very straight forward, though.  I think you paraphrased the lease instead of copying, so it's hard to be sure.  Most leases have an early termination option that allows you (Tenant) to terminate the lease early (before the stated term date) by paying an early termination fee and providing the written notice required.  That would typically "purchase" a new (earlier) lease end date and the lease would then be terminated.  You wouldn't be liable for the lease after that new (earlier) lease end date.

That said, what you paraphrase above does not read this way.  The way I am reading what you wrote is basically that you have no way to terminate your lease obligations early, but if you want to move out early, you have the privilege of paying an extra $1200 AND still being liable for the lease until it end or a new tenant moves in.  

Exact verbiage from the lease would be helpful.

Disclaimer: I am NOT an attorney.  You should consult one. 

Are you saying that the gross rent for all three occupied properties is $2150?  What is the potential rent on the vacant home?  What is the rehab needed on the vacant home?  How do you know that no repairs or rehab are needed on the three occupied units?  

What are your expenses for taxes, insurance, property management, R&M, CapEx, and debt service going to be?

Did your post get cut off at the end?  

My experience with New Western, Net Worth, and the other large "wholesalers" over the last decade in DFW and ATL has been that their ARVs are consistently inflated and their rehabs are consistently deflated. I've probably looked at three or four dozen listings from them over the years, and with 100% consistency I find the final equity in the deal to be less than 10% once I plug in accurate ARV and rehab numbers.

In 2011 or 2012 I had a close friend by a house from one of them on a hard money loan. Couldn't sell it because the ARV was overstated. Ended up coming to the table with money to close the sale, probably lost close to $20k when it was all said and done.

My $0.02:  Stay away. 

 I'm not sure the name of the legal principal that you are getting at here, but a Texas JP judge once mentioned this in court.  Basically the idea is that if you have a written contract with specific terms (like late fees), but you repeatedly play out the relationship with different terms (like not assessing late fees), then it is possible that the contract can effectively be "modified" or "altered" simply by your actions.  I would presume that it would wake a sophisticated tenant to make such an argument, though.  To my knowledge, the judge would have no place assessing such a finding unless the tenant claimed it as a defense.

Definitely something to keep in mind, however.

Always enforce your lease.  No exceptions.  

On a side note, your lease should also contain an "application of funds" clause that specifies all monies submitted by Tenant are applied against the oldest charges on the ledger first.  When that is done, the late fees are paid first and the rent is subsequently short paid.  Now you are pursuing rent in court, not late fees.  Make sense?  For example - 

-Rent equals $1000.

-Tenant pays late in March, $100 late fee assessed.

-Balance owed in April is $1100 total.

-Tenant pays $1000.  

-You apply $100 to the late fees since that charge is older than the April rent charge.

-You apply the remaining $900 to the April rent.

-$100 April rent remains due, late fees begin to accrue, you file for eviction, etc.

After one such month where you actually go to court and the judge rules in your favor, the tenant will get the idea - and start complying with your lease (if they can afford to do so; if not, they need to move anyways). 

Depending on your lease and state laws, a modification of this that I would recommend is to simply decline partial payments all together.  Thus, if the tenant owes $1100 total on the ledger, you don't accept a penny short of $1100.  Same deal here.  They might try to test you on it, but once they get served by the sheriff or have the judge rule against them in court, they will begin to comply with your lease. 

If you wanted to upgrade one of the two, I would imagine the upgrade from black or white appliances to stainless would cost less than an upgrade on the countertops.