All Forum Posts by: Fred T.

first off you don't go changing matrices just to make the deal look better...big mistake

You should know what the market vacancy rates are for that area before you play in that sandbox. 

Maintenance Reserves can be figured at 1% FMV on average. If you have low income or fixed income / section 8 then i would double that. Yes its sad to think that way, but again this is a business and you have to do proper Risk Assessments to be successful.

Management rates you should also know for sure...no guessing with that since you should have a good PM Firm on your Investment Team.

Recent P&L or tax returns will help you to verify all other expenses IF the property was previously managed. If the Owner managed it, i would ask for the receipts for the last year at a min to verify the numbers given by the property owner.

Use your Team to verify your assumptions and then simply do the numbers. If they work out to a CAP you are happy with then so be it...if they don't negotiate a lower price or walk away.

Good Luck!

Now that we figured out your CAP Rate issue...the REAL QUESTION is what are your Sales Comparables telling you the value is?

Duplexes are in a grey area and you really shouldn't be using just a CAP Rate to determine if it's a good deal or not (especially a Hack Strategy since the numbers are skewed)... The Comparable Sales Approach should also be weighed on Duplexes and in-fact heavier than the Income Approach IMHO.

Just keep that in mind...but you main question is answered :)

Holy Smokes...let's back the Train up some shall we!

1) 1% rule for rent? Don't you know what the actual market rents are for each size unit? We'll use your "Rule" but my suggestion is you find out the exact rent rates in the area of the Subject Property. **UPDATED: I see what you were saying now, that the market rents are above some 1% rule but are in-deed $5k/mth...I hope :)**

2) Insurance seems low if your property taxes are $5,400/yr - you didn't mention the state this property is located in, so I guess we have to use your number but I would do the "Discount Double Check" on that number

3) P/I I assume you are speaking of Debt Service Principal and Interest? If that's the case, then that number is a smoke screen as NOI is calculated without Debt Service. So for now, I will simply scratch that from the equation unless you come back and say it meant something else.

4) Not sure what Management "Insurance" is? Again, I will just roll with an assumption that you just meant Property Management Expense which typically runs between 8-10% of EGI.

5) Your Maintenance (Mtx/CapEx Reserve Account) again is hard to determine its accuracy since we're not sure where this property is located, the condition of the property, actual & effective age of the property, etc. With that said though, using 1% of the FMV is not too bad of a general rule to follow. In this scenario, we're going to assume the property is worth it's asking price so that would be $4,750/yr

So.....let's see what we have here from the information you provided:

GOI (based on your $5000/mth): $60,000/yr

Minus your 10% Vac Rate: $6,000/yr

EGI: $54,000

Prop. Mgmt: $4,320 to 5,400/yr

Taxes: $5,400/yr

Insurance: $804/yr (???)

Mtx/CapEx Reserves: $4,750/yr (yes, I increased your number..lol)

NOI: $37,646 to $38,726

CAP = 7.9 to 8.2 @ a target acquisition of $475,000

We are assuming that the tenants pay all utilities, if you are paying some utilities, then add that into the expense column and re-calculate./

Good Luck!

One word can be used to answer the "why doesn't BP..." question... LIABILITY

My Community researched exactly what @Mike H. mentioned and it was determined that there was too much liability involved. Someone could get the wrong idea that the person or company was somehow an "Approved Vendor" and then when something goes wrong, try to come after the website or Community that "appeared" to be recommending that company or person.

Perception is the main issue and a Human Element that can't be fixed by any amount of disclosures.

As far as the main idea of this post, the local REIAs, National Real Estate Investing Communities and CrowdFunding pretty much have this covered. My suggestion is you tap into your local networking groups or national groups and start building relationships. 

Then you can invest in reputable education programs that allow you to have intelligent conversations with those who have money in an effort to form a piggy bank or Joint Ventureship. 

There would be no way in heaven to vet members of an online forum community to even start what you are suggesting. On top of the Vetting process, you have SEC Registration requirements and procedures that need to be followed and an Accounting and Control System would have to be formed just to be able to satisfying reporting requirements.

The concept of Team Work is dead on...just the suggested platform/method is simply dead :)/

**Your Network = Your Net Worth**

ARV is an Art Form and not a guess. Guesses will have your bank account reading $0 in no time. ARV is determined by various valuation methods depending on the asset type, base condition, improvements planned, actual age, effective age and location (to name the most weighted factors) relevant to its peers and it's a learned skill not a guess. While ARVs can fluctuate, based on the individual doing the valuation, it's rare to find 2 people valuate the same property at the same number. ARVs, like Appraisals and BPOs, are an educated opinion of value based on factual data and assumptions.

CAP Rate is part of the Income Approach Valuation model and uses the Net Operating Income of the property to determine what an Investor would be willing to pay for it (or valuate it) based on their Risk Assessment and pre-determined return on their Capital. All Investors have a different desire, so there is no One CAP Fits All model to follow.

Your Appraisers and BPO Agents will attempt to determine what the "Market CAP" is for the property in situ based on prior recent sales and related P&L Data and then use the Market CAP Rate to set a value determination on their reports.

With that said, you can also find "Desirable" CAP Rates that play into Wall Street and other Institutional Investors as well as some Commercial Lenders, but not the average Joe.

I may be satisfied with a 10CAP and you may desire a 12CAP instead. The Appraiser may determine a 9CAP and the BPO Agent may determine an 11CAP all for the same property. 

The beauty of the CAP is in the eye of the beholder :)/

The only addition thing I would add is we use 1% FMV for a Maintenance Reserve/CapEx Account determination as a general rule of thumb.

@Brie Schmidt is spot on regarding Duplex Valuations. You can use a desired CAP to satisfy yourself, but the Appraisers and BPO Agents will most likely use the CMA Approach to determine value. Even though the reports will have both valuations (CMA and Income Approach), they usually give weight to the CMA number.

Income Approach plays fairly well with 3+ unit buildings and as @Joshua Nudell mentioned, mostly used on 5+ unit buildings.

Final thought... Income Approach should never be used on a SFR IMHO.

Good Luck!

@Mason H. I don't usually do 1st, last, security deposits (not to say that's right, just not something I do) and the reality is if a couple hundred dollars is going to break the bank, then prob. not a tenant I would want anyway. 

When you go to put utilities in your name, certain areas require a security deposit based on your credit report and prior utility payment history anyway...so either give that security to the utility company to turn on the utilities or give it to me if I'm controlling the utility. 

Same same./

As a safety net for you, I would control any utility that can place a Lien against the property if unpaid. 

Along with this, you want to make sure that you collect a separate Utility Security Deposit of 1mths Average Cost for the utilities you are controlling (in addition to the standard Lease Deposit) and have in the lease terms that the Tenant will pay the full amount due of xxx Utility at the same time as their rent payment. 

Each month, you will then want to make sure that you send a certified mail copy (or actual and keep a copy of the mail receipt and bill for your records) of the Utility Bill to the Tenant upon receipt by you to give them time to plan as needed.

If your county or municipality can't lien the property for say the Water Bill, then no worries and the tenant can put all in their name.

As far as "appeal to renters", if this is a SFR then most expectations are they will pay the utilities themselves in their name. Instead of raising the rent to cover utilities, they would much rather be able to control their own utility expenses and as such prefer them to not be included.

If this is a Multi-Family property, where there is common area electric or single metered utilities for more than one unit, then of course the utilities would be expected to be included in the base rent instead of splitting a utility bill each month.

Remember, this is a Business...so what do your numbers say? 

Are you willing to try to estimate Utility Costs for the coming year with all the uncertainty in the World today to derive a Base Rent Rate to charge?

Is that part of your Risk Assessment? 

Cover the Asset is the main answer here :)

Happy Landlording!

A max 3-day stay is a little unreasonable to begin with IMHO. So when I visit my Aunt, that is residing in your property,  on a 1 week vacation, I can stay with her for 3 days, hotel for 1 day and back with her for 3 days?...

As far as a rent increase, if you have a Max Stay Provision, then you should also have a remedy for that provision to address violations of the Max Stay which in most leases are an increase in rent per person for the period of time beyond the "Reasonable Stay". IF your lease does NOT contain such remedy and you try to stick them with more rent, my guess is it wouldn't hold up in court if they didn't pay and you tried to sue them for it (Disclosure: I am NOT an Attorney so you should consult with one regarding this opinion.)

To me it sounds like a Summer Vacation Stay, and so be it...I assume your Lease at least covers that the Individual stated in the Lease is responsible for ALL actions by their Guests and as such if something goes wrong, then you have legal recourse to act.

Bottom line is, use your Lease Agreement to determine the limitations and remedies and if it doesn't contain both, then consult your attorney before having a stressful conversation with your tenant and draw up a new lease for the renewal so this doesn't occur again to you.

Real Estate Investing is a People Business.../

Good Luck!

Real Estate is a people business and you should want your tenants to be satisfied and content in their home at all times...that's what keeps the money coming in. Word of Mouth in a negative manner can hurt your Business for sure.

I would not only bless their request, but would also encourage the test to occur by a Professional (not a Home Depot Kit). That is of course unless you have knowledge that Mold is present...and in that case you should have re-mediated prior to putting the tenant in it to begin with and will now suffer the consequences of your inactions.

With that said, providing you had no prior knowledge, if Mold is found, then you should be asking the question WHY was it found. Did the tenant, in the 6-mth period, cause a leak and never corrected it...were they running the HVAC systems in a way that would have created the issue, did they or do they leave windows or doors open frequently without monitoring the weather, etc. If the Tenant didn't cause it, then it could be a sign of an underlying issue with the property such as a slow leaking pipe or fixture, the roof leaking, the basement leaking, etc and you will want to have those issues repaired anyway to protect your own asset.

While a normal Property Insurance Plan may not have a Mold inclusion, you may want to see if there are other plans available such as a Flood Insurance Rider that may cover Mold and related issues that the base policy does not...again, the cost of being a property owner.

Worst case scenario is Mold is found and you, as the property owner, take care of it and the tenants are happy campers...all part of being a Landlord. Best case scenario, nothing is found and your tenants have great respect for you as you put their child first above all.

If you focus on the losing money potential and not the actual person, you will lose all the time!/

Good Luck!