All Forum Posts by: Jason Barnett

If you haven't already sold the house (i.e. if you haven't signed legal papers that enforce the sale) then you need to speak with an experienced tax / legal Real Estate advisor. Immediately! You can do what is called a section 1031 exchange and defer all taxes indefinitely.

Reading a book is a good thing.

It is safe to assume that anything that can go wrong probably will (at least at first until you've fixed the problems you didn't find before you bought the building). Generally speaking, one month's rent for the entire building is good enough reserves to pay for maintenance issues that may arise.

If you want to be extra safe (i.e. for tenants that don't pay rent, or for vacancies that you cannot immediately fill) then try to have 2 months' worth off rent saved up in your account.

I would also advise that you set up a company to manage your business (most go with LLC's). If you do this then it is critically important that you maintain business records and keep your personal life seperate from your business (e.g. don't use a personal bank account for the business, get an account in the name of the business).

I know a few things (and don't know others). It's probably better if you just ask what you want to know and maybe someone can help you?

Can they make money for you? Yes.
Can they give you headaches? Yes.
Are they a good investment? Usually.

I have a problem with a tenant. She has been in my building for only 1 month and now she is having some "buyer's remorse" and wants to break her contract. The reason she gave me is that she says she is waking up at night time and she thinks that I have mold in my apartment building.

Now... I am going to get an expert to come inspect the building and tell me if there is any mold. However, in the meantime I need to figure out what I am going to do with my tenant. She is a section 8 / HUD tenant and she and I signed her contract back in September. I think that if I evict her for breach of contract then she will lose her section 8 eligibility, BUT I was hoping you all could verify this. Or maybe someone else can come up with another solution to this problem?

Deep down I really thought this would be a good tenant; she is very clean, she is older and seems to take care of her property. Ideally I would like to convince her to stay with me and continue living in the building, but now I'm not sure what to do.

Just wanted to pitch in my $.02 and say thanks as well. This seems like a simple and effective rule of thumb when evaluating landlord deals.

Have you tried using the cash flow tool that was recently added to this site? It should help you out with this valuation problem. Basically I would need to know two things in order to place a value on the building:

1. Net Cash Flow before debt service (Yearly Cash flowing in minus cash flowing out)
2. Cap rate for your area (i.e. the rate of return that investors in your area typically earn on a deal)

To give you an idea of what I'm talking about, let me give you some details on an apartment complex in my area that is for sale.

Yearly Cash Flow before debt service: $95,859
Asking Price: $1.1M
Proposed Cap Rate: 8.71% ($95,859 / $1.1M)

So if I buy the building for the current asking price then I will earn 8.71% on my money (only about 2.5% better than my cost of borrowing!). This is not good; you profit by making higher % returns than your cost of capital.

Let's say that my goal as an investor is to make 15% ROI. Then the maximum price that I can pay for this apartment complex is $95,859 / 15% = $639,060. The value I have on this building is much, MUCH lower than the current asking price so I doubt I'll put an offer in on this one.

But basically you need to know what Cap Rate you can get in your area and what the Net Cash Flow will be on your building. Simple as that. :D

I won't attest to the legality of what you're doing; as po said you need an attorney for that. HOWEVER, I can give you some simple yet sound advice. Is the lower interest rate worth it for all of the worry you'll have of POTENTIAL litigation? Even if it never happens, you will always have that fear. You can always re-finance to pull cash out later.

That varies from company to company; check out what your mortgage contract says about prepayment penalties. If it isn't in the contract, then who the heck cares what they think about it; they can't stop you from prepaying! The first mortgage that I signed had no prepayment penalty so I was happy about that.

On another note: since you're a first time buyer I would like to point out the concept of "escrow". In some mortgage contracts the bank says that they will pay off your insurance, taxes, possibly water/sewage every year for you. However, they ask you to make payments into an escrow account whereby they will store your money until it is time to make payments. If you're the type of person that isn't good at managing money then this is a blessing, but aren't all investors good at managing money? In any case this means that your monthly cash flow will be consistent, but you will have to fork out more cash in the beginning than you otheriwse would. Plus you're losing interest on the money!!! Plus, if the bank forgets to pay your bills on time then guess who gets to pay the penalties? You do!!! If I had it to do over again then I would want a mortgage that didn't require escrow payments, but that might be hard to do with an FHA loan.

Notes = mortgages.
Cash flow = Cash coming into your bank account - Cash going out.

It's that simple. :D

As a first time home-buyer you can get FHA loans. You can use an FHA loan to buy a property so long as it is 4 units or less. FHA loans let you get into your first building with no money down (a very good thing for your first building!!!). I would suggest you consider FHA even if you have the money for a conventional loan. Reason? Becuase you will need to save cash for mortgage payments, repairs, etc. that come up while you get your feet on the ground.