Guy 1: My mentor offered a Duplex R/E option to me at 17,000 with purchase price being 85,000. It is located at Del Rio, Tx 78840. Basically here's the numbers he told me:
|10% management fee||$1,320.00|
|80% mortagage payment||$376.82|
Guy 2: My colleague's boyfriend told me I need to include 10% maintenance fee plus vacancy rate should be 10%. Therefore, the conservative monthly rent income should be 1,100.
Guy 1(My mentor) counters that house does not need 10% maintenance fee because he does preventative maintenance. Therefore, maintenance fee is just the repair fee. He told me he changed all light bulbs to CFL light bulbs and check all cables for shorting when I pressed on exactly how the preventative maintenance was done.
Guy 1(My mentor) further counters that vacancy rate is actually 7 days per year cuz the area is hot so I shouldn't use 10%.
No maintenance costs? What preventative maintenance did he do to ensure that a neighbor kid doesn't accidentally throw a baseball through a window? Is his preventative maintenance so good that a toilet won't break any time in the next 20 years? Is the HVAC new? If not, how does he know there won't be a maintenance issue with it?
Sorry, I don't buy it...
As for 7 days of vacancy, perhaps that's possible for a very experienced landlord who doesn't mind the hassle of trying to do showings before the existing tenant leaves and who can do a make-ready (paint, carpet, etc) in just a couple day. But, for a typical landlord, that's ridiculous. It's more like a month every 1-2 years, or about 4-8%, at best.
Sounds like your mentor cares more about making money than about doing what's best for his student...
Time to look for a new mentor.
I would ask the Guy 2 to see if he would be interested in helping you with first few deals.
You're in CA but looking in TX - so where are these guys located?
Stop, turn around, walk away from this "mentor," and never look back.
Um... Steve Babia
Both guys are in California. My "mentor" is in Columbus and this deal is from another student of his.
Guy 2 works in Cali but invests in Arizona.
Thanks for the helps guy!
Stephen it's common for newly rehabbed units for the sellers to quote no maintenance and these great numbers etc.
I always throw that out. I tell them the buyer over time is going to have greater costs than that on average.
Remember they want to sell on the dream but you want to buy on the nightmare projection numbers ( worst case scenario and still feel good about it).
Ditto what others said. Noresponsible mentor would ever say; count on only 7 days vacancy a year. That is just silly.
Fire Mentor 1 immediately, and with no regrets.
A "hot" market is 5% vacancy (+/-). 10% vacancy is an accepted standard, but may vary from 5% to 20% or more depending on the submarket.
Repairs and maintenance are a fact of life, and represent the average over an extended time. To not count them them is irresponsible.
1. Tenants will always break things. 2. Tenants will always cause "normal wear and tear" hence the word normal. 3. Bad tenants, which will happen on occasion no matter how good your placement is, will cause abnormal wear and tear 4. Do your numbers, projecting worst case, see if they work. If they do, great. If not, walk.
Trust nobody but yourself.
I appreciate all the help I'm getting fromd everyone. Thank you! Thank you!
I agree with the other comments regarding the mentor. Zero maintenance fees and minimal vacancy is obviously ideal and best case scenario. In an isolated year it could be achieved, but to consistently rely on these numbers will undoubtedly result in disappointment and increased probability to over extend yourself. Personally, I plan for worst case scenario and build in 2% PP Maintenance costs/yr and 8% vacancy into my cash flow analysis. If you still meet your cash flow goals with these allocations, you should find that this will provide a decent buffer year-to-year when maintenance costs are abnormally high. Best of luck. Real estate is a great addition to a diversified investment portfolio.
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