All Forum Posts by: James Mc Ree

Be sure to plan for your renovation costs as expenses in your overall return.  For example, if you have $10k in free cash flow after a period of time, then spend $10k remodeling, your return is $0 though you may have increased property value that will be realized later.

I don't think 6.1% is a great return on a real estate investment, but that is just me.  I strive for a minimum cash-on-cash return of 10%.  Typically, your all-in initial cash investment is used for calculating this return: Your 20% + financing/closing costs + any repairs you have to do or fees to pay upon purchasing the property (U&O, inspections & findings, etc).  It looks like you are only counting your initial 20% in your posting.  Your return might be a little lower.

$300 per unit for 4 units get you $1,200 per year. I own SFR townhomes and plan for about $1,500 per year each. Good years come in lower than that, but leaks, appliance repairs/replacements, falling trees (just 1 - didn't see that coming!), annual government inspection costs, vacancy/turnover costs and miscellaneous maintenance consumes it over multiple years. $1,200 may be OK for this property, but may be tight if there is a bunch of deferred maintenance that your tenants want addressed and they don't want to move (fix/replace my dishwasher please!).

Are you counting exterior maintenance: lawn/landscaping, snow/ice removal, etc?

When you renovate, is a dedicated water connection feasible for each unit?  You might want to consider that to eliminate your water bill.  I've read water consumption drops 30% when tenants have to pay for it themselves.  Tenant paid water would reduce your overhead costs and it seems like it would fit right into the overall cost profile for the tenants if their rent is so far under market.

Jim.

It is great that you have such close access to the firm's leadership.  Be sure to read the contract as the definition of the deal versus rely on a verbal conversation.  It is the written word you are agreeing to.  The CEO and your friend could move on and new leadership will hold you to the contract.

Buy&Hold yields are usually higher if the investments are leveraged.  I would be surprised if they are parking a lot of cash in properties unnecessarily.

You might want to ask for a list of properties, rent rolls, expenses, etc.  At some point, the firm will probably say "No".  That's OK.  It will give you insight into their operation.  For example, you might see you are heavily concentrated in a certain state.  That's neither good nor bad - just a fact.  The more you know about your investment, the better.

Jim.

On the surface, this looks a lot bigger than it is and 7% return to you is relatively low.

You need to know what you are buying.  Are you going to be a full partner with equity and responsibility?  (Probably not.)  Are you going to be a passive financial partner with no say whatsoever?  (maybe).  When can you get your money back?  Is the 7% guaranteed (probably not).  Can you make more if the firm makes more?  Can you talk with existing partners?  How frequent are payments?  What protects your investment?  How leveraged is the firm?  There are probably another 1000 questions to ask.

In brief, you need to read and understand the contract and supporting material before deciding to invest.

Jim.

Gutters can be useful if your municipality requires you to manage stormwater for your addition.  You can pipe the stormwater runoff from the gutters right into the ground as a stormwater solution.

Jim.

Most lenders are dealing with FNMA guidelines and what they need to show in underwriting for FNMA to back the loan.  The rules you are encountering are likely not originating with the bank, but rather underwriting rules related to FNMA (just speculating).

You will be in a much stronger position if you show a fully executed lease for $1,900/mo, ideally with an occupied rental property, versus claiming what is possible.  Even stronger is a 1-2 year old rental history of that income.  You may find a lender who will consider the $1,900 amount for your income with only a newly executed lease.

It is not a scam.  Such rules are in place to prevent scams, such as claiming inflated property income.

Alternatively, you can pursue commercial lenders and higher rates to avoid those underwriting guidelines.

Jim.

Establishing your rent price is normally not an issue if you are charging market rent.  I recently ran into an issue in Pennsylvania in which the housing authority depressed my market rent ask because they are underfunded.  I showed that I had 3 other properties identical to that one charging the same rent.  

Their explanation was the housing authority didn't even have the funding at the time (July) to pay all of their existing landlords for the rest of the year, much less new ones; therefore, my rent ask was being chopped.  Nothing was being allowed above the median rent for that type of property (3/1).  I had a choice of take the deal or let my prospect walk.  I took it.

I believe rent increases are still on hold due to the same budgetary reason.

Jim.

@Justin Stanfield

I have 4 townhouse rental properties with flat roofs for most of the roof surface and a mansard shingle roof for about 8 feet of the front of the house.  The flat roofs are mostly rubber torch down that are silver coated every 3 years.  One of them is a different material that I cannot specifically recall at the moment (bituminous.....) that I was told does not require silver coating.  They are all supposed to last about 12 years.  I've only owned them for 3 so far.

Are these good roof materials to stay with?  I replaced one flat roof about a year ago with another torch down roof on top for about $2,100.  It was 16' wide.  I don't remember the length.  I had a quote to replace the mansard shingle roof (about 16 x 8) for around $1,000 and thought that quote was high.

I did look at several other flat roof materials.  Most were a panel type of construction that was advertised as significantly better (last longer, more reliable) and significantly more costly (around $8,000) for the flat roof.

thanks, Jim.

Does the welding occur outdoors?  I assume it does, but didn't see it mentioned.

If outdoors, it might be OK.  You might want to add a "cool down" requirement as mentioned above.  If indoors, I would deny the request due to fire hazard concerns.  It probably can be safe to do indoors since plumbers do it in plumbing installations, but I don't need to take that risk in my property.

Jim.

In addition to the above comments regarding what is there now, the zoning indicates what could be there in the future.  Timing is unknowable and new development might never occur.  A developer might buy your property and neighbors' in the future to build a factory, for example.  Alternatively, the developer could just buy your neighbors' property and leave yours as is.  You can't count on anything, but other development offers could be a future benefit.

In the meantime, you can only evaluate what is there assuming you aren't looking to develop it yourself.  Visit the property as recommended and decide if it is attractive for your intended purpose.

Jim.

You need an agreement of sale.  It doesn't have to be a pre-printed standard form, but that will help you get most of the terms and conditions you and your seller want in the agreement.

Jim.