All Forum Posts by: Will Kenner

Thanks @John Warren. Sounds like we have similar situations with the percent rent increases. I too was thinking/concerned about the ability for the tenants to come up with the additional costs. There's no good way of knowing their financial capacity without being able to "re-screen" them. But I agree that getting off on the right foot is always better in the long run, even if that means some turn-over. 

I am nearing the closing date on a tri-plex in a suburb outside of Seattle. All the tenants are long term tenants with two of them having been there for over 10 years. The leases are all MTM with rents well below market rate for the area. In addition, the Property Management company that was in charge, failed to collect proper deposits, pet deposits, and pet fees. (No big surprise with the PM. Prior owners were an elderly couple and the PM did nothing in the interest of the owners. What do they say on the Podcast - most PM companies are crap?) So my concern now is A) Raising the rent so much on the tenants, about 35% more than what their current rent is (supported by Rentometer and calling surrounding buildings for rental rates), B) collecting additional deposit money to establish an industry standard, 1 month equivalent, and C) for the tenants who have pets, collect deposits and fees for them.

Since I am set to take possession later this month (November), my strategy was to give them plenty of notice of three lease options that will go into effect Jan 1st. 1) Continue MTM but rent would be raised from current to an amount $X. 2) Sign a 1 year lease and rent would be $X-$50. 3) Sign a 1 year lease with auto-pay and rent would be $X-$75. (Again, the rental amount $X would be approximately 35% more than what they are paying now.) In each case, the tenants would have to provide any short-fall in deposit funds. My thought being that if they accept the new rent of their choice, it's a win-win for both. They don't have to move and their rent is on-par for the area, and for me I don't have unit turn-over and I'm getting increased rent. If they leave, then I have the opportunity to rehab the unit then rent it out at a strong market rate. Either way, I would concurrently begin smaller improvements around the property and in the units that were noted during the inspection. This would not only improve the property, but also to show the tenants the new ownership cares about the condition of the building and is proactive in improving it, not just raising the rent. From a business side I am all for my plan and feel it is a solid one. On a moral side, I have reservations imposing such a large rental increase, especially during the holidays.

So to those BP members who have been faced with significantly raising rents after becoming the new owner, what say you?

@Nathan Gesner Thanks! Glad to help contribute to the Forums!

@Eric Ippolito I too share your concerns as it can become very expensive traveling to various properties that end up not being good deals. Perhaps some other BP members who have more long distance investing experience could shed some light for us, or there's always Long Distance Investing by David Greene (which I haven't read yet, but it's in the queue). 

But based on this last personal experience, I'm going to modify my approach by capitalizing on whatever resources are available to have the property scoped out first. This would be having the local agent I'm working with do a drive-by, maybe walk the grounds if possible, or if I know someone in the area, have them check it out for me. Then there's the option of calling a Property Management company in the area and asking them if they are familiar with the property and if they'll take a look. Who knows, they may be eager to help since if the deal does go through, they could be the PM to manage it!  

@Eric Ippolito, @Ronald Rohde is correct in that I was in the Due Diligence period when I decided to back out. In all I was out the cost of the flight, rental car, and inspection.

In general however, the Due Diligence (DD) period is the time when you "kick the tires" and look at every aspect of a property - order your inspections, get trades to bid on CapEx, review leases, look at expenses, city/county records, property line surveys, etc. If anything, for any reason, doesn't look right, you can back out of the deal. If the HVAC is "beyond its useful life", and the bid to replace it is more than you want to spend, you can back out. Or it could something as simple as once you actually see the property, you don't like the neighbors, you can back out.

Obviously you don't want to waste your time, or the brokers' time, nor money on flights and inspections, so you should get as much information as possible before going under contact and committing to a site visit. Otherwise, if you're getting under contract and backing out when you have no practical ability to proceed, you'll find it hard to find anyone who wants to work with you. 

Once you're past the DD period then, that's when your earnest money "Goes hard" and becomes non-refundable if you back out. If you're looking at out of state, or even within state but far away like NorCal is to LA, it's important to know the logistics of how and when you can get all your DD done, and give yourself enough time accordingly when you write the offer. For example, if a property is in the same city and has only two tenants, asking for 7-10 days for DD is reasonable. In contrast, if the property is out of state, has 5 commercial tenants, an elevator, and a more complex HVAC system, then you may be looking at 15-30 days.

Hope this helps! 

There's nothing like the feeling of getting that "slam-dunk" deal under contract. The perfect property at the right price, that checks all the boxes. This past week I felt I had such a scenario. After competing with 2 other offers, I finally got under contract a commercial property in a prime out of state location that was fully leased with a diverse tenant mix, and was offered at a reasonable cap rate. All seemed to be lining up beautifully so I decided to hop on a plane, then rent a car for a 2 hour drive, and finally spend some time at the property in person. 

When I first arrived, I was pleasantly surprised that the building was more or less as advertised, and the location was even better than I thought. As the meeting with the brokers and property manager continued, I made sure to not let the excitement and emotion get the better of me. Thinking back to what I've read in various books on due diligence and experiences running my current commercial property, I made sure to ask the tough questions, and persist on getting clear answers to statements. This paid off in a big way. There was a discrepancy in the age of the building as stated in the OM vs. what the property manager had mentioned during the meeting. I ask him to clarify and at first he dismissed the question, saying everything is up to code. I then asked why wouldn't everything be up to code? Is there something that would be in question? He then proceeded to give a chronological account of the structures on the property and said that there was a building built in 1962 that was formerly on the property before the current structure. At first, I assumed asbestos and maybe a small heating oil tank but since that structure had been torn down, it'd be a non-issue. But I kept pressing, and asked what kind of building was built in 1962. Come to find out, it was a gas station. 

I didn't have any experience with gas stations before but I know the clean up can be messy and expensive. And since this property was across the street from a very prominent destination lake, governmental action would be swift and strong should any environmental contamination issues come up in the future to protect the lake. So I dug deeper into the city, county, and state records. It was confirmed that indeed a gas station was on the property, and two of the three tanks had been removed. During their removal soil samples were taken and dirt was removed until the readings were within permissible levels. The third tank (a 10,000 gal tank) was left behind, and there was no documentation stating that it was officially "decommissioned". Furthermore, despite the soil sample reports being within permissible levels, there was no "NFA" documentation. 

Of course rules and regulations may change, but if a property that was once "contaminated" was cleaned up and receives an NFA designation, then the risk of expensive remediation in the future is greatly reduced. Now some BP members may have experience with environmental cleanups of former gas stations and would consider this a non-issue. Given the property was a prime location, it may be worth the investment and risk. For me however, it was not. If ever I was required to remove that remaining tank and/or contaminated dirt, my pockets aren't deep enough to absorb those costs.  

The take home lesson for me with this experience was to always press for clear and concise answers, assume nothing, and don't let excitement cloud your judgement. As a bonus, this was my first out of state property that I've had under contract so if anything, it was a great experience beginning to build a team in a city far from home. At least on the next deal I'll feel a lot more confident with the idea of long distance investing and the logistics involved!   

@Todd Rasmussen Looks like a textbook BRRRR! Was this the first time you bought long-distance sight unseen? As @David Greene would say, did you have any "boots on the ground" helping you determine if it was a good area or not? 

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $470,000
Cash invested: $60,000
Sale price: $440,000

I purchased this condo right out of school, fearing that I was going to be priced out of the market in the hot market of 2007. Fast forward two years when the whole economy came crashing down, and I was at a cross roads. I couldn't unload the property for what I owed, but houses were on the cheap all around our neighborhood and I wanted to buy. I took the leap and purchased a home just two blocks down the street and put the condo up for rent.

What made you interested in investing in this type of deal?

Since this was my first primary residence, I didn't consider the cash-flow potential, however it was a top-floor, water view condo with it's own private roof-top deck, so I felt it had intrinsic value.

How did you find this deal and how did you negotiate it?

This was one of 10+ properties pulled from the MLS that I looked at over one weekend home from school My negotiation skills were poor (well before great books like 'Never Split the Difference' were written) so I did not negotiate much.

How did you finance this deal?

Fortunately there was a nice little element in the mortgage industry at that time that let a newly minted professional, right out of school, with no income history, qualify for a jumbo loan - The no-doc Alt-A loan! Courtesy of a friend who worked at the now defunct Countrywide Mortgage, I was able to get this condo on stated income and a smile.

How did you add value to the deal?

The property was essentially turn-key as the prior owners had just remodeled the unit before listing.

What was the outcome?

Mitigated loss.

Lessons learned? Challenges?

The property didn't cash flow even with strong rent. This is where buying a rental property for the right price comes in. I overpaid for this property even though all the metrics were telling me it was overpriced. Ignoring those metrics, I "just wanted in" and ended up paying for it later. Not only was the mortgage payment sizable, but there HOA dues to consider as well. (One of many good reasons NOT to buy condos as rentals)

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $470,000
Cash invested: $60,000
Sale price: $440,000

This was my wild ride into the world of real estate. I purchased this condo right out of school, fearing that I was going to be priced out of the market because everywhere I turned, new records were being set in housing prices in the Seattle area. Fortunately there was a nice little element in the mortgage industry at that time that let a newly minted professional, right out of school, with no income history, qualify for a jumbo loan - The no-doc Alt-A loan. Courtesy of a friend who worked at the now defunct Countrywide Mortgage, I was able to get this condo on stated income and a smile. Fast forward two years when the whole economy came crashing down, and I was at a cross roads. I couldn't unload the property for what I owed, but houses were on the cheap all around our neighborhood and I wanted to buy. I took the leap and purchased a home just two blocks down the street and put the condo up for rent. I lucked out as the first tenant I signed ended up being the only tenant I had for the next 6 years. He took care of the place and was paying top of market rent with annual increases. All was not rosy though, as the property did not cash flow even with the strong rent. This is where buying a rental property for the right price comes in. I had clearly overpaid for this property but at the time, "I just wanted in", even though all the metrics were telling me it was overpriced. Ignoring those metrics, I end up paying for it later. Not only was the mortgage payment huge, but there HOA dues to consider as well. (One of many good reasons NOT to buy condos as rentals) The rent covered the majority of expenses, but at the end of the month, I still found myself shoveling $1700/mo into it. It was either this or short-sale, and I knew that I wanted to continue to buy real-estate, so I had to make it work. Lessoned learned on always sticking with the metrics - numbers don't lie!

What made you interested in investing in this type of deal?

Since this was my first primary residence, I didn't consider the cash-flow potential, however it was a top-floor, water view condo with it's own private roof-top deck, so I felt it had intrinsic value.

How did you find this deal and how did you negotiate it?

This was one of 10+ properties pulled from the MLS that I looked at over one weekend home from school My negotiation skills were poor (well before great books like 'Never Split the Difference' were written) so I did not negotiate much.

How did you finance this deal?

No-doc Alt-A loan!

How did you add value to the deal?

The property was essentially turn-key as the prior owners had just remodeled the unit before listing.

What was the outcome?

Mitigated loss.

Lessons learned? Challenges?

Know your numbers, run your metrics, and don't over-pay!

@Anthony Wick There are a lot of great comments from the Professionals regarding your concerns, and although I can't speak with the industry experience they can, I share in your frustration with my own experiences. Being in the Seattle and Greater Puget Sound area's hot market, it's commonplace to see 3-4% Cap rate valuations trading like they're on sale. Prices are very much at a premium wherever you turn and it seems nearly impossible to find a property that even remotely makes sense after some hacking and value-add. The import take-home message though, is to stick your numbers and what works for you. It's certainly tempting to simply buy a property at whatever the cost. But in the end, are you doing it just for the sake of buying a property, or to invest in a property? It seems that your intention is the latter, so the deal has to make sense to you. 

With the strong performance of real estate in the last 7-8 years, a lot of people are sitting on gains. Perhaps many of the competing buyers you're encountering are aggressively bidding because they need to complete an exchange. Paying up is cheaper than their potential tax liability. Or maybe they have enough cash in reserves from other properties that they can justify inflated prices that don't cash flow. 

Just a few things to consider IMHO.......