All Forum Posts by: Jacob Pereira

@Paul Fagot, it's not about ROI and cap rate in this case, it's about risk. If you can invest $550k (or just a half million if you take the more aggressive estimate) and get a guaranteed return of $850k, that's a great deal. Now once you break that down to $250k for the cost of the land and the bones of the building and another $250-300k for repairs, the risk becomes MUCH higher. I've never even heard of such an extensive rehab for a building under the $1M mark, but I know from doing 20-100k rehabs on buildings worth less than $500k that you never fully know the extent of the problems until you've pulled all the walls down and looked behind. Even then there can be mistakes made or other issues. I certainly wish you luck, but I think you're going to have to bring down the price significantly to move your building quickly. I hope I'm wrong, and I would love to hear about it when you get the deal done; I always love to learn more about real estate deals, especially when they prove my cynical self wrong.

@Chris Bounds hit the nail on the head. DIY is almost always more expensive than hiring others to do the work on projects that aren't live-in situations. The holding and opportunity costs on a 10-unit apartment while you gradually get it ready to rent or sell are very high. You just don't see those costs until the back end, unfortunately. Also, I know it was just an example, but an apartment complex selling for $5k is a guaranteed tear-down, so you're really just buying land to build on that needs a little extra prep work in that scenario.

Wow, popular thread...I only read the first page, so I don't know if this has been addressed, but in my opinion, everyone who posted on page one missed a very important factor: Taxes.

I'm not a tax professional, and maybe there's a clever way to get around this issue such as a permanent trust, living trust, etc. but I'm fairly certain that she'll have to pay income tax on that house you are giving her for the amount that passes the gift exemption. On top of that, you'd also get a better depreciation deduction on your taxes than on hers. Why not keep the house in your name and rent it to her? You can even pay her rent via your own gifts, which are currently capped at $28,000 per person for a married couple, I believe. 

Wow, I'm so sorry that that has happened. I actually had a tenant die quite suddenly earlier this year too. She was a really cool person and it was a huge shock to me when her daughter told me she had passed. I have to say that I side with @Joe Splitrock over @Thomas S. on this one. Even taking empathy out of the equation (which you shouldn't, in my opinion), you really don't want a tenant in your unit who doesn't want to be there and might not even be able to pay by himself. Tell them how sorry you are for their loss and then give them the three options outlined above. Whichever of the three he chooses, you're still better off than anyone else in this situation, and also better off than if you hadn't given him the option.

I am what you might term a "soft" landlord. I always waive late fees the first time it happens, and I try to work with my tenants as much as possible, even in cases where they need to break the lease or they can't pay. That being said, people who live paycheck to paycheck choose a number of financial priorities, and you want to make sure that rent is number one. If they have to be late on their phone bill, electricity bill, gas bill, credit card bill, lotto scratch-off budget, weekly filet mignon at the Four Seasons (you get the idea), make sure that all that is being defaulted on first. 

If for some crazy reason they've already deferred all those payments and they still don't have enough money, buy them enough groceries to keep them and their family nourished and start eviction proceedings. If their situation is that dire, they need to be living with stable family or in a shelter, rather than trying to hustle their way through life on their own.

I'm lazy, so if I had that much in cash in real life, I'd probably just toss it in the stock market and like off the dividends and appreciation. Historical stock market returns are about 7-8% annually, so I could expect about $175-180k a year, which is more than enough to cover my basic needs. I know you said it had to be in CRE, but that seems like more work than it's worth if I'm holding that kind of cash.

I also wanted to comment really quickly on @Paul Fagot's solicitation; you're talking about a pretty small ROI for a building that needs 250-300k in repairs. The risk on something like that is very high, so I think you'd need to drop that offer by at least 100k before you get any serious bites. I assume it's a teardown and rebuild? I can't imagine an apartment building that would cost that much to fix and still be worth less than a million. Maybe post some details so you can get some feedback from the types of people who buy that type of property.

I have to say that I disagree with @brent coombs about point three; it's actually just the opposite. With so little money down, the bank is taking on the additional risk, not you, which is why you have to pay for PMI on FHA loans. I'll give you a simple illustration:

Let's say you could somehow find a $100,000 house in Austin, and you chose to use a 3.5% loan. You'd have only invested $3,500 (I'm ignoring closing costs because they'd be similar in both scenarios) of your money, with the bank assuming the rest of the $96,500 of risk. If the market collapses tomorrow and that house becomes worth $50k, you can walk away with very little cost to you (besides the credit ding, but that's beyond the scope of your question). If you do a conventional at 20% to avoid PMI, you've risked $20,000 before closing costs, which is also money that you can't invest elsewhere, or if you're really conservative, hold in reserve in case you run into trouble.

Full disclosure, I always pay 20% on my "house hacks" because I hate PMI, but I'm painfully aware that I'm leaving money on the table by not leveraging to the fullest extent possible during this time of historically low rates.

 Yeah, a bigger van works well too. There are two relatively minor reasons that I still prefer a truck though:

1. It allows for a lot more unconventional shapes and sizes because it's open. For example, if you haul a fridge and put it on its side, you have to wait a day or so to plug it back in, but you can just leave it upright in a truck. Those big drywall sheets don't tend to fit in family vans and wagons without breaking them either.

2. It's external, so you're not breathing in the thing you're hauling and it won't ruin your upholstery. Things like old ovens, random chemical waste, excess trash left behind by a tenant, etc.

I used to drive a sedan and I was able to make that work, but having a truck is just a bit easier, in my opinion.

I'm interested to see some more responses to this, as I haven't found a sure-fire solution to this problem yet. I've inherited a decent number of Section 8 tenants over the year and placed a few myself. I've found that 95% of them are decent tenants; so far I've only found one thing that seems to be a bit of factor, but it may be illegal to factor it in in your city. I try to only get tenants who pay part of their voucher themselves, meaning that they have a source of income. Those tenants who have a 100% voucher don't have a job to go to, which means they'll also be in your house a lot more time which leads to faster wear-and-tear, not to mention parties, damages, long term "guests", etc. 

Before you make that a factor, check to see if your city has banned income source discrimination. It sounds like based on your post it hasn't, otherwise you'd have to accept Section 8 anyway, but you definitely want to make sure that you don't get on the wrong side of discrimination laws.

It seems to me that while they oversold the profit your friend will make, he's still going to come out with a few hundred thousand dollars of profit. Did I understand correctly that he's about 500k all-in for each house and now worried about having to sell for $750 each? In my market (Austin) houses in the 700 and up range tend to stay on the market for a few weeks longer than cheaper ones. I'd make sure that he's looking at solid comps, and then be patient. While those margins aren't huge, they're not bad either.