All Forum Posts by: Austin Fruechting

Overpaying is a very subjective term and the answer is always NO. 

They paid a price they were willing to pay. According to their metrics it was worth that amount and they weren't overpaying. According to your metrics it is not worth that to you. 

Is a one-liter bottle of water worth $1,000.00? You may be shouting of course not! That's because the economics of your current situation. You can walk to the faucet and get water for next to nothing. There's a huge, abundant cheap supply. What if those economics change? What if you were stranded in a raft in the ocean or in the desert and could pay $1,000 for that one-liter bottle to avoid death by dehydrating? You do it because there is zero supply of drinking water. 

I know thats an extreme example, but is shows there is no such thing as "real value" and "actual worth". The price it sells for determines its "real value". If something sells for $XXX , that is it's worth at that point in time given the economics in play at that time. 

Wow! $2500+ cash flow on a 3 unit?? If those numbers are accurate you can absorb a lot lower rental rate and a longer vacancy if it goes worse than you expect. 

What's the gross rent?

Originally posted by @Jen Starr:

@Thomas S, the second floor kitchen ceiling height is 5'11". So you really think it's nothing to worry about? It was an addition, I assume done in the 80s, maybe 90s. You may be totally right, it's hard for me to tell if I'm just scared. I have another rental that's been a great experience for the past 9 years. This is my first multi.
Thank you for your thoughts! I really appreciate it

 5'11" ceiling height isn't a problem if you happen to have a lot of hobbits looking for a place to live... 

It will most certainly limit the number of people willing to rent it. A low section on a stairwell to duck under, not a big issue. A ceiling 3" shorter than me, clearly a non-starter and I wouldn't even consider living there. Very limited pool of people to rent that unit = lower rent and longer vacancy. Make sure that's factored in. If it's in a high demand area the lower rent can probably still get you a tenant, but it will probably still take a bit to find the tenant that will be ok living with that.

To add to what I said in my previous post, this quote was in one of the sections of Tools of the Titans I was reading this morning: "In order to move fast, I expect you'll make some foot faults. I'm ok with an error rate if 10-20% - times when I would have made a different decision in a given situation - if it means you can move fast" - Reid Hoffman (the Oracle of Silicon Valley) to his chief of staff I think that's very similar to how a property manager should be looked at vs managing yourself. Strive to find one that will operate within an acceptable error rate and understand that's part of it. Especially be ok with it if you can move faster focusing your time at your other job and finding/closing the next deal. Having a PM also means moving faster in responding to tenants which equals happier tenants. But if your pm is operating at a much higher error rate, fire them and find a new one that would be within an acceptable range.

Originally posted by @David Song:

What I will avoid is areas that has low population density, not much jobs, and a over supply of house stock.

In cities where there are significant population loss, that is a danger for REI.

 Absolutely. I definitely would not buy in an area with the metrics you mentioned. Those things should absolutely be taken into consideration. A house that is spitting out cash flow now could easily become a bad investment within a short time in that scenario. 

There are areas and markets where the same rent to price purchase is still in a stable market, and will provide steady reliable cash flow. Just because it's cheap and will throw off cash flow now does not mean it's a good investment, and it also doesn't mean it's a bad investment. That's what fun about this chess game of real estate investing. 

Check out my podcast: www.biggerpockets.com/show239

My first property was in 2010 at age 25. I didn't have much cash at the time but swung a $135k purchase and $60k in renovation. 

We lived on my wife's salary and invested everything I made from the business and real estate. I negotiated the purchase of that business my final year of college. Fast forward 7 years and we reached our financial freedom goals with 141 units. More about my start here:

My parents did pay for my college education, my wife's did not, so we still had student debt. Until this past January I had two vehicles. I had a jetta diesel wagon with about 190k miles and '03 F-150 with over 200k miles. You make tradeoffs. I loved the cadillac CTS-V coupe when it came out and could have technically afforded it, but that would have slowed my ability to acquire properties and reach our real goals that mean much more. 

You will have to make tradeoffs. But if you know what you're striving for, you aren't actually giving up anything. Believe me, given what is possible to achieve in a short amount of time, giving up that nice car you'd really like or whatever it may be, isn't a sacrifice at all. The actual sacrifice would have been limiting my future for some immediate gratification... You can make progress, or you can make excuses.

A great quote from Jim John; "If you really want to do something, you'll find a way. If you don't, you'll find an excuse."

I'm not saying you should keep your current property managers. It may be worth a change of management to a better company, but bringing it in house all depends on your goals.

Where are you going long term and what are your goals? Is managing your properties your goal long term? Or is your long term goal to live freely and be in complete control of your days, weeks, months, and years?  

I can tell you from starting a property management company, you'll be owning a job if you bring it in house. With enough units it can be tough to take any real time off. You have to do showings, evictions sometimes, manage unit turnover and rehabs. Even if you have a staff to handle a lot of that, you're still always on call. What happens when your key member quits for another gig? In addition to everything you have to do daily, you'll have to cover all their duties, try to find another person, train them, etc and you'll be doing everything during those months. 

I have what I consider to be great property managers, some of the best there are. Do they treat my properties the same that I would? Probably not, but that's an insane argument IMO. Expecting someone else to treat your properties like you would is not a reasonable expectation. However, if you are treating your investments as a business that's just a part of doing business. Yes, find the best you can obviously. If they're doing a subpar job replace them. 

I currently pay ~$80k in property management fees a year (I have negotiated a good rate given my volume). I still cash flow ~$200k and all I have to do is answer an email here and there and transpose my statements into quickbooks. If I were managing my own properties, I would need quite the staff so I wouldn't be saving nearly all of that $80k anyways. I would probably only add $20-30k onto my bottom line. That doesn't even come close to being worth it. I could just pick up a few more properties to make that much, or more, and not have all the headaches of running a day to day business. 

Make sure the city planning and zoning commission will allow it! 

Small business commercial is tough. If something goes vacant it can be vacant for a very long time. There has to be someone looking for exactly that type of space in that area at that time. Make sure there is the demand as well as having the ability to weather a long vacancy. 

@Account Closed - awesome that you're already going out and doing stuff! Let me try to give some more answers to some of the questions here.

Unsecured lines - depending on a lot of factors, some banks don't like to do much. Another option I have used are the balance transfers from credit card companies. I often get these checks that I can use. They are often at zero percent interest for 12-18 months, with a 2-4% one time fee. 

1. I did not really have any issues, but it will all depend on the bank. If they're going to be doing more extensive underwriting like wanting your bank account balances to know where the money is coming from, they might not lend if you have to tell them where it's coming from. Some banks won't ask about that as much as long as you have the money. So you could transfer it to your account before beginning the process so you can just show that you have that money in your account. If you run into a roadblock there, you may have to have the down payment in cash already, but you could still BRRRR a property and use the other methods for the rehab, then refinance and pay them all back.

2. Increasing balances - use it some of it and pay it back. Then a little bit later ask for increase of the limit. With the credit cards if you are always paying the full balance each month, ask for credit increases periodically on them too (and ask them for a LOT each time).

3. I did have a couple LOCs at different banks. Some of banks are more willing to do LOCs than others, so maybe go talk to other banks about their LOCs and what they would offer if you moved some money to them.