A range of questions for the experts

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A range of questions for the experts

Mr Good
Bellevue, WA · Member since 2008 · 40 posts · 0 votes

Hi,

Found a property in a good location, minutes away and no traffic (big problem here) to huge employment areas.

House for sale is on a private side street, custom built 2002, surrounded by 4 other 50 yr old homes on same street. All 5 homes owned by one elderly lady who is in nursing care. Family says they will only keep 1 of the 5.

Strange that all 5 homes are zoned on county records "Duplex". Perhaps the old lady had them all zoned that way in the 1970s, as far as I can tell she has owned them since at least then. In this area, duplex designation just offers more possibilities I think.

The house for sale is 2100 sq ft, 4 bdrm on large 17000 sq ft lot, for this area that's unusually large. It has no garage, just a parking pad. There are two separate entrances and fully separate kitchen/living areas (upstairs and downstairs). I went to city hall and got building permit for this, it took her 8 years to get all of the prop lines redrawn, soil samples, private road widened, enviro crap, geotech, etc etc etc. It is zoned duplex but building is what they call ADU (Accessory dwelling unit). Owner can live in half and rent out the other half. No separate power/sewer meters. House is in excellent condition, like new. 50 yr roof. Big covered deck, very nice touches throughout.

It was offered $365k 200 days ago. Never gone STI. Eventually hit $320k 50 days ago. I offered $300k two days ago and seller is apparently still "putting things together" but my offer was only for 1 day so I guess it's invalid at this point.

I am unimpressed with the real estate people involved. I have little experience, only purchased 2 homes previously. Is it standard practice to tell the buyer he must write a check for earnest money, at time of making offer? My credit score is range 796-819 and I showed that to RE agent. The contract says I have to deliver the earnest money within 2 days. Why should I have to write a check at the time I make an offer? I don't like my checks floating around like that.

Thanks for any feedback about this entire deal.

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  • Scott Weaner
    Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes
    18y

    What do you plan to do with the property? If you will be renting each unit out, what rents can you get? How many bedrooms will each unit have? $300,000 seems like a large price for a duplex. They will need to rent for quite a bit, possibly $3000/month each to cash flow well.

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    18y

    Earnest money is standard with any offer, in fact you'll look like a real novice if you don't do it. I always put up $500, and tell the agent if that's a problem I'll increase it ONCE THE OFFER IS ACCEPTED.

    I've never had a problem with an agent by doing that.

    BTW, for a place that's been on the market that long I'd have probably offered closer to $250K

    all cash

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  • Greg Shaw
    kingston, Ontario · Member since 2008 · 19 posts · 1 vote
    18y

    all cash

    If your offers are rejected and no deal is made what happens with your earnest money. I am not familiar with your system.

    greg

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Hi,

    Thanks for the feedback. I've had the "cash flow" discussion here before.

    Everyone brings their own outlook on cash flow. I believe my cash savings will be eroded via inflation so I want to put some money into longterm real estate. The home I am wanting to purchase for $300k probably cost $350k to build new if you factor in cost of a lot, permit fees, construction materials and labor. Cost of construction and land keeps going up as well. Part of my price decision is based on cost of construction and inflation predictions.

    In this area duplexes go for $320k++ and that is for beat up units. I have been looking. Actually there is not much available. Homes here are in the range of $275-$375k for starter houses. At $250k you can not get anything other than rat-infested "fixer". I suppose we are a rich market. I can probably rent $2000 total for this property, getting about $1200 for upper unit and $800 for lower unit. As with anything, rents increase over time with inflation so I like the hedge.

    I can put down $90k on this deal and get a loan on the rest, rent it out and break even on a monthly basis based on today's rental market. In essence I will be risking not getting any return on my $90k down payment.

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    18y

    not2late; I'm not sure what the process is in Canada. In the states the earnest money check is made to the order of "The Escrow Agent/Title Company/Attorney, NOT to the seller. The check stays in the possession of the AGENT until such time the contract is ACCEPTED.

    At that time the check is tendered to the escrow agent.

    all cash

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  • Stephen Leblanc
    Banker · sydney, Nova Scotia · Member since 2008 · 100 posts · 8 votes
    18y

    in canada you write the cheque to "coldwell banker in trust" for example. They deposit the cheque into an 'in trust' account for you. If the deal falls through they give you the money back.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    Let's look at this "deal" from a real world perspective and let's assume that the $90K is free money, with no opportunity cost to putting it into this deal. At a purchase price of $300K and $90K down, you'll be borrowing $210K.

    So, here is how this deal looks:

    Gross Rents: $2,000
    Operating Expenses: $1,000
    NOI: $1,000
    Mortgage ($210K, 7.5%, 30 yr): $1,468

    Monthly Cash Flow: $468 LOSS

    So, you're putting $90K of your own money into a deal that will lose nearly $6,000 per year! Is this a speculation play on appreciation? How do you expect to make money? How does this being ADU affect the resale prospects for this property? Also, does it get cold where you are located? If so, having common utilities is not good.

    Good Luck,

    Mike

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Trust me I love the great feedback and all pessimistic views are appreciated. That is what I come here for. But I can not for the life of me believe that $1000 per month is going to be paid to maintain a home that was built 5 years ago and lived in by a grandma for 3 of those 5 years. It's a brand new home.

    Someone else here said 50% of the money from rent is going to go toward maintenance but I don't buy it. Call me a fool if you want. Even the bank assumes 25% is expenses not 50%. I believe new condition means even less maintenance.

    Assuming your figures are correct however, $468 LOSS but what about tax benefit. Be fair with your comparison. $90k earns interest so that is added loss, but there are going to be tax benefits due to the monthly loss plus debt interest is a write-off, is it not? I believe we will see significant longterm (10-20 year) appreciation that will supersede any monthly losses.

    Thanks for any further feedback.

    By the way using the formulas you put together one would need to pay about $100k for a duplex in order for it to make sense but there is no such thing on the market. Yet there are plenty of landlords who make money in the process. Something wrong with the picture you painted but I am just looking for constructive feedback. Thanks again.

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  • Stephen Leblanc
    Banker · sydney, Nova Scotia · Member since 2008 · 100 posts · 8 votes
    18y

    I'm new to the 50% rule myself so someone can correct me if I'm wrong. The 50% rule is more than just fixing taps that leak and drafty windows. It takes into account vacancy, a tenant that goes ape **** in your house and destroys everything, insurance and taxes. This stuff goes with any house, not just an old house.

    steve

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    If you think it's a good deal, then obviously you should go for it. However, you should be aware that the $1,000 per month is NOT to "maintain a home that was built 5 years ago". Not even close. Operating expenses are FAR MORE than maintenance. I would encourage you to educate yourself on this issue before you buy anything. The experienced people here on the forum are trying to tell you the reality of the situation, but you see to be desperate to buy something even if that means ignoring the facts.

    Good Luck,

    Mike

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  • Stephen Leblanc
    Banker · sydney, Nova Scotia · Member since 2008 · 100 posts · 8 votes
    18y

    If this is something you realy want to do to make money, I would listen to mike. If the first rental you buy turns out to be a dog, that that is a big hole to crawl out of. If the first deal will cash flow well, then it is easier to get a loan for the next proporty and you have more money available for unexpected things that happen with every rental.

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Mike I appreciate your comment and yes I am determined to buy real estate but "desperate" is not the right term. I owned a rental 4 years ago when my kids were younger. I ended up selling that house because I did not want to deal with renters at that point in my life. I kept the money (because that house was owned 100% outright, I had paid it off with every extra $ I had, and in 8 years managed to get it all paid off).

    So I was living in my second home with a mortgage loan, and I had money in the bank from selling my first home. That money paid very little interest but I never felt the timing was "right" to buy. But now, prices are falling and there are desperate sellers. I see this point in time as the right time to buy, but I am not desperate. I have been patient for 4 years thus far but at some point you have to decide if it's the right time. I want to get 1 rental within the next few months, that's all.

    Assuming the 50% rule is true because renters will vacate and some will go ape sh** and I will have to pay a lawyer for services, etc, I can still get a tax write off for that but I wonder if someone can briefly outline the overall tax benefits of owning a rental.

    I think I am being very cautious because debt exposure is low. I just can not expect to buy a rental property and right away get positive cash flow. It's a reality of the market. I believe longterm it will be a good investment as long as I buy smart--that being a range of attributes.

    Thanks again for all feedback.

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    18y

    goodvalley; you're to be congratulated for the discipline it took to pay off the other house in 8 years, particularly with a family to provide for!

    I'm always a bit taken aback when I hear someone talk about the "tax benefits" of LOSSES. I'm not certain how the tax system operates in Canada, although I'm pretty sure your tax rates are much higher than in the US.

    Let me explain my thought process on the "tax benefit" of losses. Assume that I am in the 25% marginal tax bracket. That means that for every DOLLAR that I've PAID, or LOST (either in interest, or excess of expense over income), I'm allowed to deduct TWENTY FIVE CENTS from my tax bill.

    In other words I'm buying quarters for a dollar apiece. As another poster once wrote; "if you want to trade dollars to me for quarters, we can make that trade as often as you like, and keep at it as long as you like".

    Think it through a bit more. It sounds as if you've got a case of "gottamakeadealitis".

    all cash

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Hi ALLCASH thanks for your comment. I am not sure how Canada got into the thread above but I am in Seattle WA. Thanks for the info on tax offset due to losses.

    I am really thinking about the investment carefully. Something I did not mention is the fact that right now I live in a very expensive area on a huge lot which I should not have afforded but got lucky. It is very expensive to maintain (in terms of time spent landscaping etc). My longterm forecast is to buy a rental now, but a slightly "upscale" one with two rents coming in. Then, over time (5 year horizon) get my existing home in tip-top shape and sell it for a very pretty price. Then, move into the rental that I bought when the market was slow (now) and use the proceeds from the sale of my current estate to further invest in more properties. It's a longterm deal. Having a rental just fits in very well with my outlook at this point in my life.

    I just read through Mike's blog and it's an exciting look at the business of being a landlord. I love that kind of info. But in my mind I can not help but wonder something. If a landlord owns an upscale property not a Section-8 type thing, is there a benefit of being able to keep tenants longer and attracting more responsible tenants which leads to a higher percentage of rent being kept by the landlord? My thought is to charge a relatively low rent (for what is provided) but then trust that I can find an excellent tenant who will pay on time and not screw the place up. I don't mean to boast but I have rented homes/apts before and never once missed a payment or caused one scintilla of damage to any property, ever. I have, however, found that landlords are often real penny pinchers in the way they run their business.

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  • Will Barnett
    Investor · DFW, TX · Member since 2008 · 66 posts · 2 votes
    18y

    I am a newbie myself but I have a few things to add.

    When you buy a property it has to be a deal. Traditionally a deal is a property that is 70% or less of it's retail value. These types of deals don't come often. In my area it averages one deal a month, and I have to pounce on it quick or some other investor will lock it up. The most common sources of distressed properties are motivated sellers or lenders (banks).

    The property you describe does not fit this criteria. It's been on the market way too long, the sellers are not motivated, and you're buying at only a 15% discount.

    The major tax benefit of owning a rental is from a depreciation allowance, which in most cases eliminates taxes from positive cash flow.

    It seems that you have not really analyzed the rent rolls in your area. Are renters standing in line to get a good rental, or are their a ton of vacancies in that area, for that particular property type. Assuming that you will get a good tenant by lowering the rent is not a good idea. Good tenants come from properly screening applicants by checking their credit, criminal and eviction history.

    Please, please listen to some of the real estate vets on this forum like Mike and All Cash. I've only been doing this for two years and have made a lot of mistakes myself, but by reading the posts here and on other sites, as well as further educating myself, I've been able to do some good things lately. This sounds like a very bad deal to me.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    One question that I often ask people is "how many of these DEALS can you afford?" If you're going to lose nearly $500 per month on each investment, how many could you afford? Contrast this "investment" with an investment that actually makes money. With your investment, you are limited by the amount of money you can take out of your pocket each month. With a cash flowing investment, you can buy an infinite number of rentals and the more you buy the more money you make. QUITE A DIFFERENCE!

    That is because you have such little experience and you got lucky. When I started out, I was also lucky. I had over 10 rentals before I ever had a vacancy. I thought I was a genius and that operating rentals was the easiest money on the planet! However, as my portfolio kept growing, the averages started to catch up with me and I started to have vacancies, evictions, damage, legal expenses, etc (all the things that occur in the real world). Keep in mind that your experience could have been just the opposite (if you had been unlucky). If you have followed the threads on this forum, you have seen people that have had their one and only rental turn into a nightmare.

    Yes and no. No, you won't keep tenants longer with more upscale property (unless you are in such a high priced area that upscale people can only afford rentals). In fact, there is often a higher turnover because these people are simply in-between owning houses. Yes, the tenants tend to be a little better and they tend to do less intentional damage than low income tenants.

    If that is true, then why don't you find a desperate seller and buy a property that will cash flow? Desperate sellers will do ANYTHING to stop their pain.

    Good Luck,

    Mike

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Hi Mike,

    Thanks for your thoughtful response. One of the things I like about forums such as this is that it's possible to see all posts made by a given forum member. I had a chance to look over your history and it's obvious you are a highly experienced landlord generously offering all kinds of useful tips--notably on contract and legal matters. But when it comes to purchase advise you are the perpetual "Don't Buy That" guy. I say that lightly and hope you don't take it the wrong way.

    But each market has it's own characteristics, and things are just more expensive here plain and simple. I think prices in certain areas of this region are no doubt going to rise longterm, more than cash in a bank rises due to interest income. We are a landlocked region with mountains on one side and ocean on the other. Following the strict cashflow guideline here means that nobody would ever buy a rental, yet people are buying nonetheless. I believe I am correct that in this area investors in rentals look at a longer term forecast if they intend to fetch revenue from rentals.

    May I ask you something Mike, I realize it's something you'd rather not share, but how much money are you paying each month in bank interest? Irrespective of revenue, what is your total outlay in bank interest monthly on all of your properties?

    Thanks for your participation here it is highly appreciated.

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  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    18y

    Sorry about that; I saw the Canada on not2late's post and it stuck in my head. Regarding your questions and points:

    Yes less lost rent during turnover, less light cleaning and touch up paint. This is why I went to 2 year MINIMUM leases, when I did that I think my tenants started staying about 5 years on average.

    Having the BEST house available attracts good tenants. Everything "ship shape and Bristol fashion" as my Brit friends say.

    No, no, and NO. You charge a premium rent! I used to think that too, experience changed my mind. Back in the day I would have prospects call me and ask about my sign. I would tell them the rent was $800 for example. They would tell me the guy in the next block only wanted $750 for a comparable sized house.

    I would point out that mine had; extra insulation, higher efficiency A/C, solar shielding screens on all south and west facing windows, automatic garage door opener (well before they were truly standard on every price range house), recent paint and carpet etc. Or I would just tell them mine didn't have holes in the sheetrock and dog p**p on the carpet. That's why mine was more.

    One other thing. When I walked my prospective tenants through the house I paid particular attention to HOW each of them rounded corners when entering a room, especially when it's necessary to make a bit of a turn into the room!

    Lower "class" folks tend to put their hand no the wall and "swing" themselves into the room. And by class I don't mean just economic, social or race. It's just something that people with a "renter mentality" do. With people that do that you're going to have major cleaning and painting even if they're only there for 30 days.

    But that's YOU. You're an OWNER, you're not a "renter". Different attitudes about life, and how you treat other people and their property.

    IMO many of the major expenses of a house are NOT related to the class of tenant; roof, heater, water heater, carpet and other flooring. Granted these things are all long lived, and carpet will wear faster if it's not regularly vacuumed. But if you're keeping your tenants 5 years you're probably going to replace it every turnover. Lower class tenants you're more likely to try to stretch its useful life which is often penny wise and pound foolish as you may attract a lesser tenant with worn carpet.

    Just a few random thoughts.

    all cash

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    That is absolutely wrong. It is true that I suggest not buying a "deal" that will lose money (like yours). It is also true that the vast majority of newbies fail in a short period of time because they 1) pay too much for their property and lose a bunch of money due to the negative cash flow and 2) they don't understand how to deal properly with tenants.

    I look at each deal a person posts individually. If the deal will lose money, I say it's a bad deal. That is most of the deals on the forum because most of the posters are newbies. If a deal has a little cash flow, I will say that the deal is OK, but that it would be a better deal at a lower price. If the deal has significant cash flow, I will say that it's a great deal and that I would buy the deal myself.

    I honestly don't know why you even posted here. Almost everyone with experience told you this is a bad deal. You thought that the expenses consisted entirely of maintenance expense. When we told you the truth about operating expenses, you blew it off. You touted the tax advantages of this property, but when All Cash explained that you were really trading dollars for quarters, you blew that off too. You have ignored all that advice and you insist it is a good deal. That is fine with me. You may be right - long term appreciation MAY bail you out. You're speculating on appreciation - also fine with me - it's not my money. If you like the deal, you should buy it!

    I would like to hear REI's opinion on this deal. REI usually is a proponent of a deal that will lose money in hopes of appreciation. I wonder if he thinks this is a good deal? Would he do this deal?

    As to the interest I pay each month, I certainly don't know the exact figure without looking at the reports for each of my companies. Suffice it to say that the interest is MANY thousands of dollars per month. What is your point?

    Good Luck,

    Mike

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Fair response and appreciated greatly. I think a person with little equity and high loan payments is under greater pressure to get a property cash flow positive from the get-go, but longterm that same person pays more loan interest so perhaps there is a bit of tradeoff.

    I am quite sure that there is no property here in this region which one can purchase with low down pymt and instantly make a positive cash flow. Prices are too high, yet the fact is, people still invest in real estate. Just like I paid a lot of money to go to college, to send my kids to educational expeditions, I am educating myself with one property and will go from there. Nothing ventured nothing gained, I have my pulse one the market here and think I know a good deal when I see it.

    I have been attending foreclosure auctions for the past 10 weeks (give or take) and have a feel for that part of the mkt. A guy picked up a duplex two weeks ago for $250k at auction, which was the lowest cost duplex I've seen in my months of looking at MLS, etc. It was at least worth $50k less than the new property I am considering (looks like I will not get it if seller holds firm, in any case I did offer $300k) on huge lot in a far better area with direct link to huge employment center. I may be underestimating rents as well.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    That doesn't make sense. A person with little equity (and high loan payments) won't have a property that cash flows. To get a property to cash flow, you need more equity and lower loan payments. None of my properties have less than 30% equity and many/most are closer to 50%.

    Mike

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  • Scott Weaner
    Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes
    18y
    Originally posted by "MikeOH":

    That doesn't make sense. A person with little equity (and high loan payments) won't have a property that cash flows. To get a property to cash flow, you need more equity and lower loan payments. None of my properties have less than 30% equity and many/most are closer to 50%.

    Mike

    Mike, I think he means down payment equity, not equity from getting a better price. (Is this really different? I guess not.)

    When he was talking about renting properties and having no damage, I think it was referring to him as a tenant. I have been a tenant several times. My family lived in an apartment growing up for 6 years, and we did not abuse the place. Then I lived in a new rental house as a student. What was the owner thinking!! Five male students and a dog in a new house? BAD idea. I lived in a rental house while in the Air Force with my wife. No damage, all rent on time.

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  • Mr Good
    OP
    Bellevue, WA · Member since 2008 · 40 posts · 0 votes
    18y

    Reflex: correct on me being the renter and not causing damage, ever. I was a renter for about 8 years starting age 18, through 26. Never broke anything or failed to pay on time.

    Good to know about loan percentage 30-50% as I intend to stay in that range as well. I believe, though not sure, that in some of the richer markets such as the one I live, rental props just may not breakeven for a few years. I could be wrong. I am looking longterm though and see a solid home in good condition as a great hedge against inflation which is my own personal outlook.

    The RE agent who I dealt with for this purchase called this morning and said the seller went with another offer so it's a surprise. They had it on the mkt 200+ days, and 50 days ago went to $320k (started out at $365k), and the day I offer $300k they take an offer for the first time from someone else. Apparently this prop has never been STI in the entire time it's been on the mkt. Perhaps it's a RE trick to say another offer got it, who knows, but it probably was purchased by someone else. I have no emotional attachment.

    This puts me back to Square 1 and I will no doubt come again seeking further advice, and welcome all Naysayers of course. I am an eternal optimist so I always seek the naysayer.

    The home I was very interested in about 2 months ago was just formally listed as REO a few days ago. I first found it as a foreclosure. It went to auction and failed at $324k in September. Owned by Chase now. They just listed it on MLS for $350k. My friend said to wait until the first round of price reduction, which will be about 45 days, and it will go down about 10% because banks work on a time frame. After the first reduction go ahead and make an offer. I think it's a good deal at $300k. Does that sound about right, in terms of timing? Thanks for any feedback.

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  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    18y

    That makes a little more sense, however having a high loan payment means that the cash flow is lower, regardless of the cause of the high loan payment. However there is a HUGE difference between having equity as as a result of a down-payment vs. buying at a discount. In the first caseyou are buying the equity with your cash. In the second case, you keep your cash and EARN your equity by finding a good deal. Earning the equity with a great purchase is the way you build wealth!

    Mike

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  • Will Barnett
    Investor · DFW, TX · Member since 2008 · 66 posts · 2 votes
    18y
    Originally posted by "all cash":

    One other thing. When I walked my prospective tenants through the house I paid particular attention to HOW each of them rounded corners when entering a room, especially when it's necessary to make a bit of a turn into the room!

    That's something I've never thought about, but makes perfect sense. Thank you for that little tidbit of info.

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