All Forum Posts by: John Umphress

While these are good for owner/occupants who can handle the monthly payments, I hope lenders don't extend these to investors.  We actually bought our first house back in '95 using a similar product.  It was combining low down/no down loans with non-documented income, phony appraisals, HELOCs and outright fraud that contributed to the mortgage meltdown. 

Back in 2007 I felt strongly that the house of cards was going to fall - if I had only known that you could bet against CDOs . . .

You need to check with both the local jurisdictions where these homes would be erected or placed, as well as state law concerning industrialized or modular (not manufactured) housing.

My first advice is to not purchase property that has a thin margin when the economy is GOOD.  When I read questions here on the forums asking how little down payment someone can get away with paying (or how to get into a property with zero down), I wonder what will happen to some of those investors and their properties in an even mild recession, especially those buying into what I see as an expensive market. 

Questions I ask myself when evaluating properties:

• What will it cash flow at 20% vacancy?
• What will my DSR be at that vacancy?
• Will I be able to reduce rents if the market demands it?
• Is there any room for trimming expenses, like electric and water/wastewater?
• What will I need for reserves and cap ex?

That is why reserves are important, not just for P&I, but for addressing repairs when they arise.  

Here is a short story.  In 2003 we bought a house in central Austin for $180k.  Knew it likely wouldn't cash flow due to condition.  It was rezoned right on the eve of the recession.  As taxes rose, there were months we were $400+ in the red.  In 2012 we leased it to a couple for a restaurant, where it started to generate some positive cash flow.  Last year we sold it to the restaurant owners for a nice gain.  Worked out great in the end but there were some lean years in between.  However, we went into it having a good idea what we were in for.

Moral of the story?  Know your market, have a plan, and have a contingency if the plan doesn't quite work out.  We can't control economic forces, but we can take steps to mitigate negative economic forces and their impact upon us  Best advice I ever received was from a long time RE investor/developer:  "Have a plan to hold the property at least ten years - you may need that long to get though the downturn."

When I started my current search, I looked at population and employment trends for SMAs in the Midwest and southeast, selecting about 20 that had attractive growth in both.  Then I looked at recent permit data (SF, 2-4 units, 5+ units) to get an idea both how tight the housing market is and how tight it might be in the future.  (No sure bets.)

I looked at Waco and concluded there were better opportunities elsewhere.  (I've spent a fair amount of time in Waco over the years.)   A television show, no matter how popular, is a questionable criterion on which to base your investing decision.  

@Kusum Chanrai, you didn't say if you were looking for income, price appreciation or both.  I'm in shoes similar to yours but since I'm spending money via a 1031 exchange, I have no choice - I have to buy RE.  You have some options.

If you decide to invest in a MF property (or a couple) and you decide to use even a modest amount of leverage, you would be wise to have it managed by professionals.  As long as you select a good PM, it really doesn't matter how close or far it is.  I have a building in San Antonio - just an hour away - and I have a management contract.  They have the experience and processes to do it efficiently and I don't have to worry about it.  (I still have my day job.)

Best advice I can give is that you figure out what kind of return you would like to see from your investment (plus what leverage you are comfortable with) and look for property that fits.  Look for smaller markets with decent population and job growth that isn't overbuilt with either MF units or low-priced SF.  Focus on properties that have been maintained and well-managed.  You may pay more per unit put you won't be having to fix preexisting problems.  You may be able to retain the management (if they're good) which is a bonus as they will know the property. 

Good luck!

In Austin there was a bit of a lull in price escalation - houses sat on the market longer but there wasn't much discounting.  Affected the high dollar homes the most.  Denver was hit pretty hard due to the presence of telecom - a lot of fiber companies went down the tubes.  (Smart investors used the downturn as an opportunity to load up on "dark" fiber at pennies on the dollar - cash is king.)

We did a 1031 exchange last year and are likely to do another soon.  Had an experienced 1031 intermediary and a RE attorney.  Both said that sometimes it is preferable to take a hit on taxes than to purchase a bad piece of property.  We ended up with a pretty good property but also had some boot - will be writing a check to the IRS next month.  Just didn't have a great feeling about the value of one of our other identified properties.  Silver lining is that we have some cash available.

Doing it different this time.  Even though we are 45 - 60 days out from closing (buyers will work with us on the closing date to ensure we can line up replacements,  I am beating the bushes right now.  If things go well, we will close on our replacement property prior to the 45 day deadline for identifying replacements.  Have already spoken to the bank on the amount of leverage they are willing to provide.

If the 45 day identification deadline is looming, you might want to look for a single duplex or fourplex that will cash flow. Might be more doable (with less stress) than multiple SFR.

You will need to honestly evaluate whether the savings is worth dealing with tenants and related issues long-distance.   An eviction or problem tenant would be a real challenge to deal with from several states away.  I don't have the time or procedures in place to manage residential rental, which is why I have a PM for my eight unit building down I-35 in San Antonio.  (They just started an eviction process the other day.)  Heck, if I owned MF here in Austin I would still probably hire a PM!

Russell is on the money re the 1980's seeing some shoddy multifamily construction, but it was the rapid depreciation of rental property allowed under the 1981 tax reform that was the real culprit.  Was especially attractive in reducing tax liability from oil and gas earnings - and of course a lot of it was financed by the S&Ls.  We all know how that sad story ended . . .