All Forum Posts by: Ron Averill

@John Matthews   Great topic. The same question has entered my thoughts more than once. 

You really caught my attention with the Matlab program idea. A fellow engineer, I assume? We tend to over think everything. :)

But this is not a tractable mathematical question. Every gift of time, money or goods that helps another person generates its own immeasurable ROI. These benefits not only compound with time, but actually grow exponentially like a multilevel marketing scheme, as the people we help then pay it forward by helping others. Talk about leverage! Waiting to start this process would drastically diminish the time benefits of this growth.

So don't wait to do something nice for someone else! You may think that you can do something greater in the future, but you can't out-invest the power of compounding good deeds.

I believe that risk is mitigated more by cash reserves than by equity. Regardless of the amount of equity an investor may have in a property, that property's equity is always in jeopardy when tough times hit. It takes adequate cash reserves to weather the storm.

The lowest risk positions are either 0% equity (or as low as possible) or 100% equity, with adequate cash reserves in each case. In the first situation, there is hopefully cash left in your pocket. In the latter, there is greater cash flow that can be accumulated.

The highest risk scenario is being anywhere between these two extremes without adequate reserves. More specifically, risk increases as equity increases until you reach 100% equity, when it decreases substantially (and cash flow increases). 

From a risk perspective, I don't see any advantage in having 60% equity in a property while being short on cash. The upsides of leverage are also reduced in this case, so you get substantial risk without some of the best advantages of REI.

However, getting to 100% equity seems like a very good long-term goal, especially when the accumulation phase of your plan is completed. Based on the above assessment, the snow-ball approach is a good way to achieve this goal.

Thoughts?

@Albert Hasson Why do you say that a rent increase of $50-$100 per month is not worth spending $5k on improvements? This amounts to a 12% - 24% ROI, plus the potential for better and happier tenants and an increase in the value of the property. This looks like a pretty good investment to me.

I do believe that most tenants take better care of a rental unit if they truly believe that the landlord cares about the quality of the unit and the well being of the tenant. Upgrades, excellent maintenance and just generally being nice go a long way toward making tenants feel respected and comfortable, which in turn often leads to tenants staying longer, taking better care of the house and paying rent on time more often. Of course, just acting like you care about and respect your tenants in order to evoke better behavior usually does not work. It's important to actually care.  We genuinely like all of our tenants, and we care about them as people.

This approach does not work 100% of the time. There will always be a small percentage of tenants that misbehave. These can usually be filtered out through proper screening.

@Jay Velastegui   That process sounds about right. An application and yearly inspections are common. Some cities and townships also have steep fees to obtain a rental license.

You will probably get a variety of responses to this question. Some people prefer SFHs while others prefer multifamily. In my area, the numbers work better on multifamily, so many of my properties are duplexes. 

If I were younger and just starting out, I would purchase a duplex (or 3-plex or 4-plex) and live in one unit. Save money and then repeat as often as possible.

Your city's housing office probably regulates rentals in the area. Many cities require that you obtain (pay for) a license in order to rent a unit. I would contact this office asap to find out the status of this property and what would be required for you to be able to legally rent it. They may also have a file on this property, which you can review for status history and previous violations. 

@George Smith  Another way to look at this situation is that you could purchase a run-down property yourself and use this contractor to do the rehab based on your specifications. The contractor can help you determine what updates are needed and help you establish the rehab the budget. The end result is that you get a great duplex for buy-hold and the contractor gets steady work over the winter months.

I'm doing exactly this as we speak. I recently bought a duplex in a great neighborhood for $120k and it is now undergoing an $80k rehab. When the rehab is completed and I have renters on both sides, I plan to refinance the property to pull out most of my rehab costs or more (might have to wait a few more months for seasoning). Based on my projections, the property will then return at least 14% COC. Even better, my maintenance and capex costs should be very low for quite a few years after such a massive overhaul of the property.

@Frankie Woods  What is VMTIM accounting?

@Kevin Lewis  This deal is not even close to cash flowing. I would pass.