All Forum Posts by: Andrew Johnson

@Patrick Mortenson I looked a bunch of vacation rentals in a variety of markets and came to any number of conclusions. One of the key things that I found was that there were usually only a handful of vacation rental management companies of any size in a given market. Odds are if you are thinking about buying a vacation rental property it is being serviced by one of these firms. These companies will be giving their owners a statement that literally shows days booked, rental rates, expenses, etc. for the trailing 12 months (typically what I would ask for). They also are able to supply the reservations for the subsequent 12 months so that can at least pencil in some income. If you vet 5-10 properties and get 5-10 of these statements it becomes extremely easy to see high-season vs. low-season rental rates, occupancy, etc. You can even start to see when they do 4 day minimum reservations vs. 7 days minimum reservations. My guess is that what you'll find is: annual occupancy is less than you think it is (don't be shocked if it's 50%), you make the majority of your money in about 1/4 of the year, there may be months with zero income, and (relative to SFRs or multifamily) you have unexpected expenses like satellite TVs, internet, periodic new bedsheets, etc. And on a practical level the property management company has likely built up a list of people (families) that are used to booking that specific property for that specific week through that specific PM company. Don't discount the impact of moving away from a PM company (or even just switching to another PM company) on occupancy. Keep in mind this is coming from the perspective of someone that always found better ROI on multifamily deals that vacation rentals and thus never pulled the trigger.

@Walter Roby jr This will echo @Diane G. but I've never seen one in a major metro area.  When I have see anything close to 2% there's always a hitch, usually in the form of massive deferred maintenance.  So "today" it will pencil out great but after replacing a roof and a few HVAC systems on a multiunit property the deal comes back down to earth.  Not to mention that any deal outside of an easy drive for you is going to require a PM (knock 10% off of those gross rents) and you'll probably want to see it from time-to-time (factor in $1,500 a trip) and the lauded 2% deal -- for all practical purposes -- will evaporate.  Not to say that others haven't found an off-market all-cash deal from an eager-to-sell owner but those won't show up non-disclosure states if you're doing your research there.

You mileage may vary but I've never found a solid ROI on upgrading appliances and counter tops. It's an overly general assessment but renters are still renters and will treat your property like renters. Just because the appliances are stainless instead of white doesn't mean they will go any easier on them. The same thing goes for counter tops, not to mention that certain granites/marbles/etc. can stain if wine (or other liquids) spills and sits. And you might have the added challenge that your bathrooms have the same cabinets and white tile. All of a sudden your bathrooms are going to appear "old" because the kitchen has been upgraded. I'd replace your appliances with white appliances that tone in with the sink and tile. Keep it simple, forgo unneeded expenses, and get it rented. If it takes a month to upgrade the kitchen you'll lose $1,900 you'll never recapture.

@Robert South It's a really tough question to answer and that's in part because "full rehab" can have very different definitions depending on the age of the property.  Did they rip out and replace all of the electrical?  Did they rip out and replace all of the plumbing?  If the property was much older than 20 years you might have to start thinking about things when vetting against a property that is 20 years old (which in 1997 will have modern electrical and plumbing).  

If you're conservative (which it sounds like you are) you might consider a slightly different way to analyze it.  Look at the annual cash-flow and determine what you can fix for that amount.  Yes, you'll have to depreciate the refrigerator but you have to pay for it now!  I always ensure that cash-flow can pay for those things (carpeting, appliances, etc.) all fairly easily.  And some tenants can be rougher on those things that others so it's harder to plan out.  If things "unexpectedly go wrong" I just have less cash-flow that year rather than ending up losing money.  

Other items like a roof or HVAC systems can be a different story entirely.  If the fully rehabbed property has a new roof that's good for 35 years (take an warranty with a grain of salt) and your 20 year old property has 15 years of life left that could be a huge difference.  Ask yourself (or calculate) how many years of cash-flow it will take to pay for the roof replacement.  Then ask yourself what is the impact of pushing off that expense another 20 years.  

There's really no right or wrong answer here so just food for thought.       

@Daniel Cuevas You also have to take into account that there is a heavy degree of survivorship bias when it comes to posts and replies on BiggerPockets.  The people that didn't have adequate reserves, bought the "wrong" property, bought at the wrong time, or just plain had unexpected expenses and ended up upside down certainly don't post with the same veracity as those with (earned) success stories.  Consequently you'll hear more from people who turned $10K into $100K than you will from people who turned $10K into $0 (or worse). 

That being said, the $100K number does seem rather arbitrary.  $100K in Manhattan is vastly different than $100K in Kansas.  I always looked at it more along the lines of how much I have in the bank after establishing the Suze Orman style emergency fund.  Money beyond that could just be sitting in the bank earning nothing.  Would I wait for that account balance to hit $100K if I found a great deal?  Absolutely not.  Would I drain my emergency fund to put myself into a highly leveraged great deal?  Absolutely not.  Will that prevent from getting the outsized returns of others?  Yup.  Will that prevent me from getting the outsized losses that don't get broadcasted?  Yup.

So a couple of potential ideas to consider:

1.) If you buy your property where land values are low then a higher portion of purchase price (the structure) will be depreciation on an annual basis.  Easy example, you could pay $500K for an old property on a decent lot in Los Angeles so you'd have a high purchase price, might be able to rent it out for a decent amount, but your depreciation will be low.

2.) If you paid a low amount and put a bunch of money into it it's not the same as buying it fixed up.  Consequently (unless you refinanced) you have a relatively low mortgage for the quality of the property you have post-improvements.  If it wasn't reassessed you could also easily have lower property taxes for the rehabbed property.  So you have effectively lower leverage and therefore not as much mortgage interest to write off.

3.) Your property management fees also look low (not at bad thing!)  I pay 10% of gross rents which would be $1,732 instead of $1,040 and $1,938 instead of $1,200.

4.) Your insurance costs are also low.  Do you only have coverage for the pre-rehab value?  Do you have any kind of umbrella policy to protect you?

The net result is that it looks like you're paying less than some of us for insurance, property management, and potentially mortgage interest.  That's either a potential risk or just you getting a good deal.  Either that or you just found a great property!

What I've found is that the first deal is always 10 times harder than the second. Doing pro-formas for the 1st time takes way longer than for the 100th. The better I know a local market the easier it is to screen in (or out) properties for further diligence. And the more properties I vet the more questions I learn that I never thought to ask. As it slowly becomes second nature the flow gets way more efficient. But as is often said, if it was easy...everyone would do it!

You'll want to look into LLCs in different states. There are slightly different levels of owner insulation and there can be vastly different annual fees. I have to admit, I haven't heard there one definitive "best" option so I'd imagine it's worth talking to a real estate attorney for their perspective. Alternatively, you could ask your insurance company about getting an addition umbrella policy (which isn't a bad idea anyway). I've found it's not nearly as expensive as I thought to add an additional $2 million or $3 million umbrella policy. But I'm not a lawyer, CPA, or anything else so just take this as perspective, not advice!

I'd try to identify as many other multifamily properties for sale in the area as you can find. Build the pro-formas for all and if 2-3 look decent make a trip out to see those 2-3 and as many other as you can have a realtor set up. My experience has been that what looks great in a photo can look not so great in person. Not to mention until you're on-site it's hard to know the property at a street level. The last thing I'd do is put down an EMD to get something under contract before I visited a property that's so poorly managed (not to be overly judge mental) that there are no lease agreements. You think the owner would get them signed at least to help make the property appear more marketable.

At 101 units you're going to have a property management company.  It's almost a certainty.  That PM company (especially since it's now 2017) will have completed the 2016 income, expenses, etc.  They can probably pull the annual report from whatever application they use and send it over to you.  Then you can look at actual collected rents (occupancy), expenses, maintenance, etc.  If that still looks good to you it doesn't take long to have a conversation with a community bank about financing.  You're probably looking at 20 (maybe 25) year amortization table and the local/community bank might even know the property.  They would be able to quickly tell you the required downpayment (could be anywhere from 15%-35%) as well as the interest rate.  Odds are it will be adjustable and reset after 5 years.  I know I'm being overly general and things vary from market to market but at least that might give you a starting point.