All Forum Posts by: Travis Hughes

Additional notes - condo and townhome HOA's can decide to put in rent restrictions whenever they please. SFR HOA's can do this, too, but I've seen it much more common with townhomes and condos.

We were managing a condo unit in Atlanta that was worth perhaps $60k and rented for $700 a while back. When the HOA contacted us, they informed of rent restrictions. (Homeowner wasn't aware, and the HOA didn't contact us until home was occupied.) Had to force the tenant to move out and the owner had to sell the unit. Here's the worst part - that complex was probably 20% vacant because of these stupid rental restrictions. The HOA wishes to "preserve" their property value by social engineering to force homeownership, but the opposite comes to pass - most qualified owner occupants have more expensive homes, and folks who want to occupy those units are not qualified to own. Thus the occupancy of the neighborhood plummets, the values plummet because landlords have a hard time selling their units to an owner occupant, and the tenants who want to live there are locked out.

YMMV, but in the markets that I have worked, we have not seen it worthwhile to upgrade to either granite or stainless steel for units that rent this low.  My personal recommendation to clients is to upgrade to SS appliances if the unit rents for $1200+.  Granite might be more like $1500+. 

That being said, on a side note, I've never really seen a kitchen with white appliances that I liked.  Not sure what color scheme you have going on.  

At this price point, in the markets I have worked, I would go with black appliances and laminate counters every time. 

Census, HUD, BLS, and local REALTOR board can provide great insight to this sort of thing. According to census, Hillsborough County has added about 12% to the population from 2010 to 2016, approx 2% per year or 25k - 30k people.  Just under three people per household, total of 468k households.  New home starts in 2016 were 17k total, of which 10.6k were SFRs.  According to BLS, unemployment at 4.7% currently for Tampa-St. Petersburg-Clearwater, FL MSA with 1.5M labor force.  Employer cost per man hour is lower than national average, with wages lower in 16 of the 22 major occupational groups, indicating moving jobs to the area is beneficial to a company that is paying higher wages elsewhere.  According to HUD, rental vacancy peaked at 13.1% during recession, back down to 8.6% by 2015, no current data.  According to board of Realtors, housing supply is still falling. Was around 4 months in 2015, then about 3 months in 2016, now around 2.7 months.  Case Shiller index still puts this MSA significantly below the pre-recession levels, at 191 currently from 225 in 2006.  (I've seen nominal prices of homes rival or surpass 2006 levels, so I'm thinking maybe the Case Shiller index is also adjusted for inflation?  Someone help me out on that if you know.  I would have expected this to be at least equal to if not slightly higher than pre-recession levels already.)

Two options - 

1) Get started on the eviction process immediately.  No tenant should ever be this far delinquent without any legal action being taken.  Rent is due on the 1st and late on the 2nd (or whatever your lease says; hint: it should say late on the 2nd).  Enforce the lease.  Do not make any exceptions whatsoever.  This is business.

2) If you don't know how to carry out an eviction, or you are afraid to do it yourself or ruin the relationship, etc, just hire a professional property manager.  These are signs that you should have had a professional managing the home in the first place.

No pay, no stay.  Simple as that. 

Oh, I totally forgot earlier.  I saw this on your figure, but then I got on a diatribe about your maintenance costs.

You really need to factor in property management as well.  I understand that you plan to manage yourself, however there may come a day that you wish to hire a PM to handle it for you.  You need to factor those costs so that you don't get stuck managing yourself.  You should have plenty of cashflow for it; might drop your cash on cash some, but should still be very healthy.

Look at it this way - today, you judge your time to be less valuable than the cost of property management.  Obviously you aspire to reach a level where your time is (significantly) more valuable than what it would cost to pay a PM.  At that time, you'll hire a PM and put your time to more valuable uses.

Or maybe you just want to spend more time with your family.  Or maybe some tragedy strikes and you are unable to manage yourself even if you want to.  Or maybe... 

Still looks like a good deal. 

Excellent tips from @Ranga Ramanathan.  I agree, the maintenance numbers seem low given that you have 4x the mechanicals of a single family home.  Add in closing costs (mortgage origination, funding escrow account, title insurance and transfer, etc).  

Upon move out, if we assume your $1350/mo estimate is accurate for all 4 of the units, double the maintenance to $3,660/yr, and add another $5,000 in closing costs for acquisition (that's sort of random), your cost to acquire the asset becomes $24,000 and your annual cashflow comes out to about $9,000.  That would be 37.5% cash on cash return when all four units are leased out.  Maybe run those numbers through the calculator and see if they match up with my bar napkin math.

Also, is there no rehab needed at all? 

One thing that I like to do for maintenance is add up all of the mechanicals and appliances and divide over a 10 year lifespan.  So if we assume each unit has an HVAC system ($4,000), water heater ($800), fridge ($1,000), range ($750), and dishwasher ($500), then that would come out to $7,050 per unit per decade to replace those items.  Over 4 units, that's about $28,000 in maintenance every 10 years just for these five items.  That comes out to $2,800 in annual maintenance before you handle any other repairs.  (These prices are in my experience with my vendors here in ATL.)  

Overall this looks like a good deal. Just check your assumptions and be confident about the ARV, rental rates, closing costs, rehab figures, maintenance figures, etc.

Angela, I can handle that for you.  Please send me a PM with your contact information and I will reach back out to you.

@Matthew Sutton, IRA's are tax advantaged. Holding real estate with a mortgage (outside of an IRA, just in your own name) also has tax advantages. If you hold the real estate within the IRA, most or all of the tax advantages of owning the real estate would be lost.

If you're putting all of your retirement accounts into real estate, you are also not diversifying very much.  Sure, you can diversify from market to market, but if you only own single family homes, it's still all real estate.

What I do is leave all of my retirement account money in a low cost index fund, then buy real estate outside of any tax advantaged accounts.  That way my investments are diversified between real estate and equities, and I capture the tax advantages of both the real estate and the retirement accounts. 

If you don't have the funds outside of your accounts to acquire real estate, perhaps you could make a loan to yourself or something? I don't really know anything about writing notes out of an IRA, so I can't speak to that directly. Perhaps someone else could help.

@Michael Wagner looks like a good deal on the numbers.  Can I ask how you found the deal and/or connection that brought you the note? 

@Brian H. Sounds to me like you're doing fine, then.  As you mention, might just be the analysis paralysis.  

If you're pulling 6% cash on cash return including property management, then you should be at least beating the stock market (over a very long time horizon) once you take into account your appreciation, mortgage interest deduction, asset depreciation, mortgage principal pay down, etc.