All Forum Posts by: Dan Bosak

If you sell, what will you do with the profits?  After paying taxes could you buy 2 rental properties or 1 that brings in more money or has less maintenance, etc?  Basically, will selling it help you move toward your goal or set you back?

Regarding her buying it, if she is going back to work soon, it'll be a while for her to be approved for a mortgage since she will need to show some history of income at that level.  So if she wants to buy it, she may have to continue renting for a while until she qualifies or you may have to do some sort of seller financing or installment sale, which is likely more complicated than this needs to be. 

Again, biggest point in my mind is what's best for you? 

The way I have handled is that all security deposits and pro-rated portion of the rent paid and collected are transfered to the buyer.  Buyer then inherits the tenant with a negative balance and if they are able to collect on that, they get the money.  The seller had their chance to collect it and since there is no guarantee that the buyer will actually get it, the seller shouldn't get any benefit from that. 

You can finance it but they are almost always as-is, so if its needs repairs for you to get your loan, you may run into issues.  You can offer less than asking since typically even the asking price is not an approved price.  

Once the seller accepts your offer then it goes to the sellers bank for approvals.  I've seen anywhere from 3 to 9+ months to get a response from the sellers bank, so be prepared to wait. 

Seller(s) first.  If you have a truly great deal, it'll be easier to find a buyer and to get their attention.  If you have a huge buyer's list and no good properties to sell, the list is useless.  And the serious, active buyers know the other serious and active buyers so if you call one and they are not interested, ask them if they know someone who would be interested.  

At worst, you can partner with a wholesaler in the area and blast out to their list and split the wholesale fee.  

Finding the great deal is the tough part so do that and you'll make money.  

and yes, a lot of wholesalers do have a bad reputation because they send out deals that are simply bad and their numbers are wrong.  I most often see rehab budgets that are way too low and to a lesser extend ARVs that are too high and based on the absolute top of the market (i.e. 1 sale at $310k but 10 in the $265-275k range and they say itlll be worth $310k).

Good Luck!

You should have a set of criteria that you use for screening and most importantly you need a good system for screening.  There are several online systems for screening and most will provide: credit, eviction and criminal reports.

In terms of specific criteria, I try and look at a tenant with as complete of a picture as I can get.  I love great credit but in many of the areas that I rent, that is tough to find and I have great tenants with bad credit.

A few items that are must for me:

1.  No evictions.  If they got to the level of an eviction with another landlord, what makes you any different? (I have 1 tenant with an eviction from when she was 18-19; she is now in her mid 40's).  

2. Good income.  Total combined income must be at least 3x the monthly rent.  This is especially important on lower priced rentals.  Things will come up: cars will break down, kids will get sick, tenants will have their hours cut for a couple weeks.  I don't want these items that will come up to prevent a tenant from being able to pay rent.  Every time a tenant has been close and I've decided to "give them a chance", they end up behind in rent and moving out mid lease or evicted. 

3. Good Landlord Reference.  If they have been good tenants for someone else, they will most likely be a good tenant for you.  Make sure that you are talking to the actual landlord and not some friend they want to cover for them.

If you are not sure about a tenant get more info and verify: Get pay-stubs, Call employers to verify employment and income, call past landlords, ask for clarification on anything that doesn't seem right to you.

If you are talking about the Zestimate then definitely no. They are occasionally accurate, but you never know. If you are using Zillow to see whats on the market (your potential competition) and what has sold and using that to come up with your own estimate of value, then that is ok. I still go to the MLS and several other sites so that I can get as much information as possible, but I often use Zillow as a first pass especially while I am at the property to see what else is immediately around.

This is a tough one.  It's so easy to find ways to spend the money that comes in from real estate back on the the business.  

The book Profit First from Mike Michalowicz is the best structure that I've found for actually paying yourself.  

I modified it a bit but have my bookkeeper moving funds from my checking account each month into 2 separate savings accounts; 1 as an escrow for the quarterly tax bills, annual insurance bills and reserves for major expenses and 1 as a profit account.  I take a small monthly pay and then quarterly take 1/2 of what is in the profit savings account.  If something major comes up, I still have reserves so the business doesn't fail.  

It's tough to implement though since I still find myself reinvesting into the business since there is always another great deal and once you get into it, it's tough to pass up.

FHA will generally require justification for the big price difference but I've gotten around that with showing scope of work and in some cases invoices for work.

Regarding the inspection repairs, there are 2 inspections. The buyer will do their home inspection and you will need to negotiate with them the same as you would regardless of financing. But... the FHA appraiser also does a small property inspection in addition to determining the value and yes you will have to do their required repairs in order for the buyer to get the mortgage. Pealing paint is one of their big issues so if you have any exterior wood that is pealing, expect to do that. Earlier this year, I had to redo a driveway for an FHA buyer since the concrete was cracked. The buyer didn't care about it and neither did the city inspector but since the FHA appraiser required it as a condition of the loan, we either fixed it and moved forward or had to look for a new buyer.

For most rehabs, the FHA requirements/repairs are minimal but they do come up.

I use this strategy all of the time and have been for years.  

Regarding the stages, I start with analyzing the as completed property as a rental.  Specifically, how much will the finished property bring in for rent and what expenses will I have.  In addition to your direct expenses (taxes, insurance, utilities, etc.) most banks will also take 15% off the gross rent to cover vacancy, management and maintenance so I also include these estimated expense.  From the income and expenses, I calculate the net income and use that to estimate what my bank will loan me on a refi.  

I learned what my banks would loan me by asking them what criteria they use and how they evaluate rentals.  Talk to your bank to find out how they will look at a rental deal since your numbers will vary depending on loan type/rate/terms.

For me, that means having a debt service coverage of 1.25 and a max LTV of 75%. The loan is based on the lower of those 2. Debt service of 1.25 means that the net income needs to cover 1.25 x the loan payment. For lower end properties, it normally hits the 75% LTV first and for middle to high end rentals, it tends to hit the limit with debt coverage first. Even if the property brings in 2 or 3x the loan payment, the bank will not loan me more than 75% of the appraised value.

Once you know how much the bank will (potentially) loan you on a refinance, you know the maximum amount that you can have into the property.  Make sure you include: purchase price, closing costs to buy, holding costs, and closing costs to refi.

Closing costs are normally a % of the purchaes or refi price and talk to title companies and your bank to find out what to estimate for those.  To figure out what you can pay for the property as-is, the only missing number is the repair budget.  

Play around with the numbers to give yourself a feel for just how good of a deal it is.  What happens if you get $50 less in rent or interest rates rise 1/4 point or you find a surprise during your rehab that costs you $5k more or the rehab takes months longer than you expected.   For me personally, I've gone over my rehab budget most often so I always want some extra room.    

I'm not sure of the legal requirements in NY but yes you want to notify them.  If nothing else, they need to know who and how to pay you.  I send them a notice in writing with the following info: new owner name, mailing address, contact info (General and for maintenance/emergency), how to pay rent, etc.  

Additionally, I notify them of receipt of their security deposit of $X.xx and the bank and account where it is held in escrow (NJ requirement).  

I also include a note that: 1. Their current lease will be honored and 2. they will be given the opportunity to renew their lease at the end of their current term.  I don't want them to be afraid of what might happen and for them to look to move out.  

Lastly, I ask them to send me an email with their updated contact info so that I can be sure that I have a way to reach them and for my own systems, I do almost everything electronically so I want a good email address to reach them.