@Tiffany Drahonovsky Your soft costs are low. i use 8% vacancy,5% repairs, and 10% capex. No PM should be around 10%. Other landlord paid utilities ie garbage. lawn or snow removal.
Investor Friendly Agent · Milwaukee, WI · Member since 2019 · 53 posts · 37 votes
6y
@Tim Herman if I'm buying and holding, why does capex matter? I thought that was only relevant if I were to flip. Also, tenant handles snow and lawn. Garbage fees are in our taxes. There is a pm in place, but I'm waiting on his agreement/contract. I'm not sure what he does other than collect rent. The place is tidy and in great shape. I've asked for maintenance/service call records.
@Nicole A. Yes, buying it cash. I took the property tax # from Zillow and I have an insurance quote from my agent. The property is being sold by a wholesaler, but we found it on Zillow, even though he didn't list it there. $200/year for personal liability umbrella. This will be held in my personal name for now. May convert to an LLC, still evaluating the pluses and minuses there. Advice along those lines is very welcome.
Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
6y
Great start! Capex matters because it is savings for big items like new roof or new HVAC system in the future. You treat that as a seperate savings pot of money from typical repairs.
Regarding a LLC, I would say that you will likely be just fine getting an umbrella policy. While I'm not against LLCs, as I have one myself, I do think they are over-hyped. You can still be sued. Many people don't run their LLC correctly and it's easy to "pierce the veil" and sue the individual rather than the LLC. And if you're generally providing safe housing and following local rental laws and requirements and just treating people professionally and fairly, no one is really going to have ground to sue you for anything. You might find yourself dealing with an angry tenant one day who makes the threat, but they usually don't mean it because they know you did nothing wrong. They're just angry at whatever situation.
Once you begin to get several properties that also have a lot of equity, it may be a good time to more seriously consider a LLC. But if there isn't much equity or asset value, then there isn't much to chase after.
@Tiffany Drahonovsky Like @Nicole A. said Capex is for future repairs. These are some of the items that need to be included in a capex budget. Roof 25 year life span, floors 10 year, appliances and hot water 12 year life span, hvac 20 year, bath and kitchen remodel 15-20 year life span, etc. Your rental would be the first that didn't have future expenses.
Rental Property Investor · PA · Member since 2019 · 63 posts · 57 votes
6y
@Tiffany Drahonovsky
If you buy it in your personal name and then try and transfer it to your LLC you will need to pay transfer taxes. These can be steep depending on the property and the value. Something to consider before purchasing this property. Ask your agent/attorney what the estimated title transfer tax will be.
Also CapX, repairs and maintenance, and vacancy are majorly important! I typical factor in 8-10% for vacancy, 5-8% for CapX, and also 5-8% for maintenance. It is IMPERATIVE to factor in these numbers when evaluating a property. Without these safety nets in place you WILL go belly up. It’s not a matter of IF repairs will happen, it’s a matter of WHEN they will happen. You need to have a decent amount of cash on hand to make repairs or upgrade your building in time. When the HVAC goes and you owe the repair man $5,000, wouldn’t it be nice to have $3,000-$4,000 in your CapX account that you’ve been saving for the past 2 years? That way you are only out of pocket a grand or so.
Summary. Over calculate for repairs and CapX. You’ll thank me in 1-5 years when you still own your building and all your major systems are replaced and good to go for another 10 years.
Investor Friendly Agent · Milwaukee, WI · Member since 2019 · 53 posts · 37 votes
6y
@Tim Herman that makes sense, and I appreciate the tips to keep things real! We want to go into this with eyes wide open and a solid plan in place. Thanks for your comments and the ballparks you use! These will be helpful to start with and see if they hold true for this property and market. Have a great New Year!
Investor Friendly Agent · Milwaukee, WI · Member since 2019 · 53 posts · 37 votes
6y
@Dylan Thomas It's interesting that my accountant did not point that out. I'll have to check with her, so thank you for bringing it up. I can really say I learn something new in this business every day. I also agree on the when vs if. We went with a small single family as our entry point for that very reason. It's important to be stringent on the planning and funds and not let the cash flow derail us from the business plan. Back up savings has served me well in personal life, the same principle certainly will hold true in this area as well. A smaller emergency is always better than a larger (financial) emergency. Thank you for your comments!