Looking to expand my family business through the knowledge here!

Podcast Guest on Show #101

Dawn BrenengenBusiness Member

Moderator

Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes

7y

If it would truly double your rents, then I would recommend some immediate upgrades, but are you sure your numbers are right? Usually, rent is driven by location and size for the ost part. Upgrades play a part, but don't usually increase to double the rent unless you are talking about a gentrifying area.

I usually upgrade over time. As the old white fridge breaks, change to stainless. Replace worn carpet with laminate, etc.

3 Reply

OP

Member since 2018 · 10 posts · 3 votes

7y

Thank you for the response,

I actually forgot to mention that all of the houses are severely under market value, considering the rent has not been raised in the last 15 years (crazy i know). Our properties rent average are $600 per unit. I recently compared the properties to that of section 8 rent standards which are $1353 according to the location of the properties. So now im thinking of a rent increase. But im not completely sure on what to raise them to?

Kerry BairdPro Member

Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes

7y

My first thought: Can you not use the cash flow that is generated from the properties to renovate? Or cash that is in your business/maintenance fund?

The challenge in renovating in a portfolio like the one you mention is determining which renovations will allow you to increase rents, ie give you a benefit or return on your investment.

You might consider “hardening” your properties, and you’ll find many threads on that topic. In our rentals, as an example, we have removed carpet when it is present, and replacing that with a nicer quality vinyl plank flooring. The price is reasonable, and it lasts better than carpet, doesn’t scratch and presents a modern finish. At the same time, deferred maintenance isn’t part of my investing vision.

You don’t mention what is needed for updating. It is a juggling act between what is needed, its cost, and the increased rents that the market will bear. As an example, you have to decide between those desirable granite countertops vs bargain laminate and everything in between. Same goes for new, dent-n-scratch, or appliances. New windows don’t often bring increases in rent. So...you’ll really have to set parameters that you and your business partner/s can agree upon.

You mention asset protection. You also need to get the guidance of an experienced real-estate planning CPA. You will find repairs vs replacement of components in each property will affect your tax situation.

Long story short, get detailed advice from your advisors.

3 Reply

Richard Sherman

Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes

7y

@Andrei Stegger jr Holy undermarket rents batman! What market are you in? I buy apartments and I ALWAYS want one run like this...because Property Value is = NOI divided by cap rate. So when rents double....what happens to value?

GREAT advice from @Kerry Baird

Here is what I would do RIGHT NOW.

1. Anyone that is out of lease gets a rent increase. Check your local regulations, you might be able to raise it a LOT and you might have to stagger it. Bigger increases go to properties I want to rehab or tenants I want to get rid of. If they leave, great, if they stay at the higher rents with no rehab...GREAT. I LOVE the paid for properties...get rents raised first, if you can, use rents to pay for updates, if not, look at maybe a 50% LTV portfolio loan (talk to banks and find one that will loan against ALL the properties, 1 loan, 1 appraisal and closing etc. You will need to look around, probably it will be a local credit union or smaller regional bank.

2. Update the whole process...maintenance repairs, leases, get a LLC , get an umbrella insurance policy if you dont have one (and shop insurance, don't just use your grandpa's old buddy Dan's grandson who runs the farmers agency you have been using for 40 years...am I reading your mail a little? haha. Have all repair requests etc come in writing if you can (email or letter) that kind of thing.

You have a great start, listen to your grandpa though, there is a lot of wisdom there, just needs some modernization and to reduce some of the operating by fear that led to not raising rents. This is a business, if he owned a gas station he can not sell gas at $0.89 a gallon just to keep old customers happy.

OP

Member since 2018 · 10 posts · 3 votes

7y

@Kerry Baird Thank you for the response! Unfortunately, The cashflow thats generated is not enough to fund any renovations. Quite frankly at this time it seems all we can really afford to do is retuxture the walls and paint everything a modern color with white trim. I also agree with "deferred maintenance" not being a part of your vision, it is definitely not a part of my vision as well. But the cashflow generated does not allow me to do the things i want.

Also, i will definitely check into "hardening" the properties. There is a lot i still have yet to learn.

The majority of the houses were built between 1912 and 1955 and quite frankly it does not look like they have been updating much since then.

Also it is just my grand father and I. His mentality is patch them up rent them back at at below market value. But cost of living has gone up a great deal since he started in the 1990's and he has not increased them since.

I will have to look into acquiring a CPA. We have never had one, but i know they would be a great deal of help in establishing everything.

At the moment there is no advisors, really i have just been working with a friend doing all the due diligence i can before calling anything into action.

OP

Member since 2018 · 10 posts · 3 votes

7y

@Richard Sherman Amazing advice from both you and @Kerry Baird ! thank you for the quick response aswell.

I am in the buy/hold, our preference is to rent properties.

I know here in Texas if your tenant is on a month to month then you can raise is it by any amount, once a year.

Definitely some great info here. With a 50% LTV portfolio loan i should be able to full rehab to tenant grade each property as they become available. Atleast im assuming that would be the proper way of action?

Yes, our lawyer advised a Series LLC? still want to look further into that. Also acquiring an umbrella policy is on the list as well. Haha yes my grandfather does not like to steer from his old ways. I will start doing that, usually the tenant calls me and we do all of the work. We've always done everything ourselves, we have never hired any contractors or anything like that.

I agree 100%! Exactly we are running a business, that is the mindset him and i need to acquire

Richard Sherman

Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes

7y

@Andrei Stegger jr Texas is good, that is a very friendly state for landlords.

A#1-- RAISE THE RENTS ASAP. Even if you want to do a small across the board raise ($50-100-150) and a larger raise on some renters who are problems or properties you want to work on, then do that. I would try to avoid getting the loan if at all possible unless you absolutely WANT to.

Try to do the renovations out of cash flow. $100 per door over 18 units is $1800 a month increase, save that up for a couple of months and do your repairs on 1-2 units as they become vacant, then keep going. I always want to make my properties pay for their own repairs. I am not against the loan, but there are costs, depending on value etc, probably around 10k totak at least in appraisals, loan fees etc.

If you go the route of the loan, I would start doing exterior work that needs to be done WHILE increasing rents and only rehab when units become vacant. Know your market, do not put granite in a section 8 level rental etc. For example, are the cabinet boxes good and you just need new doors and or sand and paint them and a new countertop? Replace ALL valves for water, all outlets when you do remodels. ALL switches, valves, outlets and fixtures get updated as it will save you a headache in the future. Standardize on one line (I like Delta Foundations for faucets etc). Same for flooring. I would do vinyl plank as @Kerry Baird suggested. I do a gray looking wood grain with a light gray wall and semi gloss white trim. LOOKS AMAZING.

Do the work if you know how and like it, hire it out if you do not. Also, I am not sure on the series LLC. Did the lawyer give you an estimate on the price? What's the total value on all properties you think (just ballpark?) I keep up to about 3-4 million in value in each LLC and have a parent LLC that owns all the others. Depending on value you might not need a series LLC, you might be better off with just a really solid insurance policy. 100% get a CPA...shop around there too. My guess is there is some depreciation stuff going on and you will want to get a handle on that.

https://www.biggerpockets.com/blogs/5868/52761-the-simple-guide-to-getting-started-on-bp

Brandon L.

Real Estate Agent · Falls Church · Member since 2012 · 2k+ posts · 1k+ votes

7y

Hello! @Andrei Stegger jr

Welcome to BP, and congratulations on making the decision to invest in your future via real estate.

I have written a few blog posts that may help you get started here on BP, and with your investing. Please click on the links, give them a read, and share your thoughts in the comments.

First is a post that I feel will help not get overwhelmed with the amount of info that is here on BP:

The second is a post that will help get you focused with your real estate investing goals:

https://www.biggerpockets.com/blogs/5868/52743-im-new-to-bp-any-advice-would-be-appriciated

The last one is a post that will help you choose an “investor friendly” real estate agent.

There are many agents out there, but it’s important to choose the right one.

https://www.biggerpockets.com/blogs/5868/52724-im-new-to-investing-how-do-i-find-an-investor-friendly-agent

I love answering questions if you have any! Good Luck :)

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

7y

Originally posted by @Andrei Stegger jr:

@Richard Sherman Amazing advice from both you and @Kerry Baird ! thank you for the quick response aswell.

I am in the buy/hold, our preference is to rent properties.

I know here in Texas if your tenant is on a month to month then you can raise is it by any amount, once a year.

Definitely some great info here. With a 50% LTV portfolio loan i should be able to full rehab to tenant grade each property as they become available. Atleast im assuming that would be the proper way of action?

Yes, our lawyer advised a Series LLC? still want to look further into that. Also acquiring an umbrella policy is on the list as well. Haha yes my grandfather does not like to steer from his old ways. I will start doing that, usually the tenant calls me and we do all of the work. We've always done everything ourselves, we have never hired any contractors or anything like that.

I agree 100%! Exactly we are running a business, that is the mindset him and i need to acquire

What makes you think that?

OP

Member since 2018 · 10 posts · 3 votes

7y

@Richard Sherman sorry for the late reply. Yes you are absolutely right, Texas is good state for landlords.

I am planning on raising the rents ASAP. I'm just trying to figure out the proper way to do that. I have done it once before to a few properties, but im not too clear on the aspects. Is it a 30 day hand delivered notice only on month-to-month leases? and if they don't want to pay then its another 30 days if they write a letter declining? im still a bit iffy on that.

But yes i do agree. I would much rather do these repairs out of cashflow. But another thing to consider is that these houses are severely out of date and need modernization.

I agree with that route. Doing exterior work and major repairs like roofs and foundations, while rehabbing interiors as they become vacant. Ok that was definitely some good knowledge right there, i will make a note of that. Get all of that done to avoid future headaches. Thanks so much for that. I would like to have all of the properties eventually look modern, tenant bases budget in mind. Higher curb appeal will attract more potential tenants.

I would honestly prefer to higher contractors so i can focus more on running the business. The price was $4200. Well based on market value they are in the ballpark of 1.5M. But i know that since they are outdated and need work they are gonna be somewhere below that.

CPA, That's definitely another thing i want to look into. I'm just not sure if we can afford to hire one with the cashflow being generated now. After doing some networking my lawyer gave me a number of a CPA he trust and knows personally. Just need to find out how to fund this.

Also, instead of doing a refinance, how does an equity line of credit work? could you also enlighten me on the LTV portfolio loan.

Thank you again!

OP

Member since 2018 · 10 posts · 3 votes

7y

@Brandon L. thank you for than info. iI'm definitely going to go through those forums, i need all the knowledge i can. I appreciate that!

@Ronald Rohde that's the thing. I'm not to sure on what stipulations there are when raising rents. It's something I've been looking into on the internet. I want to make sure I'm doing it the right way

Richard Sherman

Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes

7y

@Andrei Stegger jr A CPA is a must and it should not be crazy expensive. Even if you spent $400 or so for a few hours of consultation I think they could really help a lot. Is your grandpa doing his own taxes now?

A lot of the worries are the cashflow, and that is what we need to solve ASAP with those rent increases. You will want to spend some time onine finding out what the process is for raising rents in TX. Google search renter rights in Texas. It will tell you what you need to do for notice. I would generally do a 90 day notice for rent increases, but I am in OR. Just a simple form and letter listing the new rates and explaing why (because you want to bring them up to market.) You do not want to have a lot of vancancy, so consider keeping them under market by a little so it is still a good deal.

Most of these issues...rehabs, updates, CPA, Series LLC etc can all be solved by better cashflow. ALSO, I would say 100% your first money spent needs to be on a CPA. My guess is that there are some serious tax savings possible.

Start talking to local banks on the portlfolio loan. My guess is you could get maybe 65-70% LTV...BUT remember, loans will cut your cash flow. Cash flow is your friend. Do everything you can to keep them debt free at least until you get the rents up and them fixed up (because the value will be higher then.)

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

7y

Originally posted by @Andrei Stegger jr:

@Brandon L. thank you for than info. iI'm definitely going to go through those forums, i need all the knowledge i can. I appreciate that!

@Ronald Rohde that's the thing. I'm not to sure on what stipulations there are when raising rents. It's something I've been looking into on the internet. I want to make sure I'm doing it the right way

Read the existing lease, or any written agreements. You should get this reflected in new leases anyway.