Dear landlord pros... please evaluate my plan so far.
Dear Old Pros,
I'd love your critique of my situation and plan if you can spare the time. I'll lay it all out there in the hope that some folks might have some useful insights or advice.
I've been an "amateur" investor for most of my adult life, typically only having one or two rentals, with one unit being part of a duplex that I resided in. I live in Louisville, Kentucky, a city noteworthy for inexpensive real estate (and cost of living in general). As an aside, it's a very fine city and I highly recommend it to anyone. Especially foodies.
I sold my last rental (a duplex) just before the crash/recession (lucky me) and stayed out due to how frothy the market was. At that time and to this day I was living in a duplex as well and renting out the top floor. About 18 months ago my family convinced me to get back in as they had started buying foreclosures and had moved into Section-8 rentals. I was very dubious about this, having heard tons of horror stories. I'm pretty conservative and don't like drama so I wasn't sure how well I'd take to this sort of strategy. However, I did a lot of research and then bought my first foreclosure shortly thereafter, rehabbed it, and was able to rent it to a tenant I really like (and still have) about 60 days later. Since then I've done two more.
Here's my current section 8's and some pictures I posted on them at one time. These are all very nice houses, but in dubious areas, not full-on warzones, but not too far from warzones either. They were affordable, which is what I needed:
2000sqft 5/2 - purchased REO and rehabbed for a total of 44K. Rented at $900 monthly. This was my first one and I will most likely never buy another 2,000 sq foot rental, doesn't make a lot of sense for what I'm doing and just makes for more house to maintain.
www.whizbang.net/shawnee
1050sqft 3/1.5 - purchased REO and rehabbed for a total of 32K. Rented at $700 monthly. This was my 2nd deal.
www.whizbang.net/cokestreet
1350sqft 3/1.5 - purchased REO and rehabbed for a total of 33K. Rented at $825 a month starting next week. This is my latest deal.
www.whizbang.net/41street
I also currently reside in a giant old house that we have setup as a duplex, living on the first two floors and renting out the 3rd for $700 a month. This house is currently for sale for $399K, which I may or may not be able to get in the current market, but I'm trying.
www.whizbang.net/eastbroadway
Financially speaking, I bought and rehabbed the first two section 8's for cash and I have a 19K, 8 year loan on the 3rd one.
I want to get more heavily into rentals and out from under my current mortgage, so here's my thoughts...
I owe 155K on my house, the duplex, and have listed it for sale for $399. I built-in 20K haggle room on that price, and it's listed through a realtor, so about 20K would go for commission. It's been listed for 5 months, had a number of showings, but no offers yet. It's a pretty unique house and is zoned for offices as well, so I'm hoping the right live/work professional will come along and want it. It's also in a very desirable part of the city, if you like city living that is. If I can't sell it as it's listed now, at some point I'll not renew the realtor's contract and do a combo FSBO/MLS listing and offer a 3% buyer's agent commission and drop 30K off the price. Maybe that will move it, I don't know.
I have enough cash and short term investments to buy another section 8 outright, but I would never want to not have the cash cushion, so I'm not comfortable even contemplating that. I actually wish I'd borrowed more when buying these as I'd have more cash on hand and feel less worried about doing more deals right now.
My idea is this... If I can sell my primary residence, I'll take the equity (after taxes/commissions/fees/etc) of about 190K and try to buy four more rentals. We'd move into the first one, with an eye towards being there for maybe 18 to 24 months, while I got the other rentals purchased/rehabbed and up and running. At that time, we'd have enough rental income (and almost no debt) that I could make the move into full-time real estate and investing, starting with getting my realtor's license. (I've worked in online web site development and programming for 20 yrs, but it's getting a little old and doesn't pay as well as it used to.) And ultimately, move out of the rental we occupied and into something we'd enjoy being in more long term.
A couple of big IF's here though... IF I can sell this monster we live in. IF the rental market holds out (lots and lots of rentals coming onto the market here every day).
In the mean time I don't want to lose my momentum so I'm looking at buying a "#&@$ Burger", as a friend likes to call them... maybe a little 2/1 that wouldn't cost more than 20K purchase & rehab, that I could just put $4K (20%) down on and get rented out for $550 or $600 a month.
Any constructive criticism or thoughts on any of this is MUCH appreciated. I've spent the last week (since discovering BP) trying to read everything ever posted here, so I'm all ears. Ha!
If you've made it this far, thanks for reading my novella and don't hesitate to chime in with any advice or thoughts you have on any of this.
Best,
- Chuck
And just to elaborate on why I'm focusing on section 8 properties ... If I look to neighborhoods on the next "quality" notch above those I've been buying in, the houses that I could get $800 a month rent on would cost more like $70-$90K instead of $30-$45K.
Now granted, it takes me a while to rent these things, typically 60 days, as I end up discarding most applicants. There's also a lot of competition for section 8 rentals, with more every day, so this may not hold true forever. (What does?)
My only thought is that nice low cost rentals will always be in demand. I think you are in a very enviable position. Many of us are in areas that have never had numbers like what you describe.
Jeff,
I've read a lot about people doing much more expensive rentals, and there are lots of folks in town here doing them as well (further east, where property costs a lot more) but I've never understood the math. It takes me (I'm not a realtor) so much work to find these things, then to rehab them, then finally to get a tenant into them, that I think it would be too daunting if I was looking at much more expensive property. The money I'd need just to get in the door would be much, much higher. Ugh!
I'd feel differently if I could buy a 100K house that would bring $1,500 a month in rent, but to get that sort of rent around here you're looking at something like a $175K home.
Best,
- Chuck
One advantage of higher priced rentals is they move a little faster. In my area a rental in a decent part of town (after looking hard) will cost ~$90k, rent for between $1000-$1200
but they go fast, lots of good qualified tenants. And very little turn over. So yes I have to pay a little more, but there are a lot less headaches.
Chuck, I'm amazed at the quality of the houses you can get in that area for the price, and your own property is amazing! Here in good old NJ, homes like that would start at $200K. And the one you're living in - $800K depending on the area.
Love the Shawnee house!
Chuck,
Your rent v purchase price ratio is quite good! Don't be too shy on securing more if you can continue to get those types of numbers. I am buy and hold with focus on cash on cash return with a minumum of 40% per unit. Depending on your tax situation it looks like you could be doing even better....specially if you did less all cash in deals and leveraged some with mortgages. Good luck!
@Rusty - absolutely! The better neighborhoods rent FAST with tons of applicants here as well. I would have only have been able to afford one house though if I started there and the cash flow would be far less, at least for me here. I'll also most likely not see the kind of appreciation long-term that a better neighborhood would bring. I hope to be able to add some units in better 'hoods one day.
@Aly - it's a function of where they're at (rougher neighborhoods) combined with the fact that property in Louisville is historically cheaper than most places I'm aware of. for instance, if the Shawnee house was on a great street in Louisville it would be worth as much as 250K. Where it's at now, it's probably worth 65K right now (maybe $115 prior to the crash). The rougher neighborhoods were cut in half by the crash and the full on war zone neighborhoods are now nearly worthless.
@Steve - Yes, the rents compared to prices seems very good to me, especially considering that I'd have to buy the same house for $70-$110 in a slightly better neighborhood, but I wouldn't get much more in rent despite that. Thats why i keep focusing on these section 8 rentals. I do worry about diversification though and who knows when section 8 might get cut deeply. Scary thought for me. I need to start using more leverage too. That's the feedback I'm seeing from a lot of folks.
- Chuck
Keeping the type of investment that you are doing will work great if you are planning on making this a more full-time operation. A little more work for better cash flow. Wish I could do it but investing in nicer places with less headaches is better suited for people wanting to work full-time and can wait for appreciation. The successful landlords that I've known with 30 or more cash flowing houses generally have houses that might be slightly rough in one way or another giving large returns because of low prices.
It seems a key component is selling your personal residence for 399k.
From the pictures it is clear you need to declutter and take personal pictures and items out of there.When the property is staged you are sending the message that you have mentally moved out of the house.
If you have a bunch of stuff there it will seem to a buyer you have it listed but are not ready to move on.Also the buyer will have a hard time envisioning themselves and their memories there and will be focused and amused by your STUFF.
What are the recent SOLDS for the area?Not real far away but by the blocks if in urban core.You look like you are on the cross street road.
What is the traffic noise like? Do you have updated windows to block it out?
Is your market declining,stable,or appreciating every month and by what percent?
You need to be in the bottom 50% of recent solds to sell quickly.What is average days on the market??
It won't matter if you go FSBO later if you are just chasing the market down.If the market is going down fast or many properties are fixing to flood the market you need to know that.
Has your listing broker looked at properties that are fixing to become REO or in trouble close by? That can severely impact you selling.
You really need to nail down the exact price so you can sell quick and get the cash to implement your plan.
Chuck,
Thanks for posting the pictures and the numbers behind the properties. I also currently live in the highlands in half a duplex. You have done some really nice rehabs. Do you do the work yourself or hire it all out?
I have one property downtown that cash flows like crazy. I’m even closer to or in the war zone though. Its on 3517 West Ky. Bought it was 13,200 and after about 1,000 dollars in updates it rents for 575-600. The tenants I have dealt with and the general area has provided some difficulties though. I plan to make that my only west end property because of this. I took a loan out on it for 36K though so i'll be keeping it for awhile. I haven’t done section 8 yet, but may try to do that for the next tenant.
However I do think there are deals to find in better areas. Have you looked around Church Hill downs at all? Not to bad an area especially on certain streets. For 40K you can get a 3/1 that’s nearly ready to rent.
I recently looked at a pretty good one off Payne Street for 40K which is an even better area. Probably needed 25K in rehab but it would have pulled good rents. I ended up passing though because I wanted something a little cheaper.
I just purchased a property off Davies Ave by U of L. Again not the best area but an improvement over the West End and I think the street is up and coming. Lots of other rehabs going on right now on the street. Paid 9,200, rehab is going to be around 12,000 to 13,000 but it should pull in 550-600. There is also the hope that The Bellamy will expand and buy the street.
I assume you can send private messages on BP but I don’t know how. If you want to shoot me your email address we might be able to help each other find deals. If I buy anything you send my way i'm happy to kick in a bird dog fee.
Thanks,
Dan
Chuck, thanks for posting all the details. As others have stated your rent to price ratio looks good. Make sure you keep cash reserves.
Good luck in selling your home.
I'm no pro, but a couple thoughts I have are:
You have 190K equity (supposedly) in your personally occupied duplex. You have the top rented for 700. Now, how about some details as to what the mortgage is and how much the bottom could rent for?
Also, if you really do have that kind of equity, could you make use of a HELOC? If you got a HELOC for 100K, you could do a lot with that. Maybe you could get a couple 4 plexes or maybe someting like an 8 unit apartment building. Most likely you'd need to have some cash in addition to the HELOC, depending on market prices and actual amount of HELOC.
Have you thought about doing any flips to generate cash infusions?
I think my ideas above inlclude more risk than your proposed strategy, but its worth considering and running the numbers even if you conclude that path is not for you.
Wow, Chuck I'm envious of the type of houses you can get for the price.
@Dan - I have been looking in the area south of Davies. I hear rumor that one of those big brown-fields is about to be developed. If I could confirm that I'd be a lot more interested in the area I think. I've been spending some time in Newburg and around Dixie, north of 264 lately too.
Sec-8 would probably pay you more than you're getting today, but you have to do a lot of due diligence on the applicants to get a trouble-free tenant. I guess that's always true...
I spent some time last night looking at what was available for sale and the conclusion I came to was that the types of houses/deals I had been getting the past couple of years seem a LOT harder to find today. I don't know if that's due to the market leveling out or other investors sucking all the air out of the room, but it actually made me contemplate listing the properties for a flip, but I really want to build a portfolio, not become a rehabber, so I have to fight that urge.
I sent you my email via private message here on BP.
~~~
@Brian - I didn't even consider a HELOC because I had heard (maybe a long time ago) that they weren't even available any longer. I might have to look into it.
I had two offers to lease my current house commercially (it's zoned for offices, SF or MF) at 3,000 and at another time at 4,000. It was extremely tempting, but the age and historical details on this place made me too leery to consider it. That and without a large chunk of up-front money it could put me in a tough position if something went wrong. It's not what I would consider a "hardened" building for rental and I do have some emotions tied up in the old girl.
My current mortage, taxes and insurance is $1,450 with 155K left on the note (or thereabouts). Utilities are $290 a month for the entire building (it's all metered together. Getting the utilities in-line was a challenge, but we did a lot of work on tightening the place up, installing high-efficiency HVACs (one per floor), etc.
RE: Equity - I have 20K haggle built into that price and the realtor's commission is about another 20K. My thinking now is that if we can't move it at 380K before the agent's contract expires (June 1), I might try to FISBO the thing at 40K less. It would give me the exact same money I'm looking for today, but at a much more attractive price to the buyer.
~~~
To everyone noting how bad the original pictures were, and how cluttered the house was, thank you! We took that to heart, de-cluttered a lot (though more should be done) and had new pictures taken. The link hopefully now shows much better: http://www.whizbang.net/eastbroadway
RE: How much work I do - I'm mainly the light handyman and grunt worker. I help with demo, paint a lot, do small repairs, cleaning, etc. I can refinish a floor and install a chain link fence as well, but I'm slow and it's hard work (the way I do it, ha!). I do not use big renovation companies, but rather, rely on individual contractors who I've established a relationship with over the years. The cost difference can be staggering, but the usual landmines and caveats apply.
Best,
- C
PS. The agent called me yesterday and wanted to discuss putting me on a lease as well as extending the lease on the upstairs tenant. He thinks that if we could show a fully leased building with a 1-yr lease at 3K a month he could sell it to an investor who would be happy with a 7.5% CAP rate (a rate I wouldn't be happy with).
I'm wondering now if I shouldn't have jumped at the 4K a month commercial lease, rented something for us and prayed it all worked out (and sold). Hmmm...
Best,
- C
"He thinks that if we could show a fully leased building with a 1-yr lease at 3K a month he could sell it to an investor who would be happy with a 7.5% CAP rate (a rate I wouldn't be happy with)."
Unless it's a corporate tenant with a long term proven track record that would mean nothing to me as an investor.
The reason is businesses fail everyday.Even if the business has thrived for the last few years they might have been only going out of the home or a small space.Now they are going bigger in space and they may or may not grow as expected and the rent might take them down.
They could be down sizing in space and carrying a ton of debt and fixing to go under.
So as an investor the track record and seasoning and performance of the lease is critical when doing an income approach.You also have to analyze if rents are dropping in the area.Even if the tenant has been there awhile they might be jumping ship for a lower rate elsewhere and the lease is coming up soon.
I think FSBO really isn't going to get you a higher price.The agent bringing a buyer will now have to do 2 jobs with the buyer and the seller for one fee.
Also the buyer will see you are saving on the listing commission compared to other properties listed for sale and will reduce the offer to you.
It's a classic mistake of the seller thinking they are saving the listing commission and the buyer reducing in the offer.
@Joel - Thanks for the input!
>>>I think FSBO really isn't going to get you a higher price.The agent bringing a buyer will now have to do 2 jobs with the buyer and the seller for one fee.
My thinking on FISBO is that I could offer a substantially lower cost, partially due to agent commissions and mostly due to the fact that I could simultaneously drop off my wiggle room at the same time.
I have 20K in "haggle" built into the price today (no one is haggling, ha!). The agent has another 20K in commission (today). Maybe I could drop my haggle room off, drop off another 10K for agent's commission and be able to reduce the price 30K to get what I'm hoping for today. Or drop the price 40K and get just 10K less than I'm hoping for.
I don't know if 359K versus 399K would move the needle in regards to interested buyers, but it's already the lowest-cost-per-sq-foot listings in the area (for anything 2000+ sq ft), so maybe it would make a difference, and maybe not. It seems like a substantial price reduction, but the numbers are large'ish to begin with.
Best,
- C
Looked at the pics.
I would power wash the sidewalk next to your building as well as the entrance and patio.They are real dirty and you can see algae growing on them.
You can rent concrete pressure washer with a high PSI at Lowe's or Home Depot for cheap.
Make sure you spend a little higher amount to get the high psi sprayer.Do Not use it on the house but concrete only as damage can occur.The houses use a lower psi sprayer than the concrete ones.
I would say you are looking at identity disorder with this property.I get your story about it but what else is around it??
You have to discover the highest and best use and market a full campaign to that buyer.Just putting a bunch of options out there overwhelms potential buyers.
Looking at your place with google streets brings up a couple concerns. You have a large cedar tree blocking the view. With your architecture the house needs to show more. The yard needs to be immaculate. The sign needs to be visible(near the street). I would consider the market to a commercial buyer like an attorney, title company, insurance company also.
Second concern Inside; Looked like missing drawers in kitchen, not sure also saw cats. Often peopel are not aware of animal smells. These are always deal killers. Otherwise house looked good but still too much clutter in kitchen.
Agent. Sometimes agents will let you out of contract if they are not getting results. I have been known to use force. I never get locked into long term contract. Although as an agent I sometimes not list my own properties because of the type of house. Your's is probably one of these. FSBO, i have gone this route 3 or 4 times with always substandard results. When i have a special property and I use another agent I will get someone who sells the most of that type of property. For example there are agents who specialize in listing but really dont do marketing, there are others who speicalize in getting buyers. Guess which one you want. if your area has MLS you can get this information. Its not the one with the most listings, its the one with the most sales.
Selling; Is your agent doing his job? As an investor this is your job to know. Your sucess or failure depends on it. Here are some questions to ask yourself. Is he advertising? Is the house listed properly? Does the listing show good--agent remarks, do the photo's pop? etc. Is the price right? Since your house might be on a busy street, did you factor the 20 to 25% deduction in value, or if you are selling commercial did you factor the potential increase in value?
Understanding your market: I would say about 100% of the time your house will sell for market value. You just may not be doing your job. Here is how you do your job. As an investor due dilligence is not the agents job, it's your's. Do these steps if you have MLS in your area. 1. tell your agent that you need a detail and summary report for the last year. 2. The detail and summary will be the same only summary will have one line per property and the detail will have 2 to 3 pages for each house. Tell him the parameters will be; house has to be same area (subdivision) or about 1 mile radius. comps will be about +- 10years of your age if house is 30 years old or more, size +- 10 to 15 percent. You want to look at active and sold comps going back 1 year. You want to get about 30 comps. Comps have to include all photos, and public and agent remarks(read them, this is like xray vision). if the street you are on is busy then you want other comps on same street if possible. 4. You will need to spend a minimum of 1 hour digesting this information. You will difinitely see trends, and comparisions. Have to give or subtract for ammenities. I dont recommend doing a CMA that the computer spits out because of too few datapoints.
The rest of your plan sounds good and I dont think there is a shortage of houses in your area to keep the plan going.
BTW some other options are Trading your property for someone who is having trouble managine small apartments, Exchanging property, O.F. with large down, getting rental commitments but not signed and appeal to commercial buyer, or Lease Option. Sorry about length
Looking at your place with google streets brings up a couple concerns. You have a large cedar tree blocking the view. With your architecture the house needs to show more. The yard needs to be immaculate. The sign needs to be visible(near the street). I would consider the market to a commercial buyer like an attorney, title company, insurance company.
Second concern Inside; Looked like missing drawers in kitchen, not sure also saw cats. Often peopel are not aware of animal smells. These are always deal killers. Otherwise house looked good but still too much clutter in kitchen.
Agent. Sometimes agents will let you out of contract if they are getting results. I have been known to use force. I never get locked into long term contract. Although I am also an agent I sometimes will not list my own properties because of the type of house. Your's is probably one of these. FSBO, i have gone this route 3 or 4 times with always substandard results. When i have a special property and I use another agent I will get someone who sells the most of that type of property. For example there are agents who specialize in listing but really do marketing, there are others who speicalize in getting buyers. Guess which one you want. if your area has MLS you can get this information.
Selling; Is your agent doing his job. As an investor this is your job to know. Your sucess or failure depends on it. Here are some questions to ask yourself. Is he advertising? Is the house listed properly? Does the listing show good--agent remarks, photo's etc? Is the price right? Since your house might be on a busy street, did you factor the 20 to 25% deduction in value, or if you are selling commercial did you factor the potential increase in value?
@RayS - The Google streetview is way out of date I'm afraid. A lot of landscaping has been done since those were taken, porch was renovated, railings all painted, etc. The place will really look spectacular this summer when everything comes out and the trees leaf up.
I have it listed with a broker that does both residential and commercial listings, so it's listed on our MLS and our commercial MLS. He's got a good reputation and is all over the city. He's adamant that the place will bring something close to ask (399K) but he said it might take some time. I've been talking to him about dropping the price 20K (my "easy" haggle room, considering his 20K commission) but he doesn't think it's worth it. I believe his quote was that "There are probably 8 or 10 people a year in Louisville looking for something this big for a good live/work situation, so it could take some time." Which was exactly what we bought it for, our original plan was to live on the 2nd and 3rd floors and have the first floor be office space.
RE: Kitchen - Yes, the first floor kitchen is the "remnants" of an industrial kitchen. The cabinets are jacked, but it still has a giant, commercial hood vent, powered louvers, fire suppression system, commercial 3-bay sink, regular sink and a "handwashing" station. It's very bizarre, but someone might want to rework it as a commercial kitchen (we've had one professional chef look at the house twice). I could do a nice rework on it, but I have no idea if a potential buyer will even want it or even a kitchen on the 1st floor, so it's left as-is right now. It's fully functional, just not very pretty.
>>>Trading it for an apartment - This had never even occurred to me. Maybe I could find someone wanting a big, old house, or office space, who might want to unload some rentals. That could accomplish the same thing. I'll have to start thinking about how to promote that sort of deal.
RE: FISBO - The only reason I'm contemplating this is that I could easily drop 40K off the price today (my built-in haggle room and his commission) and see if it picks up the showings any. I'm not sure if 359K vs 399K is a big enough drop, but it seems substantial enough to try it...?
Best,
- C
Looks and smells are everything. Look at the comps that are selling fast in your area and see why they are different than yours. Do this and you will be free.
By the way I dont know how to set the messages so they automatically email me or i would have responded sooner.
