All Forum Posts by: John Nachtigall

The math is very simple, a 401k is the best option.   When you add in risk/effort adjusted returns it is not even close.  

Example 70,000 a year salary

401k: contribute 6% with a 3% match Invest in SP500 which has a 10% return (dividends reinvested) for more than 100 years with no effort whatsover. Grows tax free. Assume your salary grows at 5% per year (which is low my salary, as an engineer, has grown 10x in 25 years it comes out to 10% a year annually). Feel free to plug it into the calculator below but it comes out to just a little over 5 million in 40 years, with zero effort and almost no long term risk.

https://www.aarp.org/work/reti...

You are not going to get that in real estate with zero effort. BRRRR requires you to buy properties at 60-70% of actual value. So you have to make 40-50 offers to get 1 acceptance. You have to find those distressed sellers. You have to fix up the properties, be a landlord, have excellent credit to get refinanced, etc.   Additionally the short term variations matter a lot more in terms of timing the market

My advice to you is this. Concentrate on your career, max out your 401k and do a good job to maximize your salary and bonus for the next 10-15 years. That will put the most money in your pocket. Put an extra 5% in your "BRRRR" fund every month and by year 10 you will have 100,000+ to invest in a BRRRR with excellent credit and a W2 job that makes financing a breeze. Then if you want to become the Real Estate Mogul you do it from a position of strength. But per your original question, you cant beat compounding tax free growth at 10% a year with zero effort. 401k is the clear winner

A lot of the narrative around the eviction moratorium centers on the tenets.   It is not surprising that the mass media would concentrate on the side of the story that more people could relate to, there are many more renters than landlords.  But that does not make the real and savage impact of the moratorium on landlords, both big and small, any less impactful.  

I came across this landlords story online, I have no connection to Ms. Davis.   I think it is worth publicizing her real struggles as a result of the moratorium.  Beyond that it is a good example of learning while you are a landlord.   Below is the playlist for her journey.   I hope everyone here can sympathize with her.  She is a better person than me, I would have never been able to stay as positive and upbeat as she has.   I won't spoil the ending, but it is not a happy one.  You can watch from the beginning or skip to the end. 

As I said, I have no connection to Ms. Davis, but as a fellow landlord and engineer I wish her well and thought spreading her story would be the least I could do for her.  One last comment, everyone on this forum has the right to speak their mind, but I have no intention of causing her more pain by people criticizing her.  She was brave to share the unfiltered truth of her journey, I would suggest that you keep that in mind as you comment.   

Road to Eviction Playlist

I dont, all my rentals are on the sewer system.  I thought I was being brave buying rentals with a boiler instead of forced air heating.   I am conservative by nature so a septic system would be too scary for me.   I know they work just fine for a lot of people, but being remote I am not willing to take the risk.

My one piece of advice is that if they do accept your offer you specifically put in the contract you will have a specialist inspect the system (separate and apart from the home inspector).  There are all kinds of complex rules regarding updates and fixes to the system so what is legal now may not be able to be fixed because the codes have changed.

Good Luck

I would not consider any new alternative investments with your IRA until the recent proposed laws are resolved, they would have a huge effect on this strategy and they do not grandfather in existing investment.

Summary of Proposed Law

As bad as everything above is, the worst part is that existing investments are not grandfathered in.   Because they want to "reclaim" the tax revenue the current bill gives a date of December 2023 to divest any offending investment. So either you have to move the item out of the IRA, paying taxes and penalties, or somehow sell it before the due date.

In my case I own 2 real estate syndications with 2 and 10 year time frames. Best case scenario is that I would scrape up non-IRA money (150k) and convince the sponsors to let me sell my IRA owned shares to myself (non-IRA money). They then refund my IRA money back and I can invest it in approved items. This is not normally allowed as in syndications they don't normally allow people to buy out other limited partners.

Worst case it gets kicked out of the IRA (divested) and I lose 150k of tax free money out of my IRA. I dont lose the investment, but obviously 150k in a tax free account is way more valuable than 150k regular money.

All of this to go after 500 accounts that have more than 5 million in them. I get it, everyone is mad that Peter Thiel has 5 billion in his IRA. He did not steal it and followed the rules, but they want to punish him and anyone else they think is clever at investing. It is really just sad.

Agree, I was just trying to explain the RUBS concept to the self proclaimed newbie.   Obviously you and James have way more experience in general and specialization in Cleveland.  I personally was billed for RUBS when I rented living in Pennsylvania.  Even with autopay in a class A building I found it annoying.   As a single person I suddenly found myself caring about the 5 person family next door washing his car every weekend.    I can't imagine managing it in lower cost rentals.  

He is, there are a lot of ways of getting the tenet to pay utilities.   What he is talking about is RUBS (Ratio Utility Billing System).   This is used when it is a multifamily building but does not have a separated utility, so 1 common bill.  The landlord charges it back to the tenets of a multifamily building using various ratios.   The problem is how do you divide the bill?   In a duplex if 1 tenet is a family and 1 is a single person do you split 50/50.   If not and you charge the family more are you discriminating against the family?   Also are you and the tenets willing to have a different amount of "rent" every month, because utility bills vary.   In general the bigger the building and the more similar the units, the more RUBS makes economic sense.  

I understand there is a strong desire to have tenets pay utilities, it is ideal for any landlord.   But in this case, with a commonly billed duplex, to bill them back I would still have to have the utilities in my name.   Set up a RUBS system and decide on a ratio that is agreeable to all tenets.   Bill the tenets every month a different amount.   And if they don't pay, I still have to pay because they would otherwise lien the house.   And if I tried to evict I would be doing it on a utility bill that is not in the tenets name.    

As it is I have an account for each house, I have it on autopay and I don't have to monitor it or worry about it.   It is an expense of the rental so that helps with taxes also.  I also get all the notices (by email).   Last month I got a notice the water bill was high for one of the rentals.   PM sent a tech and the toilet had been running all month.   I can't imagine you would want to hear a toilet running all month, but they had.   The tech fixed it, and did some other fixes.    So in that case it helped keep the house in good shape with some simple preventative maintenance.  I would not call it lazy, I would call it efficient, but to each their own.

 

For Water and Sewer they will only bill in a landlords name.     So if the tenet does not pay, the debt and obligation is the landlord.   Also there are specific laws that state the landlord must supply water.  If you billed back and they don't pay you will be trying to evict for a bill that is not in the tenets name, not good.  It is a Cleveland thing, I know all cities are not like that.   So water/sewer is just built into the rent.  

I have 2 properties where the gas is to a common boiler, so no way to split that.   Same thing, built into the rent.  

Everything else goes to the tenet when there is a tenet.  When they are vacant, you have to transfer the utilities into your name or you can't do the construction work because there is no power and/or no gas so no heat.  

I own 4 duplexes in Cleveland.   They are fully managed by Holton-Wise who are active in these forums @James Wise.   I have been very happy with the management.  I have to take care of the utilities, they take care of everything else.   You should be aware you have to pay for water/sewer yourself, they bill to the owner not the tenet in Cleveland.   

I would suggest you check out their website Link and The Ultimate Guide to Cleveland Neighborhoods guide UGCN Link.  James will do a personalized analysis of a property for you for a small fee, I put a link to one of the analysis he did for me below.   I found them invaluable given I am remote and he understands the market so well.   A little money up front was well worth the very in-depth analysis.  Even if you don't use them there are hundreds of videos analyzing properties in Cleveland and you can learn a lot.  

Good Luck

YouTube Link

I forgot to include my numbers for water/sewer.   I paid $2705, $1340, $2336, and $1338 for the 4 properties I own for 2020.  You can see that it is very variable depending on how many people live in the properties (families vs no kids etc.)

I think you need to take a step back and ask yourself if it is possible to be successful with a class c property managed by a property manager.   So before you get into the details, is the entire investment thesis valid.  

When I decided to get into remote ownership of rental property I did a lot of research.   And while there is disagreement on the profitability of class c properties, there is no disagreement on a host of the disadvantages.   

• - They are "high touch" even with section 8 vouchers
• - The wear and tear on the properties is high
• - The vacancy and turnover is high compared to class A/B
• - Unless the neighborhood gentrifies, the capital appreciation is generally less than A/B
• - Tenet quality is highly variable regardless of vetting

Obviously these disadvantages are offset by higher cash flow and guaranteed rent when using section 8.  

I looked at these pros and cons and specifically choose to buy class B properties knowing I was giving up cash flow.   I dont think that it is possible to be consistently profitable with class c properties that are not directly managed.  That is just my opinion, but I think it is supported by evidence.  Even with that the first 12 months of turnover, renovations, etc put me deeply in the red the first year, which I had anticipated and planned for.  

So this is a really longwinded way of asking if you think it is even possible to be profitable when the property is stable.   Does Revenue minus $580 (PM) minus taxes/insurance minus 15% for maintenance/capital minus mortgage a positive number?   If not, sell and be done because your can't even get there in theory.