All Forum Posts by: George Azita

The only time you need sign Lien Releases is when you are dealing with sub contractors who work on your job site and when you are dealing with material suppliers who deliver materials to your job site, but your Prime contractor (the contractor you signed your contract with) is not required to give you a signed Lien Release, but many will give you one just to appease you, or because a high percent of contractors don't understand the contracting laws.

The purpose for a Lien Release is so when you (the property owner) has construction work performed you want to make sure all the sub contractors and materials suppliers are paid. 

Since you are dealing with only the Prime Contractor (the contractor you hired) the Prime Contractor does not have to sign a Lien Release because you already know you hired the Prime Contractor and you are aware of how much you owe him.

Every sub contractor has to give you a Lien Release because you need to make sure the sub contractors are paid before you pay the final amount to your Prime Contractor.

This is why the Lien Release is for sub contractors and how it works. When you hire the sub contractor many workers show up to work on the job and you don't know Adam from Eve regarding whether or not your Prime Contractor is using sub contractors because your Prime Contractor can lie to you and tell you every worker is one of his employees. Then, after you pay the Prime Contractor all his money you could get bills for thousands of dollars from sub contractors.

TO PREVENT THIS LEGAL PROBLEM WITH SUB CONTRACTORS the sub contractors are required by law to give you what is called a Preliminary Notice within 21 days from the time they start work  in most states. This Preliminary Notice is to notify you that they are sub contractors, they are working on your job and the notice tells you that if your Prime Contractor does not pay them then they will come to you for the money and sue you if you don't pay them. So, to make sure you are free from the sub contractors you need them to give you a Lien Release that stated that they have been paid

There are two types of Lien Releases you need to get from sub contractors. The first Lien Releases are for Progress Payments for every time the sub contractor is paid as the job progresses and the second type Lien Release is a Final Payment Lien Release (can't remember the exact name) for when the job is 100% finished.

As the job progresses, the property owner usually writes checks and makes payments directly to the sub contractors.

If a sub contractor fails to give the property owner a Preliminary Notice and nobody pays the sub contractor then the sub contractor is poop-out-of-luck and can sue you and file a Mechanics Lien against your property, but the Mechanics Lien will expire within something like 90 to 120 days and if the sub contractor takes you to court he will lose the case.

I've been a contractor for 50+ years and the following is a clause in my contracts:

"LIEN RELEASE - XYZ CONTRACTOR will never file a Mechanic's Lien on a property unless a payment is not made when due. The Conditional Waiver And Release upon Final Payment is a form that protects you (the Buyer). This form states that after making a payment, when due to XYZ CONTRACTOR, XYZ CONTRACTOR is giving up the right to file a Mechanic's Lien. Since XYZ CONTRACTOR is your prime contractor, XYZ CONTRACTOR is not using sub contractors, and all materials and supplies are delivered directly from XYZ CONTRACTOR'S own warehouse,
XYZ CONTRACTOR, nor XYZ CONTRACTOR employees, nor any of XYZ CONTRACTOR'S suppliers are required to provide you with a lien release. Even so, there is no harm in providing the Lien Release even before XYZ CONTRACTOR receives any payment."

The same Lien Release requirements apply to material suppliers who deliver materials to your job site. Suppose, you hire a Prime Contractor and a lumber company delivers a truckload of lumber. Since you don't know whether the lumber came from your Prime Contractor's warehouse, or whether it came from a lumber company then the lumber company is supposed to give the property owner a Preliminary Notice so the property owner is made aware that if the Prime Contractor does not pay for the lumber then the property owner must make sure the lumber is paid for by the Prime Contractor, or paid for by the property owner, or the property owner will be sued. So, the property owner is required to give all materials suppliers a signed Lien Release and, of course, it is better to get those lien releases from the materials suppliers and sub contractors before paying the Prime Contractor.

Most property owners and even most contractors don't understand the Lien Release laws and Prime Contractors try to make their life easy by giving every customer a Lien Release, but since many contractors don't understand the laws the customers get ripped off and end up paying for their work several times before lawsuits are settled.

It is good to know that you can tell sub contractors and materials suppliers to pound sand when they don't provide you with a Preliminary Notice. Otherwise, how would you know whether or not sub contractors are working on your job.

 "I see, said the blind man"

According to my calculations you will have a negative cashflow of almost $1900 per month. I don't have your exact numbers because I don't know the following expenses.

Trash removal
Water
Electric for the house meter
Sewer Use Fees
Business Licenses
Annual fire department fees
Annual County Housing Inspection Fees
Property management costs.
Property insurance plus annual increase

With today's high prices I don't think properties will appreciate more than 2% annually, or may go down.

I don't know exactly what property taxes are in San Francisco, but in Los Angeles the property taxes are 1.25% of the purchase price plus property taxes increase by 1% every year. I purchased a $1.95 million property in 2001 and my property taxes were about $20,000 and now the taxes are $48,000 every year. So, the property tax and increases are very significant and those numbers are not included in my charts, below. Maybe, I will put the taxes calculations in my charts later tonight to see how much more investors lose out on profits.

According to the marketing package the loan interest rate is less than 3% and I think the current rate is higher than 4%.

I've been wrong a million times when giving advice. So, don't listen to me, but this property is not a sure-thing, does not fit my business model, could bog you down and I don't take risks.

When not including profit from principal paydown you will lose $221,000 in 10 years.

I appreciate all arguments to show where my projections are not accurate.

If you have the kind of money this property will take to purchase you can do much better by purchasing a 10+ unit property. The only way you can make a profit on this property is if it appreciates significantly and I would not bet on that. I put $60 per month for rent increases every year in my calculations and since the tenants are already paying $3,916 per month per unit I would not count on being able to increase rents even one penny for a few or several years, but I don't know and I definitely don't increase rents enough for my own rentals. But...when I am not sure I don't take the risks. I like to but sure-things with zero to very limited risk.

I find that most sellers mysteriously forget to put the correct operating expenses in the marketing packages. I am really mad at myself for letting a seller get away with lying to me on a 6-unit property I purchased in March 2021. The seller bragged about his installation of a solar hot water system and told me his gas bill for heating hot water and the laundry room was only $75 per month. I was stupid, lazy, trusted the seller and did not do my own evaluation. After I purchased the property, I found the solar hot water system was super hokey, had two electric pumps with frozen motors and the system did not produce any hot water. Then, I found the building had a Master Gas Meter for all 6 units plus the laundry room and I paid for the heating and kitchen stoves in all 6 units. My gas bill is more than $400 per month vs. the $75 the seller put in the marketing package. The day I took over the building the tenants said they never had enough how water during the evenings and I found out the 6 units was supplied by only a 50-gallon hot water heater. So, I had to install a tankless water for a cost of $8,000 out of my pocket and since I am a plumbing contractor that was my actual cost due to the installation of new water piping, gas piping, electric wiring and permits.

 I buy my refrigerators at a place called WDC in Torrance California on Hawthorne Blvd..

The next best place I ever found is Lowes because they always have stoves and refrigerators in stock and they have some great sales, but in 2020 I went to about 8 Lowes, 4 Home Depots and not one store had an 18-cubic foot refrigerator with the exception of WDC and they had as many as I needed. Home Depot has never had a stove or refrigerator in stock when I needed one.

Not many things go wrong with refrigerators where you need to worry about how tenants take care of them. Some tenants leave refrigerators filthy, but it takes less than 20 minutes to make one look like new. We take them outside and wash them with a garden hose, soap and chlorine when they are filthy and stink.

We put 18-cubic foot refrigerators and stoves in every unit because those are large items many tenants don't want to own and don't want to manhandle getting them inside your unit. We don't want tenants thrashing our floors when moving stoves and refrigerators. They are an amenity that helps to rent units faster and some tenants insist they they bring in their own refrigerator and I never had a tenant who brought in their own stove. We get 18-cubic foot refrigerators for about $600 and they last an average of 10 to 15 years before the compressors conk out or the door seals deteriorate and we always keep 4 refrigerators and 4 stoves in our warehouse so we can exchange them fast.

You don't need to waste one penny purchasing Quickbooks or using any service you need to pay for just to manage a few rental units. All you need is a simple database or spreadsheet to track money coming in and money going out so you can send your accountant or CPA your records at the end of the year.

The most-important thing you need is a thorough rental (Lease) agreement that protects you for every possible situation. You need to have policies you adhere to in regards to late rent payments and other tenant problems. Then, when you stick with your own policies and guidelines you will not let tenant problems make you emotional. Just stick with your rules and realize that you are running a business like a business.

A few months ago, someone on BP posted a lot of free software for analyzing rental properties and for bookkeeping, etc. for the rental business. Search Google for Bestline Plumbing, scroll down the home page until you see MS Access software and you can download all the software you will ever need for single-family to multi-unit properties. If I remember correctly, the owner of the software posted a large rental agreement, but I don't know where it is on BP. You may want to ask for a copy.

 Every business in the world must be run by immoral people with the way inflation has been increasing.

People who feel guilty about increasing rents are in the wrong business, or should have someone running their business for them.

Failing to increase rents for a single-family home only takes some money from your pocket, but failing to increase rents for multi-unit properties causes landlords to have properties with rents below market value and when those landlords sell their properties they tend to lose tens of thousands of dollars because the value for multi-unit properties depends highly on the annual gross income.

We raise rents for every tenant on the same month every year like clockwork because we are running a business and our good hearts, feelings and worries about other people's problems are not factors we take into consideration. I say every day, "we have our own personal and business problems we have to deal with and our tenants don't worry about us and they don't offer to pay more rent when he have a disaster like when a unit is flooded or when the wind blows a section of the roof off". When we evict tenants or terminate their tenancy we still send a rent increase notice to those tenants along with all the other tenants' notices just in case those tenants fail to move, or in case we change our mind and decide to continue to rent to them.

Raise your rents every year like clockwork so rent increases are an expectation and not exceptional.

Generally, with the exception of pure luck, purchasing no less than a 4-unit property will out-produce a single-family for profit every time because when you increase the rents for a 4-unit property every year by only $40 per unit you automatically increase the value of the property in accordance with the 'Rule of Thumb Gross Multiplier' by $28,800 every year as in this math $40 x 4 x 12 x 15 = $28,800 increase value every year and in 10 years you profit $288,000 plus all your regular cashflow and your total profit could possibly exceed $320,000 to $340,000.

I always see 4-unit properties for about the same price as a single-family home. 

 If you paid only for a 50-gallon then you got the water for less than the cost. The cost for a 40-gallon at Home Depot is a little more than $800 plus 10% for sales tax = about $900. A 50-gallon is at least $900+ plus sales tax.

I am a plumbing contractor and a 50-gallon with sales tax costs me no less than $1050 with sales tax even at a supply house. We charge $1850 for a 40-gallon and $2100 for a 50-gall water heater. So, $2400 is a little on the high side, but Home Depot charges no less than $2600 for a 40-gallon and no less than $3200 for a 40-gallon when installed by a Home Depot subcontractor.

The prices I quoted are totally inaccurate because I am in California and California's laws require more-expensive water heaters with more smog crap on them. The water heaters for other states may cost $200 to $300 less making your $2400 price significantly higher.

 I don't post a profile picture because I don't even like to look at my own face in the mirror and I think a profile picture is so people can profile me???