Hi All,
I'm pretty new to the forum and REI in general. Wanted to get my feet wet and get into an investment property within the next few months. Any thoughts, ideas suggestions? Should I wait a little for the mortgage madness to subside?
Thanks,
M
Welcome to the forums! I am wondering where you plan on buying a rental property at? In SF or out of state. If you are planning on buying in SF what price range would you be into. I assume it is very expensive to invest out in that market.
The market turbulence has increased the possibility that you can find a good deal. People throw out the good with the bad during such times.
You still need to do your homework. You need a cash buffer to ride out any storms. You should always have one so the present is no reason to think otherwise.
Good hunting.
I lived in SF in the past. I suspect you will have to look pretty far outside the city to find a property that will cash flow even by CA definitions of break even cash flow. How far were you going to look?
John Corey
Thanks!
Anywhere in the US my friend. I'm new to this and would like to get my feet wet asap.
Regards,
Michael
Michael,
1. I am a fan of investing at a distance. Note that it is harder as you can not just pop around to check out a place or visit with a contract to see how things are coming along.
2. Decide on what you are looking for in terms of numbers. Then narrow the focus to a specific community or a short list of communities. You want to get to know the market even if only on paper and across the web.
You can build up multiple locations over time but learn each one before moving on rather than just shot-gunning all across the US.
3. You can consider partnering with someone who can find you deals. Just be careful about who you pick as your partner.
John Corey
Mike -
Do you plan on investing somewhere that you can maintain and operate the property? Will it be close enough to manage yourself? Investing long-distance can certainly be a challenge (I could tell you horror stories -trust me). Also keep in mind that if you're buying cash-flow property, you'll need to get an even better deal if you are buying it long distance, as you will have to pay someone to manage it vs. running it yourself. This extra cost could be anywhere from 5% - 15%.
To extend what Josh has said...
MikeOH and Ryan will tell you that you always have to price in the cost of property management. Only then can you tell if you have a good deal.
You would not work for free on a J.O.B. Why work for free when it comes to property management. If you do think working for free is fine then let me know as I have some yard work you can get sorted.
Great investors make their money from finding great deals. They do not make their money as property managers.
If you are ill, on holiday, need to visit a relative for a while or any other reason that takes you away from the property who will do the property management? I mean legally so a friend or relative is not going to work. If the deal numbers will not work when factoring in property management you do not have a deal. You have an alligator waiting to eat you alive.
Always factor in the cost of property management. If you then want to pay yourself as you are doing the work then fine.
John Corey
I agree with REI that you must find a great deal. The rental must cash flow with paid management.
However, I disagree that investors do not make their money as property managers. I am a strong believer in doing both. Property managers charge an average of 10% of the gross rents. In addition, they typically hire maintenance at retail. Buy doing the management and maintenance yourself, you will normally at least double the amount of money that you make each month. For example, in my area, if you buy properties at a BIG discount, you can get a positive cash flow of about $100 per month. Doing the management and maintenance means that you EARN another $100 per unit per month. That means that you only need 1/2 the number of rentals to make a certain amount of money.
In my opinion, management is one of the most overpaid businesses in existence (even though there are a lot of TERRIBLE managers out there). In reality, there is VERY LITTLE WORK involved. They collect 10% of the gross rents and have absolutely no contact with most tenants in any given month. During a typical day, I get about 30-40 calls. Almost all of these calls are from potential renters looking for a place to live. I spend less than 1 minute on each call.
If I am ill, on vacation, or out of town for any other reason, who will manage my rental? I will! It's very easy. If I get a call from a tenant with a maintenance problem, I tell them that I'll be back next week and will fix it then. If it is an urgent problem, like the furnace went out, I simply do what a property manager would have done - I call a contractor and have him go fix it. EASY! When I go on vacation, I cancel my newspaper ad that week and my number of calls drops from 30-40 per day to about 3 or 4.
Mike
They can, and that is how I see it. I think Mike is just saying that in his case and if someone were to choose to do so, he basically doubles his cash flow by doing management and maintenance himself.
However, if you can make $100 an hour or more doing other ventures or another job, it would make sense for you to do hire these jobs out.
Some people can't or would prefer not to do these things themselves. However if they choose to take on these jobs themselves they will be able to make more cash flow.
If someone owns rentals, but also has a career or other business that brings in 100.00 per hour plus, why would they not hire out management and repair or maintenance for 10.00-12.00 per hour.
In other words, if someone's time is worth 100.00 per hour avg. be it a job, self employment or finding investment properties, why would they do work that could be hired out at 10% of their hourly avg. income potential?
James,
Great point. Some do earn more from a day job than they would from hands-on property management. It can also vary over time. I have worked for very little and I have worked for $2,700 a day (10 months at that rate plus travel expenses).
My key point is that a good investor will likely find deals that pay more than the property management tasks pay. If you can make $10K each time you find a deal then sorting out the management is likely to be a lower return effort.
John Corey
I have to take some exception with MikeOH's statements.
Once you reach a point (as he apparently has) where you have a thorough understanding of the various systems and components used in construction; all the local laws and standard practices pertaining to the rental business; the rental market and seasonal fluctuations; issues regarding hazardous materials utilized in the construction of housing, and in some areas found in the ground around housing; Federal Fair Housing, Fair Credit, Title X, EPA, IRS, and many other regs; contract law; Building codes, code enforcement, and the permitting process; subsidized housing; AND you have a team of reliable, responsible, and reasonably priced vendors to utilize; AND you have established systems and procedures that work for you, THEN, and only then, does PM become "easy".
Up until that time, you are giving away money, subjecting yourself to unnecessary fines or lawsuits, stress, and complete chaos.
I am willing to bet if MikeOH or any other long term investor is completely honest, they have had many "lessons" that either cost real money, or they have had very close calls and just got lucky. EXPERIENCE is the only way you can get to the "easy" part, you can't just read a book, or scan even an excellent forum such as this, and expect to Master the business with your first property.
By the same token, hiring any real estate agent that says they manage property is no guarantee...experience is still the key, and if they spend most their days chasing homebuyers instead of dealing primarily with investors, they are generally NOT experienced in PM.
Having said all that, for beginning investors with one small building, or a half dozen houses nearby, CAN you self manage? Yes, certainly. But you better have adequate reserves to pay for the inevitable "lesson". You better move cautiously, and you better have a good Real Estate attorney on retainer to ask questions. And keep reading BiggerPockets!
Very well said Beachbum.
John Corey
There are several very good reasons:
1) Quality of life. If you earn $100 per hour in a job (and the VAST MAJORITY of people on this forum don't), then you are under someone else's control. With my rental business, I am totally able to control my schedule (except for the 1st -4th, when I collect rents). I have no job, no boss, no employees, and near total freedom. That's the most important thing to me - FREEDOM!
2) Taxes - If you earn $100 per hour in a job, the government is going to take a BUNCH of that in taxes. There is no worse way to make money that to earn wages. With a job, you earn income; pay taxes; and then get to spend what's left over. With a business, you earn the money, pay the bills and then are taxed on what's left. THAT IS A HUGE DIFFERENCE!
3) The idea that you are going to pay someone $10-$12 per hour to do all your maintenance is ridiculous. It's like saying that cash flow is rent minus the mortgage payment. It is oversimplistic and while it sounds good, it is not reality. If you have employees, even if you only pay them $10-$12 per hour, your payroll expenses are MUCH higher than that. "941" contributions, worker's comp, liability insurance for your employees all add to that amount. In addition, someone making $10-$12 per hour is near the bottom of the food chain and they can cause you far more problems and expense than they prevent. Poor work habits, alcoholism, drug use, and criminal activity are prevalent in handymen and construction workers in these pay grades. Anyone that has actually had employees can tell you that for a fact. In my opinion, dealing with employees is MUCH worse than dealing with tenants - MUCH WORSE!
4) I also disagree with the idea that doing basic maintenance and management is difficult and will result in the owner making a lot of expensive mistakes. You can buy a home improvement book at Lowes that will take you step by step through most basic repairs. If you don't read well, they even have weekly sessions at Lowes and Home Depot to teach these skills. This is not brain surgery.
Now, here's the point. Let's say you had only 25 rentals. For the average person, if you bought right those 25 rentals would earn you $2,500 per month in cash flow. That probably isn't enough to live on. However, if you worked only a few hours per week doing the management and maintenance, you would probably double that and earn $5,000 per month. That is enough money for a lot of people to live on.
More importantly, that is enough money for a lot of people to quit their 9-5 and become FREE! Is that reason enough to work a handful of hours per week? Better yet, you can work that handful of hours per week anytime you want. You could work one day per week and take the other 6 days off. You could work one hour per day Mon-Fri. You have complete control over your schedule. That's what I'm talking about.
Mike
good post mikeoh, common sense but not everyone sees the big picture
**********,
i agree with the main point that you bring up. it's about what makes you happy, and that's different for everyone. but i'd like to bring a little perspective to your comments on people living on $65k a year. believe it or not, the majority of americans in fly-over country live on less than that. i live in dallas, tx, which is a large urban center, where we do have electricity and horseless carriages, and yet $65k a year is a comfortable living. now, i'm greedy, and i'd like to make considerably more than that. i plan on re-investing all my re earnings for awhile, while i live off my j o b. but i love my job, so it works well for me. when i've had enough, and i start looking at an early retirement, hopefully i'll have a healthy business ready to go.
-dean
Flipper,
I agree with almost everything you said. If you enjoy your 9-5 job or your business, then that is great! People should do whatever makes them happy.
In 2005, the median personal income for people over the age of 18 was $25,149 ($32,140 for those age 25 or above). So, yes I have been out of Sticksville on occassion.
Not only could they quit and become free, they would make about double the national median income with only 25 rentals.
I was referring to my example with 25 rentals. I chose 25 rentals for my example because it would allow most people to exceed their current income and only work about 5 hours per week. Of course it takes more work if you own several dozen rentals (I work an average of 12-16 hours per week on the management and maintenance).
I think this is one of the most misunderstood aspects of operating rental properties. There is not a lot to do. I answer calls and show vacant units to pre-screened applicants. I take the occassional call from a tenant that needs maintenance. I pay the bills. There is more to do on the maintenance side. I mow the grass at my apartment buildings. I do the occassional repair for this or that. Most of my time is spent fixing up rentals after they go vacant or rehabbing units as I buy them. However, all of this only takes 3-4 hours per day, 3-4 days per week.
The "pipe burst" at 3 am is more of an urban legend than reality. I've been in this business for almost 4 years and you can count the number of calls I've received after 11pm on one hand. None of these were for a major repair. In fact, the only pipe that I ever had burst was at 10 am, not 3am. Moreover, even if you do the management and maintenance yourself, you always have the option of calling a plumber. So, in the unlikely event that a pipe does burst at 3 am, you could simply call the plumber and go back to sleep.
Flipper, again, I'm not disagreeing with you. Do whatever makes you happy. If that's running a contracting business or working 9-5, if you enjoy it - I sincerely think that's great! The point of my post is that doing the management and maintenance yourself will allow you to be free with half the number of rentals or make double the income.
Mike
Mike,
Thanks for spelling out how you see property management. From what I understand it sounds like the primary activity is office work rather than running around dealing with maintenance and other issues. A rather low impact to your day given you also run ads to find motivated sellers. Easy to take calls for maintenance while working the phones for deals.
Your concluding comment is also spot on. Some people like to invest them time in certain ways so all the power to them.
John Corey
John,
Not quite. I don't do mostly office work. In fact, with the exception of paying the bills and sending an occassional letter to Section 8, I don't do hardly any office work. My cell phone is my business phone. I answer calls from tenants and applicants whatever I'm doing. I can do maintenance or rehab a property and still answer calls from tenants. I can also be on vacation snowboarding in Utah and still answer calls from tenants (although I take my rental ad out while I'm on vacation, so I don't get many calls).
Except answering the phone, I only work about 3-4 hours per day, 3-4 days each week and that is mainly doing maintenance, rehabs on vacant units, etc. Today, I'll head to town at about 11am and work until about 3pm (unless something more pressing comes up).
Mike
Mike,
Sorry about the confusion. I call answer the phone 'office work'. We are on the same page otherwise.
John Corey