All Forum Posts by: Chase C Henderson

Quote from @Melissa Stanley:

Great to hear you’re in Dayton, Chase! It’s a 2 bedroom house in the Historic South Park neighborhood. The extra person got “kicked out by their landlord” and my tenant told me about them because they wanted me to change the code on the door lock after he and his pit bull moved out (tenant moved in Dec 1, guest moved in Jan-April). My handyman later realized he had seen the extra person smoking weed in the living room but he mistook them for my tenant. The lease says any guest staying more than 10 days needs to be approved. The tenant referenced this clause saying that’s why they didn’t tell me but they needed the door code changed. They took me off guard so I haven’t had a conversation with them yet. 

Our other properties are pet free and mostly families renting with a 650+ credit score (Kettering), but in this house we have never kept a tenant more than 12 months. This couple is a bartender and a pizza store manager with two large dogs. They didn’t have strong credit and income on paper is just over 3x rent. They were struggling to find a place and unlike my other options had a history of living in houses for multiple years so I thought they’d be longer term tenants.

I would want to do repairs and the 2 bedroom cottage would sell for much more if it were vacant so if I want to kick them out, I think now is the time. The lease says I’ll give them 60 days notice. 



Quote from @Chase C Henderson:

Melissa,

I think some of the details can help make your decision. How did you find out about this additional occupants? Did they come forward, just a little late or did you find out during an inspection. Does the unit support that many people? I.e if its a 400 sq ft studio, that a problem that needs addressed. If its a 3 bd house, well its a smaller problem. Did you let them know when they moved in that if anyone else moves in they need to tell you? If yes, this is a problem, if no then set the boundary moving forward. Finally, I think the greatest factor is what type of property/tenants do you lease to? If they are work force, then a strong hand can be beneficial, if they are working professionals like nurses and they moved a coworker in, id be a little less concerned. 

In my experience it is always best to be up front with tenants, let them know this third person needs to go through the application process if they are going to live there, (assuming its not a child). Let them know they will be charged an normal application for that person. It's not just for your protection but theirs. You should do a background and credit check and more. That way the existing/original tenant know that their new roommate isn't a safety hazard or liability. 

*** Side bar love to see Dayton investor on here and glad to see you have such strong cash flow on this deal!! Way to find a good project!

Melissa,

I had a nice long post responding to this, but it seem yesterday I didn't press post.

I know that area actually pretty well, my partner and I just ate at the troll pub down that way about 2 months ago and have had friends actually live in the exact neighborhood your talking about. It definitely a neat area that has some huge upside if the area as whole can make the improvement. I do think there is a strong chance of appreciation in the area due to UD and the Hospital and how some of the Area and surrounding has a "cool" factor. That also being said, much like any larger town, the next neighborhood or two over transitions pretty quickly if I recall correctly. Overall, I personally am I buy and hold investor, so I hold and almost never sell and in fact I have never sold anything I have ever bought (real estate investment wise).

In regards to selling I think you need to look at a couple things.

1. Will loosing this Cash Flow Negatively Affect yourself and your families way of life?

2. Is dealing with the tenant issues negatively affecting your or your family health/relationships? ( My favorite representation of this fact is if someone said I will give you a million dollars tax free, but you die tomorrow would you take it? This scenario says to me, my/your health is more important then any cashflow or positive return)

3. Where are you going to invest your proceeds? If you are happy healthy and netting lets say a 10% cash on cash return on cash flow. where are you going to invest your proceeds of the sale? Does that place net the returns you want or need to meet your specific goals? Nothing wrong with a 4% CD if your sitting on a IRA and 62. Idk your situation, have a plan, don't just sell something you like for a small frustration and regret it later

In regards to the tenant,

I would if; you haven't already reiterate the policy to the tenant moving forward. Also, we charge $75.00 to "rekey" a unit for our workforce units, so maybe this is something you look at in the future as a we will reprogram the lock, but it will cost a fee (whatever you think is enough to make a point, but enough that they can afford). Also, generally, when we move people in, we tell them they need to notify us for these reasons if the occupancy changes "Saftey- i.e if the fire marshal calls me a 1 in the morning asking how many people are inside I can give them another, Legal- We as landlord are required to report our occupants to the City, this allows them to solve any occupancy disputes and keep our communities safe and final protect you then tenant- so if a roommate comes in and damages the place, you won't be held fully responsible for the damages, they will be held responsible too as we all know if someone doesn't have skin in the game they are more likely to make a mess of things"

In whole, the extra tenant issue is not something I would loose a paying, well kept tenant over. Unless, that extra occupant did something worth removing them over. I understand the situation as a whole and the upkeep of the unit has been burdensome, but just my thoughts.

Melissa,

I think some of the details can help make your decision. How did you find out about this additional occupants? Did they come forward, just a little late or did you find out during an inspection. Does the unit support that many people? I.e if its a 400 sq ft studio, that a problem that needs addressed. If its a 3 bd house, well its a smaller problem. Did you let them know when they moved in that if anyone else moves in they need to tell you? If yes, this is a problem, if no then set the boundary moving forward. Finally, I think the greatest factor is what type of property/tenants do you lease to? If they are work force, then a strong hand can be beneficial, if they are working professionals like nurses and they moved a coworker in, id be a little less concerned. 

In my experience it is always best to be up front with tenants, let them know this third person needs to go through the application process if they are going to live there, (assuming its not a child). Let them know they will be charged an normal application for that person. It's not just for your protection but theirs. You should do a background and credit check and more. That way the existing/original tenant know that their new roommate isn't a safety hazard or liability. 

*** Side bar love to see Dayton investor on here and glad to see you have such strong cash flow on this deal!! Way to find a good project!

Sam,

So are you going forward the the AC unit? What ultimately was your deciding factor?

Ari, 

So there is no limit to the amount of debt technically speaking. 

That being said there are some things with banks and loan programs to look at.

Most banks have a lending limit not in number of loans but amount borrowed on investment/commercial lending. 

That being said I have heard of a limit around 10 loans, but I have never ran into this issue.

Bigger banks have larger limits, but can be harder to get in the door, if at all. Small banks have smaller limits, but are generally more understanding of getting started. 

The example of this is we have a local bank here in cincinnati that we have 6 loans with, they have told us on many occasions they will right as many loans that underwrite and stay under there 1.25 million lending limit. 

However we have a loan on one of our larger projects that is upwards of 2 million and serviced by a larger regional bank in kentucky. 

if you are looking to take advantage of FHA or Hud or USDA loans be aware they generally only allow you to have one or two of these loans at a time.

Another program to look into is DSCR loans are a great tool to look into and ones that we use on all our investments. Long as you have some basic solid credit, the banks will only judge the property, and not you.

Hope this helps

Quote from @Eli Kim:

Quote from @Chase C Henderson:

Eli,

Another piece of the puzzle to look at, similar to what @Payton Haight was discussing and your own financial situation. Is the cashflow your expecting to receive include repairs and vacancy set backs? While it works today. Lets look into the future, what can you expect your cost to be in 3,5, 10 years? As an example.... When is the last time the auditor reappraised the value for the purposes of taxes (in Ohio we have a 3 year (Triannual) evaluation period on property taxes, meaning they can adjust our property taxes and the amount due every three years and recently a lot of properties in my specific area saw increase between 15% to 35%. (Not to mention insurance adjustment, material cost and interest rate increases).

Another point of investing advice. If you plan to buy another property with 25k you get. Make sure it does at least 1 of the two things.

1. The replacement property/investment will net you at least 7.15% or better cash on cash return. (This covers the 7.15% interest you are paying on 25k loan you are taking out).

2. Make sure you financially are at a place you can afford to take on both mortgage or renovation if they were to become vacant. (Or at least have a plan for where you gonna get the money to cover these cost). 

Growth is a great thing, but if you over extend yourself, by the time you notice, it's often too late.

Very good points. I have taken adjustments into consideration. That’s another one of my worries. My cash flow would be reduced to only a few hundred dollars if I were to refinance. I’ve already experienced escrow adjustments on all my other properties and have lost a chunk of cash flow in a past several years. I would assume in a few years, adjustments would eventually take over the cash flow for this property. What are my options then? Raise rent? 

I’m solid as far as cash on cash goes. I would be okay for mortgage and vacancy if that were to happen. But my concern would be if multiple of properties were to go vacant. I have 4 properties right now. I’m thinking I have enough cash flow from the other properties and back up to cover for a few months. 

thoughts? 

 Sorry about my delayed response I was on Vacation. Even us real estate people need breaks too!!

If your concern is vacancy and keeping up with cost there are a couple tools to discuss in this regard.

I am working on the assumptions you have a couple properties based on your previous messages. 

Tool 1- You nailed it is rent increases, these are a tool of every landlord to keep up with cost rising, that being said, your property has to justify the cost or you will create vacancies. I have heard the "Old heads" talk about raising rents 30 dollars a month as no one will move out for a dollar a day, to everyone gets a flat $50 raise till they move out, to others saying take your increase in cost and add your profit margin to it (So if your cost increase $25 a month, then times 25 by your preferred cash on cash return i.e 8% for me. so $25x1.08 and i would increase my tenant rent by $27 that year.

So tool 2 to protect against multiple vacancies is stagger your lease expiration/renewal dates. So if you have 4 property/units try to set your lease to renew with some variance. So unit 1 lease ends December 31st, Unit 2 end March 31st, unit 3 June 30th, Unit 4 would be the last day of September. 

*** This will space out when your have planned vacancies or help you prevent a swarm of move outs. This method if your are doing a good job vetting tenants and managing your properties should help stabilized move outs. (This won't prevent non payment issue based evictions, but will give you a planned idea about went to expect move outs. So you don't get caught with multiple voluntary move out in the same month)

Tool 3 is underwrite the vacancy in to your business. So we underwrite that we will only receive 90% of the rents we are supposed to collect aka 90% economic occupancy. Now we do this as we rent work force (factory workers and retail workers) housing in metro to rural Ohio. If your properties are in the premier neighborhood in like Orange County California you can adjust to a lower percentage of vacancy. The point being is we reduce our project revenue by 10% to create an accurate rent number to account for those vacancies.

Tool 4. Utilize equity in the other properties or your home

A great way to protect yourself from cashflow shortfalls is have a emergency place for funding, some organizations will use cash on hand, others will use things like lines of credit. So for instance if your worried about floating a property or 2 if you have multiple vacancies, if you have enough equity in another property you can get a LOC for emergency purposes. The idea being you get the LOC before you need it, so when you do have to cover a payment to contractor on a vacant property, or your tenant leaves in the middle of the night and you need that months rent to pay property taxes you have another pool of money to access and cover your butt. Also, it helps that its generally interest only and at a much much lower rate then a credit card.

*** Don't go spend on the LOC all willy nilly, this could put your whole operation in a bind

There is always levers and tools to solve situations and I am sure there is more then what I recommended here, but remember the reason most business fail is not because they aren't profitable, but because they mismanage their cash and do not have money to meet their liabilities when they come due

Eli,

Another piece of the puzzle to look at, similar to what @Payton Haight was discussing and your own financial situation. Is the cashflow your expecting to receive include repairs and vacancy set backs? While it works today. Lets look into the future, what can you expect your cost to be in 3,5, 10 years? As an example.... When is the last time the auditor reappraised the value for the purposes of taxes (in Ohio we have a 3 year (Triannual) evaluation period on property taxes, meaning they can adjust our property taxes and the amount due every three years and recently a lot of properties in my specific area saw increase between 15% to 35%. (Not to mention insurance adjustment, material cost and interest rate increases).

Another point of investing advice. If you plan to buy another property with 25k you get. Make sure it does at least 1 of the two things.

1. The replacement property/investment will net you at least 7.15% or better cash on cash return. (This covers the 7.15% interest you are paying on 25k loan you are taking out).

2. Make sure you financially are at a place you can afford to take on both mortgage or renovation if they were to become vacant. (Or at least have a plan for where you gonna get the money to cover these cost). 

Growth is a great thing, but if you over extend yourself, by the time you notice, it's often to late.

Quote from @Sam McCormack:

Quote from @Chase C Henderson:

Hey Cody,

Always nice to see another "younger" investor coming into BP. It's great to hear you already had some success an as an investor. I assume your Norris Lake project is a STR. How is that project doing?

Hope to see you around in Cincinnati and maybe catch you at a local real estate investor meet up!

 it's always a good feeling seeing other young investors. I feel like I have been seeing it more and more recently to be honest. Connecting with others around the same age is always nice. We are normally facing the same issues. Love to see it!

 Totally agree. 

The more and more I connect with our generation the more I see how many of us are facing the same issue and hungry for ***pick your buzz word*** "financial peace, escape the rat race, become an investor, etc".

I think it's because our generation has seen so much economic change and volatility in our life time, many of us are desperate to take control.

What's your thoughts? Why do you think so many young investors are stepping forwards?

Quote from @Cody Steiner:

@Chase C Henderson same here, Chase! Would love to meet and hear about your journey. 

Thats correct, we are planning on it being an STR - found a great deal and decided to snag it while we could.

That's awesome, I can normally be found at the Butler County and Cincinnati REIA meet ups. That being said I am always open to get a cup a coffee or bagel with another investor.

On your STR is it up and running or is part of the great deal you got require some value add or TLC to get it market ready?

Hey Cody,

Always nice to see another "younger" investor coming into BP. It's great to hear you already had some success an as an investor. I assume your Norris Lake project is a STR. How is that project doing?

Hope to see you around in Cincinnati and maybe catch you at a local real estate investor meet up!

Quote from @Allan C.:

Financially, you're on the hook for all the past depreciation and capital gains so you'll need to factor that into the acquisition price. 

Legally, you're on the hook for any past liabilities. 

What is your motivation - property tax savings or low rate loan assumption? How clean and detailed are their books? How long has LLC been in operation?

is this a multi-member LLC or single? Do they have robust OA? Is the loan under the LLC or individual's name?

unless you are a seasoned investor and know how to perform rigorous due diligence, it's likely unwise for you to acquire an LLC. Perform an estimate of how much you expect to save vs how much liability you're taking on.

Allan raises a lot of good points here. One more thing to think about if your keeping the seller LLC and name of his/her business is you will also be inheriting his or her reputation. This can be a positive or negative. Of course you can avoid the negative by doing a DBA(Doing business as) or fictitious Name Registration with your Secretary of State and change the businesses operating name. These positive or negatives won't show up on a balance sheet or the books (unless they have line in the balance sheet for Goodwill which is extreme rare in real estate). So get out on google and see how they look or even ask local people around town.

Also, to piggy back of Allan if your in the property tax saving game, check with your county auditor and see what it is currently appraised for. For instance if the county has it appraised/valued at $190,000.00 and you are purchasing the property/LLC for $200,000.00 its not gonna likely move the need much on your cashflow and underwriting and likely will not be worth the trouble.