All Forum Posts by: Account Closed

Quote from @Andrew Postell:

@Account Closed some of what you are mentioning is good to consider.  Keep in mind we ONLY work with lenders that recognize our rental income. I mean, you can work with whomever you want but sometimes our success is dependent on the viability of our vendors. Everyone's market is different. Generally speaking, an "average" investor - one who doesn't know the BRRRR method, would put 20% down (or so) and buy a property off the MLS. And this is fine. Historically, this will give you about a 15% COC return on your money. But if you don't have 20% down what do you do? You do the BRRRR method. And make no bones about it - the BRRRR method is very hard to accomplish successfully. Especially if you are doing it on your own with no guidance.  But if bringing 20% down is impossible...and the BRRRR method is very hard...what is my choice?  I only have one way of purchasing properties if the other way is impossible. There are other methods of acquiring properties as well but for some of us the BRRRR method has been very successful for us.

By "guidance" you mean buying courses?  Please clarify. And how are people acquiring property with no down payment?  Partnership with BiggerPocket people?

Quote from @Michael Plante:

My dad gave me a book about BRRRR 47 years ago

was called something different.   BRRRR is just the new cool term 

Worked back then and still works now 

Were was it advocating converting the living and dining rooms to bedrooms for additional income? 

Quote from @Andrew Postell:

@Account Closed some of what you are mentioning is good to consider.  Keep in mind we ONLY work with lenders that recognize our rental income. I mean, you can work with whomever you want but sometimes our success is dependent on the viability of our vendors. Everyone's market is different. Generally speaking, an "average" investor - one who doesn't know the BRRRR method, would put 20% down (or so) and buy a property off the MLS. And this is fine. Historically, this will give you about a 15% COC return on your money. But if you don't have 20% down what do you do? You do the BRRRR method. And make no bones about it - the BRRRR method is very hard to accomplish successfully. Especially if you are doing it on your own with no guidance.  But if bringing 20% down is impossible...and the BRRRR method is very hard...what is my choice?  I only have one way of purchasing properties if the other way is impossible. There are other methods of acquiring properties as well but for some of us the BRRRR method has been very successful for us.

You ONLY work with lenders that recognize your rental income?  If you are radical, especially if you're doing short term rentals and you have a lot more than the expected income for that assessed property, NO LENDERS will suddenly appraise your $200,000 house much higher.  That's my point.  In my area a 3 br middle of the road home in a middle of the road area rents for about $1500.  Rooms of about 100 sq ft rent for about $500.  But if that house has large living and dining rooms that could  be another $1400 if partitioned.  If it has a basement potentially 3 more $500 rooms down there.  
$1500    3 x $500 bedrooms upstairs
$1400    LR + DR
$1500    3 $500 rooms in basement.
$4400    Total and this is not doing short term rentals which often double or triple that income.  In my area 100 sq ft rooms are going for $50/night and many people are fully booked.  Say $4000 x 3 = $12000 monthly.  
$1500 to $12000  
You think any bank is going to believe that and assess your home at 8 times the original $200,000?  
You think any buyer is going to pay you $1,600,000 for your $200,000 home because you are getting 8x the expected revenue?  
It simply isn't going to happen.  They won't give you half of what its worth.  Not even 1/3.  Not even 1/4!!!
So you enjoy your income, pay your taxes on it and use those tax records to qualify for a much larger mortgage.  With all that money pouring in you'll have a down payment for the next place in no time.  
Now the reality is most areas are not so great for short term rentals.  But even almost triple the expected revenue from long term rentals is great.  And that would allow a mortgage to be paid off in just 5 years with several hundred cash flow every month for expenses and improvements.  

My point is as soon as you get really creative and radical, people won't reward you for it.  Your real reward is the rental income.  The challenge is minimizing your taxes on it.  

> 1. Have you already done this? How many times?

Nope.  I used to own an apartment building with a layout that actually was well suited for this.  I just missed the whole concept when I owned it.  

> 2. If you have, is it as profitable as you thought?

If you know the rates for rooms in your area its easy to figure out.  I owned and managed that building for several years and dealt with a lot of different tenants and their problems.  But when I owned it I focused on my competition's apartments, never individual rooms.  If only I had done the math!  If only I had stepped back and seen the bigger picture I would never have sold the building.  Back then 2 br's were about $550 and rooms were about $300.  So with my new way it would have increased my revenue from $550 to $900.  1 br's were about $450 so they would have gone up 50%. 

I just realized another advantage of this arrangement.  If someone experienced incompatibility with their roommate they could opt for a different suite/roommate and the landlord wouldn't lose a tenant!  If one had multiple buildings they could be moved to another building to get away from the problem altogether.  

Quote from @Justin Moy:

I have heard of a group that does this. I'd have to look up the interview I did it a while ago. It's definitely something that boosts your returns, I'm not 100% sure how residents feel about it. The feedback he gave me was their biggest complaint is usually neighbors since it's a house that's holding more residents than it typically would. 

Also lending would be tricky because most banks will not allow you to use rents on a per non bedroom basis for the income of the property.

The more I talk to banks the more I realize they are just pointless in terms of working with you.  They are so stubborn, so uncreative, everything has to be done the way its always been done. Buyers can be similar.  When you're really good at this probably the best thing to do is just keep it and let the money roll in.  Because other people don't believe they could do it and double the typical revenue of a house (or much more if its short term rentals in a good area).  After a year or so of tax returns, maybe 2, you should be able to qualify for a much larger mortgage.  I used to think of paying it off as soon as possible but because banks are so stubborn, once you have the money it may be better to lower your monthly payments as much as you can with as long a mortgage as possible, so you can save up for another down payment.  Basically you're stringing the bank along the first time as much as you can.  Refinancing seems to come with so many compromises.  But one could argue anything is better than nothing I suppose.  Even a 80% refinance at a low appraisal still will give you a down payment for 1 or 2 more homes.  

The more creative you are the more frustrating banks will be!  

Bigger houses often have rooms that may not be a bedroom now but could be repurposed for that.  The larger the house the more likely you'll have a large living or dining room, a library, a home office, a rec room, a media room.  Anything that is fire code safe can be rented as a room.  Here's an example of a description of a 2100 sq ft house renting for about 40% more than the median in this area.
Main floor: living room, dining room and family room.
Second floor: 4 bedrooms.
Basement: 2 bedrooms + large rec room.
So we see 4 rooms that can be repurposed and we haven't even seen the house yet.  Its advertised as a 6 bedroom but you know the living and dining rooms are going to be much larger and nicer and probably have nicer views than the bedrooms.  So in my middle class area where bedrooms are averaging about $550, we have (6 x $550 = $3300) + living room ($700) + dining room ($600) + family room ($600) + large rec room ($700).  $5900 total and its renting for about $2400.  You need one of the rooms so say $5900 - 550 = 5350.  

In a small house you almost never have "extra" rooms you can repurpose.  
In large apartments you sometimes see rooms that can be repurposed but usually houses are just far better for this.  Plus you generally have far more privacy in a house.  Neighbors can ruin things.  

One needs to separate each part of the process and explore in detail.  Lopping it all together under "BRRR" makes no sense.  Different techniques for different people for different areas in different situations with different needs.

First the purchase.  Layout of the house is everything.  What does the local zoning laws allow you to do?  You better be very clear on that before making your offer.  Buying a house that has lots of space you cannot rent is fruitless.  

Then the preparation for renting it. Here is where almost nobody maximizes their situation by thinking conventionally.

Then tenant selection.  Most people are very careless in this regard relying on useless "references" who exaggerate and lie for their friends.  Time with the prospect is what's needed.  Few people are willing to spend the time.  

Then tenant management.  Tenants always behave well when they first move in.  Then reality shows its ugly face.  You have to be ready to evict problem people fast and find a way of doing it amicably.  If you know of good deals in your area and can move them for free that helps hugely. Often you can find them a better deal than your place (if you're maximizing your rent) so they're happy to move!

Then deciding if its best to refinance at 80% (almost never if the rent is maximized because banks don't treat it as a business and won't recognize your huge rental income very much), sell at 100%, or use your proven rental income to qualify for a higher mortgage and buy another house as soon as you can.  If you do things radically and have radical income because of it a lot of buyers won't have the confidence they can do that as well so they won't pay you adequately.  If you're pulling in $50,000-$80,000 on a $200,000 house would anyone sane sell it for $200,000?  Often it makes no sense to sell if people don't pay you even close to what its worth.  Also you know the house and it's quirks by then and can deal with things easier than a new person will be able to with their learning curve, especially if they don't live there which few dumb real investors ever do so they're detached from their investment and out of touch with what's going on.  Often its just better to keep it and keep refining your system maximizing your income.  The challenge is often the taxes on that high income!  But if you're buying more property you can usually write a lot of stuff off if you're well organized.  Also after a while you probably have some tenants that would be happy to manage a house for you for some small compensation if its not a lot of work which it usually isn't.  That frees you to travel, do stuff like normal people and expand your holdings.  

Doesn't all your monthly income hinge on this?  The average size of bedroom in my middle class area is 100 - 150 sq ft.  The average median priced home here is about $300,000 and about 2000 sq ft, often not including the basement.  Do the math.  That could be an awful lot of revenue!  Most dummies with houses rent to one family and get about $1500 - $2000/month but if they rented to individuals here they'd get about $600/month for say 125 sq ft.  Just one floor could have about 8 people!  That's $4800 a month.  Then there are the other 2 floors if you use the basement.  The problem is the layout. 

Young families want to keep an eye on their young children to keep them safe so they want more of an open concept type layout.  Perfectly understandable but not good for renting to individuals.  We want the absolute opposite!  And that's the problem.
   
Things like closets, expansive stairwells, unnecessary hallways, consume a LOT of space.  By having all your rooms fan out from a center kitchen and bathroom on a shared accommodation floor you minimize hallways.  Instead of closets everything should be on wall mounted shelving that is height adjustable.  This way you can put a short shelf under a deep shelf.  Anything you want is possible if its wall mounted.  Think wall standards like we've seen in grocery stores....that type of design.  Paint it black to make it look more stylish if you want. 

The more I think about this the more I wonder why so many people overlook this?

The focus should be getting a run down property cheap, then use that discount to change the layout to best maximize revenue because almost no house really works very well for this.  And soundproofing it up the ying yang!  Young families want to hear little Johnny if he falls down.  We don't want to hear our renters and they certainly don't want to hear each other.  Sound proofing is a must.  

All of this applies to short term rentals as well of course.  Even more so as they tend to be louder.  They're more likely to want a self contained area with a mini kitchen.  

> This is done all the time in New York City.

Creativity usually is born out of necessity! With high land prices people get inventive.

> In fact, there are companies that install prefab pressurized walls to create an extra bedroom out of a large (large for NY) living area. So the result is a extra small bedroom with windows, and a smaller living area usually with no window.

Its best not to use up space with a living area. Their bedroom is the living area for each person. What might work is a common area, especially if there was space that couldn't have a window, that couldn't be used as a bedroom anyway. Of course that could be used as a co-working space!  But generally you don't want the tenants congregating together as they tend to discuss what's wrong with the building. :)

> If you’re going to rent rooms, you MIGHT generate a greater income,

Might? You WILL. Look at my numbers for examples in my 2 bit city. The increase is huge.  

> but once you rent by the room you are no longer just investing in real estate; now you’re also in the real estate business. Also, you’ll have increased turnover, wear and tear, higher property management fees ( or if you self manage higher time commitments) etc. The increased revenue will come with higher costs.

If my revenue is 50%+ more that's just fine. Also remember my costs wouldn't go up much.  Nowhere near 50%.  Most owners get a 6 - 10% return.  That's just pathetic.  But that's what they get for a largely hands off investment.  But think if the revenue doubled how their profit would skyrocket.  If they're only clearing 10% before and their revenue increases by 50% they now make 5x what they made before minus management costs.  That's the angle I'm intrigued about.  Look at room rental prices in your area to see.  

> A potential problem is that the resulting layout may generate less tenant demand and a resulting decrease in what a tenant is willing to pay. Some areas rental rates are generally determined by the square footage, all else being equal, and since you’re not increasing square footage rental income won’t increase.

In most areas you get more money for a smaller space. Almost always. For instance in my area a 200 sq ft bedroom will rent for only about 30% more than a 100% sq ft bedroom, everything else being equal. Small spaces always bring in more money.

> If you’re talking about eliminating a living area completely, and renting each room, what you’re created is not a boarding house, but what’s known as SRO, or single room occupancy (a boarding house has a common ( shared) living area, kitchen, dining room at a minimum, and usually additional common areas such as second living rooms, dens, patios. With no common living areas your net income may actually decrease as you’ve just made your potential market significantly smaller.

Not in almost all the markets I've looked at. The numbers are as I described in the original post.

Of course this assumes a market with strong rental demand. Most areas have that. And for good cash flow it needs to not be in a hyper expensive market like NYC or SF or beachfront in California. Obviously.

I show rental increases of 100% and you ask why?  Really?  As for management we all pay people do do stuff for us.  If the income is doubled you really think its a problem?  I think not. 

I wouldn't rent to transients.  If they couldn't show me their banking history or proof of financial solvency they wouldn't get in.  This is for people that are out most of the time because they're busy.  Not a alcoholic infested flop house. 

I've lived in shared accommodation and never has the common spaces been a problem.  If someone makes a mess they're removed.  its called tenant management.