All Forum Posts by: Joshua Christensen

Typically, I run a current income/expense column next to a ProForma column to show potential value add opporunties.

I agree with @Robert.  If the expense ratio is 23%, it's missing expenses somewhere.  For owner managed properties like this we see expense ratios in the 35%+ range.  On proformas, it really should fall somewhere closer to 45-50% range for expense ratio.  

If it walks like a duck...well?  

Serious investors may pass this by on the info provided.

Hey @Jesse Glatz

What system are you searching in? My MLS system (FLEXMLS) allows us to set the criteria first by Residential, Commercial, Land, Residential Income. I chose R Income, then from there I chose the number of units I am searching. It only pulls the filter I use.

On Realtor.com or Zillow there are filters you can use as well.  You just need to find the filter on the system you're using.

@Daniel Kalam

It's an issue.  Based on a Triplex, I wouldn't spend the money on submetering.  It will take a long time to recoup the cost on a property this size.  There's no real value add other than your convenience.  

I'd get the 12 month average from the utilities and determine a new Monthly amount added to rent.  If you're coming in short monthly to cover these, identify where the "leakage" is.  Has water come out to scan for leaks?  Watch the gas usage in the winter when the heater is used as it will increase.

You could do a schedule for Higher gas and water consumption months.  Ex.  Jan-Mar Gas is $125 per unit Apr-Sept Gas is $75 per unit  Oct - Dec $125.  Do the same with water but showing higher amounts in the higher consumption months.

Be sure to check your lease for what you're allowed to do with any changes to utilities.  You may be locked in on that amount until the lease expires.  

Ultimately, charging tenants a monthly RUBS will save you a huge expense in the long run for something you can manage.  You'll need to make adjustments as the utilities cost changes.

@Gabriel Miritello These are a lot of questions you have going into this deal.

First.  You mentioned developing 7-14 units or storage.  Do you have any experience with development?  Does the proforma include "potential" non-existent units?  

 Second.  It doesn't sound like you're using a multi-family spreadsheet calculator to underwrite your deal. If you're looking at PITI, that is a residential 1-4 unit figure, not used in Multi Family underwriting. Taxes and Insurance are part of your expenses. Debt service is the mortgage payment deducted after expenses are subtracted out of income.

 Third.  10-20% under markert value rents.  That's a wide spread.  Have you contacted apartments personally or are you taking the brokers word?  Do the work and look at the rents surrounding the property.  Same size apartments, similar amenities, and similar type of complex if you can find them.  This will not compare to a large apartment complex.  It will compare closer to 4-20 unit MF complexes.   

Fourth. Per door, not so much. Cash Flow on day one on a property this size is not likely, especially if your rent is currently 10-20% low. Plan on 18-24 months before you realize positive cash flow. You'll have deferred maintenance, capex, low rents, vacancy issues, evictions, etc. to deal with the first year. Does your PM charge sales tax on top of the 10%? What's the mark-up on your PM's maintenance costs? Vacancy is based on the area norm and the past performance of the property, so not a set amount. Capex is based on the property and what it NEEDS to produce.

Fifth.  Master metering is not a bad thing.  You can actually charge a RUBS fees with the rent to offset utilities.  Check with the local utilities to see what the max is they allow in that area.  Usually not a source of revenue, but the billing comes to the landlord who passes it to the tenants on a pro-rata basis.  Example> 10,000 SQ ft total.  A 1000 SQFT apartment is 10% of the building meaning 10% of the Bill monthly.  Most people charge a flat fee across the board to each tenant and then eat the difference.

Good luck.   

@Taylor Cook

There are two issues I see here.  Residency of the state is not one of them.  If she's not living there more than 181 days, I don't think she can claim it as primary.  This is a CPA & Mortgage lender question.  Be careful of the advice you get from unqualified persons here or in any forum.

First.  Tax issue.  I am not an accountant, so consult with a qualified tax person.  The 181 day rule applies to tax benefits of a 2nd home.  There are different rules that may apply.  You'll need to check on the CO rules as well.

Second.  Mortgage issue.  I am no longer a licensed mortgage broker, however, I was a lender for 11 years prior to getting my real estate license.  Verify what I'm saying here with a licensed mortgage broker.  Interest rates and down payment requirements have a great deal of variance between owner occupied (primary), 2nd home, and Non-Owner occupied (rentals).  When you are deciding what type of loan to take out, be sure that your use meets their requirements otherwise this can fall into loan fraud which comes with hefty fines and jail time.  

Be safe out there and be careful what type of advice you offer your clients.  If you're not licensed in an area and your advice is outside your expertise, you can put your license at risk.  If you're a licensed real estate broker, your broker duty includes not offering advice outside your area of expertise.  

@David Lutz this is fantastic.

I am a Realtor and was a mortgage broker for 11 years prior. I've been investing since 2008 in anything from the wholesale, fix/flip, SFR rentals, MF Rentals, and I even have a small PM company.

You hit the nail on the head when it comes to cash flow.  My general discussion is centered around 24 months to start seeing some positive flow.  You did a fantastic job explaining the expenses, hidden costs, and the guru 'cash flow' speak that gets so many new investors in trouble.

Real Estate has always been a long-term play, but the information and coaching industry has grown to a point where there is too much fluff in the messages.  I am all for honest real experience.  Occassionally, you'll find a deal that has ok cash flow out of the gate, but most barely break even.

I've been fortunate in my career to stay on the positive side of my deals, but some got hairy early on.  I was self-managing so that made a big difference.  There are real costs that new investors don't know and get tripped up.

The biggest mistake I see new investors make is making offers on deals that no seller in their right mind would accept.  Why?  Because the deal doesn't "pencil" in the current cash flow state.  Most don't.  Our job as investors is to buy, IMPROVE, and hold for long-term equity and cash flow down the road.   

Thanks for such a well thought out message with honest grit.  

Based on what you're sharing, it is difficult to answer with limited information.  Every investor has different criteria for what they are looking at and investing is not done in a vacuum.  We all have different strategies.

Example.  Here in my market, the current in place rents are well below market ($300-500) in some cases.  The valuations are often promoted by using proforma numbers.  During the pandemic years, it became increasingly popular to lease month to month which creates opportunity to increase rents rapidly on in place tenants.

I'm buying a condo this month in which the tenant agreed to stay and signed a new lease raising his rent $250 per month.  He couldn't find anything cheaper and I got much closer to market rent.  I kept him on a month 2 month AND I paid the seller's asking price without any haggling.  However, I offered them only $7500 down and got a rate of 3.5% on owner financing.

I have another deal I'm working on that is a 53 unit portfolio that the seller will carry the note and is giving me incredible terms.  I'm offering her several hundred above her asking price in exchange for a principal only payment - no interest.  

These are just a couple of examples where I'll make nice cash flow with phenominal returns because of my structuring in the deals.  

There are more than one way to skin the cat, so ask people who are doing things that don't make sense to you how they are doing it.  Perhaps there are some strategies you've never seen.  Also, there may be some raving lunatics about to get a very expensive lesson.  Both are true in the game of real estate investing.

The best deals I've ever put together had some of the best results and everyone around me thought I was nuts.  They didn't understand what I was doing.  I learned that there are deals in every market and even more when most investors can't see it.  The best deals are the ones you Make that no one else can see.

Happy investing buddy!

Good afternoon @Raj Singh

Congratulations on your recent acquisition.

Every state has different tenancy laws, so be sure to follow CA's laws.  I'm in New Mexico, so not sure how relevant this may be.  I'll keep it general.

1. VETTING TENANTS  The leases follow a sale and the vetting process was done previously by the seller.  You inherit and must follow the in place leases UNTIL they expire.  

Because you have one of them on M2M, that gives you the opportunity to raise rent, request an application from the tenant, put your lease in place with your terms, etc.  If you're not happy with them, 30 day notice.  If they're not happy with you, 30 day notice.  Then you can start over.

The other LTR lease is in place until it ends.  You're held to that one.

2. CHALLENGES

It sounds like you are new to leasing in general.  Your challenges will mostly be learning how to be a landlord in Sacramento.  Join the local Apartment Association as they are usually a great source of networking with other landlords and professionals in the area.  Our association has monthly educational meetings keeping us up to date on local & state law changes.  You'll learn a lot in those meetings and meet others you can talk with to expand your sphere of influence.

Tenants will test you in the early months of new ownership.  They will tell you horror stories from the previous owner.  They will tell you tales of promises that were not kept.  Build instant report.

Rule of thumb with tenants.  

1. Everything is in writing & signed by tenant & landlord - no verbal promises  If they ask you to fix something, write up a work order on the spot or ask them to send you an email/text request (sneaky way to get proper email & phone #).  

2. Get their proper contact information.  

3. Review the lease for who is supposed to live in the unit.  If there are more people living there, Make them do applications with background checks and add them to the lease for responsible parties. 

4. Use your inspection reports from purchase as a punch list to get into the units and fix little things that came up.  Check smoke detectors and air filters on HVAC systems.  Look for leaks under sinks.  etc.  

5. Identify the vehicles in the parking according to the units.  Know what vehicles should or should not be there.  Proper registration on all vehicles and must be operational.  

Best wishes to you.

Hey there @Lawrence Bland

Congrats on jumping in big.  I'm glad to hear your health is better.

I was a mortgage broker for 12 years before getting licensed as a real estate broker 12 years ago.  Been investing since 2008.  What a rush.  

BUILD / BUY

Both have their advantages.  In today's building environment, a lot of markets don't have the necessary income for a 4-plex to support the cost of building a new one.  To offset the build cost you need more units to carry the lower margins initially.  If you don't have the skills and licensing to be your own contractor, it may make more sense to buy existing.

BUILDING A TEAM

This is all about relationships and not transactional.  Make friends.  Offer your skills and knowledge in exchange for theirs.  It's a journey, so enjoy the ride with people you enjoy working and playing with.

STRATEGIES 

Sustainability is the real question. There are a lot of different ways to skin the cat, not just one. Keep an open mind and don't be afraid to be creative. LTR, STR, MTR, BRRRR, Multi-Family, Businesses, Cash Vending, Note trading, Tax Liens, etc. Sustainability is a very personalized thing depending on what juices your soul.

With my background in mortgage lending, I love finding creative ways to do deals without banks.  Every deal is different and every structure is different.  It depends on the other party. 

I'm happy to connect.

The one you are most comfortable with.  

Stop analyzing and pick one.  You'll never get off the ground if you don't just do it.