All Forum Posts by: Joshua Weidman

@Adam Burns,

This is a great post! I grew up in Hershey, Pennsylvania (in central PA) and am now in the Philadelphia market. I've looked at a lot of investments in Harrisburg, Lancaster, Lebanon and surrounding areas, but have never pulled the trigger. However, I know a lot of people that have had excellent success in the middle part of the state.

To ease your mind, the following are some items to consider when looking at any investment (especially those that appear to be too good to be true):

• Vacancy - you mentioned that you were prepared to over-estimate the vacancy rate for the property. It's important to put a number on that and to understand what it means. If a unit is vacant 1 month out of 12, the vacancy rate is 8-1/3%. Most standardized cash flow calculators default to a 5% vacancy rate. But I've seen plenty of new landlords decide to turnover a property themselves. Nights and weekends stretch the turnover from 1 week to 2 months. Then it takes another month to lease. In this type of situation, you're looking at a 25% vacancy rate for the unit. Be realistic with yourself and make sure you're not using "pie in the sky" numbers.
• Rental Demand - This property has 4 units and it sounds like 2 of them are vacant. Based on your post, I'm guessing that they are vacant because the place needs work. Have you inquired with the seller about why they haven't prepared them for lease? Sometimes there will be a demand for a certain type of unit in one area, but not for another type. In my market, I do not invest in 2 bedroom single family houses. The demand for them is low. Check Craigslist to see if there are similar units (1 bedroom, 2 bedroom, etc.) for rent near you. Talk to property managers and get their feedback about the demand for different types of units. In some situations you may have great difficulty filling up the property, even if you've got the nicest property in town.
• Renovations - Many new investors want to complete the least amount of work on a property to get a tenant into their apartment. I've done this myself. But I've found paint and carpet rehabs to be very short sighted. Today I make sure that I repair/replace anything in my properties that has a shelf life of less than 10 years. I prefer to have all of my apartments and houses vacant at the time of acquisition so that I can make the repairs quickly (and to choose the tenants - see below) without having to work around residents. If I have to assume the tenant, I will plan the repairs as the tenants turnover. But the bottom line is that you need to be realistic about what its going to cost you up front to put the property into a condition that will require no major repairs for a decade.
• Tenants - I believe that most people are generally good. They pay their bills. They go to work. They take care of their family. But the number 1 factor in whether a tenant pays rent or not often boils down to whether or not they can afford the property. This factor impacts a potential investment in 2 ways. First, you have to ask yourself (research it if necessary) whether or not they people that want to live in the neighborhood can actually afford to live there. Do they work? Are there plenty of employment opportunities? Etc. Second, are the tenants living in the property you're considering good tenants? Do they pay their rent every month? How do they maintain their units? Do they interact well with the other occupants in the building? Get a tenant ledger for each unit. Look for proof of payments. Talk to the tenants about their feelings about living in the unit. If you're uncomfortable with the answers you are getting, make the sale contingent upon vacant units. Then you can pick the tenants you want, not who you are stuck with.
• Expenses - Expenses are often the area where most people miss the mark. As a general rule, you should budget 30-35% of the gross rents (minus vacancy) to be allotted toward property expenses. This fluctuates slightly from location to location, but it's a good, quick analysis that you can do to see whether a property merits further analysis. Make sure that you include all of the expenses when making cash flow calculations. This will include some basic items like property taxes, school taxes, landlord insurance, rental license fees, management and maintenance. Expenses can also include additional costs like utilities (by the way, who pays for electric, heat and water in the 4 unit you asked about?), condo association fees, homeowner association fees and other. Lastly, you'll want to include an annual expense for capital expenditures. This will be a war chest that will grow over time. It's built to account for the cost of replacing larger items as they age (i.e. A flat roof has a life of 15 years and costs $3500. Capex budget for the roof is $233.33 per year).
• Financing - An often overlooked component to a property evaluation is the financing. Consider the difference in cash flow on a $100,000 loan financed over 30 years at 4.5% versus 6%. At 4.5% the annual principal and interest payments come to $6,080.22. At 6% the same loan will cost $7,194.61 per year. That's a difference of $1,106.39 each year ($33,191.70 over the course of the loan!). And since you're purchasing a building larger than 3 units, you'll probably need to explore commercial loans. They're typically amortized over 20 years and will either reset (interest rate) or balloon at least once during the loan. Know your long-term financing options before you buy. It will have a big impact on your cash flow and profits.

Real estate investing has a lot of variables to consider with every investment, but it really isn't rocket science. Ask the right questions. Search for the right answers. Listen to your gut. If something looks too good to be true, it might be or it might not. Once you have all the data, make the decision that makes sense.

Good luck!

@Jia Lin,

It sounds like things got off on the wrong foot with these tenants. I've seen this kind of thing on numerous occasions before I sold my property management company. Usually this type of conflict comes when a property is not properly prepared for a new tenant. However, it sounds like you've done what you should to prepare the property.

Most of the time, tenants just want a clean, safe place to live their lives. When there are a lot of repairs required in a short period of time, they start looking more closely at the house and patience runs thin. Small issues become big ones and this all can lead to a big mess.

I would recommend 1 of 2 courses of action...

1. Provide the Option to Leave - You may be at the point of no return. If they're completely unhappy, your interests may be best served by finding another tenant. Make sure the house is inspected and any additional issues addressed before the next tenant moves into the house. Then reset and move forward.
2. Get Written Resolution - Schedule a time to meet with the tenants. I know you are far away, but the personal touch may be what is needed to put this issue to bed. During the conversation, makes notes of all of their concerns and complaints. Determine what repairs/improvements you are willing to complete, and then talk about time lines and what they can expect. Finally, talk to them about the other issues they bring up (i.e. property manager, communication regarding repairs and your expectations regarding rents). The most important part of this conversation is to communicate that you are fully invested in providing them with a safe, clean place to live, BUT that you expect rent to be paid on time. Have them sign the list of agreed repairs and get them done. When things calm down, send a hand written note thanking them for their patience throughout the process and praising them as great tenants.

The goal at the end of the day is to make money. Whether you are right or wrong, if the tenant withholds (or threatens to withhold) rent, its a bad situation. Likewise, even if you are legally correct, it doesn't give you a rent check.

Try to get them back on the same page with you. If they insist on taking advantage of your kindness, start the eviction process. It'll all come out in court. You just need to get your property back - sooner than later.

Good luck. It sounds like you have your hands full on this one.

@Caplan Abbey, thanks of the post. It's garnered a lot of attention, and the responses have given me a few chuckles. I've got a few comments to add on both your post and the responses. Here goes...

One of my biggest pet peeves in real estate is the CAP Rate. This rate is supposed to be a simple calculation of the net operating income divided by the cost of the investment. If done correctly and accurately, the CAP Rate boils down an investment to simple numbers we can all understand. It also provides a base line by which to compare different types of properties.

The problem with the CAP Rate is that it provides a huge opportunity to manipulate the numbers. Omitting (or using a generic) vacancy rate, leasing fees, management costs, legal expenses, associating fees, maintenance, capital expenses and other fees associated with property ownership can really skew an analysis. I see a lot of P&L projections that list taxes and insurance as the only expenses and then use projected rents to calculate income (It's amazing how many rental properties are listed for sale with rental rates far below market rates).

The snide replies to your post are predictable from this group. There are a lot of experienced people who have gone down this road before. The expenses on your example property sound extremely low based on the size of the complex and the rental income provided. The sample looks a lot like the seller (or seller's agent) found some calculation online and punched it into a formula ignoring performance in real life.

If you're a potential buyer looking at investing in this property, take a deep breath and take a step back. Get the real numbers you need to accurately evaluate this investment. The following are some basic expenses that should be considered (or eliminated if the expense doesn't apply) when evaluating the cost of a buy and hold investment:

• Licensing Fees
• Utilities (common areas and vacant units)
• Association Fees
• Leasing Costs
• Management Fees
• Maintenance
• Taxes
• Insurance
• Capital Expenses

You also need to take a look at the vacancy rate. Use the seller's tax returns or bank records. What was actually collected? Look back at least 3 years and as much as 10 years to determine the average vacancy rate. How much came in during the period and how much should have been collected based on full occupancy. Adjust the projections accordingly.

Once you have the right numbers, then make a good decision.

If you're selling these assets, do the same calculations. Do your self and your clients a favor. Give them honest numbers. You might not sell this building, but you'll sell your clients good deals. They'll buy more and you'll develop a good reputation. 

Bottom line...real numbers = happy investors. It's really just that simple.

@Dustin J Woods,

When I bought my first rental property I was so excited to be a landlord I think I told the entire block the place was mine. When the tenant moved in, I realized my mistake. @Account Closed is absolutely correct. Don't let the tenant know you own the place.

In 2010 I started a property management company with a friend of mine. In the beginning, we did everything ourselves, including all of the interactions with the tenants. It became much easier to deny tenant requests when I had no decision making authority for the property. When a tenant wanted a new ceiling fan, I had to ask the owner. If the rent was late and the tenant wanted to late fee waived, I had to ask the owner. And because I wasn't the decision maker, it became much easier to say no.

Today all but one of my properties are managed by a 3rd party. The one property I do manage is about a mile from my house, and then tenants think I work for the management company. All the calls come to me, but the calls and emails are to Josh who works for the property management company. It's made a huge difference in my bottom line and my sanity.

Good luck!

@Cameron Ellis,

Hopefully this response finds you waist deep in investment properties that you've purchased over the past 4 years. I'm writing this response in hopes that it will help others looking at turn key investments. If you haven't bought anything yet, hopefully it will help you too.

The term "tun key" can be a little confusing. I see it used in a number of various contexts. For the purpose of this post, let's define a turn key investment as an investment offered by a company that either offers a renovated rental which they offer to manage, or an investment vehicle that combines acquisition, construction management, tenant screening and leasing and property management. So you're either buying a finished product or you're buying the project with all the pieces provided by your turn key vendor.

Properties are often marketed directly to interested investors who have signed up to be on a TK provider's list or through a national 3rd party that collects a fee from the TK provider for bringing in the clients. In some cases, like with my company, the provider will work with each investor to source a property specifically for the investor with the investor's needs in mind.

Some properties are sold with tenants in place. Some properties are in the leasing process. And still other investments are sold pre-construction. Each provider is a little different with advantages for each option.

Services from TK providers vary greatly. When selecting a company to work with, make sure they are responsive and transparent. If you're working with them on management, make sure they have a good track record and can refer you to other clients. Most importantly, make sure that you have a point of contact that can answer questions and keeps you informed about your property.

The 2 most important things to look for when evaluating a TK provider are the management end and the communication. Renovations and transactions never seem to go according to plan. Things happen. Stuff goes wrong from time to time. You want to work with someone who is on your side and communicates when there is an issue. A good property manager will be a very important part to the success of a passive real estate investment.

There are a ton of resources on this site regarding TK investing. Best of luck in finding your next project!

@Marci Stein, in a perfect world, your tenants would take care of their own floor. After all, it sounds like you just replaced it a year ago. But the reality of the situation is that they probably can't afford to have it fixed. If you push the job back to them you're going to be left with 1 of 2 outcomes (or maybe both):

1. They'll probably either do it themselves or hire the lowest bid they can find to complete the install. That probably means the work won't be great.
2. They hire someone reputable and blow all their cash on the floor.

Either they pay for a crappy floor or they blow your rent money on the floor. In both scenarios, you lose.

A better option is to meet with them. Tell them you'll agree to have the floor installed. During the discussion, see if there are other items they'd like to have completed at the property. Identify an item or 2 that you'd be willing to complete and then make a deal to improve the property based on the performance of their rental payments (i.e. paid before the 1st for 6 months = ceiling fan in master bedroom). This will let them see that you are a reasonable guy who wants them to have a nice place to live. At the same time, it limits future requests by tying improvements to consistent performance. I did this with a long-term tenant in a similar situation and it worked great. The tenant stayed in the property for 10 years before I sold the house. 

I hope this gives you something to think about. Good luck.

@David Brian Medina,

I get this questions from clients about once a week. Before i answer, I'm not an attorney nor am I an accountant. I'm sure your accountant and attorney will have their own opinion about best practices for your specific situation. With that said, consider the following before you jump into an LLC:

• If a property is owned in the name of an LLC, you're very likely going to need commercial financing on your rental property. Commercial loans are typically amortized over a 20 or 25 year period instead of a 30 year period. In addition, there is often a rate reset or balloon payment due prior to the maturity date of a loan. Both the amortization and the loan reset/balloon are going to have an impact on your cash flow. Rate are really low right. They're likely to be much higher in years to come. The longer you can borrow money at 4.5%, the more of an advantage you'll have.
• Most commercial loans require a personal guarantee. So even though the loan is made to your LLC, if the loan goes into default, you're ultimately responsible.
• An LLC will certainly protect you in the case of a lawsuit. But if all your i's aren't dotted and t's crossed, the liability protection can disappear. If there's any commingled funds, there's a realistic argument to be made that the LLC is really just you. Additionally, if you are the sole member of the LLC or the managing partner, you'll be held personally liable if there are any questionable legal practices or anything of the like.
• There is an added accounting cost to make sure your LLC docs and tax returns are filed. For one property, this cost can be prohibitive.

In my opinion, you do not need an LLC is you're buying one or two houses. If you're looking to build a portfolio, definitely seek legal and financial assistance.

Best of luck!

@Matt Scott, the 5-10 year window is mostly about timing. I tell investors to expect a 5-10 years to time an exit at the top. It also sets expectations related to market fluctuations. If you buy today and we're at the top of the market, it might be 10 years. Wrote you see any significant increases in property value. But for 10 years you'll have good cash flow and principal reduction. Basically, a 5-10 year window wards off the gut reaction to sell if prices drop. It's all about going into the investment with the right expectations.

@Matt Scott,

You might be new to investing, but your questions are very well informed. You've done a great job of identifying potential issues with the turn key model. 

First, I think it is important to understand that every TK provider is different. From the way they source properties, the way they oversee renovation and ultimately the management, each provider is going to have its own strengths and weaknesses. There are some fantastic companies in the market place (I'd put my company in that lot), but there are also some providers that play things fast and loose. You really need to investigate the track record of anyone you want to work with prior to spending the money.

Addressing your questions specifically....

1. Options in a market saturated with investor owners - The real estate market is a cycle. Values go up and they go down. It's important to enter an investment with a projected timeline for the exit. On turnkey investments, you should anticipate a 5-10 year period to hold the property, at a minimum. This allows the investor to choose a time toward the top of the market to sell. This will allow you to ride the wave of market fluctuation. In the mean time you'll make cash flow returns every month. In addition, you should always be buying with equity. Our clients see about $20,000 in equity on every property. This gives you options. If you have to sell quickly, at least you won't get hurt. 

2. "Average" people moving into the investment - Before the model A was released by Ford, cars were a luxury items only available to the elite. Now, most families have multiple cars parked in their garages and driveways. Bringing a good investment vehicle to the masses is not necessarily a bad thing. So long as the TK provider provides a good product at a price that leaves room for the investor to make money, mass appeal is great. But if the product is no good, average investors will get hurt. Investigate the provider!

3. Why aren't TK providers keeping these houses? - Many TK companies do buy a lot of their own properties. Selling TK investments provides the opportunity for an additional income stream and added income today. At the same time, their portfolio grows. 7-10% returns are great over time, but a few hundred dollars per month in cash flow doesn't always pay the bills.

4. Snake oil sales people - Any industry that has the potential for large profits tends to attract unsavory characters that just want your signature on their contract. Cash flow investing is a way to get rich slowly. It's certainly not a get rich quick plan. There are plenty of quality providers across the nation. Choose someone you trust. Investigate them. Look for unhappy customer reports. Ask about situations that have gone poorly as well as those that have gone well. In the end, don't work with someone you do not trust.

Turnkey-style real estate investing is a great way to build wealth over time. Look for a company and a location in which you can be comfortable investing. Trust your gut. 

@David K., buying outside your local market can be tricky. There's a lot of good advise in this forum. Reputation is certainly a huge factor in selecting a good turn key provider. But you can also "hedge your bet" by consulting a local agent. Once you're comfortable with an organization, find a local agent that works with investors. Use them as a consultant (I'd offer to pay them a fee) to bounce deals of of and even to be your feet on the ground.

My company provides turn key investments in the Philadelphia area. It's really important to me to clearly communicate our investment to our clients before they invest with us. 

Real estate is local. If you aren't sure about the market or a specific neighborhood, enlist the help of a local expert to fill in the gaps between the sales talk and the asset.

Good luck with your investments.