All Forum Posts by: Kevin Young

ned's list pretty much sums it up. one small add ... i've seen cash flowing deals purchased in partnership when and the partners had some kind of falling out and needed to part ways. amazing how emotion can railroad logic.

Hi Matthew,

nice to meet another wisconsinite! i grew up 3 hours north of milwaukee, but migrated west. the fact you're choosing to invest in income producing RE (vs say a cool sports car), is certainly what will get you closer to your goals more quickly.

my 2 pennies...

SFH vs multifamily: could be debated either way. i prefer multifamily over SFHs simply b/c of the economies of scale. i.e., with a duplex, you have 1 roof, 1 lawn to care for, etc vs with 2 SFHs you have 2 roofs, 2 lawns, etc. that said, i know people who own and manage a large number SFHs and love it and do incredibly well. regardless of what you do, be smart with your numbers, do thorough due diligence and never buy on proforma rents ;-)

its been my experience that banks are most comfortable lending bigger amounts of $ to people who have a solid track record or pretty deep pockets, both of which mitigate their risk ... so i agree with kelly's recommendations. if you have 50k to invest each year, i'd recommend accumulating 2-4 unit multi's and adding as you are able until you have assembled a number of units (try to keep them together if you are able, easier to sell as a block and less running around for you).

if you need capital to move into something bigger, sell them and if you are able, 1031 into something bigger. i know for a fact some banks (at least mine does) will look at you more favorable when you if you can demonstrate that you have a strong track record of managing multiple units, so start accumulating now.

diversifying is always a good thing, but i'd recommend you first learn about what you're getting into before jumping into it. there are pros and cons of different types of commercial real estate.

in terms of deepening your commercial RE knowledge base, i can't say enough about BP. some pretty smart ppl here. I also think the CCIM courses are excellent. top not curriculum, small classes, and top notch instructors with deep, deep commercial RE knowledge. i liked their case study method where we worked in small groups with people who ARE in the business vs who want to be in the business. i learned as much from my group as i did from the instructors. to this day i keep in contact with my CCIM 101 instructor and fellow students (who are brokers) they've been good mentors for me.

Robert Lapp with regard to contacting brokers, i tend to reach out to them if I don't hear anything in 3-4 weeks. sometimes they'll give me a call sooner ... but if they haven't by week 4, i'll reach out [as reminder that i'm still around and looking]. you need to feel it out, everyone is different and this business is relationship based. don't bug them, but don't go too long between calls. some of the brokers are more chatty and some are all about business. so, it just depends, i guess. use your best judgement.

before i end the call, i always remind them that i'm ready to buy and ask they to get me a call if they find something. if they don't have a deal i tend to catch up on what's been going on and get a 'read' on what's happening in the market when i talk to them.

Robert Lapp i've had good luck finding brokers (not deals) through loopnet. i use it to see which brokers are active and then give them a call on one of their deals, talk through it, talk about what i'm looking for, etc. one of my best deals was an off market deal brought to me by a broker i met this way. another way to find brokers is through the ccim website. http://findaprofessional.ccim.com/search

Bill Robinson I opened up a separate checking account which i only use for rent deposits. I then ordered a few books of deposit slips and handed them to the tennants when they moved in. I gave each person 13 (1 extra in case they mess one up) and explain that its their responsiblity to take their money and deposit slip to the bank...which was the extent of my 'training'. When I renew their lease, I'll give them another stack of deposit slips.

My rent is due on the 1st, with a 5 day grace period. On day 6 I charge $10/day late fee. I explained this policy and I explained how I check and verify that rent is paid on time. If people know you're looking, they get it in on time. Everyone liked the idea, so I didn't really need to 'sell' it to them. I just stated that it was the way I collected Rent.

How do I know who paid when the rents are the same? I know who deposited what amount b/c wells scans an image of the deposit slip and the check. Before i hand out the deposit slips, I wrote the unit number next to my business name so I could sort out who paid, and when. If your bank doesn't provide a scanning service, then this method could be a nightmare ;-)

Chris MartinI, I originally opened a separate account for each tenant. The building in question is 9 units, which meant 9 accounts. In concept, it seemed like a great idea. In practice it was a bit of a nightmare b/c Wells charges a monthly service fee which can be side stepped if you transfer $100 back and forth between the associated savings and checking each month Wells set up the accounts and messed up the auto transfer ... money wasn't transferring and they were debiting monthly fees, etc. In the end, they credited everything back to me b/c they set it up wrong, so I didn't loose out. I closed all but 1 account which I use as my deposit account.

Hope this helps.

hi nik,

if cash flow is your goal, you may want to venture out. if you do invest out of state, i suggest first look for a property mgt company (vs finding a good deal and then hope to find one) the property mgt company can make or break you with expenses on repairs and such. for smaller properties, you could expect to pay 10% collected rents to the PM.

if you are looking 'close to home', that may give you additional security if you have family in that area who could help in a pinch. not suggesting they plunge a toilet, but if you have a big issue, they could be your eyes and ears ... and a sanity check on the property mgr.

in terms of finding deals, you could go a few routes. online like you have (i also like trulia a lot). there's also loopnet, which i've found most postings over priced). i use loopnet to see which brokers are active then give them a call to see if they have any off market deals). just did a cursory search on loopnet in astoria and found 4 properties <300k

i also source properties through direct mail. you could buy a list or get to know someone at a title company who may pull a list of 2-4 units.

my advice is to set your investment parameters (what return do you expect), do your due diligence, and only buy on actuals vs proforma numbers!! if you invest out of state, find a solid property manager (referrals are best and ask for references...and ask for a copy of their contract.)

best of luck.

Hi John ... did a quick crunch on the numbers. on the high side, 90k would be my ceiling (assuming no repairs are needed)

i used the following assumptions ... broad strokes

PP: 90k

annual rent: 18,540
vacancy: 10%, could be higher or lower based on your area
SWAG expenses: 9,270 (50%) rule
CAP: 8.24%
gross rent multiplier: 4.85%

financed amount: 67.5K
down: 22.5k
annual debt svc: 4104
DSCR: 1.81

year 1 NOI: 7416
before tax cash flow: 3,312
before tax cash on cash return: 14.72%

assuming a 5 year hold, at 90k you could expect an IRR 9.7% (assumed 1.5% increase in rent/expenses and 5% cost of sale.)

i found a large deviation in per unit comps for 2-4 unit properties in malvern, pa (assuming you're looking close to home). low 27.5k - 200k on the high end. i can send a pdf of comps and the 5 yr analysis to you if you PM me.

Cole Tarbet, to avoid handling checks and fielding 'lost in the mail' excuses, i've trained my tenants to deposit their checks directly to my account at wells fargo. i know exactly when the check was deposited (time/date stamped with an image) ... and look on the 5th of each month to see if anyone is late. no one pushed back on doing this. i set up a seperate account used only for deposits ... so if it were comprimised, i'd close it and open a different one. haven't hand any issues.

let me know if you use rentomatic and how you like it.

IMO "TheAnalyst" is the best financial app out there.

best $10 you'll spend.

you can check it out here before downloading it -> http://blyn.cc

hi benaiah,

based on what you shared, i'd stay away from both of these.

first red flag! the numbers don't add up. e.g., when i multiply the monthly gross x 12, in both cases its less then your stated annual gross.

with expenses, the suggested 50% rule is a good rule of thumb. depends on your taxes, maintenance, turn-overs, etc. my Hawaii properties run at 40% with property management BUT, HI also has the lowest tax rates in the union. i owned in dallas and had a 55% expense ratio.

So you need to verify. never take the sellers current taxes/expenses for face value. e.g., they could be paying taxes on a very low appraised value. call the assessor to understand how much taxes would be. other expenses can and should be verified. you can get ave water bills, power, etc by calling the utility companies. they will usually give this out, at least they have for me when i've called.

i always include a mgt fee in the expenses whether or not i'm managing the building myself. you should too even if the seller does not.

debt service is a factor you should consider. for example, i currently have a 3.5% rate on my apt buildings, which adjusts every 3 years. i underwrite using the ceiling interest rate to ensure my cash flow is protected should rates go back up, and they will some day. ask a broker for a referral to a mortgage broker who works with banks on smaller commercial deals. you could talk to them to get estimates.

with insurance, i always call my agent to get a swag price on insurance. they turn this pretty quickly for me, usually same day.

my take on the buildings:
the 4plex is grossly over priced, IMHO. just based on the numbers, assuming a 30yr fixed @ 3.5%, the most i'd pay is 500k, based on the return i'd expect.

at 500k, with stated income/expenses, you'd be buying it at a 8.63% cap. you would need to understand the prevailing cap rates in your area to know if this is good or not. e.g., in san francisco, investors buy at a 2-4 cap, which i think is crazy, but ppl buy for appreciation and make it up on the back end on resell. in the SF east bay, you can pick up similar properties for 8-10 cap. you would need to do some homework to understand what the prevailing cap rate is. local brokers will share this with you.

for the larger property, with your given income/expenses, at 1.3 your paying 4.4 cap. unless this building is in san francisco, its grossly overpriced. i can appreciate that its renovated, but what you are buying is an income stream and the income doesn't support this high of a price unless you know you can significantly increase the rents.

also, underwrite using actuals vs proforma numbers. e.g., if its 20% vacant, thats what you should plug in. why should the seller get the upside if they aren't going to do the work of filling it up with good tenants.

i calculated gross annual income at 169,332 (vs your 200,333). the difference is 15% so i'm not sure if vacancy is included or not. you mentioned 20% vacancy ... so the numbers don't bridge. i'm skeptical.

adding up expenses, I get 103,652, putting you at a 61% expense ratio. i think this is high.

also, with commercial properties, the amortization period is almost always 25 years vs 30 years on <5 unit buildings. this has an impact on your monthly payment, so for >5 units, us 25 vs 30 years.