All Forum Posts by: James Mc Ree

@Ryan Craig gives good advice.  You might be able to bring your purchase price down by the cost of mold remediation with a contingency.  The downside is you end up paying for the inspection and cash out of pocket for remediation.  Banks usually don't want to do work on properties.

I had mold in a basement in a Pennsylvania property.  My seller didn't want to deal with it at all, even when I asked them to pay for the inspection to define the cost.  I positioned it as a potential $10,000 problem, maybe a $1,000 problem, and for a little over $100; we could find out.  Otherwise, I was pricing it at $5,000.

They accepted the $5,000 guess-timate: their mistake, my gain.  Carpet and some sheetrock were removed, surfaces sprayed and basement sealed off and fumigated.  The treatment cost $1,200.  Repairs were about $300 as I planned to replace the carpet with tile anyway, so the mold remediation effort to remove the carpet contributed to my overall rehab plan.

Jim.

Welcome!  I am also a fellow Pennsylvanian a bit south of you and also an IT manager in the finance industry.

There are some great BP books on investing with low money down and rentals to get started.  I started without them, learned from "experience", then read them 3 years afterward and learned more.  They are good values, great easy reads and well organized.  Search for "books" in the search box at the top of this site.

Jim.

The underlying purpose of the permits is (or is supposed to be) safety.  The inspector(s) will be ensuring the work meets the building code edition enforced in your area.  The cost of the permit is usually very small while work required to satisfy the permit may be more substantial, but brings your property into the definition of "Done right."

Keep in mind that you may retain future liability for the work you are doing to a future property owner.  Liability due to a failure to build to code will likely be dramatically more than the cost of inspections and meeting code, to include possible loss of life.

I once objected to the cost of work requested by an inspector when rehabbing a deck.  He told me of 3 decks that had collapsed in the county in the past few years as a result of homeowner jobs on decks that didn't meet the building code.  He asked me, "How many people do you expect to be on this deck?"  I hadn't thought about it and said, "Maybe 10-20, at most."  He said, "It's probably big enough to hold 30 or more.  What if there are 30 and they're all dancing, swaying and cheering something exciting while leaning over the rail?"  The building code accounts for that and would protect me; otherwise, all 30 could sue me for damages if it collapsed.  The 3 collapses were all this kind of scenario.

Jim.

If you don't have these covered within one of the above categories, consider the cost of:

• Utilities during vacancy if tenants pay utilities or you are paying them full time?  If you pay, consider changing that as part of your rehab.  I recently read of a 30% reduction in consumption just by making tenants pay their own utilities.
• Do your taxes or another line item include trash service?
• Does landscaping include snow/ice removal (I am speculating that it would)?
• Do you include marketing your property within PM?
• Municipal inspection fees, rental licenses, etc?

I recommend splitting out PMI from homeowner's insurance. You pay 2 different parties and could get a better deal on homeowner's insurance. You can't shop PMI, to my knowledge.

Just speculating here: the mathematical model to come up with cash flow is the relatively easy part.  I think it would be much more beneficial to dig into your $30k rehab costs and timeline.  The above items on my list may only sway your cash flow a couple hundred per year.  Could you be $10k off in your rehab estimate or a month or two short on your rehab schedule?

Jim.

I just had an initial Section 8 inspection on a property I settled on 6 weeks ago today.  It failed.  I thought there might be something I missed, so it wasn't a surprise.  Since there were a few mentions of concern about what an inspection might find, I thought I'd share:

Issues causing failure:

1. 3 Ungrounded electrical outlets.  I think of this as my fault since I should have tested all of them.  It is an easy fix to downgrade the 3-prong outlet to 2-prong, fix the grounding wire or sometimes it is feasible to run a new grounding wire at low cost (not often though).
2. 1 Bedroom with insufficient electrical outlets.  There is a requirement for a bedroom to have 2 outlets or 1 outlet and a ceiling light controlled by a switch.  I was unaware of this requirement and have no ceiling light and only 1 outlet.  Fortunately, the tenant already asked me to add an outlet and a ceiling light which I agreed to do.  This finding was a surprise to me as a failure issue, but makes sense as a single outlet leads to extension cords running around the room and potential circuit overload.
3. 2 Smoke detectors needed.  My fault too.  The requirements are clear that each level and bedroom require a smoke detector.  Somehow, I missed the basement.  I could have sworn I had one.  The main level has a smoke detector, but it is on the wrong side of the door leading down to the basement and would do no good if the door could be closed.  I knew that and forgot to install another in the dining room to avoid the potential safety and inspection issue.

Minor issues that would cause a "Pass with comments" (meaning fix before the next annual inspection) were:

1. The kitchen ceiling fan does not spin. Light works. I knew this and had it scheduled for fix/replacement. HUD cites any landlord-provided feature of the property that doesn't work.
2. Bedroom window screen missing.  I hadn't noticed this and have screens in the basement.  Hopefully one fits or I buy a new one.  I think it's perfectly reasonable to expect a screen in each window that should have one.
3. Leak mark on the living room ceiling.  I knew about this and expected it.  The leak was fixed a week ago and ceiling fix is scheduled.  It is a simple scrape and paint task.

I planned ahead and already had a contractor coming tomorrow to address a couple other items.  The plan is to add whatever the inspection found, re-inspect next week and pass.

The inspector was very professional and helpful.  She gave me tips on managing the property and working with the housing authority.  For example, she told me their paperwork does not show the house as having central air and the washer/dryer provided, which the property has.  That makes the tenant eligible for more assistance or a higher rent allowance.  I was unaware their paperwork was wrong.

Our local municipality performs U&O inspections, but does not check these items.  I like that a trained inspector walks through annually and points out what needs attention at no cost to me, at least for the inspection.  This was an initial inspection which usually yields the most issues.  Annual inspections cover the same scope, but yield fewer issues because any findings have to be something recently broken versus never provided (ie. ungrounded outlets).

My only dislike about the process is that I need to turn the fixes around by the end of the month or I don't get paid rent for August. Our application was submitted and approved the 3rd week of June. It feels like this inspection could have been scheduled sooner to give me more reaction time, but HUD works on a very specific monthly schedule that might not allow for that. A company with competition, versus a government agency, would schedule in a more client friendly way.

Jim.

@Tarl Yarber - It is an absolutely beautiful outcome.  Thank you for sharing.

What finish did you use in the bathroom (not the white tub picture)?  Is that a large walk-in shower with tile on the walls too?  I couldn't quite make out the brown rectangles on the walls.  Are they large tiles?  Is it all open or is there a closure?

thanks, Jim.

There are plenty of laws and regulations that you need to follow (ie. HUD/equal housing, discrimination, disclosures, contract law, etc.). I get concerned with a question like this if you are thinking of going FSBO with no support and asking if there are any laws that you need to follow.

I recommend getting your property into the MLS too. You can do that cheaper and without a full price broker with firms like "Help-U-Sell". I am not recommending for/against them: just pointing out there are ways to get listed in the MLS that do not involve paying 6%.

Consider interviewing a few top selling real estate agents in your area to learn what they would do to market your property if you have not already done so. You might learn they will do nothing more than you would and no better, or a lot more/better than you thought. You can then use that knowledge in your FSBO or hire one of them.

Your number of showings will be much lower if you don't pay the buyer's agent. I recommend paying 2-3% to the buyer agent if you go FSBO. You can do without a seller agent if you know what you are doing. Buyers are what you really need. They come with agents who want to be paid or many will never see your property.

Jim.

As mentioned, the lease is your governing agreement.  You are entitled to a full August rent if the lease specifies rent is paid in increments of a whole month, not days.  It is ambiguous if the lease says neither a whole month is due or rent is prorated in a situation like this.  You may have to rely on case law in your state.  The legal cost of inquiring might not be worth it.  I do proration.

You may be able to make a deal with your tenant.  Consider positioning full month payment as what is expected, but offering a rent rebate if the tenant abandons the property on or about Aug 1 and you find a new tenant to move in by Sep 1.  That aligns your and tenant's interests: tenant is happy, gets a rebate if you are successful and is motivated to help; and you get in early to prep and show the property.  You also get to show the property during a more favorable time of year.

Your lease may prevent you from showing the property to rental prospects until the tenancy ends.  Your current tenant might be unhappy and obstruct the showings.  This approach might address both of those risks.  It may also allow you to keep the additional rent if you don't find a tenant to move by the move-in date.

Jim.

3 Of my 4 units are rented to Section 8 tenants in PA.  I think Section 8 is great.  I get to pick the tenant, just like any other lease, and the government guarantees a large portion of their rent.  It arrives the 1st of every month without fail!

I like that the program gives a family of lesser means an opportunity to live in a nice place and hopefully lift themselves up.  I see Section 8 as a way of helping others, profiting in the process and it always feels good to get my tax money back!

Tenant screening is key - screen poorly and you could have a poor experience regardless of how they started paying their rent.

The inspections don't bother me.  They help ensure my tenants properly care for the place and that the property meets the absolute minimum of safety and sanitation.  I like the personal responsibility part of the tenant inspections.  I don't manage my properties to stress the minimum standards so maintenance costs driven by inspections aren't much and I always have a safer home for the family as a result.

Jim.

I recommend not starting your real estate investing education buying foreclosed properties or it may be a very expensive education.  Bidding is easy.  Paying for what you didn't realize you bought - maybe not so easy.

Consider buying the BiggerPockets books for low/no money down investing, flipping, estimating rehab costs and rental property investing.  Investing a lot of your time here reading real life questions and answers.  You didn't mention your real estate background.  I am assuming "getting started" means just that.

My recommendation is to look for a more traditional purchase with or without a mortgage of a property that needs some work.  The BiggerPockets books and posting content will give you some great education on what to do with that property, but there is nothing like looking at a sagging upstairs ceiling and wondering, "Why is that?  Is it expensive?"  (Broken roof joist, $300 repair).

Good luck!