All Forum Posts by: Justin Hoggatt

I will take a different approach to this reply versus some others.  I would absolutely take the rent in advance.  Yes, I would understand why the tenant wishes to do so, but I have known and continue to know many people that prefer to pay their bills in advance so that they don't have to think about it.  When someone is bad with money, they get a big payday, or simply don't want to be late, it makes sense to pay early.  Especially if you're going on a trip - and why not go on a long extended trip if you can - you can pay early so that you can budget and know that you don't have to worry about the money for rent because it's already been taken care of.  It sounds pretty responsible of the tenant to me if they are asking to pay early.  It doesn't sound like they are trying to stiff you.

I also would make sure there is a plan in place for checking in on the unit.  Either you do or know that they have friends or family checking in regularly so that there are no squatters, bugs, etc.  

I'll note that I just had tenants that signed a lease in October and in November they went on a "trip".  I believe it was for work and they were gone for 2.5 months.  Although they didn't pay early, they did continue to make sure rent was paid.  So, I didn't care if the unit was empty and rent was paid.  It was less wear and tear on the property.

The asset class is certainly a consideration, along with the condition of the asset, and it's location.  If you look at apartment buildings, for example, a class A building can sell for a cap rate in the 4's, a class B and C in the lower 5's, and anything else around upper 5's to low 6's in the Denver market.  You have different sized markets and generally the larger and better performing markets will have better terms on loans and subsequently lower cap rates.  Higher down payments required and the cap rates will go up a bit.  Also, the Triple Net Leases can be a much lower cap rate because there isn't much you have to do except take a check.  An apartment building requires more management, and then moving on to what we are doing in the RV Park asset class, the cap rates are even higher because the management is even greater along with a product that generally takes longer to sell as well.

We use Cap Rate as a quick and easy metric to check value on the investment and what the seller is offering, but by no means is it the only calculation we're doing. The amount of investment required along with deferred maintenance or other Capex items that we feel is necessary to get the property into a condition we feel good with, is all calculated in our returns and investor CoC and ROI and IRR.

If you're comfortable getting outside of the Austin market, I'd consider other areas outside of Austin.  Of course, right now your appreciation in that market is likely driving down cap rates and increasing investor interest and demand-another reason why cap rates will vary.

You can sometimes ask your insurance broker or other risk management professional.  I would consider just putting up a sign that warns of the risk if you're worried about it.  I don't think putting up a fence is something I would want to see around a pond, and as an owner, I wouldn't want to pay that expense - certainly if it's a current draw to the property.

@Daren Monk, where would the privacy gate go? Is it for the entire park? If so, I’d say no privacy gate so that it’s easy for people to come in. I suppose, however, that it may depend on the area and the type of clientele you’re servicing?

@Mason Jeffries - So sorry to hear of this.  It's always a horrible situation and I've personally gone through a couple similar situations.  How much water did you end up having?  From my experience, it's sometimes the shock factor that gets the nerves going and the feeling of defeat.  I suppose it depends on the amount of water, but I've found that generally after a quick response and removing the water, that there isn't as much damage as first thought.  Getting the bottom of the drywall cutout if needed to allow the walls to dry is needed and often drywall repair is generally cheap.  I'm not sure of your flooring, but if you can clean it and get it dry, it shouldn't be to bad.  I think just take one step at a time and you'll work it out.  It all makes for a great story later after you've not thrown in the towel and have gone through some of these experiences and come out ahead in the end.  I'm not sure how much help I am, but maybe just knowing that many of us have gone through this same situation before can be somewhat comforting as well.

In addition to the questions already mentioned, I think it's important to inquire more about the current tenants.  What lease are they under (MtM, Annual) and talk about the details with that.  What is the rent, are they paying utilities, what utilities is the seller paying?  Obviously figure out if there is potential to increase rent, flip the house - what is your exit strategy or hold scenario?

You may also want, based on why he is selling, to find out if he is willing to do a creative financing situation.  Don't lead with this, but seller financing?

I might be a bit confused, but I'm looking at the numbers a little differently so let me ask a couple questions.

You mention it has 10 lots - are there 6 rentable lots and 4 mobile home rentals? So, is the monthly income then 6 x $175 and 4 x $600? Then that equals $41,400/year income. Take out 40% expenses (like Frank was saying) and you end up with NOI of $24,840. At purchase at $250,000 then you're at about a 10 cap. Perhaps the value of this deal isn't all about development opportunity right now, but does seem to have pretty decent cash flow on the purchase. Do you see that the lot rents could be increased? Are the mobile homes in good shape? I'd have the pump replaced in the deal - don't have that up to you after closing.

@Eric Krasinski, it sounds like you have the ability to keep this house while also purchasing another. Do it! Do an easy quit claim deed and put the house into an LLC.

I say go for #1.  It's a flip, stay with cheaper - it still looks good and natural light wins every day!

Tabitha,

I was trying to look and see what I thought but it's missing a lot of information on there.  Here's my quick and dirty on this one.

Loan Term almost certainly wouldn't be 30 years because it's 5+ units (commercial).  You'll be looking at 20-25 year amortization schedule on this.  The down payment of 20% may or may not be accurate based on the location and bank, best to account for 25%.  The rental income is currently $6k?  Expenses are missing a lot.  Insurance will be more than $1,000/year.  Taxes are pretty low for a 10 unit, is that right?  You'll certainly need to put in a lot of other expenses to even start getting an idea on this one.  Does the current owner have any of this for you?  If you have $6k in rents, account for at least 40% in expenses but the 50% rule works good for this, not including the mortgage.  The cap rate on this deal looks to come out to about 6.0-6.5% on super basic ideas.  Depends on the area, it's not horrible.  The cash flow goes up based on the amount you put down.  Just keep playing with it.  Because it's hard to say what the property is, the condition of it, the area, the leases, etc, I wouldn't personally be able to give a good opinion.