All Forum Posts by: Evan Kraljic

Hey AJ,

Your analysis looks pretty good, a few things I would mention though for the expenses. 

I'd agree with Tim that the 15% expenses may be little low. I'd probably go with 20% for vacancy, maintenance, and capex combined, possibly more depending on the area and condition of property. I searched that property and it has had some updates recently so I think 20% is solid. I've also heard people use $200/door/month for maintenance/capex alone and then vacancy as a % of the monthly rent. In this case the numbers would work out similarly for the fully rented income at $2400.

Your fixed landlord expenses are actually probably higher than needed. I would assume tenants pay for gas and electric in their units and landlord covers the water, sewer and garbage. This gets billed monthly and has been around $150/month for my duplex in South Mpls. I've heard it's higher in St. Paul but 150 could be used as an estimate for any Mpls duplex. Snow removal and lawn care can be written into the lease to be the tenants responsibility. I would recommend this if you aren't owner occupying. So that would boost your cash flow by $150 and counteract the $120 loss for 5% higher expenses, close to a wash.

Last thing, although this property looks to be relatively turnkey, I'd always budget for some repairs up front, maybe 1-2k. I believe the fees for rental license change of ownership in Mpls are $450 alone + maybe another 70-100 per unit, per year. And then there are little things you can do to make the property more attractive, repainting where needed, LED lights or a few new fixtures here and there, etc. A little bit can go a decent ways in that regard

Real estate investing, like a lot of other walks of life, is all about tradeoffs. In Minneapolis/St. Paul you can find cash flowing properties, but the best of those are generally in C or D neighborhoods where some landlords stay away because they don't want to occupy a home and/or rent to tenants in an area with higher crime, worse amenities, etc. 

You mentioned you're looking at B class neighborhoods. My experience in looking at this asset class is that good deals are not simply found, they are made. I'll give you an example of a property that went up on the MLS that is in the Armatage neighborhood of SW Mpls, which is generally considered a pretty nice and high rent neighborhood. The address is 5432 Penn Ave S and it's listed for 325k. It's a 3 bedroom side by side duplex, which median rent for a 3 bed in that neighborhood is 2k/month. That duplex however seems to be in pretty rough shape with one side currently being rented for $875, the other side doesn't even look like it has tenants in it so it may be in a worse condition.

That is a property where you need to make it a good deal. It has a lot of potential, the basement is about 250-300 sq ft. so you could rough in a bathroom on each side and make it a 6 bed 4 bath (3x2 on each side). If you remodeled the whole place with finishes to match or exceed the rest of the neighborhood you could possibly get 2200-2400 in rent on each side, the question is how much work is it going to take to get it there? That's going to depend a lot on the mechanicals, if you've got knob and tube, barely working HVAC, and corroded galvanized pipes that's going to eat up a lot of money for little ROI. But once that is done and you can move onto fixing up the kitchen, bathrooms, and repainting and floors you could put 50k in and see a huge return in cash flow and forced appreciation. If I were looking for a property right now that one would be very intriguing, but I'm guessing it will be snapped up quickly as duplexes in that area for that price don't last long.

Hey Mahad!

I think househacking a multi-family home in Minneapolis is a great way to get started, that's what I'm doing currently. Listening to the biggerpockets podcast is a good way to start for building baseline knowledge and also to hear other people's stories to fuel your own fire and show you the roadmap, and since you've done this for awhile I'd say the next step for you is to start reaching out to loan officers and real estate agents to build a network for when you're ready to make that first purchase.

For loan officers I can recommend three that work with investors heavily and I've only heard good things about: @Tim Swierczek, Conor Hesch, and Kim Burke. It's great that you mentioned you are working on saving up money for your first purchase, it's super important to have reserves and the more you have, the more renovations you could potentially make to force appreciation and boost your cash flow too. Since you want to get into BRRRR later, this would be a good introduction to it. But anyhow, although Covid makes meetups less likely I'm sure you could hop on a call with any of these 3 and they'd be able to help you get in a position for your first purchase.

Next you'd want to link up with an agent. Side by side Realty is a group that was started by Scott and Drew Hoefler and specialize in investment properties. Alyssa Strom is also in their group and they have all done their share of house hacking and helped buyers get their own so they'd be a good place to go. I'm partial to the Duplex Doctors as they helped me get my first duplex. My agent was Kent Hranicka and I've also interacted with Clark Lensing and Jason Reed who started the group. All good dudes who invest in the twin cities so they know the area and are very knowledgeable as well. 

For other good resources, I'd say the Millenial Investor Focus Group on facebook is the best because it's a large group of investors in the Twin Cities so you can ask very specific questions about local ordinances or get referrals for various contractors, as well as just meeting other like minded people. I'm sure you've probably done this already but if you search Minneapolis house hacking on these forums you'll probably be able to find some good info from past threads too, I know I've commented on a few. For books, The house hacking strategy by Craig Curelop is a good deep dive on the subject but be mindful that every market and invidual's situation is different so YMMV. 

Best of luck, and if you want to meet up sometime once this pandemic dies down let me know!

@Tom Wagner It is definitely thinking outside the box a little bit but I dig it. I mean really it comes down to one question: what are your long-term goals? That's not rhetorical either, I genuinely want to know. If you're trying to build a lot of wealth while trying to minimize the # of units you own therefore minimizing time invested, it makes a lot of sense. And you're willing to take on the risk of being highly leveraged and have a high enough salary to support it if you're slightly cash flow negative for a little while so that checks out too. 

It's always good to be thinking ahead on what your next move is and exit strategies so here are some other things to consider. I believe the maximum number of low down payment loans is 4. If you start with an FHA loan you will need to refinance out before you can buy another property with 3.5% down, which you'd be able to do when you're at ~78-80% LTV. If you had to rely solely on equity paydown to get you there that'd take about 8 years, of course with appreciation helping you out you'd get there a lot quicker, more like 4-5 years assuming appreciation in the 2-3% range and your loan interest rate is in the 3s.

Another important point here, with all things equal multifamily generally doesn't appreciate as fast as single family. I don't have hard data to support this but I'm sure it can be found with enough searching, however it is always brought up when weighing pros and cons between the two so I'm trusting the conventional wisdom here. But I digress, my point is that if you're willing to play the long game your strategy works fine but if you have the desire to scale quicker forcing appreciation by buying and renovating a property that doesn't have all the bells and whistles is probably your best bet. If you're buying at the tip top of the market trying to maximize your leverage then naturally you will be looking at places where most if not all of their income potential has been realized. 

So I guess if I were trying to use that strategy I'd focus in one triplexes and fourplexes and not just look at the very top of the market but look a little below that too. Look in those A neighborhoods but instead of going for the 250k/unit fourplex go for the one with a slightly below market rents but with some cosmetic upgrades could put in on that same level. And of course doing diligence on the market to make sure it has strong fundamentals and isn't ripe for a downturn if COVID shakes our whole game up. 

Best of luck man, I'm interested to see where this goes for you

I see you have a pretty well thought out and reasoned approach, just wanted to bring up a few things to consider. 

A lot of these high rent markets also happen to be very tenant friendly, which should be a consideration in your search. If you buy a property for 1 million plus obviously you're going to be dependent on rents to pay your mortgage as you've stated. This also puts you at the mercy of the city gov't in their responses to this pandemic, many of which include eviction moratoriums and proposals to cancel rent. Hopefully the latter doesn't come through anywhere, but I'd hate to see you buy an expensive property only to foreclose a year later. 

This one I'm sure you've thought out already but really pay attention to property taxes. Coming from NJ you're probably aware of how much high taxes can affect cash flow, but just want to make sure since all that has been discussed so far is the % of monthly rent over the purchase price, which is an oversimplification but keep things quick for the sake of discussion so I can see why you're using it here.

Lastly I would say that instead of finding the most expensive market you can buy into, try to find the best market that you think still has room for upwards growth and buy into that (try giving Phoenix a look).  Leverage is great in realizing appreciation on the way up but equally as bad on the way down. A lot of investors don't even consider the potential for depreciation but with COVID19 there should be at least some degree of uncertainty about real estate moving forward. Is it going to spur people to move outward into the suburbs due to more people being able to work from home and a general desire for more space and safety during these next couple years? It's been theorized by people but who knows really. What I'm trying to get at is you seem very stuck on one strategy which could be a losing one, but the 3 tenets of sound real estate investing remain the same. 

1) Buy for cash flow 

2) Have adequate cash reserves 

3) Secure long-term debt

If you follow these 3 rules you should be able to weather any storm that comes your way. In buying into a million dollar FHA mortgage you're probably only following #3, unless you're sitting on 100k+ of cash but just want to get into your first property with as little down as possible.

Were the expense numbers given to you or did you come up with them yourself? Because they are being grossly underestimated. 

Your vacancy, capex, and repairs and maintenance is estimated at 5.7% of your rental income, which is probably the lowest I've ever seen apart from them being left out completely. Depending on the location of the property and its condition those should be at minimum 20% combined, probably more like 25% with COVID potentially causing higher vacancy in the near future. Insurance at $200 for a 12 unit also seems pretty low considering that duplexes will run around $120ish but I don't dabble in commercial so maybe I'm off there. 

 He said the property is 2.5 hours away from the cities and he is in St. Paul - I misread that at first too. I'm guessing it's in Duluth

Hey @Luke Nelson, congrats man! It sounds like you're in a great situation financially to start real estate investing. I think where you have to start is being real with yourself on what you're willing to sacrifice with your current lifestyle in order to buy a rental property. 

Normally house hacking is where I'd encourage people to start, but you have a wife and two kids so maybe that's not as attractive of an option for you. The reason I'd recommend it is just so you can qualify for a low-down payment purchase, but it sounds like you have the discipline to save up some money fast and who knows where the market is heading, maybe 1-2 years from now will be a prime time to buy. Also I feel like I should add, there are some damn nice duplexes in the west metro so house hacking a side by side 2000+ sq ft/unit house wouldn't be bad for a family, I'm just thinking more along the lines of your typical 2/1 1000 sq ft duplex in Mpls/St. Paul. 

But yeah, aside from that I would just say to decide on what type of property you want, where you want it, and link up with a local agent for an MLS search and lender to determine what you can be prequalified for. The rest of your team can be found later but those two roles are crucial to you getting serious about finding your first property. I can offer some recommendations too if you want. Good luck!

You call it letting people take advantage of you, I call it being empathetic and working with people. You said charge them for everything and bet they won't file a small claims court case, I call that being a slumlord. 

I understand it's bad business to let people take advantage of you, I just don't think that is the case here. Next lease you are starting fresh and now it becomes fair and equitable to charge a tenant for damage that you could clearly attribute to them. There's not a lot of gray area there. Maybe we aren't as far apart as we seem here but when you say something like just take the whole deposit, they probably won't sure you... Nah, that's just 10 kinds of F'ed up. But yes, to each their own :)

I was in a similar situation to you, bought a house that was in less than stellar condition and had tenants move out after, including one guy who lived there for 10 years. I basically told them I wanted to give them their whole security deposit back as long as they removed everything they could and made a reasonable attempt at cleaning things. 

In my mind, that wasn't my money to keep and with no move in checklist to go off of it wouldn't have been right to charge them for things that could have been preexisting when they moved in. Personally, I bought the property knowing it would need a facelift and I'd be putting in a lot of hours getting it cleaned and remodeled regardless of how well the tenants tidied up before moving out. Charging them for a few hours of my time is not how I wanted to start out as a landlord, especially since they already had to go through the inconvenience of moving. 

Lastly, I'd just emphasize communicating with your tenants beforehand. This go around was weird because you hadn't signed the lease with them and didn't have the pre-existing relationship. But in the future make sure you have the move-in report completed by them, then give a move-out cleaning checklist with fees next to each item so they know what to expect. Sorry if that all was a little preachy but just wanted to drop in my 2 cents