All Forum Posts by: Forrest Shealy

If you are not accustomed to dealing with the "cash economy" and this type of neighborhood, the way business is conducted would spook you. In that case, you're better off with the lower returns with A or B type areas where you rent to professionals, with W2 incomes. This is where I invest. In the cash economy, you hire contractors where you normally pay in cash. Ironically, I use a landscaper who charges me $100/month for mowing a SFR rental. ask them to mail me the monthly bills, and we'll send him a check. Had the same conversation with my plumber. The usual answer is "in that case, I'll have to include sales tax because it'll have to be be reported", and I get the sense they prefer cash. I tell them, "it's OK, I be deducting it on my taxes". These guys are doing me a big favor taking my check. Funny, it seems the landscaper occasionally forget to add the sales tax as most of his customers pay cash, so I'll get monthly mowing bills of $108.25 including the tax and a few months in between for $100.00 when they forgot to add it.

My friend who bought the 32 unit apartment grew up in the restaurant business that his dad was in for a while. It's located in an immigrant community where many residents are undocumented. You might say "I can't rent to these no good people with no W2's, work history etc." But the fact is these people has to live somewhere, and pay their landlords rent. My friend preferred the undocumented, and you would think he would have problems with them, no W2's,  not paying rent. I would think so too if my friend didn't set me straight. We all heard about eviction court where tenants using "legal aid" would not pay rents for months, drag it out, and take 6 to 8 months to evict. He said the advantage with the undocumented is he tells them he'll "call immigration" on them if they don't pay rent, he wouldn't bother with eviction court. His tenants understand this, believes him,  and few would dare skipping rent. So it's pay the rent or you go back to Mexico or where ever.

Funny you mention the shoebox full of receipts. I was playing cards with him when a tenant of his called about a problem with a ceiling light. He excused himself and came back 30 minutes later with a signed receipt in hand for $35.00. Told me he had tenants sign the receipts whenever they call him on a small repair, or complaint, he makes one up, does the repair, they sign it, and the receipt looks like he got a handyman repairing it, and it's deducted from his taxes. If anyone checks, he'll say he paid by cash. So in the final analysis, his shoe box of receipts would be full of these made up receipts, and its up to you to figure out how reliable and real the information is.

You could make any business in the cash economy work if you know the ins and outs and avoid the pitfalls. My dad had a cash business. In the case of rentals, you'll have to check to see if the building is full of violations by visiting the "buildings dept." here in NYC for instance. But if the building is full of undocumented, it's doubtful they would even file many complaints against you. For you, if you know the how much units would rent for, and inspect what shape they're in. if the rents are paid, you be OK. Here, estopple letters would be useful in determining that.

@Forrest Shealy . Yes, there are plenty of landlords who don't keep books. It is really up to you to decide if you want to take his words or try to "force" him to show more.

Your offer price should definitely be based on the comfort level you have with the numbers that have been given to you.

I honestly don't know what you mean with "The price is great", when you haven't been able to validate the statements of the seller. Is he selling the property to you pro-forma?

@Forrest Shealy Does he have a separate bank account or was he commingling funds? If there's a spereate account ask if you could see the monthly deposit record. 

Regardless though, you will want to verify as much information as possible. Also, look to make sure there aren't any leans against the property. 

Best of Luck:)   

Great job sticking to the due diligence process!  Is the broker your guy or the buyer’s?  Ultimately they are it’s looking to get paid and if that means forcing a deal good,bad, or indifferent then so be it, hopefully not.

Hard to get expenses without help from the buyer but you can at least verify income and what the owner pays for via estoppel statements from the current tenants.  Verify rents, if they’re current, security deposits, what utilities the tenant pays for, etc.  If they have a property manager in place you can try talking to them about what kind of issues the property has or had and the expenses they’re seeing. 

You should also look into the appraisers office and see if there are any open permits, code enforcement fines, or special assessments coming.

Place to start, hope that helps

Is this normal? Yes, in certain markets. I myself use QuickBooks, try to be up to date with my bookkeeping, making sure I'm not more than a few months behind. Yet, not that many years ago, my best friend own a 32 unit apartment building, does not keep books, receipts are kept in shoe boxes, and eventually given to his accountant a little before tax time, or sometimes after. The only thing he did as far as keeping records is a big chart on one wall of his living room where tenants who paid the rent is mark off with a large check mark with a flair pen. This chart has 32 rows, each one for an apartment, and 12 columns, one for each month of the year. He did not use a PM as the doctor who sold him the building was a tired landlord who get ripped off by a PM supposedly through false expenses and other shenanigans. He got rid of the PM, took over the unit occupied by the "super" rent free and a dozen years later sold it back to the doctor for several times what he paid for it. The building cash flowed at that point whereas for the doctor originally it did not. My dad owns a small mixed use property and does not keep books either.

There are many small landlords that fit the above profile. It's unlikely that when they decide to sell a property, records kept in shoeboxes suddenly gets recorded into QuickBooks, and up to accounting standards. In fact, people I know in these situations are so tired from land lording at a certain point they will not likely going to learn QuickBooks and record their monthly income and expenses. Some are even some years behind filing taxes. So it's possible that you may have a good deal from a tired landlord. These people are in a parallel universe to Bigger Pocket members.

@Kenneth Garrett, Can you recommend any education on the subject of zoning, rezoning and maximizing highest, best use of current zoning potential?  Preferably audio books? I can not find a thing on it except only to dig into county pdf documents and try to interpret them.