First deal under contract!! Any last minute tips?

18 Replies

Hi everybody,

I have listened to almost all of the podcasts and have wanted to invest in a rental property for the past year.. I have been patiently waiting for a property to fit my criteria, which has been difficult in this market. I am located about an hour north of Atlanta, GA. Some details about my first deal...

1. 3br 2bth townhome, 1500 sq ft, built in 2005.

2. Asking price was $100k, first offer was $70k, and we settled at $77k and seller pays $1.5k closing costs.

3. It needs about $10k of work, and renovated comps are around $95-105k.

4. Rents in the area are about $900 a month, and the neighborhood has a $75 a mth HOA.

5. The area is probably a B-B+, however with a university expanding to about a mile away, and some relatively large businesses coming in about a mile away, I am hoping to see decent appreciation over the long term.

I am hoping to potentially do a little BRRRR action if it appraises high enough after the small reno. After factoring in property mgmt even though I will personally manage, I believe it should cash flow just over $100 a month. We close November 6th, and one of my biggest concerns is trying to find a renter during the holidays. I get a little comfort knowing rentals in the area are tough to come by, and typically 950+.

I have about a month to organize everything. I plan on getting some hard quotes from vendors for new appliances, flooring, fixtures etc to move quick once close is final. I also want to have my minimum tenant requirements, lease, policies, and application fees/process in place before we close. I will be spending a lot of my times on the weekends painting and doing what I can after we close so I wanted to make sure I got the "behind the scenes" work done first. I am also going to transfer it into an llc after we close, and manage it through a separate property mgmt llc. I have some last minute questions, and was hoping you guys could give me any tips you might have to avoid any mistakes/problems I may not have addressed?

1. Do you guys deduct mileage on your taxes/llc P&L every time you visit the property?

2. Should I set up an LLC before close? I am wondering if there are any tax issues I would run into if I buy the house in my name, then transfer it into a business (I know most of you arent tax CPA's but anecdotal stories would be appreciated).

3. I am going to market via flyers at local businesses, zillow, rent.com, all the standard sites, but was wondering if you guys have any creative strategies since it may be more difficult during the holidays...

4. Does anyone recommend a homeowners insurance company? 

5. Am I missing any glaring issues? Sometimes its difficult to see the forest through the trees.

I am so excited, this is really a dream I've had since I graduated college two years ago, I have saved all I could (even with student loans) to pursue my goal of financial independence. Any help would be really appreciated! Thank you in advance!

How did you get to your $100 cash flow? I'd like to see your thought process. 

Also, definitely get insurance on it. With it going to sit vacant for a short time and you doing renovations to it you definitely want to have some coverage on the place. Murphy (Murphy's Law) can show up at any time!

It is always more difficult at the beginning.  Here are my answers to your questions.

1) Yes. You would want to deduct the mileage every time. I tried to make things a little easier. So I usually find the distance through Google map and just record the times visited the property. I am not an accountant, but I think as long as you have some documents to explain where your number comes from, it should be ok.

2) We set up LLC before close. It saves you some money for title transfers. No tax issue on transferring the property from your name to LLC. When we set up LLC initially, it was for legal protection based on other people's suggestions on the forum. However, when we start to advertise properties for rentals, I realize a LLC sounds much more professional than a person's name. Good quality tenants tend to prefer more professional sounding companies.

3. If you have not tried Postlets yet, you should try that first. That is usually my starting point when I need to create a new ad.

4. Allstate has the best prices I have seen. However, they could only sell you insurance for maximum 4 rental properties. More than that, you need to find a different one.

5. We use MrLandlord.com to do credit checking. They only charge $9.95 for the service, which is the lowest I could find online. We have been in rental business since 2011 with total 12 SFR rental properties. We have a very good track record of quality tenants. I must say MrLandlord.com's credit checking has made our decision process much more reliable and consistent. We also use eRentPayment for collecting the rent on almost all of our properties. They have excellent customer service with very reasonable price.

Wish you good luck on your first leg of journey!

Wow, thank you everyone for the quick and in depth responses!

@Tim Puffer , My inputs well undoubtedly get more detailed and "accurate" as I get better at this, but as a practical expediant, I used some percentages of revenue and purchase price to estimate certain costs. Dollar amounts bellow are annual...

Rev: $10,800

Vacancy (8%)

Cap ex estimated at 1% of the purchase price or $770

Maintenance estimated at 5% of gross rental revenue or $540

Property taxes (last few yrs were $400s) estimated conservatively at $700

Insurance est $1000, this feels like the biggest guess to me...

Property Mgmt at 8% rent revenue or $864

HOA $900

NOI = $5,126

Debt service at 4.625% interest (30yr Am Fixed Rate, 20% down) $3,801

Free cash flow $1,325

Depreciation ($2,852)

After Tax Total Return $1,707

As for the insurance, I am in the process of getting quotes now. Actually just spent the last 3 hours on the phone with not much progress. Getting "landlord" insurance is more difficult than I first thought.

Originally posted by @Jane Z. :

It is always more difficult at the beginning.  Here are my answers to your questions.

1) Yes. You would want to deduct the mileage every time. I tried to make things a little easier. So I usually find the distance through Google map and just record the times visited the property. I am not an accountant, but I think as long as you have some documents to explain where your number comes from, it should be ok.

2) We set up LLC before close. It saves you some money for title transfers. No tax issue on transferring the property from your name to LLC. When we set up LLC initially, it was for legal protection based on other people's suggestions on the forum. However, when we start to advertise properties for rentals, I realize a LLC sounds much more professional than a person's name. Good quality tenants tend to prefer more professional sounding companies.

3. If you have not tried Postlets yet, you should try that first. That is usually my starting point when I need to create a new ad.

4. Allstate has the best prices I have seen. However, they could only sell you insurance for maximum 4 rental properties. More than that, you need to find a different one.

5. We use MrLandlord.com to do credit checking. They only charge $9.95 for the service, which is the lowest I could find online. We have been in rental business since 2011 with total 12 SFR rental properties. We have a very good track record of quality tenants. I must say MrLandlord.com's credit checking has made our decision process much more reliable and consistent. We also use eRentPayment for collecting the rent on almost all of our properties. They have excellent customer service with very reasonable price.

Wish you good luck on your first leg of journey!

 Wow!!! Thank you so much for this information! I will try Allstate next, I havent had much luck with a few other companies. Mr Landlord sounds perfect! I have not heard of that one. I see you're pretty close to me, have you had any leases end during the holidays? 

Originally posted by @Rafael Norat :

I would add to your list a comparable market analysis from a realtor to give you an idea of what you can possibly refinance for when done. That can also help guide your costs on the rehab.

 Good call! I will keep that in mind during the rehab. I seem to lead towards "over building" when I was getting some quotes for flooring and appliances...

Do you know if most banks will refi 80% LTV? I assumed they would, but the other day I thought I came across an article saying 70% is typically what they do. If thats the case I wont be able to pull anything out initially :/ Maybe I will look into a portfolio lender once we reach that point.

Other than Allstate, the other insurance we used is American Family Insurance. Their price is much higher than Allstate, but better than some other companies' quotes. I think Allstate offered us a discount since it requested us to buy our own home and car insurance from them in order to get that price.

We had lease ended in Oct - Dec in the past. I would definitely try to avoid those months if possible. Even January is much better.  However, rental market here is very hot these days. So it may not be as difficult as in the past. I think it is very important to resist temptation to rent to someone below your acceptancy policy when the property has been on the market for a couple of weeks. I would rather lower my rent than lower my acceptancy standard. In the end, if you have a good clean house in a decent area with some pretty pictures online, quality tenants will find you.

Hi David,  The biggest congratulations to you for getting started. These are some suggestions based on the hard knocks I experienced.

1) talk to good CPA ASAP.   You'll be able to deduct a whole lot more than mileage. Even if they charge for the consultation It's worth it. You'll be amazed at how much you learn with just a conversation.

2) spend as little money as necessary on the remodel. Buy nice secondhand appliances off of craigslist. Use basic cheap materials from the big box stores that are easy to replace when damaged by tenants. 

3) Think about your lease very carefully and discuss it with an attorney.  Make sure it is rocksolid. Consider things like smoking, what happens when their lawnmower brakes and they stop cutting the lawn, what happens if the tenants get a puppy half way through the lease(they'll use your house to house train him), what happens when the tenants brother moves in and the tenants move out. That can be a tricky eviction. 

4) understand the Georgia eviction procedure inside and out. Go to the courthouse and watch a few sessions. Wether you use an attorney or not you're going to want to know the process.

5) in Georgia you're able to manage your own properties without a real estate license however a property management LLC must be a licensed realtor. If you are going to manage property yourself verify with an attorney that you can do this with the home in an LLC.

6) talk to lenders now. Most lenders will not lend to an LLC. The ones who do will want to see two years of LLC tax returns.

I hope this helps.  Feel free to reach out if you have any more questions. Thanks, Jason.

Originally posted by @David Kenny :

1. Do you guys deduct mileage on your taxes/llc P&L every time you visit the property?

 I am a new investor with 1 rental property. I write off everything I can. My rental is 4 miles from my personal residence. Even when I just drive by the property to see if the grass has been cut, I will write off the 8 miles for the round trip. I never even get out of my car, but I'm still going to write it off on my taxes. It's a business trip. I am checking on my investment.

David Kenny First, congrats on getting started. Here's my honest advice (different market, but I'm speaking from experience and years spent hitting my head against walls before realizing the below is just reality)...

- The LLCs are overkill and will only make your life harder. You're getting a Fannie-backed loan, I assume from the terms you referenced, and you're not going to want to change title from your personal name to the LLC.

- Assuming you want that same good loan term on your refi, you'll only get 70% LTV.

- You're going to over-improve the place. Almost everyone does on their first one. Take the above advice about materials and appliances and make sure it sinks in. You'll be in the minority if you can control yourself on this point.

- For insurance, look to whomever has your primary residence and/or auto insurance. Ask them to add the new place. Again - holding title in your own name makes this way cheaper and easier than dealing with LLCs, general liability, and the accounting details needed for a company. The more policies you have with one company, the cheaper and easier life is for investors.

To make a bulletproof advice post requires lots of caveats and asterisks and acknowledging special situations that could result in different advice - I'm not going to waste characters here on that. I'd bet there's a 95% likelihood the above applies to you.

Suerte!

Congratulations!

1. Absolutely on mileage. I have a spreadsheet that I keep in Google Drive so I can just do it from my phone.

2. I haven't bothered, and I have more properties than you. I think you will hear pros and cons on this, but if you keep a good umbrella policy you should be fine.

3. Do something that other landlords don't do. Ideas: accept pet(s), install/provide over and beyond appliances/services; play up a fresh remodel; price slightly below market rates for the off-season. Holidays are tough, not impossible. I try to have all leases end in the summer to avoid this issue.

4. I use Allstate and the 4 property thing is new by me. Maybe my agent just doesn't realize how many properties I have.... I won't say they are the best or cheapest, but I have had them for a long time and every time I shop insurance no one beats their rates in my area. 

5. Remember the important part of rental properties: clean, neat, safe, usual amenities. Don't try to make your property the Taj Mahal, but don't expect renters to overlook filthy carpets or busted light switch covers, either. Do improvements that add to the bottom line and skip foo-foo stuff that feels good but doesn't add any value. Don't skimp on important structural issues, not much of an issue for you in a th/condo. Don't get trendy on improvements. Always have the tenant pay utilities if possible. Install items that can take regular abuse or are cheap to renovate. Screen tenants thoroughly and carefully - it is better to have a vacancy than a bad tenant. Always remember that cash is king, money talks and ******** walks, as they say. 

Wow, so much good advice in here! Thank you all for the detailed responses, I am taking them all to heart! 

Its going to be hard to not over improve I think, only because I have so much pride in this one (since its my first and only). Luckily I have a more level headed girlfriend who will keep me balanced. Again thank you all for your advice!

I don't think anyone mentioned it above. Make sure to post your ad on Craigslist too.  That along with Postlets gets most of my leads. Postlets automatically posts to Zillow, Trulia, Hotpads and other sites as well.   Many tenants use the Trulia or Zillow phone apps to look for apartments. 

Assuming you have an HOA, make sure your HOA allows rentals before you close. Some don't, some may charge you a fee or have restrictions on the type of tenant, and some HOA might not be financially sound which will cause a problem for your mortgage lender.

If you have an HOA and common walls with the neighbors, often the majority of the insurance cost is already covered by the HOA. Your landlord insurance can be a lot less than $1000/yr. I have two HOA condo townhomes in MN each for under $200 per year.

For tenant screening do a background check on each applicant in addition to credit checks. I use MySmartMove.com to get both for $35 per applicant.  

Make sure they make 3x rent in income, and make sure the credit score is at least 660 for all applicants.  Check past landlord references and also ensure they can prove the work income with paystubs and tax returns.

Originally posted by @Marc Jolicoeur :

I don't think anyone mentioned it above. Make sure to post your ad on Craigslist too.  That along with Postlets gets most of my leads. Postlets automatically posts to Zillow, Trulia, Hotpads and other sites as well.   Many tenants use the Trulia or Zillow phone apps to look for apartments. 

Assuming you have an HOA, make sure your HOA allows rentals before you close. Some don't, some may charge you a fee or have restrictions on the type of tenant, and some HOA might not be financially sound which will cause a problem for your mortgage lender.

If you have an HOA and common walls with the neighbors, often the majority of the insurance cost is already covered by the HOA. Your landlord insurance can be a lot less than $1000/yr. I have two HOA condo townhomes in MN each for under $200 per year.

For tenant screening do a background check on each applicant in addition to credit checks. I use MySmartMove.com to get both for $35 per applicant.  

Make sure they make 3x rent in income, and make sure the credit score is at least 660 for all applicants.  Check past landlord references and also ensure they can prove the work income with paystubs and tax returns.

 Great point on finding tenants on their phones! I will be posting on Postlets for sure.

I did check with the HOA and they confirmed (although not in writing) that there were no rental restrictions. This is kind of a side question but has anyone dealt with property management companies who also run the HOA? That is the case for this property, and my realtor said a lot of neighborhoods are going this route.

I am having a good bit of trouble with the insurance side of things. Allstate got back to me and said they recently updated there requirements and if I dont have an auto policy with them, my deductible would be $5k AND the property had to be less than 5 years old. This seems a little ridiculous. I am trying Liberty Mutual and Metlife tomorrow, but am getting a little worried. I didnt really think this would be such a tough thing to accomplish. 

Do you charge that $35 application fee to your applicants? A buddy of mine swears people wont pay an application fee, however I have always done this when applying to rent an apartment. I dont really want to eat that cost for everyone that applies.

That is another great point, I wasnt sure where the credit score cutoff should be. Most of my friends/family are well over 700 so I wasnt sure just how low I could go and still get quality tenants.

Thank you!

@David Kenny Most HOAs for townhomes around here (in MN) are run by management companies that specialize with this type of business.

If you have an attached townhome, your HOA will have insurance on the building for major issues like fire, storm damage, and other natural disasters. Their policy will have a high deductible like $5000. Then you need to get a policy that will provide the gap insurance for all of the insides of your property including your appliances. You need to get copies of the HOAs policy then ask your insurance agent to quote you for the landlord policy taking this into account. Work with a local insurance broker rather than a national call center on this.

I ask my applicants to pay $35 each directly to www.mysmartmove.com.  They do not resist the fee.  Around here, everybody charges something. The lowest I have seen was $25 per applicant and I have seen it be advertised much higher too.    You should not pay it yourself because you have to take all applications you receive, even if you know the applicant will not likely be approved. 

@Marc Jolicoeur How do you like smartmove? I am in the process of getting my basic tenant requirements drafted and was also looking around at a lot of different screening companies. I like that smartmove will charge the applicant directly. I am mainly looking for a credit report, and a reliable, comprehensive background check (for felonies and/or sexual offenses). 

Since were on the topic, I was thinking I would require the standard, 

1. 3x Gross Monthly Income

2. proof of employment (most recent w-2), previous 2 years of tax returns if self employed

3. Minimum credit score of 650

4. No felonies or evictions

5. Prior and current address with landlord contact information

Am I missing anything major?

Also I am a little worried about smartmove because they require a SSN which could violate fair housing laws. I would need to have a backup screening process in place as well because we  have a  large minority population.

So this is slowly becoming my "deal diary." 

We had a slight issue during the inspection, a crack in the slab was kind of at that warning level in terms of size. Had to pay an extra $390 to get a structural engineer out there, however it was well worth it for the peace of mind, and to protect my life savings. The verdict was normal settling, and that he doesnt believe it will continue. 

I finally found insurance for my property through Homesite Insurance Agency. It came out to about $890 a year, so I have already saved about $100 on my initial annual expense budget. Next on the list is to nail down tenant requirements/screening process and get a lease T'd up. 

Thanks again everyone!

@David Kenny Smartmove will give you a detailed credit report where you can see the whole report in addition to credit score. Will show you if any debts are not current or not being paid on time regularly.   

I have never seen an applicant that had evictions or criminal records (yet) so I don't know how well that report works.

I ask each tenant to give me an application and do the smartmove unless it is a married couple where I will ask the head of household.

Add Debt to Income ratio less than 45%. You can use the smartmove reporti to calculate the debt to income ratio.

I allow pets so qualifying the pets is another criteria I use.  < 25lbs and type of pet matters to me.

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