So all the updates of interest are posted now and I figure it's time to update overall where we stand. In 2010, we started out on this venture with 0 properties. We bought our first SFR in 2010, our second in 2012, 3 in 2013, and then more from there.
Currently, our property portfolio looks like this:
-- 8 SFRs
-- 4 MFRs
-- 3-unit
-- 5-unit
-- 12-unit
-- 14-unit
This brings us up to 42 total units. Our goal for 2018 (since we basically bought 29 units since Dec 2016), is to add one more 10+ unit in 2018. We have some focus on getting all our properties set up to cash flow as much as possible before we look for more. We should have that plan completed by Summer. After that (unless something awesome falls into our lap before then), we plan to aggressively look for MFR #5 and close on it sometime in the later part of 2018.
That pretty much sums it up for now. Stay tuned for more updates as they occur!
Wednesday, February 21, 2018
Selling SFRs
The first 13 properties we bought were SFRs. In 2016, we decided to move away from SFRs and focus solely on MFRs. We owned 8 in MS and 5 in TN. Our long-term plan was to unload all 13 SFRs (or at least most of them leaving a few high cash flowing ones) over time.
We saw an opportunity to sell all 5 of our TN properties at once, moving us out of TN completely. We completed the sell of those in June 2017 and are now down to 8 total SFRs, all in MS. We made quite a bit of cash on the sell and plan to use that money for future MFRs.
While we don't have any of the remaining SFRs on the active market, we have put the word out that we are looking to sell the rest of them to our network. Currently, all of them cash flow positively so we have time to wait for the right buyer at the right price and without agent fees. We plan to get the most out of them if we are going to sell them.
More on that as sells happen!
Heat/AC units!
On SFR #3, yet another issue popped up. If you've read previous posts, you know that some units (4 or 5) were not paying for their utilities. Well, it became extremely (and unusually cold) in MS for a couple of weeks. This caused several units to need repairs or replacement.
Here is the kicker here. All of the units we paid electricity for had an issue. Here's why, and this is very important. When your tenant does not pay for their electricity, they DO NOT care how much electricity they use. What happens is the tenant will set the heat up VERY high to keep the apartment well heated during the winter months (Some units we confirmed had it set to 80!). When it drops down to 9 degrees at night, heating units just can't keep up. We are fairly sure this was the cause of most of the problems. We had a few thousand dollars of repairs to heating units (including 2 replacements) because of the extreme cold.
The lessons learned from this:
-- Make sure you don't pay for your tenant's power. They won't care how much they use and will push AC/Heating systems to the max.
-- It might not be a bad idea to send someone out to check all your units before it gets super cold or hot and do preventive repairs. A $500 service visit could have saved us $3k+.
Oh well, onward and upward!
Here is the kicker here. All of the units we paid electricity for had an issue. Here's why, and this is very important. When your tenant does not pay for their electricity, they DO NOT care how much electricity they use. What happens is the tenant will set the heat up VERY high to keep the apartment well heated during the winter months (Some units we confirmed had it set to 80!). When it drops down to 9 degrees at night, heating units just can't keep up. We are fairly sure this was the cause of most of the problems. We had a few thousand dollars of repairs to heating units (including 2 replacements) because of the extreme cold.
The lessons learned from this:
-- Make sure you don't pay for your tenant's power. They won't care how much they use and will push AC/Heating systems to the max.
-- It might not be a bad idea to send someone out to check all your units before it gets super cold or hot and do preventive repairs. A $500 service visit could have saved us $3k+.
Oh well, onward and upward!
Well, this is a first!
So on SFR #3, we have been having an interesting situation occur. As our plan to get everyone off our master power bill, something interesting came up. We had a $300 bill for power in December and $600 in January. This just occurred as it started to get cold (This is Mississippi after all). The only thing that's supposed to be on the master power meter is a few lights and a couple of other smaller items.
We knew something had to be up. We brought in an electrician to see if we could figure out why a few items cost us $600 when it should be less than $50. What we discovered absolutely amazed us. Turns out, even though every unit is individually metered, there were still random items on our master meter, including 2 heating/cooling units. This was the main cause of the larger bill. We had the electrician move everything to the appropriate units meter. Unfortunately, this means that a couple of units are about to get hit with a $200+/month higher bill in the colder and hotter months than they were used to. I'm sure they thought they had super efficient apartments. We plan on reaching out to them and explaining the situation. We aren't going to go back and ask for back utilities because of this but going forward, we will save $500/month in expenses.
I had no idea this could happen. Obviously, anything is possible but whoever originally metered that apartment apparently had NO IDEA what they were doing. It never occurred to us for a second that this was a possible scenario. On our bigger complexes, checking this out is definitely on our to-do list when purchasing a property. We probably lost thousands of dollars since we purchased because of this.
We knew something had to be up. We brought in an electrician to see if we could figure out why a few items cost us $600 when it should be less than $50. What we discovered absolutely amazed us. Turns out, even though every unit is individually metered, there were still random items on our master meter, including 2 heating/cooling units. This was the main cause of the larger bill. We had the electrician move everything to the appropriate units meter. Unfortunately, this means that a couple of units are about to get hit with a $200+/month higher bill in the colder and hotter months than they were used to. I'm sure they thought they had super efficient apartments. We plan on reaching out to them and explaining the situation. We aren't going to go back and ask for back utilities because of this but going forward, we will save $500/month in expenses.
I had no idea this could happen. Obviously, anything is possible but whoever originally metered that apartment apparently had NO IDEA what they were doing. It never occurred to us for a second that this was a possible scenario. On our bigger complexes, checking this out is definitely on our to-do list when purchasing a property. We probably lost thousands of dollars since we purchased because of this.
MFR #4
So for MFR #4, we purchased a 14-unit complex. This was was different from our previous 2 MFR's in that it was fully rented with a waiting list, needed no (or very few) repairs. There is also no plan to refinance quickly and pull money out. It's more of a traditional purchase. The objective is also to cash flow out of the gate.
Here is the plan we wanted to implement:
-- Turn it over to a new PM (my younger brother who is getting into the business).
-- Do small repairs needed (not much)
-- Get rents moved up to market level (They are currently about 15-20% below market).
-- Get everyone on a lease (Currently they are all month to month).
And that's it.
There isn't a lot to post on this one as things have pretty much gone according to plan. No big surprises have happened in the first ~6 months of ownership. 4 units are at market rent, and the 8 others are going up to about 5% below market as of March 1st (couldn't raise too much in the first year) and everything will be up at market levels by March 2019. Also, on March 1st, everyone will be on a lease (no more month to month). It has cash flowed out of the gate pretty much from the start. The first couple of months were close due to initial repairs and updates. So beyond not quite being to market rent with every unit, we completed our goals well within our timeframe.
The real lesson here is that a traditional purchase is much easier to handle than the BRRRR method. No opportunity for infinite returns in the first ~5 years, but cash flow is king for us and it accomplishes that. We did currently dip down to 12 units rented but have applications for the other 2 so I expect to be full again soon. It's just part of the game. You have to turn down folks when you're full and hope you can find them when you're not. That's why it's so important to not require a fully rented place just to make money.
Here is the plan we wanted to implement:
-- Turn it over to a new PM (my younger brother who is getting into the business).
-- Do small repairs needed (not much)
-- Get rents moved up to market level (They are currently about 15-20% below market).
-- Get everyone on a lease (Currently they are all month to month).
And that's it.
There isn't a lot to post on this one as things have pretty much gone according to plan. No big surprises have happened in the first ~6 months of ownership. 4 units are at market rent, and the 8 others are going up to about 5% below market as of March 1st (couldn't raise too much in the first year) and everything will be up at market levels by March 2019. Also, on March 1st, everyone will be on a lease (no more month to month). It has cash flowed out of the gate pretty much from the start. The first couple of months were close due to initial repairs and updates. So beyond not quite being to market rent with every unit, we completed our goals well within our timeframe.
The real lesson here is that a traditional purchase is much easier to handle than the BRRRR method. No opportunity for infinite returns in the first ~5 years, but cash flow is king for us and it accomplishes that. We did currently dip down to 12 units rented but have applications for the other 2 so I expect to be full again soon. It's just part of the game. You have to turn down folks when you're full and hope you can find them when you're not. That's why it's so important to not require a fully rented place just to make money.
MFR #3 - Work in Progress
So MFR #3 was a 12-unit complex. This is our first MFR above 5 units. What a learning experience this one has been. A quick recap is we purchased this for about 25% less than the appraisal. Our plan was very similar to MFR #2, except this one wasn't in disrepair and was partially rented. 5 units were rented when we purchased and 1 unit was being used as storage. Our plan was to purchase, put a little work into it, allow the 12th unit to be rentable, and refinance once full to pull all of our cash back out of it.
Some other items of note:
-- The property was poorly managed so our intention was to replace the property manager.
-- The owner currently paid all utilities (Power, Water, and Cable). Water must be paid as it isn't separately metered, but we wanted to move all tenants to paying their own cable and power.
-- Some units were furnished. We are not in the business of providing furnished apartments, so our long-term goal is to get rid of all furnishings and no longer provide those.
-- We had to come up with somewhere to store everything in the 12th unit, so we planned to purchase a small piece of land and put up a storage unit to hold things like furnishings and everything in unit #12.
So as you can see, the plan is pretty complex. Our plan was to have all this done by Jan 1, 2018 (Spoiler: That didn't happen, not even close). Below is a decently detailed account of the timeline so far.
Spring/Summer 2017 - Our focus right out of the gate was to get the complex more rented than it was. We had 11 rentable units and only 5 tenants. A new PM was put into place within 30 days of purchase. At this point, we went to work getting some repairs done and beginning to figure out our plan for all the items above. Expenses were way out of control. Going forward, any new tenants would pay their own utilities and provide their own furnishings. Over the summer we didn't have much luck with tenants. We did add a couple but lost a couple as well. By the end of summer, we were still at 5 and hemorrhaging money (but we had planned for that).
Fall 2017 - We purchased the land we had planned on and got the storage unit put into place. We began to get the 12th unit renovated and got about 75% of the way through and decided to hold off on more until we got more units rented. We did go +1 on the count to 6 units rented.
Winter 2017/2018 - Here is where everything is starting to come together. We went +2 on the units rented to 8 total and as of this writing have 3 applications in for future renters. So things are starting to look up on the units rented total. Our goal is to get back on the 12th unit once we reach 10 units rented so that should happen soon. As of February 2018, all units are now paying their own Power, so check that item off the list. We did reduce rent somewhat to make up for the electricity being off our books but we should come out very positive on that change. Cable is still up in the air and may phase out as we loose all the original renters but that's a drop in the bucket compared to power. Cable averaged ~$35/unit where some units were using $200-$300/month (or more) in power.
Current status:
So to sum up kind of where we are overall:
-- 8 units of 12 rented.
-- 12th unit 75% done and almost ready to occupancy.
-- All scheduled repairs and updates completed.
-- All units are now unfurnished.
-- All power is moved off our master bill.
-- Only a few units left with us paying cable, but will slowly go away.
-- Land purchased and Storage unit in place.
What's left:
-- Finish unit #12 and get it ready for occupancy.
-- Get up to 12 units rented.
-- Refinance and pull all (or most) of our money back out).
Our new adjusted completion date is now Summer 2018. Here's hoping we can get it done! That will make it slightly over a year (~14-15 months) since purchase so in hindsight that's not a horrible timeline).
One final thing to note. We expect February 2018 to be a breakeven month (or thereabouts) so things are looking up!
MFR #2
So I'll have a series of posts here to update everyone on some things. So why has it been so long since I posted? The answer is somewhat simple. Since we decided to move on to MFRs only, "activity" tends to be a lot less. In 2017, we picked up 2 properties (more on that in later posts), whereas in previous years doing SFRs, we had done 5+ for a couple of years. There is more to the MFRs than the SFRs, but new activity is much less.
So in December 2016, we purchased MFR #2. To recap, this was a 3-plex that was in more disrepair than we're used to, so it was a little bit of a learning experience for us. We actually put more money into it than it cost to purchase. In April 2017, we finished our repairs and began to rent it out. It took a few months, but we got it fully rented. We dropped back to 2 of 3 units rented for about a month and have had all 3 units rented for a while now (as of February 2018).
The interesting thing about this project was our plan for it. Our plan was to buy it, fix it up, rent it out, then refinance and pull all of our money back out of it. A few months ago, we were able to complete just that. We successfully refinanced the property and pulled our purchase price and renovation costs back out of it. It was close and basically, we pulled the max out we could in order to accomplish this. So infinite returns on this one is now a reality. It's currently cash flowing positively and we have $0 in it.
It was definitely a long journey (~10 months) but we got it done.
So in December 2016, we purchased MFR #2. To recap, this was a 3-plex that was in more disrepair than we're used to, so it was a little bit of a learning experience for us. We actually put more money into it than it cost to purchase. In April 2017, we finished our repairs and began to rent it out. It took a few months, but we got it fully rented. We dropped back to 2 of 3 units rented for about a month and have had all 3 units rented for a while now (as of February 2018).
The interesting thing about this project was our plan for it. Our plan was to buy it, fix it up, rent it out, then refinance and pull all of our money back out of it. A few months ago, we were able to complete just that. We successfully refinanced the property and pulled our purchase price and renovation costs back out of it. It was close and basically, we pulled the max out we could in order to accomplish this. So infinite returns on this one is now a reality. It's currently cash flowing positively and we have $0 in it.
It was definitely a long journey (~10 months) but we got it done.
Friday, March 17, 2017
Updates on Multi-Family #2 and #3
First, I'll start off by giving an update on Multi-Family property #2. I know it's been a few months since I've posted so I'll sum it up.
We purchased MFR #2 in December 2016 and just finished renovations. We had a goal of $25k in Renovations and $35k as a budget. Well, that didn't work out. In the end, we were just shy of $50k in renovation costs. As we got into it, we found a lot of things that you just can't see until you get into it. We found roof problems, old pipes that had to be replaced, and a leak we found only after we got everything done and turned the water on. It destroyed some walls and we had to rip it all out and do it again after fixing the pipe that busted. However, all is well now and we are looking for renters.
There is some good news. While we are going to have to borrow a little more than anticipated to get our money back out of it (100% of it), we will be able to finance enough to pull all of our money out and be in it for $0. When we ran the numbers initially, we used conservative numbers. The good news is the rents are going to be $400/month more than we anticipated. We have 1 of the 3 units rented already and the other 2 have applicants. We should have full capacity here shortly. Our expenses are also slightly less (although not much) than we anticipated, plus we don't foresee many (if any) maintenance costs since almost everything is brand new. Even though we factor the normal maintenance into our numbers, it *should* be much less as time goes on. The short of it is we have a 3-unit MFR that we have $0 left in that will cash flow us conservatively about $700/month. Not bad. The level of effort was about what we expected along the way so no big surprises there for our first BRRRR property. If anything changes or even if it doesn't, I may post more on this one later.
Now on to MFR #3. We're in the early stages of it but it's a much larger property. It's a 12-unit apartment complex. There is a lot to it and I hope to have a post in a few months detailing our progress on that one. We're scheduled to close April 1st (give or take a few days). We got it for a pretty good deal. There is a lot of work to be done on this one. Not necessarily $ or renovation wise. We are expecting $25-$30k in renovations. It's 90% cosmetic so we don't expect many unexpected complications. With that being said, we've set a budget of $50k to be safe AND we have some capital above and beyond that just in case. Running our conservative numbers, we are expecting quite a large return. In fact, we've already got our insurance quote back and it's $3,500/year LESS than we were expecting. So right off the bat, we're looking at $300/month more than projected. I'm sure along the way we'll find something that will cancel that out, but even if we come it at our conservative projections, we should be in great shape.
Just to give an idea of the things we have planned:
-- 5 of the 12 units are rented so it's some cash flow up front. About $1000/month in the hole.
-- Our first real goal is to get units 6-11 ready to rent. It shouldn't take much. It's all cosmetic so we should be ready to start renting those a month or 2 after we have it.
-- Unit 12 is currently being used as a storage unit, so our next goal is to get unit 12 ready to rent.
-- Along the way, there is some outside and common area items to take care of (again, all cosmetic). This will happen in tandem with getting the other units ready
-- The current owner has some furnished units and we don't plan on doing furnished so we'll be converting those to unfurnished before we rent. Also, a couple of renters rent furnished apartments, so we'll take care of those as tenants switch over.
-- The current owner is currently paying all utilities. Water will remain ours, but all the other utilities we will put on the tenants. As leases expire we'll convert and for unrented units, we'll rent them with the responsibility on the tenant. Everything is already metered separately so there is nothing to do but let the tenants know it's their responsibility.
-- We need to add some outdoor lighting and gravel over a small lot we plan on purchasing so parking is adequate.
So as you can see, we have our work cut out for us. I'm sure there will be several items not mentioned we will have to take care of along the way as well. Now that #2 is completely done, we're ready for #3 to start. We are eyeing a couple of other projects but it's VERY early in those stages and we don't plan on making any more moves until we feel we have #3 well underway and under control. Nothing worth writing about yet. We're excited about #3 and getting that up to it's potential. We've given ourselves until Jan 2018 to get it all done which we feel is VERY conservative. Hopefully, we're much faster than that but until we get into it, the timeline is all speculation at this point.
Stay tuned. There should be more to write about in the near future.
We purchased MFR #2 in December 2016 and just finished renovations. We had a goal of $25k in Renovations and $35k as a budget. Well, that didn't work out. In the end, we were just shy of $50k in renovation costs. As we got into it, we found a lot of things that you just can't see until you get into it. We found roof problems, old pipes that had to be replaced, and a leak we found only after we got everything done and turned the water on. It destroyed some walls and we had to rip it all out and do it again after fixing the pipe that busted. However, all is well now and we are looking for renters.
There is some good news. While we are going to have to borrow a little more than anticipated to get our money back out of it (100% of it), we will be able to finance enough to pull all of our money out and be in it for $0. When we ran the numbers initially, we used conservative numbers. The good news is the rents are going to be $400/month more than we anticipated. We have 1 of the 3 units rented already and the other 2 have applicants. We should have full capacity here shortly. Our expenses are also slightly less (although not much) than we anticipated, plus we don't foresee many (if any) maintenance costs since almost everything is brand new. Even though we factor the normal maintenance into our numbers, it *should* be much less as time goes on. The short of it is we have a 3-unit MFR that we have $0 left in that will cash flow us conservatively about $700/month. Not bad. The level of effort was about what we expected along the way so no big surprises there for our first BRRRR property. If anything changes or even if it doesn't, I may post more on this one later.
Now on to MFR #3. We're in the early stages of it but it's a much larger property. It's a 12-unit apartment complex. There is a lot to it and I hope to have a post in a few months detailing our progress on that one. We're scheduled to close April 1st (give or take a few days). We got it for a pretty good deal. There is a lot of work to be done on this one. Not necessarily $ or renovation wise. We are expecting $25-$30k in renovations. It's 90% cosmetic so we don't expect many unexpected complications. With that being said, we've set a budget of $50k to be safe AND we have some capital above and beyond that just in case. Running our conservative numbers, we are expecting quite a large return. In fact, we've already got our insurance quote back and it's $3,500/year LESS than we were expecting. So right off the bat, we're looking at $300/month more than projected. I'm sure along the way we'll find something that will cancel that out, but even if we come it at our conservative projections, we should be in great shape.
Just to give an idea of the things we have planned:
-- 5 of the 12 units are rented so it's some cash flow up front. About $1000/month in the hole.
-- Our first real goal is to get units 6-11 ready to rent. It shouldn't take much. It's all cosmetic so we should be ready to start renting those a month or 2 after we have it.
-- Unit 12 is currently being used as a storage unit, so our next goal is to get unit 12 ready to rent.
-- Along the way, there is some outside and common area items to take care of (again, all cosmetic). This will happen in tandem with getting the other units ready
-- The current owner has some furnished units and we don't plan on doing furnished so we'll be converting those to unfurnished before we rent. Also, a couple of renters rent furnished apartments, so we'll take care of those as tenants switch over.
-- The current owner is currently paying all utilities. Water will remain ours, but all the other utilities we will put on the tenants. As leases expire we'll convert and for unrented units, we'll rent them with the responsibility on the tenant. Everything is already metered separately so there is nothing to do but let the tenants know it's their responsibility.
-- We need to add some outdoor lighting and gravel over a small lot we plan on purchasing so parking is adequate.
So as you can see, we have our work cut out for us. I'm sure there will be several items not mentioned we will have to take care of along the way as well. Now that #2 is completely done, we're ready for #3 to start. We are eyeing a couple of other projects but it's VERY early in those stages and we don't plan on making any more moves until we feel we have #3 well underway and under control. Nothing worth writing about yet. We're excited about #3 and getting that up to it's potential. We've given ourselves until Jan 2018 to get it all done which we feel is VERY conservative. Hopefully, we're much faster than that but until we get into it, the timeline is all speculation at this point.
Stay tuned. There should be more to write about in the near future.
Sunday, December 4, 2016
Second Multifamily Purchased
So last Wednesday we closed on our second multifamily property. It's a 3-unit vacant property in need of some work. We bought for a great deal as it was a bank owned property. We are putting some money into it to renovate and produce maximum rent. While we've done similar things before, this is our first real BRRRR as they call it. Our goal is to renovate one of the units and get it rented immediately while we focus on the other 2 units. The top 2 units are accessed differently than the bottom one so it should be easy to renovate the top 2 without much (if any) disturbance to the tenant on the bottom unit.
We recently partnered with another individual and are doing this entire project with all cash. The goal once all 3 units are rented is to refinance with the bank, pull all the money out that we put into it, and create an "infinite return" scenario since we'll have no money into it. It should be a fun project that creates cash flow for life without having to keep any money in it after the renovation.
I'll post again once we've refinanced and let everyone know how the project went. We're looking forward to doing many more just like this. Now, to find more of them!
We recently partnered with another individual and are doing this entire project with all cash. The goal once all 3 units are rented is to refinance with the bank, pull all the money out that we put into it, and create an "infinite return" scenario since we'll have no money into it. It should be a fun project that creates cash flow for life without having to keep any money in it after the renovation.
I'll post again once we've refinanced and let everyone know how the project went. We're looking forward to doing many more just like this. Now, to find more of them!
Saturday, October 22, 2016
A Revelation - Kind of....
So our most recent purchase was our 5-unit apartment complex. Yes, it had a couple of hiccups but it's gone further in making me realize that MFR's are the way to go. But make no mistake, the learning we obtained while doing SFR's has been invaluable and we would not be where we are today without having gone through it. It has allowed us to take chances, risks, and learn in a way we wouldn't have felt comfortable doing with bigger properties.
The SFR's that we've been dealing with have been sub-$100k purchases. All things considered, we weren't really risking a lot there. With the first few, our worst case was we had to float them personally. With 3 of us, it would have been pretty easy to handle them not being rented. As time moved on we had more money in the bank, other properties to help carry others that weren't being rented, etc. We then figured out that the more of these we had, the less risk we seemed to take on. When we got to 13 SFR's we realized that we were pretty well protected from complete disaster and the risk was about as low as it could possibly be.
So what do you do when the risk you have is way below your tolerance level? You raise your risk of course back up near your tolerance level. How? Well, we decide to try our hand with a small apartment. We purchased a 5-unit apartment complex which was over double the most expensive SFR we had ever bought. We were raising our risk level back up a little bit. I still don't believe we've come anywhere near our tolerance level yet. 3 years ago, a 30-50 unit apartment complex would have scared the %$#& out of us. Now, I could see us more than doubling our unit count in our next purchase. Will we? Maybe. maybe not. We would only do that if the deal was right. No matter the risk level we have, we will never buy something that we don't deem a good deal. If I ran across another SFR I could buy for $30k that I could rent out for $750/month, you better believe I'd do it.
So now, more and more every day, our attention is turning toward apartment buildings. Our comfort level with risk has been raised to apartment complex's without fancy amenities. A 50-unit complex that is just a few buildings at most and no real amenities (maybe there is a coke machine and a laundry room or something) is within our tolerance level for risk at this point. It may mean we partner with someone to make a purchase like that, but the point is we feel comfortable with a purchase of that size now. After a couple of those, perhaps we will feel comfortable with an apartment community. Think 100+ units where you have on-site dedicated staff, amenities like a pool, tennis courts, main building with common areas, etc. Right now, that type of property exceeds our tolerance level for risk, but 2-3 years from now, maybe not. Our acceptance for risk certainly seems to change often based on the properties we purchase.
With that being said we are now looking for our next MFR. Are we done with SFR's? Maybe, maybe not. If we are able to start purchasing apartments anywhere near as easily as we have SFR's, I believe so, otherwise I hate letting too much cash sit unused. We may need to fill some gaps between purchases and that's an easy way to do it. Hopefully over the next 6-12 months, I'm blogging about our 30-50 unit apartment complex that we've purchased. Stay tuned, it could get interesting! In the meantime, I should have plenty of other posts to keep you entertained :)
The SFR's that we've been dealing with have been sub-$100k purchases. All things considered, we weren't really risking a lot there. With the first few, our worst case was we had to float them personally. With 3 of us, it would have been pretty easy to handle them not being rented. As time moved on we had more money in the bank, other properties to help carry others that weren't being rented, etc. We then figured out that the more of these we had, the less risk we seemed to take on. When we got to 13 SFR's we realized that we were pretty well protected from complete disaster and the risk was about as low as it could possibly be.
So what do you do when the risk you have is way below your tolerance level? You raise your risk of course back up near your tolerance level. How? Well, we decide to try our hand with a small apartment. We purchased a 5-unit apartment complex which was over double the most expensive SFR we had ever bought. We were raising our risk level back up a little bit. I still don't believe we've come anywhere near our tolerance level yet. 3 years ago, a 30-50 unit apartment complex would have scared the %$#& out of us. Now, I could see us more than doubling our unit count in our next purchase. Will we? Maybe. maybe not. We would only do that if the deal was right. No matter the risk level we have, we will never buy something that we don't deem a good deal. If I ran across another SFR I could buy for $30k that I could rent out for $750/month, you better believe I'd do it.
So now, more and more every day, our attention is turning toward apartment buildings. Our comfort level with risk has been raised to apartment complex's without fancy amenities. A 50-unit complex that is just a few buildings at most and no real amenities (maybe there is a coke machine and a laundry room or something) is within our tolerance level for risk at this point. It may mean we partner with someone to make a purchase like that, but the point is we feel comfortable with a purchase of that size now. After a couple of those, perhaps we will feel comfortable with an apartment community. Think 100+ units where you have on-site dedicated staff, amenities like a pool, tennis courts, main building with common areas, etc. Right now, that type of property exceeds our tolerance level for risk, but 2-3 years from now, maybe not. Our acceptance for risk certainly seems to change often based on the properties we purchase.
With that being said we are now looking for our next MFR. Are we done with SFR's? Maybe, maybe not. If we are able to start purchasing apartments anywhere near as easily as we have SFR's, I believe so, otherwise I hate letting too much cash sit unused. We may need to fill some gaps between purchases and that's an easy way to do it. Hopefully over the next 6-12 months, I'm blogging about our 30-50 unit apartment complex that we've purchased. Stay tuned, it could get interesting! In the meantime, I should have plenty of other posts to keep you entertained :)
Wednesday, September 14, 2016
When It Rains, It Pours!
So far in the years I've been writing this blog, it's been 95% positive. Sure there have been some unexpected expenses, 1 almost eviction, and a couple of deals we didn't move forward on, but it's all been what I'd consider normal. This post will be long but probably one of the more important ones I've written. It will help to keep you grounded on your real estate journey plus go to show you how preparation is so key! We were prepared for what you're about to read but that doesn't make it any less disheartening. So without further ado, here is basically what has happened in the last ~45 days.
Let's start first with what was going to be our 3 newest properties. This would have taken us to 21, but alas we are still at 18. Not too shabby though being at 18 units after just 6 years. Our first 2 properties that we will discuss were through our turnkey firm that we've purchased 3 previous properties with. We offered on the 2 properties an amount that based on our calculations was the correct amount based on the rental income. The properties were actually rented for the amount promised. However, we had an appraisal that was $16k less on one and *$36k* less on the other. You read that right. These are sub-$100k properties as well. Appraisals on SFR's aren't done on the income approach. They are on the comparable approach. The mistake we made was we ordered the inspections before the appraisals came in. We had success in the past so we could argue we had our basis covered. The bank we used had also had some issues with flipped properties being returned to them via foreclosure. So instead of going with an in-house evaluation, they decided to stand by the appraisal even though it was an appraiser has consistently been incompetent. I say that because 2 years ago the bank threw out an appraisal from this person because it was so low and did an in-house evaluation which allowed us to close that deal. They would not do that for these 2 and we were stuck. We had to foot the bill for the appraisal and the inspection ($650 each) and we had to back out. We could have at least save $250 by not ordering the inspection. Lesson learned.
The 3rd property was an REO at the bank where we made an offer based on the numbers and it was accepted. The offer was a good 35% below market value. Having learned our lesson on the previous 2, we went by the property before going under contract and we found a tree laying on the house, mattresses in the backyard and a tenant telling us the hallway had flooded 6 months ago. There was all kinds of damage in this house and the tenant was just rattling off all the stuff that needed to be fixed. This was a pretty easy decision and we walked away. So inside of 10 days we walked away from 3 deals (2 of which was under contract). Fortunately, this one didn't cost us anything to walk away from.
Next, let's talk about the apartment we just purchased and what happened. It turns out that one of the units was basically destroyed upon move out. Holes in the walls, destroyed carpet, you name it, it happened. What it boils down to is ~$6k in unexpected repairs and cleanup. We are going after the tenant for the money and if anything comes of that, I'll be sure to let you know.
Now, let's talk about the bevy of unexpected expenses. Below is a list of unexpected expenses that occurred across our properties in the past ~45 days that resulted in about $4k more on top of the already $6k from the apartment unit:
-- *2* Hot Water heaters went out
-- An AC unit went out
-- Flooring needed to be replaced (just old)
-- Other Misc Expenses.
Maybe we've been lucky, but these 2 hot water heaters are the first in 6 years and the AC unit was the first in 6 years as well.
We also just received word that a tenant filed bankruptcy so there is that to attend to. Perhaps I'll write a post about that when it's all said and done and it's our first one.
WHEN IT RAINS IT POURS!
So there is a brief synopsis of the last 45 days. 3 properties that we walked away from, $10k in unexpected (more than normal) expenses, and a tenant in bankruptcy. Merry Christmas! :)
Let's start first with what was going to be our 3 newest properties. This would have taken us to 21, but alas we are still at 18. Not too shabby though being at 18 units after just 6 years. Our first 2 properties that we will discuss were through our turnkey firm that we've purchased 3 previous properties with. We offered on the 2 properties an amount that based on our calculations was the correct amount based on the rental income. The properties were actually rented for the amount promised. However, we had an appraisal that was $16k less on one and *$36k* less on the other. You read that right. These are sub-$100k properties as well. Appraisals on SFR's aren't done on the income approach. They are on the comparable approach. The mistake we made was we ordered the inspections before the appraisals came in. We had success in the past so we could argue we had our basis covered. The bank we used had also had some issues with flipped properties being returned to them via foreclosure. So instead of going with an in-house evaluation, they decided to stand by the appraisal even though it was an appraiser has consistently been incompetent. I say that because 2 years ago the bank threw out an appraisal from this person because it was so low and did an in-house evaluation which allowed us to close that deal. They would not do that for these 2 and we were stuck. We had to foot the bill for the appraisal and the inspection ($650 each) and we had to back out. We could have at least save $250 by not ordering the inspection. Lesson learned.
The 3rd property was an REO at the bank where we made an offer based on the numbers and it was accepted. The offer was a good 35% below market value. Having learned our lesson on the previous 2, we went by the property before going under contract and we found a tree laying on the house, mattresses in the backyard and a tenant telling us the hallway had flooded 6 months ago. There was all kinds of damage in this house and the tenant was just rattling off all the stuff that needed to be fixed. This was a pretty easy decision and we walked away. So inside of 10 days we walked away from 3 deals (2 of which was under contract). Fortunately, this one didn't cost us anything to walk away from.
Next, let's talk about the apartment we just purchased and what happened. It turns out that one of the units was basically destroyed upon move out. Holes in the walls, destroyed carpet, you name it, it happened. What it boils down to is ~$6k in unexpected repairs and cleanup. We are going after the tenant for the money and if anything comes of that, I'll be sure to let you know.
Now, let's talk about the bevy of unexpected expenses. Below is a list of unexpected expenses that occurred across our properties in the past ~45 days that resulted in about $4k more on top of the already $6k from the apartment unit:
-- *2* Hot Water heaters went out
-- An AC unit went out
-- Flooring needed to be replaced (just old)
-- Other Misc Expenses.
Maybe we've been lucky, but these 2 hot water heaters are the first in 6 years and the AC unit was the first in 6 years as well.
We also just received word that a tenant filed bankruptcy so there is that to attend to. Perhaps I'll write a post about that when it's all said and done and it's our first one.
WHEN IT RAINS IT POURS!
So there is a brief synopsis of the last 45 days. 3 properties that we walked away from, $10k in unexpected (more than normal) expenses, and a tenant in bankruptcy. Merry Christmas! :)
Wednesday, July 13, 2016
Our First Multi-Family (Commercial) Property!
So we are closing on our first Multi-Family tomorrow which means there could be potentially an edit to this post :). It is our first multi-family and more importantly our first commercial property. Yes, 5+ units are commercial properties, not residential properties and therefore a 4-unit and a 5+-unit are very different.
There were some lessons learned along the way that I'd like to share. Fortunately, none of them were huge, but all important nonetheless.
-- Insurance: It will be a little higher than you expect. If you think a $100k SFR that insures for $500/year means your 5-plex that you buy for $200k will be $1,000/year, think again. It would seem to make sense, but underwriting on a commercial property is much different and the insurance can vary widely. There are minimums per Sq foot, more underwriting, and different timelines. The advice here is don't guess (or be extremely conservative, like double what you think it will be for your analysis). Also turn around for a policy could take longer (weeks) whereas an SFR policy could be written in days or less.
-- Closing: It will take longer than those SFR's and most likely because it's commercial, it has to go through different approval channels. Which means you get in line to go through a committee or maybe a couple of people (one of whom might be on vacation, etc). So plan for an extra few weeks to be safe. Closing costs on a $200k SFR and a $200k MFR could vary widely as well depending on a multitude of factors. Check with the bank for an estimate.
-- Additional expenses: There are things you will need to pay for (water, lawn care, etc) with a commercial property that tenants pay for in an SFR rental. This varies widely as well depending on the setup, so do your research and put those costs in accordingly to your analysis.
-- Inspections: Depending on the state/local laws there may be additional inspections (no to mention that inspection will cost more than an SFR) that you need to get when ownership changes hands. Do your research.
There may be more to add to this post over the coming days, but I just wanted to get some lessons out there (Those are in no way all inclusive, just items we experienced) while they were fresh.
Sunday, June 5, 2016
Revisiting the purpose of this blog
With 50 posts on this blog and a few years under my belt I figured it's time to revisit the purpose of this blog as I'm sure many folks aren't going back to the beginning to read it. We (My Dad, Brother, and I) bought our first property in 2010. Throughout my real estate journey, I've read many books, forum posts, articles, etc on real estate. Almost all of them were from people who were established investors (did it full time). I have a full time job outside of real estate and just do it in my spare time. What I failed to find was someone just like me who was going down the investing road and experiencing the same things I was. So in 2013, when I had ~5 properties, I decided to be that person for others. I'm what you'd consider an "Average Joe". I'm married, have a couple of kids, both myself and my wife work full time W-2 jobs. I did not come from money. I do well for myself but like most folks, I graduated college with student loan debt and no money. I scored a good job and would have been considered middle class when I first started my real estate journey. It took us 2 years to save enough to buy our first property (a sub-$100k SFR). The point of being that detailed is I want everyone to understand I didn't come from any money. I didn't grow up "poor" either but I earned everything I have in my life just like the majority of folks will have to do.
We've all read about how "easy" it is to invest in real estate. There are those out there who preach no/low money down, buying a $1M+ property as your first property, etc etc. But let's be honest, while all of what you read *IS* possible and some have done it with great success, that's just not reality for most people and it wasn't my reality. I'd love to create a snapchat, facebook, myspace, etc and make billions in just a few years but I'm also a realist (a very optimistic one). I love dreaming big and do so every day. I don't make all or nothing decisions when it comes to my money, but I'm not a tightwad either. I'm right in the middle. I'm also not a best selling author (maybe one day), nor have I written a book or anything outside of forum posts and this blog. I'm not a "guru". I didn't even have a mentor for real estate. I don't endorse anything (maybe one day) and I'm not paid anything by anyone for what I do in real estate (again, one day that's the goal, I do dream big remember?)
So if you haven't gathered by now, the whole purpose of this blog is to show the average person's journey with real estate so that those folks who are starting out, doing it on the side, and that only own a few properties (or 1 or none, etc) can at least have somewhere to go to see someone just like them. If you aren't into real estate, I'm sure this blog is boring, but hopefully someone somewhere will get something out of it. And also, I do keep this for myself as well. It's also a record of my journey that I can reflect back on as well. I just happened to make it public for others to see as well.
The last piece of all this is that since this blog is public, you won't often see personal details, company names, individuals names, or specific details in this blog. So if you see anything that is vague or not very detailed, don't think I'm leaving anything out that is crucial to the situation, I'm just leaving those personal details out. If there is something you want to know more about, just leave a comment and I can elaborate more if you feel I don't cover something in the detail you wanted. I also don't have all the time in the world to just write, so sometimes posts are just shorter because I'm short on time. No one pays me to do this :)
I hope you enjoy the blog and feel free to let me know if you have any questions.
We've all read about how "easy" it is to invest in real estate. There are those out there who preach no/low money down, buying a $1M+ property as your first property, etc etc. But let's be honest, while all of what you read *IS* possible and some have done it with great success, that's just not reality for most people and it wasn't my reality. I'd love to create a snapchat, facebook, myspace, etc and make billions in just a few years but I'm also a realist (a very optimistic one). I love dreaming big and do so every day. I don't make all or nothing decisions when it comes to my money, but I'm not a tightwad either. I'm right in the middle. I'm also not a best selling author (maybe one day), nor have I written a book or anything outside of forum posts and this blog. I'm not a "guru". I didn't even have a mentor for real estate. I don't endorse anything (maybe one day) and I'm not paid anything by anyone for what I do in real estate (again, one day that's the goal, I do dream big remember?)
So if you haven't gathered by now, the whole purpose of this blog is to show the average person's journey with real estate so that those folks who are starting out, doing it on the side, and that only own a few properties (or 1 or none, etc) can at least have somewhere to go to see someone just like them. If you aren't into real estate, I'm sure this blog is boring, but hopefully someone somewhere will get something out of it. And also, I do keep this for myself as well. It's also a record of my journey that I can reflect back on as well. I just happened to make it public for others to see as well.
The last piece of all this is that since this blog is public, you won't often see personal details, company names, individuals names, or specific details in this blog. So if you see anything that is vague or not very detailed, don't think I'm leaving anything out that is crucial to the situation, I'm just leaving those personal details out. If there is something you want to know more about, just leave a comment and I can elaborate more if you feel I don't cover something in the detail you wanted. I also don't have all the time in the world to just write, so sometimes posts are just shorter because I'm short on time. No one pays me to do this :)
I hope you enjoy the blog and feel free to let me know if you have any questions.
Our First Multi Family Property!
I find it funny that our first multi family property comes in my 50th post. It seems significant. Our goal when we first started investing has always been to get here at some point. In fact, our long term goals take us even farther than that (overseas investing as well as large building investing), but let's not get ahead of ourselves :). The property itself is a true commercial property, but barely. It's a 5-unit apartment complex. I always figured our first MFR would be a "plex" of some kind (4 units or less), but we'll take this.
We've been open to and somewhat actively looking for a multifamily property in the areas we invest in. We've been letting folks know that we're interested, checking our loopnet occasionally, and other looking. I think it's funny that the way we found this property was using the last method I thought we would find it through. Our bank sends us their REO list every month. I've always sorted through it and narrowed it down to SFR's in the price range we want. I never thought to look at the commercial section. I had missed it entirely. My Dad was actually the one who spotted a couple of apartments on the list. He reached out to me and asked to do a quick analysis on the property. I did our "5 minute check" on it and the numbers looked pretty good by themselves. On top of that, we discovered that the rents are about 20% below market and need to be raised. I'm a big advocate of never analyzing based on anything pro forma. However, with rents where they are, it's still a good deal. With rents where they are supposed to be, it's a phenomenal deal. If it was a case where it was a bad deal with current rents and just a good deal at market rate, there is no telling what we would have done. But long story short, it passed the quick test and was destined for further analysis.
We reached out to the bank to get all the financials (last 2 years) and did as good an inspection as we could to make sure there were no major repairs needed or deferred maintenance. So far so good. We put in an offer which was basically accepted (we went up 1% on our initial offer by the time it was all said and done) and we are now under contract. Believe it or not, we purchased it for a little less than the appraisal 3 years ago. The NOI is higher now than it was then so we know we're getting a good deal. The bank is even doing an evaluation as opposed to an appraisal which saves us money. Keep in mind, the bank owns it and has an appraisal from 3 years ago that is above the purchase price, so it's a win all around. We are currently in the process of sending our property inspector out there for the full inspection. Further negotiations may ensue after that, but we don't think anything major will result.
So there is some discussion to be had around moving from SFR's to a 5-unit apartment complex. This is new territory for us so I'm sure there will be some lessons that come of it but hopefully they will be minor. If there are, I'm sure they will find there way here in future posts. So far in our investing, we've had no "huge" lessons that I would consider detrimental or extreme setbacks. I do think that comes from educating ourselves. When it comes to apartment complexes, I've read lots of books, articles, blog posts, forum posts, etc on the topic. I've also had conversations in my investor's group around them as well as spoke to people who own them. I've listened to podcasts and such along the way too. BY NO MEANS, do I consider myself an expert. However, I do feel that I've educated myself enough to jump in. Enough is the key word. I could do more, but I'm at the point where I think further education is no longer necessary and I'm ready to jump in. Do I feel educated enough to buy a 220-unit? Hell no. But a 12-unit or less, yes, I believe I'm ready.
We've all heard the term analysis paralysis. We've all heard about people buying a 20-unit as their first property ever. We've also seen people talk for 10 years about doing something and they never do. Their is no black and white line here. We've gotten to the point where we think we've learned enough to jump in and experience first hand. The other key point is we're also buying in a price range we are comfortable with. We're only spending about the equivalent of 2 or 3 SFR's (depending on which SFR's you use). So again, it's not a purchase that equal's our entire portfolio. We've educated ourselves to the point where we felt ready for a purchase anywhere in the neighborhood of $150k - $350k. Even if we learn some hard lessons, in that range we've minimized the risk of a detrimental situation to our business.
We're still in the early stages and probably ~30 days out from close but we're excited and I wanted to post about it sooner rather than later. If anything interesting comes of it I'm sure I'll post more.
And yes, this brings our total # of units to *20* which is super exciting by itself.
We've been open to and somewhat actively looking for a multifamily property in the areas we invest in. We've been letting folks know that we're interested, checking our loopnet occasionally, and other looking. I think it's funny that the way we found this property was using the last method I thought we would find it through. Our bank sends us their REO list every month. I've always sorted through it and narrowed it down to SFR's in the price range we want. I never thought to look at the commercial section. I had missed it entirely. My Dad was actually the one who spotted a couple of apartments on the list. He reached out to me and asked to do a quick analysis on the property. I did our "5 minute check" on it and the numbers looked pretty good by themselves. On top of that, we discovered that the rents are about 20% below market and need to be raised. I'm a big advocate of never analyzing based on anything pro forma. However, with rents where they are, it's still a good deal. With rents where they are supposed to be, it's a phenomenal deal. If it was a case where it was a bad deal with current rents and just a good deal at market rate, there is no telling what we would have done. But long story short, it passed the quick test and was destined for further analysis.
We reached out to the bank to get all the financials (last 2 years) and did as good an inspection as we could to make sure there were no major repairs needed or deferred maintenance. So far so good. We put in an offer which was basically accepted (we went up 1% on our initial offer by the time it was all said and done) and we are now under contract. Believe it or not, we purchased it for a little less than the appraisal 3 years ago. The NOI is higher now than it was then so we know we're getting a good deal. The bank is even doing an evaluation as opposed to an appraisal which saves us money. Keep in mind, the bank owns it and has an appraisal from 3 years ago that is above the purchase price, so it's a win all around. We are currently in the process of sending our property inspector out there for the full inspection. Further negotiations may ensue after that, but we don't think anything major will result.
So there is some discussion to be had around moving from SFR's to a 5-unit apartment complex. This is new territory for us so I'm sure there will be some lessons that come of it but hopefully they will be minor. If there are, I'm sure they will find there way here in future posts. So far in our investing, we've had no "huge" lessons that I would consider detrimental or extreme setbacks. I do think that comes from educating ourselves. When it comes to apartment complexes, I've read lots of books, articles, blog posts, forum posts, etc on the topic. I've also had conversations in my investor's group around them as well as spoke to people who own them. I've listened to podcasts and such along the way too. BY NO MEANS, do I consider myself an expert. However, I do feel that I've educated myself enough to jump in. Enough is the key word. I could do more, but I'm at the point where I think further education is no longer necessary and I'm ready to jump in. Do I feel educated enough to buy a 220-unit? Hell no. But a 12-unit or less, yes, I believe I'm ready.
We've all heard the term analysis paralysis. We've all heard about people buying a 20-unit as their first property ever. We've also seen people talk for 10 years about doing something and they never do. Their is no black and white line here. We've gotten to the point where we think we've learned enough to jump in and experience first hand. The other key point is we're also buying in a price range we are comfortable with. We're only spending about the equivalent of 2 or 3 SFR's (depending on which SFR's you use). So again, it's not a purchase that equal's our entire portfolio. We've educated ourselves to the point where we felt ready for a purchase anywhere in the neighborhood of $150k - $350k. Even if we learn some hard lessons, in that range we've minimized the risk of a detrimental situation to our business.
We're still in the early stages and probably ~30 days out from close but we're excited and I wanted to post about it sooner rather than later. If anything interesting comes of it I'm sure I'll post more.
And yes, this brings our total # of units to *20* which is super exciting by itself.
Property #14 and #15
So we haven't been buying a ton of properties lately and now that we have 13 of them (all rented), Cash is flowing in nicely and we can't seem to spend it as fast as we'd like. Sounds like a good problem to have, I know, and I'd agree. We never have stopped contributing monthly either so that helps as well. I recently reached out to our turnkey company in Memphis and said we were looking to buy some more property and to let us know what they can find. Fortunately, they had a couple they were about to buy. Because we've done business with them, we're going under contract before the renovations even start.
For those of you that scares, here is the kicker and where we keep risk low. In those contracts we have an inspection period AFTER the renovations are complete so we don't fully commit until we are at the point where we've seen the renovations and had it inspected properly by a property inspector that we use. The key lesson here (and this is a lesson I've never had to learn the hard way as I've read about others who have), no matter how comfortable you get with something or someone, always keep your risk mitigated. Yes, we are going under contract before they even start renovations. Yes, we sent earnest money in to hold it. *YES*, we are going to have all the normal items in the contract in regards to financing, inspection, etc. *YES*, we are going to close using the bank and have all the same insurance and checks that we would normally have to ensure our risk is as low as if we did it any other way.
So currently as I write this, we have these 2 properties with them under contract taking us to 15 total once they close. Exciting stuff!
For those of you that scares, here is the kicker and where we keep risk low. In those contracts we have an inspection period AFTER the renovations are complete so we don't fully commit until we are at the point where we've seen the renovations and had it inspected properly by a property inspector that we use. The key lesson here (and this is a lesson I've never had to learn the hard way as I've read about others who have), no matter how comfortable you get with something or someone, always keep your risk mitigated. Yes, we are going under contract before they even start renovations. Yes, we sent earnest money in to hold it. *YES*, we are going to have all the normal items in the contract in regards to financing, inspection, etc. *YES*, we are going to close using the bank and have all the same insurance and checks that we would normally have to ensure our risk is as low as if we did it any other way.
So currently as I write this, we have these 2 properties with them under contract taking us to 15 total once they close. Exciting stuff!
Saturday, April 9, 2016
Property #13
We've officially closed on property #13. This is our second owner financing deal but unlike the first one we did, this one is for a longer term. There is a 7-year balloon payment on this one but it could go longer if both parties decide to do it. I have a feeling if we did anything we'd be refinancing with a bank, pulling out some cash for more properties, and paying off the seller financed loan. There isn't anything really special about this one. It's part of the 6 property group we were looking at, but we only came out with this one due to the foundation issues at most of the other properties.
This property gets us closer to our first Million goal of "Own A Million". We're only 2-3 properties away from that goal and we're pretty excited about it. I can't imagine we won't hit that goal this year.
In case you were wondering, the other "Million" goals are:
-- Revenue a Million
-- Cash Flow a Million
-- Profit a Million
I have no idea when we'll reach either of those. I assume the next one is a few years out but the first one sure will be special.
This property gets us closer to our first Million goal of "Own A Million". We're only 2-3 properties away from that goal and we're pretty excited about it. I can't imagine we won't hit that goal this year.
In case you were wondering, the other "Million" goals are:
-- Revenue a Million
-- Cash Flow a Million
-- Profit a Million
I have no idea when we'll reach either of those. I assume the next one is a few years out but the first one sure will be special.
Saturday, March 5, 2016
Various Updates
There are some various updates I had mentioned before and just wanted to give some status:
- 2 refinances: 1 is complete and the other is underway. We're looking at a large chunk of cash coming from this one to help buy future properties. I probably won't bother posting about it other than this. To keep some level of privacy, I won't say exactly how much, but it's enough to purchase 2-3 more properties at our current level alone. Pretty exciting.
- Property #11 and #12: I posted about them in separate posts, so no need to mention them again.
- Property #13-#17/18: Turned into just property #13. We drove by the properties and noticed most of them had what looked like serious foundation issues (Huge cracks on multiple sides). He is going to have a really hard time selling them for more than about half of what he wants. As I've mentioned before, our model is more turnkey type investments. We don't want anything more than carpet, locks, paint, etc, type stuff ($1k-$2k tops). Dealing with any type of foundation work (even if we got a good enough deal) is just not in our interest right now. One of the locations was an SFR that we are purchasing. So instead of a possible 6, it's just 1 out of this lot.
- Downed Tree: Again, pretty uneventful like we like it. the neighbor offered to split the tree removal (even though he didn't have to), proving that good people are out there. Cleanup and repair was only ~$500, so we dodged a bullet with that one. We have insurance of course, but who wants to deal with that whole process? If that tree would have fallen a few feet further to one side, we would have had a duplex (and not the good kind) :)
- Foundation Issue: Still an open issue that I'll post more about later. Still unsure if it's a big or little item.
Property #12
So we recently went under contract on Property #12. It's another turn key property in Memphis. Having done 2 of these already the comfort level is there. We went under contract and have completed inspection. The appraisal cam back above what we offered so that's always good.
We closed recently on this property and they actually had found a renter BEFORE we closed. So we're now at 12 properties with them ALL rented. Still at 100% capacity which blows my mind. The first turnkey we bought they had it rented within ~30 days of closing. The second one was rented within 3 days of closing. The third one (this one) was rented prior to closing. This turnkey thing just keeps looking better and better.
Sorry for the short post, but these turnkey properties just seem so uneventful. Doesn't make for very interesting reading, but when your on the investing side, uneventful is a beautiful thing :)
We closed recently on this property and they actually had found a renter BEFORE we closed. So we're now at 12 properties with them ALL rented. Still at 100% capacity which blows my mind. The first turnkey we bought they had it rented within ~30 days of closing. The second one was rented within 3 days of closing. The third one (this one) was rented prior to closing. This turnkey thing just keeps looking better and better.
Sorry for the short post, but these turnkey properties just seem so uneventful. Doesn't make for very interesting reading, but when your on the investing side, uneventful is a beautiful thing :)
Sunday, January 17, 2016
Property #11
After an ~8 month real estate drought, we finally found property #11.
It all started by getting an e-mail from the REO department at the bank. I sorted through it and saw 3 properties that met our criteria (first glance). A little digging and only 1 remained. When we inquired with the bank, we found out it was already rented out (same person that was renting it when they foreclosed on it a few years back). We've already got 3 REO's in the same manner that were already rented so this process is very comfortable for us. The interesting thing is that the current renter is paying about $250-$300 below market rent. The full disclosure here is that to get market rent we have to do a little work inside. However we can easily get $200/month more.
Upon closing, our plan is to raise the rent to an amount we can easily get if the renter decides to move out. We plan to have the PM raise the rent between $100-$150 next month and sign a new 1-year lease. If the renter moves out, that's fine, our PM is confident they can rent it out quickly for that amount. It's hard to say the plan beyond that as the property is pretty profitable at that level and if we raised it to true market rent, we're 99% sure they'd move out and the time vacant plus losing the first month's rent to the new would be a lot less than our current plan.
After the 1st year, we will most likely have a significant raise in rent to get it at or close to true market rent. If the renter moves out at that point, we're prepared for it and have already gotten all our money back plus some, so a little vacancy won't hurt us too much. The renter situation could prove to be an interesting story at some point and if it becomes interesting beyond what I've posted here, I'll be sure to write about it.
UPDATE (3/5/16):
Another uneventful situation. We asked the PM to raise the rent by $150/month. She gave more than 30 days notice to the tenant for a rent increase starting 3/1/16. The tenant excepted the rent increase and signed a new 1-year lease. A few weeks went by before the tenant let the PM know he accepted and signed the lease. My guess is the tenant looked for a similar property at the same rent he was paying and realized he couldn't even find a similar property at the level we were raising it to. He had been paying the same rent for almost 6 years with no increases and even back then he was getting a great deal. Once the year lease is up, we'll increase at least another $50, perhaps more depending on where the market is. If we put about $2,000 into it, we could get another ~$150/more than we're charging, but with a new tenant and the PM taking the first month's rent and potentially a month or two of vacancy, even if we got $150/more, with vacancy, PM fee, and $2k (maybe more) rehab costs, it would be years before we broke even based on what we're getting now. I just thought I'd laid that out there if people are thinking why I didn't just raise it all the way to market, let the tenant move out, do the rehab and get full market rent. Instead of a potential ~$4k-5k with all I mentioned, we're going to cash flow $2.5k this year on it. It's a no brainer :)
It all started by getting an e-mail from the REO department at the bank. I sorted through it and saw 3 properties that met our criteria (first glance). A little digging and only 1 remained. When we inquired with the bank, we found out it was already rented out (same person that was renting it when they foreclosed on it a few years back). We've already got 3 REO's in the same manner that were already rented so this process is very comfortable for us. The interesting thing is that the current renter is paying about $250-$300 below market rent. The full disclosure here is that to get market rent we have to do a little work inside. However we can easily get $200/month more.
Upon closing, our plan is to raise the rent to an amount we can easily get if the renter decides to move out. We plan to have the PM raise the rent between $100-$150 next month and sign a new 1-year lease. If the renter moves out, that's fine, our PM is confident they can rent it out quickly for that amount. It's hard to say the plan beyond that as the property is pretty profitable at that level and if we raised it to true market rent, we're 99% sure they'd move out and the time vacant plus losing the first month's rent to the new would be a lot less than our current plan.
After the 1st year, we will most likely have a significant raise in rent to get it at or close to true market rent. If the renter moves out at that point, we're prepared for it and have already gotten all our money back plus some, so a little vacancy won't hurt us too much. The renter situation could prove to be an interesting story at some point and if it becomes interesting beyond what I've posted here, I'll be sure to write about it.
UPDATE (3/5/16):
Another uneventful situation. We asked the PM to raise the rent by $150/month. She gave more than 30 days notice to the tenant for a rent increase starting 3/1/16. The tenant excepted the rent increase and signed a new 1-year lease. A few weeks went by before the tenant let the PM know he accepted and signed the lease. My guess is the tenant looked for a similar property at the same rent he was paying and realized he couldn't even find a similar property at the level we were raising it to. He had been paying the same rent for almost 6 years with no increases and even back then he was getting a great deal. Once the year lease is up, we'll increase at least another $50, perhaps more depending on where the market is. If we put about $2,000 into it, we could get another ~$150/more than we're charging, but with a new tenant and the PM taking the first month's rent and potentially a month or two of vacancy, even if we got $150/more, with vacancy, PM fee, and $2k (maybe more) rehab costs, it would be years before we broke even based on what we're getting now. I just thought I'd laid that out there if people are thinking why I didn't just raise it all the way to market, let the tenant move out, do the rehab and get full market rent. Instead of a potential ~$4k-5k with all I mentioned, we're going to cash flow $2.5k this year on it. It's a no brainer :)
Wednesday, December 2, 2015
Lots of Updates Coming!
It's been a pretty slow year. Not a lot happened except building up the bank account. We thought we were about to move into the holidays without much going on but then everything happened at once. I'll probably arrange them into single posts, but here is just a short list of the items we're embarking on in the next 30-90 days (The big range is only because I have no idea how long each one will take.
-- 2 Refinances
-- Property #11
-- Property #12
-- Property #13-17
On top of that, we have a foundation issue and a downed tree to deal with. It's going to be an interesting 3 month period dating from Nov - Feb. Lots more to come in the near future.
-- 2 Refinances
-- Property #11
-- Property #12
-- Property #13-17
On top of that, we have a foundation issue and a downed tree to deal with. It's going to be an interesting 3 month period dating from Nov - Feb. Lots more to come in the near future.
Tuesday, October 27, 2015
Acts of God
So one of our properties had a tree fall down very close to it. It was close enough that it looks to have done around $500 worth of damage. No major damage but 10 feet to the left and we might have had a duplex :)
Here is the interesting part. The tree that fell was from a neighbor's yard. Turns out that even though the tree was on his property, he's not liable for any of the damage or even the tree removal. All he is required to do is remove the tree off his property and leave whatever is on our property for us to deal with. Apparently it's an act of god (because it was weather related) and it doesn't matter where the tree was. The only exception is if it's obvious it was negligence by the neighbor, such as he cut the tree down or it was a perfectly sunny day and the tree just fell (the law says he should have known it would fall). But simply because some wind during a storm blew it down, it's no one's fault and everybody is responsible for their own property.
The only way we could have made the neighbor responsible is if we would have notified the neighbor that the tree was a concern. Even then from what I gather, we only have a 50/50 shot of sticking it on him.
Fortunately the neighbor is a nice guy and we think he's going to pay for the tree removal or at least half of it.
Now that we know this, we are aware of all the trees around us and if we see any that look dangerous, we now know to let the property owner know that the tree is of concern (via certified mail). We need to take a picture of the tree and include that as well.
Here is the interesting part. The tree that fell was from a neighbor's yard. Turns out that even though the tree was on his property, he's not liable for any of the damage or even the tree removal. All he is required to do is remove the tree off his property and leave whatever is on our property for us to deal with. Apparently it's an act of god (because it was weather related) and it doesn't matter where the tree was. The only exception is if it's obvious it was negligence by the neighbor, such as he cut the tree down or it was a perfectly sunny day and the tree just fell (the law says he should have known it would fall). But simply because some wind during a storm blew it down, it's no one's fault and everybody is responsible for their own property.
The only way we could have made the neighbor responsible is if we would have notified the neighbor that the tree was a concern. Even then from what I gather, we only have a 50/50 shot of sticking it on him.
Fortunately the neighbor is a nice guy and we think he's going to pay for the tree removal or at least half of it.
Now that we know this, we are aware of all the trees around us and if we see any that look dangerous, we now know to let the property owner know that the tree is of concern (via certified mail). We need to take a picture of the tree and include that as well.
Thursday, October 15, 2015
The Last Few Months
Well it's been ~8 months since we purchased our last property. We're still at 10. We've had several properties we've looked at but haven't moved on for various reasons. Nothing really special to comment on, just typical deals that don't make sense for us. Perhaps it's because our model is slowly working it's way out of the economy. This time 2 years ago, we were beating properties off with a stick. Perhaps it's time to rethink our strategy again. Due to not buying any properties in a while, our bank account has increased "not insignificantly" to the point to where more options open us for us.
We've had discussions here and there. I started up a real estate investor meetup group earlier this year and have learned a lot from that group. We're already averaging 10-12 people per meeting. This month we had 16, so that's pretty awesome. I'm excited to see where it will go.
So as of right now, 0 properties in the pipeline, plenty of capital to work with and nowhere to put it. It could be a very quiet end of the year or a very active one. Stay tuned. If anything comes of it, I'll be sure to post. Just wanted to check in since it's been a while. Hopefully, this blog can become very active again soon.
We've had discussions here and there. I started up a real estate investor meetup group earlier this year and have learned a lot from that group. We're already averaging 10-12 people per meeting. This month we had 16, so that's pretty awesome. I'm excited to see where it will go.
So as of right now, 0 properties in the pipeline, plenty of capital to work with and nowhere to put it. It could be a very quiet end of the year or a very active one. Stay tuned. If anything comes of it, I'll be sure to post. Just wanted to check in since it's been a while. Hopefully, this blog can become very active again soon.
Tuesday, June 30, 2015
Analysis of the Third Kind
So recently, we came across a potential property on our Bank's REO list. It was a set of 8 residential units (townhomes more or less) in 2 separate buildings that were next to each other (4 per building). It was listed for $960k. At this point a property of that price is out of the range of what we can pay down, so we'd obviously need to potentially bring in a partner or do something else creative. But before we went down that route, the idea was to find out if it was a profitable deal or not.
So we got the financials for the past year and a half. They only had them for the last year and a half because they foreclosed on it back in 2012 and it was in bad shape. They rented for an average of $940/unit and 7 of the 8 were rented. There was still a lot of deferred maintenance that had to be done in early 2014. So I took the last 9 months of expenses and averaged them out to get my number. I realize that's kind of dangerous, but had I included further back, I would have been offering $100k for the whole lot :) I can always put a buffer on it anyway.
We put in the numbers as best we could get them and came up with what we thought would be a decent number. The number itself isn't really wasn't important at the time (it was more of a ~$50k range anyway) as the first step was to figure out if we were in the ballgame. If our analysis would have spit out $400k, we could stop there. It wasn't a high number, but it wasn't a lowball either and we figured the bank had a good chance at accepting it.
Next, we had to hone the numbers before we could put together an official offer letter (much less a contract). The main one being taxes. We had gone online and looked at the county and city's tax estimator and came up with a number, but it didn't match what was paid in previous years (not even close). It was a pretty big number and we weren't sure if the number was per unit, for each set of 4, or for the set of 8. So we just asked the bank. They came back with nearly $3k *PER* property. And with that, the deal was dead. We had about 3-4 hours of analysis into it. Our goal was to figure out if an offer was possible inside of about 5 hours. Obviously the contract period would have the real due diligence and a lot more time but we never got there.
Keep in mind, the bank was selling them as a lot of 8 only (not individually), but they were individual residential properties as the city was concerned. Had it been an 8-unit complex and classified as commercial, it might be a different situation. Unfortunately, I think the bank is going to be stuck with these properties for a long time as the best number we could come up with that would make it profitable to the level we would need would be in the $300k range and while the bank may be willing to part at a low price, they aren't stupid :)
So we got the financials for the past year and a half. They only had them for the last year and a half because they foreclosed on it back in 2012 and it was in bad shape. They rented for an average of $940/unit and 7 of the 8 were rented. There was still a lot of deferred maintenance that had to be done in early 2014. So I took the last 9 months of expenses and averaged them out to get my number. I realize that's kind of dangerous, but had I included further back, I would have been offering $100k for the whole lot :) I can always put a buffer on it anyway.
We put in the numbers as best we could get them and came up with what we thought would be a decent number. The number itself isn't really wasn't important at the time (it was more of a ~$50k range anyway) as the first step was to figure out if we were in the ballgame. If our analysis would have spit out $400k, we could stop there. It wasn't a high number, but it wasn't a lowball either and we figured the bank had a good chance at accepting it.
Next, we had to hone the numbers before we could put together an official offer letter (much less a contract). The main one being taxes. We had gone online and looked at the county and city's tax estimator and came up with a number, but it didn't match what was paid in previous years (not even close). It was a pretty big number and we weren't sure if the number was per unit, for each set of 4, or for the set of 8. So we just asked the bank. They came back with nearly $3k *PER* property. And with that, the deal was dead. We had about 3-4 hours of analysis into it. Our goal was to figure out if an offer was possible inside of about 5 hours. Obviously the contract period would have the real due diligence and a lot more time but we never got there.
Keep in mind, the bank was selling them as a lot of 8 only (not individually), but they were individual residential properties as the city was concerned. Had it been an 8-unit complex and classified as commercial, it might be a different situation. Unfortunately, I think the bank is going to be stuck with these properties for a long time as the best number we could come up with that would make it profitable to the level we would need would be in the $300k range and while the bank may be willing to part at a low price, they aren't stupid :)
Saturday, April 4, 2015
Our 10th Property/Unit
So we've reached that milestone of 10 properties/units (all SFR's). We started this journey back in April of 2010 with the purchase of our first property on seller financing. It was 10% down and we got 6.5% from the bank 6 months later and paid off the seller note. Today, Property 10 is 5% down and 5.5% interest. We've come a long way in 5 years. 10 properties, 2 states, and a LOT of learning.
Our 10th property is our best performing one by far. The numbers are really insane. Below is what we're looking at.:
-- Area: OK. Not great, but not bad either
-- Purchase Price: $37,000
-- Down Payment: 5%
-- Property Management: 10% fee monthly
-- Rent: $750/month (You are reading that correctly).
-- Taxes: $900/year
-- Insurance: $300/year
-- Vacancy Rate: 0% (It's already rented upon purchase)
-- Money put into it: $0 (Upon inspection there is nothing for us to do).
Here are the results from my analysis spreadsheet:
Cash on Cash Return: 170.15%
Debt Coverage Ratio: 2.378
Vacancy Breakeven: 44.43%
Operating Expense Ratio: 23.33%
BreakEven Ratio: 55.57%
Capitalization Rate: 18.65%
Gross Rent Multiplier: 4.111
Net Income Multiplier: 5.362
LTV Ratio: 95.00%
Monthly Rent to Value %: 2.03%
Cash Flow: $331.20/month
5-year IRR (using 2% appreciation): 175%
10-year IRR (using 2% appreciation): 172%
Present Value: $11,678
Net Present Value: $9,328
Profitability Index: 4.97
Pretty crazy stuff huh? We've never seen numbers this high. And yes, we are only $2k to get $330/month in return. 100% of our investment back in just over 6 months. Of course these numbers don't include unexpected expenses, but since it's already rented and we don't need to do any maintenance up front, we'll just take them as it comes.
I'll put into perspective. One of our houses we bought for $95k. It cash flows just under $300/month. This house is a little more than a third of that price and it cash flows BETTER. Again, I'm still in shock but hey, maybe we are pretty good at this real estate thing!
Our 10th property is our best performing one by far. The numbers are really insane. Below is what we're looking at.:
-- Area: OK. Not great, but not bad either
-- Purchase Price: $37,000
-- Down Payment: 5%
-- Property Management: 10% fee monthly
-- Rent: $750/month (You are reading that correctly).
-- Taxes: $900/year
-- Insurance: $300/year
-- Vacancy Rate: 0% (It's already rented upon purchase)
-- Money put into it: $0 (Upon inspection there is nothing for us to do).
Here are the results from my analysis spreadsheet:
Cash on Cash Return: 170.15%
Debt Coverage Ratio: 2.378
Vacancy Breakeven: 44.43%
Operating Expense Ratio: 23.33%
BreakEven Ratio: 55.57%
Capitalization Rate: 18.65%
Gross Rent Multiplier: 4.111
Net Income Multiplier: 5.362
LTV Ratio: 95.00%
Monthly Rent to Value %: 2.03%
Cash Flow: $331.20/month
5-year IRR (using 2% appreciation): 175%
10-year IRR (using 2% appreciation): 172%
Present Value: $11,678
Net Present Value: $9,328
Profitability Index: 4.97
Pretty crazy stuff huh? We've never seen numbers this high. And yes, we are only $2k to get $330/month in return. 100% of our investment back in just over 6 months. Of course these numbers don't include unexpected expenses, but since it's already rented and we don't need to do any maintenance up front, we'll just take them as it comes.
I'll put into perspective. One of our houses we bought for $95k. It cash flows just under $300/month. This house is a little more than a third of that price and it cash flows BETTER. Again, I'm still in shock but hey, maybe we are pretty good at this real estate thing!
Saturday, March 28, 2015
A single insurance carrier
We currently have 9 properties. Since we started with just 1, that means we have been adding insurance by the way of individual policies. Currently we have 3 different carriers. Now that we have 9 properties we've been looking for a single insurance carrier for our current and future properties. Our goals started out like this:
-- A single carrier
-- A single monthly payment
-- The ability to add/remove properties easily (Phone Call or E-mail). Online portal is even better but not required.
-- The same coverage even when a property goes vacant between tenants.
-- Pay less or the same as we do now for similar coverage.
With our target for 2015 still being SFR's, we're looking at adding between 5-10 properties this year. Once you reach the 10 property threshold, one starts to think about the complexities of your setup. While there are many areas that we wish we more streamlined, we are tackling one at a time. The thought process is, "How can we make managing 100 properties/units not much more difficult or time consuming than 10 properties/units?" 100 properties will of course require more time than 10 but how much more is magic number. We don't want it to be 10x more, we want it to only be 2x-3x more. This is how you scale and this is how you grow.
We feel the first place we did this well was with our bank. We have a single bank that is loaning us money and a single online portal for managing it all. Our next step is insurance. We recently signed up to be insured through NREIG (http://www.nreinsurance.com/). It actually met all of our required an optional items. We had been looking for a while and when we stumbled across them we finally found our solution. We're in the processing of switching over now but the process has been extremely easy. So far we're satisified. We can now easily add/remove properties, get proof of insurance, and insure our entire portfolio (whether 10 or 10,000 properties) in one single place.
So I wonder what we'll move on to streamline next? Any thoughts are greatly appreciated :)
-- A single carrier
-- A single monthly payment
-- The ability to add/remove properties easily (Phone Call or E-mail). Online portal is even better but not required.
-- The same coverage even when a property goes vacant between tenants.
-- Pay less or the same as we do now for similar coverage.
With our target for 2015 still being SFR's, we're looking at adding between 5-10 properties this year. Once you reach the 10 property threshold, one starts to think about the complexities of your setup. While there are many areas that we wish we more streamlined, we are tackling one at a time. The thought process is, "How can we make managing 100 properties/units not much more difficult or time consuming than 10 properties/units?" 100 properties will of course require more time than 10 but how much more is magic number. We don't want it to be 10x more, we want it to only be 2x-3x more. This is how you scale and this is how you grow.
We feel the first place we did this well was with our bank. We have a single bank that is loaning us money and a single online portal for managing it all. Our next step is insurance. We recently signed up to be insured through NREIG (http://www.nreinsurance.com/). It actually met all of our required an optional items. We had been looking for a while and when we stumbled across them we finally found our solution. We're in the processing of switching over now but the process has been extremely easy. So far we're satisified. We can now easily add/remove properties, get proof of insurance, and insure our entire portfolio (whether 10 or 10,000 properties) in one single place.
So I wonder what we'll move on to streamline next? Any thoughts are greatly appreciated :)
Monday, March 9, 2015
Venture into true Turnkey
So one thing I did not mention (at least I don't think I did) is we decided to venture into true turnkey to test the waters. Our last 2 properties were purchased as turnkey properties from a firm in Memphis. I won't name them for now but will talk some details.
If you've read previous posts you probably know that all 3 of us have full time jobs, young families, and we really aren't in the business of anything except buy and hold (rent) properties that are pretty much ready to rent. We've also said anything more than a couple of thousand dollars of work (which is pretty much nothing beyond some painting, new locks, new carpet, etc) isn't what we're interested in. You could say our first 7 properties were "turnkey" properties because they were pretty much ready to rent when we bought them. Most required less than $1k worth of work before renting.
There are companies that specialize in full service turnkey operation for rental properties. The quick overview of a turnkey company if you aren't familiar is that the company buys properties in need of a lot of repair for a low price, rehabs them, and sells them to people at a profit (think flipping) but there is usually a property management arm that also finds renters and manages them as well. All the buyer has to do is inspect the house (if you want) and purchase it. The aim is mainly at out of town investors and those who want very little time invested. Some people think it's a scam. Some people love it. Some people have had horrible experiences and some have had great ones. It's a mixed bag out there depending on who you ask.
We've done a lot of research on these types of companies and introduced ourselves to one of them in Memphis. With our time being limited, we decided to see if this kind of property purchase could save us time and still bring in decent returns. We've decided to test the waters with 2 properties. It's a small investment and if it turns out horribly we've just learn a good lesson (without it being too expensive). At this point, we've already purchased the 2 properties. Below are the details.
When we looked at their properties, we analyzed (on paper) a lot of them. Some of them didn't fit in with our numbers and we were honest with the company on our goals and what we were expecting out of it. Every property we analyzed, we came back with an unofficial offer on what made the numbers work. When we both agreed on a property, we wrote up an official offer letter and contract and started the process. Keep in mind, we still due the same due diligence on these properties as we would if we found them ourselves. We made sure the numbers worked. We had the property professionally inspected, an appraisal happens, we get title insurance, etc. We cut NO corners. Doing this minimizes the risk that everyone out there seems to be so scared about. Sure we might make 10-20% less cash flow than if we found the properties ourselves but we knew that going in and were willing to accept it if it saved us time.
All in all, we spent about 30% of the time purchasing these turnkey properties than we did when we found them ourselves. So the time aspect worked for us. The next big step was finding out if they could deliver what they promised. Long story short, they did. Not only did they rent out both properties for the rate they advertised, they signed 2-year leases. The first property took ~45 days to rent and the second took ~5 days to rent. We don't have any fantasies that 5 days will be the norm but our goal was set at 60 days so both exceeded our expectations. One of the benefits of the turnkey property is since they are the PM as well, they can start looking for a tenant well before closing.
We're only a couple of months into it and we have no real track record with them yet. There are still some things to be seen but everything looks very positive so far. Seeing as how we are already rented, that's 90% of the battle.
This post isn't meant to encourage anyone to go out and do this, but only to lay out that so far our experience has been very positive. ALWAYS ALWAYS do your due diligence. No matter what you may try as long as you don't cut corners, if a deal is bad, you'll catch 99% of them in the process. No one is perfect, especially us, but we've always been diligent and 9 properties in it hasn't failed us yet and when (notice I say when, not if, because everyone has a bad deal at some point) it does, the damaged should be severely minimized and we can chalk it up as a lesson learned and keep going strong!
What to do in 2015....
So all 4 properties mentioned in the last few posts are all closed and rented. 2014 taxes are done. Property taxes are paid. 8 of our 9 properties are now rented. It's time to begin 2015. We've got a lot to think about. SFR's have been treating us very well so we've got to decide if that's our future path for now or if it's time to move in a different direction. We've got several potential refinances we can do and with our cash flow per month we've got the funds to drastically increase our unit count.
We're over halfway to a million in property. That's something I honestly didn't foresee happening this quickly but we're looking to be there in late 2015 or early 2016. It's a very pivotal year for us and the company.
Stay tuned as I suspect there will be lots to discuss as we go through 2015.
We're over halfway to a million in property. That's something I honestly didn't foresee happening this quickly but we're looking to be there in late 2015 or early 2016. It's a very pivotal year for us and the company.
Stay tuned as I suspect there will be lots to discuss as we go through 2015.
Sunday, January 18, 2015
Update on properties and a funny appraisal
So it's a little more than 45 days for all 4 properties. When all said and done, we're looking at ~3 months. 3 of the properties were purchased before Christmas and the last one is taking a little while longer. We're only a few days out to close. Everything is finally done and we just need to actually close.
This brings me to the part of the funny appraisal. The appraisal for this last property came back about 15% less than where it should have. It was really bad, just laughable. I won't mention specifics as this is a public blog and I don't believe in publicly shaming anyone. The comps used were awful. Keep in mind, I'm the buyer. A lower appraisal is in my benefit, but neither I nor the bank believed the appraisal was valid. It was so bad, I'm pretty sure the bank will be having the appraiser taken off the list. For those of you confused....while the bank can't determine who gets what property they can have appraisers removed from the list so they don't get any future appraisals. I don't want this appraiser getting my property when I do become the seller, so I hope the bank gets this person removed. The bank essentially through the appraisal out and said they'd loan me on a higher number without making me pay the difference. The seller and I came to an agreement on a number that the bank agreed on as well. It's actually the first time I've ever experienced a bad appraisal like that ad the bank lending on a number higher than the appraisal. I'm sure I'll have many more firsts as we go throughout my career but this one was just interesting.
Our plans now are to get all of our properties rented. Only 6 of the 9 are rented. Once all 9 are rented, we'll go back down the path of getting more properties. 2 of the 3 are the 2 newest ones we just purchased. We have 1 property where a tenant (our longest one) just moved out. We're hoping by March 1st, we'll have them all rented. Once that happens, we'll do another valuation and see where we are on cash and potential revenue and make a determination on what to do with the rest of 2015.
This brings me to the part of the funny appraisal. The appraisal for this last property came back about 15% less than where it should have. It was really bad, just laughable. I won't mention specifics as this is a public blog and I don't believe in publicly shaming anyone. The comps used were awful. Keep in mind, I'm the buyer. A lower appraisal is in my benefit, but neither I nor the bank believed the appraisal was valid. It was so bad, I'm pretty sure the bank will be having the appraiser taken off the list. For those of you confused....while the bank can't determine who gets what property they can have appraisers removed from the list so they don't get any future appraisals. I don't want this appraiser getting my property when I do become the seller, so I hope the bank gets this person removed. The bank essentially through the appraisal out and said they'd loan me on a higher number without making me pay the difference. The seller and I came to an agreement on a number that the bank agreed on as well. It's actually the first time I've ever experienced a bad appraisal like that ad the bank lending on a number higher than the appraisal. I'm sure I'll have many more firsts as we go throughout my career but this one was just interesting.
Our plans now are to get all of our properties rented. Only 6 of the 9 are rented. Once all 9 are rented, we'll go back down the path of getting more properties. 2 of the 3 are the 2 newest ones we just purchased. We have 1 property where a tenant (our longest one) just moved out. We're hoping by March 1st, we'll have them all rented. Once that happens, we'll do another valuation and see where we are on cash and potential revenue and make a determination on what to do with the rest of 2015.
Monday, November 10, 2014
4 properties in 45 days
So I was sitting around last night and started thinking to myself about everything we've got going on. Since we decided to jump back into SFR's we've been busy. Just 15 days ago, we owned 5 properties. Today, we own 6 (just closed on one last week), next week it will be 7, On or before Dec 15th, we'll have 2 more properties that we have under contract closed. We'll literally go from 5 to 9 properties in ~45 days.
The total value of the 4 properties is $200k. I've been reading real estate books (and other related books) for about 10 years now. I've read in many places that eventually it can just take off and we've been at this for 4 years and we're buying almost as much property in 45 days as it took us 3 years to obtain. It's an exciting place to be. Of course, I don't have any unrealistic expectations that we can buy 4 properties every 45 days or 50 units next year or anything like that, but we haven't purchased a property in 2014 yet since we were technically saving to get into MFR's, so we had more cash than we normally keep in the bank.
Anyway, it's rather exciting (and a little scary) to be embarking on it. More details to come!
The total value of the 4 properties is $200k. I've been reading real estate books (and other related books) for about 10 years now. I've read in many places that eventually it can just take off and we've been at this for 4 years and we're buying almost as much property in 45 days as it took us 3 years to obtain. It's an exciting place to be. Of course, I don't have any unrealistic expectations that we can buy 4 properties every 45 days or 50 units next year or anything like that, but we haven't purchased a property in 2014 yet since we were technically saving to get into MFR's, so we had more cash than we normally keep in the bank.
Anyway, it's rather exciting (and a little scary) to be embarking on it. More details to come!
Wednesday, October 29, 2014
Adventures in Foreclosure and REO
In talking with our bank about possible deals, we were brought into a couple of rented REO properties. For those of you who don't know, REO stands for Real Estate Owned by the bank. You'll often hear "REO Department" at the bank for the group that manages these properties. These are properties the bank now owns (usually, but not always, through a foreclosure).
The bank said they had a grouping of properties that they foreclosed on that they thought fit our profile. We looked and sure enough we saw 2 properties that we were willing to move forward on. This is our first purchase in any foreclosure situation so even though those pieces were new to us, it wasn't much different from a normal purchase. There are no agents, your buying from the bank instead of a person or other company, etc. It was a pretty clean process with the bank (except one piece that I'll share shortly). Keep in mind, buying from the bank under REO is much different than trying to buy foreclosure (pre-foreclosure) from the owner or through auction at the courthouse. We haven't bought yet in those 2 manners but if we ever do, you can rest assure I will be writing about it. I'm sure it's much more involved than what we went through.
These 2 particular properties that we wanted to purchase were already turned over to an auction company, which only means we have to pay a 10% buyer's premium to purchase these properties. Typically the bank will not finance this fee. Our properties were low enough in purchase price that it was only a few $K and the numbers still worked great. If this was a million dollar property, it would have been $100k out of pocket to take it back from the auction house. For most that would be a deal breaker so it's ideal to get the property from REO before it's turned over to an auction house.
We have informed our bank that we're interested in these properties and they know the type of property we look to buy so hopefully they will continue to feed us properties that meet our criteria.
The only hiccup we had was that property #2 had a mistake in the legal description. The number of feet from the road was transposed. So instead of saying 45.2 feet from the road, it said 52.4. This nullified the entire foreclosure. The bank now has to re-foreclose on that property (which takes ~45 days) before we can purchase and if someone comes along with a better offer (or worse yet, the owner makes the note whole), we may not even get it. NOTE TO SELF: Always buy title insurance! It's possible this could have gone unnoticed and we could have bought it but not been the "legal" owners. It may have never come up again, but then again, it could have really bitten us. If something this simple and seemingly unimportant can void a title, then imagine the other 1,000's of items that could also do it. ALWAYS PROTECT YOURSELF!
As of the date of this post, we closed on Property #6 (last week) and are just waiting for the other one to finish foreclosure to purchase. We have a couple of other properties in the works so now that we're back on SFR's, you'll see some more postings!
The bank said they had a grouping of properties that they foreclosed on that they thought fit our profile. We looked and sure enough we saw 2 properties that we were willing to move forward on. This is our first purchase in any foreclosure situation so even though those pieces were new to us, it wasn't much different from a normal purchase. There are no agents, your buying from the bank instead of a person or other company, etc. It was a pretty clean process with the bank (except one piece that I'll share shortly). Keep in mind, buying from the bank under REO is much different than trying to buy foreclosure (pre-foreclosure) from the owner or through auction at the courthouse. We haven't bought yet in those 2 manners but if we ever do, you can rest assure I will be writing about it. I'm sure it's much more involved than what we went through.
These 2 particular properties that we wanted to purchase were already turned over to an auction company, which only means we have to pay a 10% buyer's premium to purchase these properties. Typically the bank will not finance this fee. Our properties were low enough in purchase price that it was only a few $K and the numbers still worked great. If this was a million dollar property, it would have been $100k out of pocket to take it back from the auction house. For most that would be a deal breaker so it's ideal to get the property from REO before it's turned over to an auction house.
We have informed our bank that we're interested in these properties and they know the type of property we look to buy so hopefully they will continue to feed us properties that meet our criteria.
The only hiccup we had was that property #2 had a mistake in the legal description. The number of feet from the road was transposed. So instead of saying 45.2 feet from the road, it said 52.4. This nullified the entire foreclosure. The bank now has to re-foreclose on that property (which takes ~45 days) before we can purchase and if someone comes along with a better offer (or worse yet, the owner makes the note whole), we may not even get it. NOTE TO SELF: Always buy title insurance! It's possible this could have gone unnoticed and we could have bought it but not been the "legal" owners. It may have never come up again, but then again, it could have really bitten us. If something this simple and seemingly unimportant can void a title, then imagine the other 1,000's of items that could also do it. ALWAYS PROTECT YOURSELF!
As of the date of this post, we closed on Property #6 (last week) and are just waiting for the other one to finish foreclosure to purchase. We have a couple of other properties in the works so now that we're back on SFR's, you'll see some more postings!
Monday, October 27, 2014
The hunt for MFR's hits a stall
So after almost a year of saving up money and looking for MFR's, we've decided that we'd abandon that idea for the most part. We've been looking up and down in Memphis and Jackson and haven't been able to come across any deals that get us anywhere near what we were looking for. We didn't expect to get the same level of cash flow from an MFR that we do our SFR's but the obvious benefits of fewer properties, accounting, mortgages, closings, ease of capital use, etc would outweigh 25% less cash flow. However, we haven't been able to find any deals that justify the amount of lower cash flow. Along the way, we kept coming across some really good SFR deals. We kind of pushed them to the side unless they were great. Well, we came across a couple of great ones.
While we're not abandoning MFR's, we are no longer looking. We got feelers out to people that we are looking to invest and if something should come back to us that meets criteria, we'll be all over it. The opposite of that basically happened with SFR's. We owned 5 SFR's and of course throughout our first few years, we made contacts, met people, etc. While looking for MFR's, SFR's kept falling in our lap (without looking). It's kind of amazing to see that process develop. When you think about it, we kind of went dormant for a little while. We had realtors, bankers, etc calling us. The course of this past year kind of confirms what I've read over the years prior. Once you're in, you're in. Maybe I'll write more on it later, but I just wanted to point out how cool it is to see that process unfold.
I've got a few more posts coming about the happenings of the last month or so. I've got a couple of decent stories coming you're way!
While we're not abandoning MFR's, we are no longer looking. We got feelers out to people that we are looking to invest and if something should come back to us that meets criteria, we'll be all over it. The opposite of that basically happened with SFR's. We owned 5 SFR's and of course throughout our first few years, we made contacts, met people, etc. While looking for MFR's, SFR's kept falling in our lap (without looking). It's kind of amazing to see that process develop. When you think about it, we kind of went dormant for a little while. We had realtors, bankers, etc calling us. The course of this past year kind of confirms what I've read over the years prior. Once you're in, you're in. Maybe I'll write more on it later, but I just wanted to point out how cool it is to see that process unfold.
I've got a few more posts coming about the happenings of the last month or so. I've got a couple of decent stories coming you're way!
Saturday, June 14, 2014
The hunt for MFR's continues
The hunt for MFR's has been underway for a few months. We're not having great success. It's challenging to say the least. Many have said and I've always known it to be true that there are exponentially less properties from an MFR perspective than there are from an SFR perspective. I've done searches city wide and gotten ~20 MFR's back as result. I've then done a 3 mile radius search for SFR's and gotten back 200 results. The difference is definitely exponential.
I'd be lying if I said I wasn't considering going back to SFR's. The market is still ripe and great values are still everywhere. We're still in the hunt for MRF's but it will definitely be interesting to see what the next couple of months hold for us.
I'd be lying if I said I wasn't considering going back to SFR's. The market is still ripe and great values are still everywhere. We're still in the hunt for MRF's but it will definitely be interesting to see what the next couple of months hold for us.
Saturday, April 12, 2014
100% Rented - Nice Feeling
In 2013, we bought 3 properties. We got them all rented pretty quickly but the first one we bought in 2013 went vacant for about 4-5 months at the end of the year. April 2014 is the first month where all of our properties have been fully rented in a while. Fortunately, with the properties we own we can be vacant on 2 of them and still pretty much break even. You always want to have 0% vacancy but there will be times when it's not the case. Hopefully we can run at full capacity for a while, build up that bank account and get our first Multi-Family this year. There isn't much to report as we've been pretty stagnant trying to build up some cash for that big purchase. We'd like to buy one on our own before we go looking for capital.
I did release a new version of my real estate calculation spreadsheet. I fixed a couple of cosmetic items and added a new section for misc income so it applied a little better to larger properties with supplemental income. Here is the link to it. For a limited time, offer $2 for the spreadsheet and I'll accept the offer.
http://www.ebay.com/itm/190905341882
I did release a new version of my real estate calculation spreadsheet. I fixed a couple of cosmetic items and added a new section for misc income so it applied a little better to larger properties with supplemental income. Here is the link to it. For a limited time, offer $2 for the spreadsheet and I'll accept the offer.
http://www.ebay.com/itm/190905341882
Monday, March 17, 2014
An update on 2014 goals
Below are the goals copied from my post a few months ago. The updates are in red. I think we're doing ok so far!
These goals are on our must do list:
-- Re-finance Property #1 and pull out $10-$15k in capital - Done, but we only got 8.2k. Not horrible but a little less than we wanted. See previous post for details.
-- Shop our insurance around with a broker and make sure we're getting the best rate. - Done! Turns out we're getting a pretty good rate so we're staying where we are.
-- Add a 4th member to our LLC (my other brother who is almost out of college). - Done!
-- Adjust our monthly Contributions to go up by a total of $900/month over our current contribution level. - Done!
-- Purchase our first Multi Family Property(ies): - Still looking for that first purchase.
-- For a total of 4 units minimum.
-- A goal of $315/month cash flow per $100k spent**. - We'll see after we make that first purchase!
-- A total cash flow increase of $1,000/month (across new purchases). - We'll see after we make that first purchase!
These goals are on our "Nice to Have" list (in order of importance):
-- Refinance Property #2 for $10-$15k in capital. - No movement yet.
-- Purchase more Multi-Family property (above and beyond 4 units) - No movement yet.
-- If needed, package our 5 houses (or some combination thereof) and shop them around. - No movement yet.
-- A 1031 exchange is most likely necessary so we need to purchase a multi-family with the nearly $40k-$50k we’d expect to get from selling this package within 180 days. - No movement yet.
-- This could easily run into 2015. - Unsure yet, but most likely will.
Our main focus now is finding that first MRF purchase. I'll keep everyone updated!
These goals are on our must do list:
-- Re-finance Property #1 and pull out $10-$15k in capital - Done, but we only got 8.2k. Not horrible but a little less than we wanted. See previous post for details.
-- Shop our insurance around with a broker and make sure we're getting the best rate. - Done! Turns out we're getting a pretty good rate so we're staying where we are.
-- Add a 4th member to our LLC (my other brother who is almost out of college). - Done!
-- Adjust our monthly Contributions to go up by a total of $900/month over our current contribution level. - Done!
-- Purchase our first Multi Family Property(ies): - Still looking for that first purchase.
-- For a total of 4 units minimum.
-- A goal of $315/month cash flow per $100k spent**. - We'll see after we make that first purchase!
-- A total cash flow increase of $1,000/month (across new purchases). - We'll see after we make that first purchase!
These goals are on our "Nice to Have" list (in order of importance):
-- Refinance Property #2 for $10-$15k in capital. - No movement yet.
-- Purchase more Multi-Family property (above and beyond 4 units) - No movement yet.
-- If needed, package our 5 houses (or some combination thereof) and shop them around. - No movement yet.
-- A 1031 exchange is most likely necessary so we need to purchase a multi-family with the nearly $40k-$50k we’d expect to get from selling this package within 180 days. - No movement yet.
-- This could easily run into 2015. - Unsure yet, but most likely will.
Our main focus now is finding that first MRF purchase. I'll keep everyone updated!
Infinite Returns!
So one of our goals for 2014 was to re-finance the first property we ever purchased. While we had hoped for $10-15k back on that re-finance, it turned out to be $8.2k instead. The appraisal came back lower than we were expecting, but such is the life of SFR investing. Even though we've increased rent $200/month since we purchased in 2010, the appraisal in 2014 was actually 5k LESS than it was in 2010. Yes, we contested it, but it did no good. Again, no one wants to negate an appraisal in the SFR market nowadays. It's a good reason we're venturing into MFR's this year so we have some control over value. But I digress.
In 2010, we put $7k down on this property. We refinanced and just had $8,200 deposited into our bank account. what does this mean? We now have $0 invested in this property. In fact, we were basically paid $1,200 to buy this property (we just had to tie up some money for 4 years). You could even take a step further and say not only were we paid $1,200 to purchase the property, but we were given 15% equity as well.
This is commonly referred to as "infinite returns". It means the function that calculates cash on cash return now returns an error :). Sure it took 4 years to accomplish this, but it's a huge milestone for us. We now have a property returning a positive cash flow and we have absolutely no money invested in this property anymore. If anyone is looking for a reason to invest in real estate, here it is!
In 2010, we put $7k down on this property. We refinanced and just had $8,200 deposited into our bank account. what does this mean? We now have $0 invested in this property. In fact, we were basically paid $1,200 to buy this property (we just had to tie up some money for 4 years). You could even take a step further and say not only were we paid $1,200 to purchase the property, but we were given 15% equity as well.
This is commonly referred to as "infinite returns". It means the function that calculates cash on cash return now returns an error :). Sure it took 4 years to accomplish this, but it's a huge milestone for us. We now have a property returning a positive cash flow and we have absolutely no money invested in this property anymore. If anyone is looking for a reason to invest in real estate, here it is!
Saturday, January 11, 2014
Goals for 2014
So after meeting with my Dad and Brothers over the holidays, this is what we've come up with for our 2014 goals. The list is below.
These goals are on our must do list:
-- Re-finance Property #1 and pull out $10-$15k in capital
-- Shop our insurance around with a broker and make sure we're getting the best rate.
-- Add a 4th member to our LLC (my other brother who is almost out of college).
-- Adjust our monthly Contributions to go up by a total of $900/month over our current contribution level.
-- Purchase our first Multi Family Property(ies):
-- For a total of 4 units minimum.
-- A goal of $315/month cash flow per $100k spent**.
-- A total cash flow increase of $1,000/month (across new purchases).
These goals are on our "Nice to Have" list (in order of importance):
-- Refinance Property #2 for $10-$15k in capital.
-- Purchase more Multi-Family property (above and beyond 4 units)
-- If needed, package our 5 houses (or some combination thereof) and shop them around.
-- A 1031 exchange is most likely necessary so we need to purchase a multi-family with the nearly $40k-$50k we’d expect to get from selling this package within 180 days.
-- This could easily run into 2015.
** We discussed several options for how to measure "success". We batted around ideas about property numbers, unit numbers, profit, cash flow, etc. When we finally settled on cash flow as the ultimate indicator, but we then had to determine how to measure it. We batted around $X/unit/month, $X/property/month, and $X/month per $Y spent. We ultimately settled on cash flow for money spent. We've been making a pretty good killing in SFR's so we wanted to at least continue that success. We added up our 5 SFR's and determined that we make $312.50/month for every $100k we spend (that includes loan amounts and cash out of pocket). I've personally never heard of doing it this way but it makes sense to us. We just wanted to make sure we were cash flowing as well with our MFR's as our SFR's and this is the best way we could think of doing it. Maybe 10 years from now, we'll look back and say how could we have been so dumb, but I hope not :).
These goals are on our must do list:
-- Re-finance Property #1 and pull out $10-$15k in capital
-- Shop our insurance around with a broker and make sure we're getting the best rate.
-- Add a 4th member to our LLC (my other brother who is almost out of college).
-- Adjust our monthly Contributions to go up by a total of $900/month over our current contribution level.
-- Purchase our first Multi Family Property(ies):
-- For a total of 4 units minimum.
-- A goal of $315/month cash flow per $100k spent**.
-- A total cash flow increase of $1,000/month (across new purchases).
These goals are on our "Nice to Have" list (in order of importance):
-- Refinance Property #2 for $10-$15k in capital.
-- Purchase more Multi-Family property (above and beyond 4 units)
-- If needed, package our 5 houses (or some combination thereof) and shop them around.
-- A 1031 exchange is most likely necessary so we need to purchase a multi-family with the nearly $40k-$50k we’d expect to get from selling this package within 180 days.
-- This could easily run into 2015.
** We discussed several options for how to measure "success". We batted around ideas about property numbers, unit numbers, profit, cash flow, etc. When we finally settled on cash flow as the ultimate indicator, but we then had to determine how to measure it. We batted around $X/unit/month, $X/property/month, and $X/month per $Y spent. We ultimately settled on cash flow for money spent. We've been making a pretty good killing in SFR's so we wanted to at least continue that success. We added up our 5 SFR's and determined that we make $312.50/month for every $100k we spend (that includes loan amounts and cash out of pocket). I've personally never heard of doing it this way but it makes sense to us. We just wanted to make sure we were cash flowing as well with our MFR's as our SFR's and this is the best way we could think of doing it. Maybe 10 years from now, we'll look back and say how could we have been so dumb, but I hope not :).
Saturday, December 14, 2013
Lost Rent
So we got the following e-mail from one of our Property Managers. It's been edited to provide privacy and remove any personal information, but the content wasn't changed. This e-mail was received on the 12th of the month. Rent is due on the first with the last day of "non-late" rent being the 5th:
Before I get into my points below, I will say that 24 hours after this e-mail was sent the money was found.
So it's our first case of (potentially) lost rent. I have several points to make here.
-- It's always the responsibility of the tenant to ensure receipt of rent. Rent is not paid until the Property Manager or landlord has it. How and when the tenant wants to pay is completely up to them but until it's in our hands, it's not paid. So that means using a money order (which is like cash) can be dangerous and using a drop box is at the tenants own risk. Long ago, when I was a renter, every time I paid rent, I drove 15 minutes to the property management office and got a receipt. I understand sometimes hand delivery isn't possible but the tenant must understand that AND if not hand delivered it takes 30 seconds to call and verify the PM or landlord received it the next business day. No one can say they don't have time to do at least that. That's what I did anytime hand delivery wasn't possible. It's not the owner or PM's responsibility to reach out and confirm receipt of rent when not hand delivered.
Here is an excerpt from our standard lease that covers this point. Make sure it's in yours. It's in our late fees section:
-- We were confused that we received this notification on the 12th of the month. We've informed our property management company that if rent is not received that we'd like to get a notification on the 6th of the month. We've also requested that they then send us a notification when it is received (if it was late). As owners we need to be aware of late payers. This can be a serious red flag. If a renter is constantly late, it almost never gets better. If anything, it slowly slips and before you know it they are a month behind. Knowing this can allow you to have your PM find another tenant at the end of the lease. Habitual late payers are very dangerous to a real estate business. Just because we have a PM, doesn't mean we aren't diligent in tracking our business. Our PM is very good, but insisting on these notifications is just part of the relationship.
-- A word about empathy. While it's true that the renter has a receipt for the money order, that doesn't mean anything to us. Sure, I believe you got a money order, but I have no idea what you did with it. It's important to treat your business as a business. With that being said, on the first offense, we'll definitely do things like waive a late fee, which I think our PM did in this case since it was found behind the drop box, but for all we know they put it there after getting called on late rent and made it look like it was there the whole time. I'm not saying this is what happened, but it's definitely possible. My thought is, everybody gets one (the Spiderman mantra if you will). If something like this happens again, there is no relief. Late fees will be assessed according to the lease. Again, our properties are a business. We need to treat them that way. We feel we don't have any other choice or we will be taken advantage of. If we decided to pay our mortgage on the property in the same way and the bank never received it, that would be on us. The bank wouldn't care. In this case, it's like we are the bank and we have to treat rent collection the same way a bank treats mortgage collection.
-- Let's assume the money order was not found. What would we have done? Fortunately, I have an answer to this question. We all met and decided what to tell the PM to do before she notified us she found it.
-- Asses a late fee according to the lease
-- Inform the tenant that they are still responsible for rent regardless of what happened
-- After 30 days begin the eviction process and let the PM handle getting back rent as appropriate.
This may seem harsh to some, but the comment about 30 days for a trace and 90 days for a re-issue didn't sit well with us. That may be the case on a money order, but we just don't care. As we said again, a renter's negligence is not our problem. There are many ways to get a hold of money. A temporary bank loan, short term family or friend loan (they will be empathic to your situation), etc. We don't care how the renter comes up with the money, only that they do. The dangerous part would be to set a precedent of allowing extremely late rent in that case.
With all that being said, our situation turned out fine (found rent), but I'm just hoping the tenant learned a valuable lesson. We sure did and I hope by reading this you did too. I'm curious to know how others would handle it. Please let me know your comments.
Hi,
Just wanted to give you
an update. There is an issue with this months rent. Tenant has a receipt from
two money orders purchased totaling this months rent. Tenant claims to have
dropped it off per usual except office was closed at the time so they put it in
our outdoor drop box. No one in my office has it. Which means I do not have it.
Tenant has put a trace on it. It will take up to 30 days for that to happen
then up to 90 days to re issue them the new money order. They do not have the
money to pay rent a second time this month (per the tenant). I do have the
office manager still checking every nook and cranny. Will keep you
posted on this issue.
Before I get into my points below, I will say that 24 hours after this e-mail was sent the money was found.
So it's our first case of (potentially) lost rent. I have several points to make here.
-- It's always the responsibility of the tenant to ensure receipt of rent. Rent is not paid until the Property Manager or landlord has it. How and when the tenant wants to pay is completely up to them but until it's in our hands, it's not paid. So that means using a money order (which is like cash) can be dangerous and using a drop box is at the tenants own risk. Long ago, when I was a renter, every time I paid rent, I drove 15 minutes to the property management office and got a receipt. I understand sometimes hand delivery isn't possible but the tenant must understand that AND if not hand delivered it takes 30 seconds to call and verify the PM or landlord received it the next business day. No one can say they don't have time to do at least that. That's what I did anytime hand delivery wasn't possible. It's not the owner or PM's responsibility to reach out and confirm receipt of rent when not hand delivered.
Here is an excerpt from our standard lease that covers this point. Make sure it's in yours. It's in our late fees section:
If any amounts due under the Lease
are more than 5 days late, Tenant agrees to pay a late fee of $25 per day. Rent is deemed to be late if Landlord has not
received rent by 5pm on the 5th day.
A postmark date does constitute rent paid on that day. Any payments lost prior to being received are
the responsibility of the tenant. This
includes, but is not limited to, renter’s own negligence, payment put in a
drop box that was not received, rent lost in the mail, etc.
-- We were confused that we received this notification on the 12th of the month. We've informed our property management company that if rent is not received that we'd like to get a notification on the 6th of the month. We've also requested that they then send us a notification when it is received (if it was late). As owners we need to be aware of late payers. This can be a serious red flag. If a renter is constantly late, it almost never gets better. If anything, it slowly slips and before you know it they are a month behind. Knowing this can allow you to have your PM find another tenant at the end of the lease. Habitual late payers are very dangerous to a real estate business. Just because we have a PM, doesn't mean we aren't diligent in tracking our business. Our PM is very good, but insisting on these notifications is just part of the relationship.
-- A word about empathy. While it's true that the renter has a receipt for the money order, that doesn't mean anything to us. Sure, I believe you got a money order, but I have no idea what you did with it. It's important to treat your business as a business. With that being said, on the first offense, we'll definitely do things like waive a late fee, which I think our PM did in this case since it was found behind the drop box, but for all we know they put it there after getting called on late rent and made it look like it was there the whole time. I'm not saying this is what happened, but it's definitely possible. My thought is, everybody gets one (the Spiderman mantra if you will). If something like this happens again, there is no relief. Late fees will be assessed according to the lease. Again, our properties are a business. We need to treat them that way. We feel we don't have any other choice or we will be taken advantage of. If we decided to pay our mortgage on the property in the same way and the bank never received it, that would be on us. The bank wouldn't care. In this case, it's like we are the bank and we have to treat rent collection the same way a bank treats mortgage collection.
-- Let's assume the money order was not found. What would we have done? Fortunately, I have an answer to this question. We all met and decided what to tell the PM to do before she notified us she found it.
-- Asses a late fee according to the lease
-- Inform the tenant that they are still responsible for rent regardless of what happened
-- After 30 days begin the eviction process and let the PM handle getting back rent as appropriate.
This may seem harsh to some, but the comment about 30 days for a trace and 90 days for a re-issue didn't sit well with us. That may be the case on a money order, but we just don't care. As we said again, a renter's negligence is not our problem. There are many ways to get a hold of money. A temporary bank loan, short term family or friend loan (they will be empathic to your situation), etc. We don't care how the renter comes up with the money, only that they do. The dangerous part would be to set a precedent of allowing extremely late rent in that case.
With all that being said, our situation turned out fine (found rent), but I'm just hoping the tenant learned a valuable lesson. We sure did and I hope by reading this you did too. I'm curious to know how others would handle it. Please let me know your comments.
Thursday, November 7, 2013
Please Read - Lesson Learned
Part 1 (11/7/13)
Now that we have houses, we're running into all kinds of interesting situations. Let me tell you about the latest one. My father has known someone for about 15 years. He works at a local garage and has always helped out my Dad. He told my Dad that he's looking for a place to rent. Based on this information, we started to look for a place to buy that he could rent.
We purchased a place in late August (the aforementioned House #5). He was going to move in at $1,100/month rent making it a very profitable house for us. He was set to move in October 1st. Well, October 1st gets close and he tells us he's splitting with his wife. He then says he wants to still move in but needs some help. We work a deal to give him a break on the deposit and the rent for the first 6 months to help him out. I'm already feeing uneasy at this point and I've let everyone know. He now has a set move in date of November 1st.
When October 15th comes around he's still not ready to move in (something about his current landlord). Is it true? No idea, but it doesn't really matter. It's looking like he won't move in at all. We cut an even better deal for him and he's set to move in Nov 1st. Nov 1st gets close and he still can't move in due to the landlord not letting him our of his lease until Dec 1st (or something along those lines).
Shortly after that we're told he's reconciling with his wife and they are back together. We tell him that we have to go back to the original deal of $1,100/month. His move in date is now Dec 1st at $1,100/month again. We've pushed back 2 months (losing 2 month's of potential rent) and he's still not moved in and still no lease signed. I have been vocal about being against this from the first time the move in day was postponed. Everything I've ever read said don't rent to family, friends, or anyone you know. I am seeing this through so hopefully we can all learn a lesson from this. I'll keep everyone posted on this.
We've all already agreed NEVER to rent to family, friends, or people we know ever again. I will make sure we hold true to this. In fact, I'm thinking about bringing a new edict that every property we buy uses a property manager so we don't have to worry about any of this. Had we turned this over to a property manager and they would have rented in by October 1st (giving them 45 days to find a tenant which is plenty) it would have save us approximately $1500 which, for all intents and purposes, is lost revenue to us.
Another lesson here is don't let anything deter you. If this was our only (or first) house it would be enough to make most people want to give up on real estate. We have 4 other houses rented which is providing us a profit even though House #5 is empty. As much as I hate the situation, the more we own, the less something like this hurts us. It's very nice to continue to see the bank account increase even though we'd made this mistake. Please take this post seriously and I hope you learn a lesson too. It's VERY easy to rent to someone you know (VERY EASY, TRUST ME) but with this being our only (first) experience, it's a great lesson to learn. Hopefully because of this post you will never have to learn it!
Part 2 (11/28/13)
Ok, so we've finally wrapped this up. As it turns out the guy kept stalling and kept wanting us to fix stuff and wanted to push out the move in time again. So we said, enough is enough. We are no longer renting to this guy and we're moving on. We've seen more than enough to know he most likely would not be a good tenant. So it's back to the drawing board on getting a new tenant. We've lost at least 2 months and probably over $3,000 by the time it's said and done. It's unfortunate but hey, we will learn from this mistake and hopefully you can learn through us. If we make the mistake again, shame on us. Just remember, it's your mistakes and how you learn from them that will make you stronger, not your successes.
Part 3 (12/23/13)
We decided to put the house on Craig's List and are renting it starting Jan 1st at $1,000/month ($100/month less than we wanted). BUT, it's rented and the bleeding will stop on Jan 1st. If only we would have done this the first time. Again, a big lesson learned here.
Now that we have houses, we're running into all kinds of interesting situations. Let me tell you about the latest one. My father has known someone for about 15 years. He works at a local garage and has always helped out my Dad. He told my Dad that he's looking for a place to rent. Based on this information, we started to look for a place to buy that he could rent.
We purchased a place in late August (the aforementioned House #5). He was going to move in at $1,100/month rent making it a very profitable house for us. He was set to move in October 1st. Well, October 1st gets close and he tells us he's splitting with his wife. He then says he wants to still move in but needs some help. We work a deal to give him a break on the deposit and the rent for the first 6 months to help him out. I'm already feeing uneasy at this point and I've let everyone know. He now has a set move in date of November 1st.
When October 15th comes around he's still not ready to move in (something about his current landlord). Is it true? No idea, but it doesn't really matter. It's looking like he won't move in at all. We cut an even better deal for him and he's set to move in Nov 1st. Nov 1st gets close and he still can't move in due to the landlord not letting him our of his lease until Dec 1st (or something along those lines).
Shortly after that we're told he's reconciling with his wife and they are back together. We tell him that we have to go back to the original deal of $1,100/month. His move in date is now Dec 1st at $1,100/month again. We've pushed back 2 months (losing 2 month's of potential rent) and he's still not moved in and still no lease signed. I have been vocal about being against this from the first time the move in day was postponed. Everything I've ever read said don't rent to family, friends, or anyone you know. I am seeing this through so hopefully we can all learn a lesson from this. I'll keep everyone posted on this.
We've all already agreed NEVER to rent to family, friends, or people we know ever again. I will make sure we hold true to this. In fact, I'm thinking about bringing a new edict that every property we buy uses a property manager so we don't have to worry about any of this. Had we turned this over to a property manager and they would have rented in by October 1st (giving them 45 days to find a tenant which is plenty) it would have save us approximately $1500 which, for all intents and purposes, is lost revenue to us.
Another lesson here is don't let anything deter you. If this was our only (or first) house it would be enough to make most people want to give up on real estate. We have 4 other houses rented which is providing us a profit even though House #5 is empty. As much as I hate the situation, the more we own, the less something like this hurts us. It's very nice to continue to see the bank account increase even though we'd made this mistake. Please take this post seriously and I hope you learn a lesson too. It's VERY easy to rent to someone you know (VERY EASY, TRUST ME) but with this being our only (first) experience, it's a great lesson to learn. Hopefully because of this post you will never have to learn it!
Part 2 (11/28/13)
Ok, so we've finally wrapped this up. As it turns out the guy kept stalling and kept wanting us to fix stuff and wanted to push out the move in time again. So we said, enough is enough. We are no longer renting to this guy and we're moving on. We've seen more than enough to know he most likely would not be a good tenant. So it's back to the drawing board on getting a new tenant. We've lost at least 2 months and probably over $3,000 by the time it's said and done. It's unfortunate but hey, we will learn from this mistake and hopefully you can learn through us. If we make the mistake again, shame on us. Just remember, it's your mistakes and how you learn from them that will make you stronger, not your successes.
Part 3 (12/23/13)
We decided to put the house on Craig's List and are renting it starting Jan 1st at $1,000/month ($100/month less than we wanted). BUT, it's rented and the bleeding will stop on Jan 1st. If only we would have done this the first time. Again, a big lesson learned here.
Friday, September 27, 2013
To Fix or Not to Fix!
That's always the question :)
We got a call today from a renter (a very good renter) in one of our properties. His lease is up in a few weeks and he wants to resign for 2 years. He mentioned that there was an issue with the heater and the garage door (the door to the house in the garage, not the actual garage door itself).
Obviously as a landlord we have no choice but to fix any AC/Heating issues, but it will be a few hundred bucks to fix the door. To save you the details, it's not a real problem but it bothers the renter. That's basically all it boils down to. It's definitely something we don't have to fix. So do we fix it?
It depends. In our case, we chose yes. Why? We have a very good renter and he always pays on time and he wants to sign a new 2-year lease at $1,100/month. If we don't fix it will he leave? No idea. He didn't say either way (and I doubt he would leave but he might not be happy with us and that could lead to property neglect or destruction), but one thing I know for sure. If we throw a little money at it, he is definitely signing a 2-year lease and potentially staying longer than that. If we decide not to fix it, there is no telling what might happen. If it was an unnecessary $5,000 repair I would be posting something very different :). But it's just a few hundred dollars (probably unnecessary) to fix and ensure a total of $26,400 comes our way over the next 2 years.
We obviously have other options:
-- We say we'll fix it *if* he re-signs the lease
-- We fix it later on
-- We don't fix it at all and just say "learn to live with it"
-- etc, etc, we could get creative
My point of this post is ALWAYS evaluate your decision as a business. We didn't make the decision to fix because he's a nice guy. We made the decision to fix because it guarantees a continued cash flow. He pays on time and doesn't hurt the property. It was strictly a business decision. Not having this property rented for just a few months can destroy cash flow for the next 2 years. If he was a horrible renter and we wanted him out, we may have chosen a different course.
We got a call today from a renter (a very good renter) in one of our properties. His lease is up in a few weeks and he wants to resign for 2 years. He mentioned that there was an issue with the heater and the garage door (the door to the house in the garage, not the actual garage door itself).
Obviously as a landlord we have no choice but to fix any AC/Heating issues, but it will be a few hundred bucks to fix the door. To save you the details, it's not a real problem but it bothers the renter. That's basically all it boils down to. It's definitely something we don't have to fix. So do we fix it?
It depends. In our case, we chose yes. Why? We have a very good renter and he always pays on time and he wants to sign a new 2-year lease at $1,100/month. If we don't fix it will he leave? No idea. He didn't say either way (and I doubt he would leave but he might not be happy with us and that could lead to property neglect or destruction), but one thing I know for sure. If we throw a little money at it, he is definitely signing a 2-year lease and potentially staying longer than that. If we decide not to fix it, there is no telling what might happen. If it was an unnecessary $5,000 repair I would be posting something very different :). But it's just a few hundred dollars (probably unnecessary) to fix and ensure a total of $26,400 comes our way over the next 2 years.
We obviously have other options:
-- We say we'll fix it *if* he re-signs the lease
-- We fix it later on
-- We don't fix it at all and just say "learn to live with it"
-- etc, etc, we could get creative
My point of this post is ALWAYS evaluate your decision as a business. We didn't make the decision to fix because he's a nice guy. We made the decision to fix because it guarantees a continued cash flow. He pays on time and doesn't hurt the property. It was strictly a business decision. Not having this property rented for just a few months can destroy cash flow for the next 2 years. If he was a horrible renter and we wanted him out, we may have chosen a different course.
Tuesday, September 24, 2013
5 houses
It didn't seem so long ago when we started this journey and we now have 5 houses that will be fully rented on October 1st. With the cash flow + our contributions monthly we're starting to see a real noticeable surge in the bank account each month. It's nice to be able to see the fruits of your labor come to fruition. Obviously we still have a long way to go if we want this to be our main source of income but 5 houses is a great start!
Wednesday, September 4, 2013
A network out of thin air
So I've read many books on real estate. A common theme I've read is that as you start to invest in real estate a network starts to establish our of thin air. Let me explain.
Since we started to purchase real estate the following things have happened. Also in italics is a benefit from each:
-- Real estate agents are calling us now with deals that meet our criteria. We don't have to spend as much time on base research.
-- The bank is asking us when we're going to buy our next one. If this doesn't guarantee financing I don't know what does.
-- Renters come to us. For house #5, we had a renter BEFORE we even put in an offer on the house. Through the "network" we came across a person who asked if we had houses for rent because he was looking to move. When we found house #5, we showed it to him. He said he would move in, signed a commitment letter, and we offered, purchased, and he moves in October 1st, 2013. If this isn't a motivator to keep going in real estate I don't know what is. I NEVER thought we would find the renter FIRST!
I'm excited to see what other "network" items pop up without us even having to try.....
Since we started to purchase real estate the following things have happened. Also in italics is a benefit from each:
-- Real estate agents are calling us now with deals that meet our criteria. We don't have to spend as much time on base research.
-- The bank is asking us when we're going to buy our next one. If this doesn't guarantee financing I don't know what does.
-- Renters come to us. For house #5, we had a renter BEFORE we even put in an offer on the house. Through the "network" we came across a person who asked if we had houses for rent because he was looking to move. When we found house #5, we showed it to him. He said he would move in, signed a commitment letter, and we offered, purchased, and he moves in October 1st, 2013. If this isn't a motivator to keep going in real estate I don't know what is. I NEVER thought we would find the renter FIRST!
I'm excited to see what other "network" items pop up without us even having to try.....
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