All Forum Posts by: Marcus Auerbach

Lisa nailed it !! 

And this is exactly the point that is so often misunderstood or overlooked. It blows my mind that people make statements about the great ROI and typically refer to cash flow after PITI ignoring repairs and reserves. Damn right it is about cash flow, but when you do the math for a 30k property then don't be naive about the repairs and look at TCO total cost of ownership over the lifetime of the asset. And don't forget that there is a overhead cost to every maintenance call, not just how much the contractor charges.

Replacing all mechanical systems in a house that can be expected to fail in the next 5 years makes perfect financial sense. Eventually you will have to replace it anyway, because it simply is beyond repairs and patches. So you really pay double, first for all the repairs and then for the full replacement cost on top of it.

I find that in my market $30k neighborhoods don't warrant the necessary expense to replace the essential systems, because comps no longer support it and your asset ends up being under water. The cost of a new roof is exactly the same for a $30k house and a $100k house. And eventually it will need one...

@Donald Morrison

Let me ad a little, maybe I did not do the best job explaining this - I don't think the 100/10/3/1 rule is to be taken literally. It is more a guideline like so many other rules of thumb that are commonly discussed on BP. It does certainly not mean that you can't buy a house before you have turned 2 other AOs away or have completed your 100 list. It just says that you can turn an AO away if you find something during the inspection that renders your asumptions/numbers invalid - like a bad foundation. By all means if you got a good AO and the property is ok, why would you not close?

Last year I talked a friend of mine, who has been renting for almost 15 years into what Brandon calls house-hacking. She never owned a house before and I was horrified when I found out that she offered almost asking price for a massive fixer upper duplex after looking at a grand total of 4 properties on one Saturday afternoon. It blew my mind, as she would go back and forth over buying a pair of shoes for weeks, but buys a house in an afternoon.

Well, what can I say, to my relief everything worked out well, its a great property in prime location and the rehab stayed almost on budget; she got really lucky.

@David S.

 I remember the feeling, we all have been there and it takes time to get comfortable (in hindsight you will wonder what you were so worried about). It does not sound like you are stuck in analysis paralysis, rather you feel the pressure to make something happen. You are doing the right thing by running the numbers. The more deals you analyse the better you will get spoting a gem. The old rule is: look at 100 properties, offer on 10 and get 3 accepted. Buy one. Follow this rule!

Sounds like you are already looking at deals, if you have not looked at at least 20 I dont think you are ready to make an offer. And you dont have to go inside every house. What I usually do is I make a list of 10 potential deals and then do drive bys by myself. Typically I can tell from the outside if I am even interested in the deal. This way you dont waste your realtors time. (by the way, if you are not happy with her, find someone else - seriousley, its your money on the line, not hers and you want someone who either works a lot with investors or owns rentals. You can always pay her for her time if you want to.) I schedule showings only for properties I like from the outside.

Your next goal is to get 7 out of 10 offers rejected. This is going to be hard, because you will feel the urge to make a "good" offer and get it accepted. If you get your first offer accepted you are offering too much. You want to be rejected and that is certainly counter intuitive. I am not suggesting to make redicolous low ball offers, but you should ignore the list price and come up with your own math for you purchase price. Getting your first offers rejected will also make you a lot more comfortable with your position; you will feel a lot more confident with your first accepted offer.

Once you have an accepted offer it is time for a thourgh inspection. Have a good home inspector ready and go with him and have him explain the issues to you on site. He will tell you what real problems are vs. things that are easy to take care of. If something serious or unexpected costly comes up don't hesitate to walk away from the deal or adjust the price.

You dont need your first deal a spectacular one as far as cash flow or cap rate. If you make $150-200 per door after PITI, PM fees and reserves you are doing well. The most important thing is that your first deal is a safe deal. Buy a solid property in a desireable neighborhood. You will have to pay a little bit more and there is more competition, but once you own the place you are on the other side of that equation. Easier to rent, more rent, less vacancies and if you want to sell you will be able to sell it faster and for a better price.

Remember location is the only thing that you can't fix. If you are in a good neighborhood where people want to live and you have a nice place you will never have an issue keeping it rented. There is something to be said about investing close by and five minutes sounds much better than 30, but a direable neighborhood is more important. If your cash flow is a little bit less I would not worry about it, as long as it is positive and you know your deal is solid.

Expect your first property to be a learning project. I think the main goal for your first deal is not to make it the best investment ever, that will come later, just make sure you stick to your numbers and you wont have a problem sleeping at night. Good luck!  

@Nicole BrushThe big question that I am missing here: is it a good deal? I would not worry about how to fund a deal until you can answer the question.

If you ad up your purchase price plus your 200k rehab cost, how does that compare to ARV - after repair value? You should have at least 20-25% expected profit built in. Your realtor can help you with ARV - ask for a conservative estimate.

So, lets say you pay $400.000 and rehab for $200.000 (including your holding cost for probably half a year at least) your cost is $600.000 - your ARV better be $720.000 or more.

Typically you do the math the other way arround to determine your maximum purchase price. Keep your offer about 10% below your max purchase price, if you get it for this price you have an additional cushing to ofset risk.

The old saying is that if the deal is good, the money will find it.

@William Yeh I think your question is too broad for a good answer. The quick answer is kitchens and bathrooms, but you knew that. If you can be more specific about the neighborhood, condition of the house and your rehab goals I am sure you will get helpful feedback. 

See you guys tomorrow!

@John Thedford I have heard about that. A lot depends on setting up and running the LLC correctly - if you don't have all your ducks in a row you may get challenged. Thanks for you input.

@Steven J. not sure if I follow your thought? If you owner fiance and sell, why do you use a trust? Wrap around mortgage? Sorry mobile homes are not my expertise.. 

@Steven J. Thanks for your feedback, Trust + LLC is an interesting concept often promoted, but seems like overkill for a small fish like me. Interesting to see that many of the big guys (500+ units) don't seem to believe in either entity strategy. DOS does not concern me that much, banks generally don't care that much as long as the note performs, typically they wont even know. There are a few rules to follow with an LLC, like having a bank account in the name of the business and not co-mingle funds and if you know these things they are easy to follow. I just don't understand Mike's statement about the correct way of transferring the title..?

I am looking for a drywall contractor and painter crew in Milwaukee. We are currently demoing the home and I will need two bathrooms, a kitchen, a staircase and the complete basement drywalled and the whole house painted on the inside. I have another house that needs exterior paint. If you know a good company you have worked with and you feel you can recommend please let me know! Thanks guys!

Mike Butler's book Landlording on Autopilot is a great read and I really like his hands on approach and school of hard knocks education. I just glanced it over again today to brush up on how to denie a rental application without getting in trouble and came across asset protection. There is one statement that does not make sense to me:

- transferring title from personal to entity without realizing it destroys all your asset protection (page 68).

It sounds like there is a better way of transferring title of a SF into the LLC? What would that be?

Further, even if the transfer "pierces the corporate veil" or weakens it, wouldn't it take a very dedicated plaintiff lawyer to first sue you and then dismantle the LLC in the process before really getting anywhere with the case?