All Forum Posts by: Ki Lee

Hello BP!

I've had 2 rental properties for 10 years. One SFR and one 3 units. I had no idea what I was doing when I bought them and pretty much left them in autopilot for the last 9 years or so. Lately I decided to learn more about investing and took a closer look at my properties. Both are under-performing, but they have appreciated. Breaking even is partly due to inefficient management, but also high taxes(Chicago) and the age of the building.

I'm looking to do a 1031 exchange on both of them to trade up for a better cash-flowing properties ($500-$600k for one and $180-$210K for the other one).  Initially I was only looking at 3-4 units because 5 units+ becomes commercial and I need to get a commercial loan. But it seems like I'm also limiting myself this way.

What are some of the challenges for 5 units+ for a novice investor?  Is it going to much different than investing in 3-4 units?  What are the best resources to learn to do it?  Books?/blogs/podcasts?  Are the loan rates much higher and difficult to qualify for?

I'd imagine that the cost of loan and also the cost of management/vacancies are going to be higher for 5 units+..  What kind of cap rates should I be looking for?  And other metrics that are more relevant?

Thanks in advance

Hello BP - 

I'm doing a 1031 exchange where I'm going to sell my under-performing properties in Chicago and Ogden to trade for a better cash flowing properties. These properties have appreciated, but are not cash flowing at the moment.  

Where is your favorite place to buy a cash-flowing 3-4 unit properties for $500-$600k range?  I'm going to be putting down about $250K so the loan will be $250-$350k  and P&I will be between $1270~$1773 at 4.5% 30YF.  

I've been looking at a couple different areas - Denver, Salt Lake City, and Provo because they have low taxes, growth in population and jobs, and somewhat business friendly laws.  It was not easy to find properties that had close to 1% price-to-rent ratio.  For $500K property, I'd like to see gross monthly rent of about $5,000.  

With the current state of the market, is it really hard to find properties with monthly rent that is 1% of the PP?

What city do you think I have the best chance of finding these properties(that's not in class D/F neighborhood)?  

Thanks in advance!

@Derek Gendig

It’s 3/1, 3/1, 2/1.

No I’m not paying for all utilities.

I’m paying water for the building, and gas/electric for the common are.

I looked at isolating the gas/electric on the garden unit from the common area.  The estimate was something ridiculous like $8,000. 

Thanks for all the thoughtful responses.

Yes, the PM company charges leasing fee.  One month rent for new tenants and $150 to renew lease with existing tenants.  Yes they have in-house handyman which seems like a bit of a conflict in interest.

They have no incentive to prevent turnovers.

The utilities- it’s not just water/sewer that is $437.  It’s water for the building, and common area gas and electricity.  Yes it’s coin operated.

The stairs- I think this one was actually somewhat legit- we shopped around for different vendors and the pricing was a bout right.  It’s metal exterior stairs in the backyard for all 3 units.

@James Wise look, I’m not expecting the management to work for free or anything or have unrealistic expectations of making a ton of money.  The issue I see here is that after the basic fixed costs per month, there is about $1600 left for unexpected and routine repairs, maintenance, etc.  this seems like a high amount that they somehow burn through each month. Another concern is that 62% of the monthly rent is somehow spent on total expenses.  These numbers seem significantly higher than the “standard” scenario.  Also getting 1.2% of monthly rent compared to the PP, is it really unrealistic to be able to cash flow?

Thanks @Daniel Kong

Here is the break down-

$400,000 PP.  3.75% interest 30YF

$2195 PITI (principle, interest, tax, insurance)

$437 - water/sewer, common area electricity and gas (washer/dryer, garage, hallway, etc)

$271 - PM fee

$75 - pest control

$163 - landscaping/snow removal

Total fixed cost = $3141

Rent -$4755 total - $1750/$1475/$1430/$100(garage)

monthly rent to Purchase Price  = 1.2%

Vacancy is pretty much close to 0.  I had 2 months of vacancy in all units combined in the past 5 years.

So the difference between the monthly rent and fixed costs is $1614.  Basically between routine maintenance, major repair, and turnovers, It's costing me $1614/month.  I have had somewhat frequent turnovers.  PM said that upon following up it's due to personal lives of the tenants(moving, new job, getting married, etc)

I did have one major repair last year (exterior stairs repainted and treated that cost $8500 and $375 project management fee)

Total Annual Income = $57,060

Total expenses(everything except Principle and Interest) = $35,725

62.6% of the rent is being spent on expenses - I've read that this is around 50% optimally.

This seems all pretty high....  Thoughts??

Despite the old building and somewhat high taxes, I think I should be able to cash flow at least $500/month($1100/month in repairs/turnovers,etc).  Is this too optimistic??

I feel like I'm kept hostage by the contract that requires me to pay around $1,000 if I break the contract before March, but if I can be sure that I can save more than that, I'm willing to break the contract and find a new PM.  

I'm genuinely frustrated and I would love some help if you have any advices or contact info for super star property managers in the Chicago area.

Hey BP, I have a 3 unit property in Logan Square, Chicago. 

I have a PM management company that takes care of it, and in the past 5 years, didn't pay much attention to the numbers. As I started scrutinizing the numbers, I realize that the rent I'm getting is pretty good - 1.2% of PP.  This makes me believe that I should be able to generate a nice cash flow.  But I dont.  I'm pretty much break even or even having a slightly negative cash flow year after year.  Now, I know that the 1% rule isn't perfect, but I'm wondering if the management is ripping me off.  This doesn't make sense.  

A few things about the property - It IS old.  100 years +, and the taxes are rather high in Chicago.  Property tax is rather high - $6000+ for $400K house.  I do pay for water/trash/snow removal/landscaping  and gas/electric for common area.  But even given these facts, not cash-flowing seems very suspicious.  What do you guys think?

It's hard to point our what is exactly racking up all these bills, but the turnover cost is huge.  between commission for signing a new lease and turning over the new unit, it comes out to almost $4,000.  Is this outrageous for a unit that has a rent of $1700?  Can you shed some light?

I need help.  The contract I signed locks me in until next March or I need to pay a fee that equals to 50% of their expected PM fees.  Anybody know a very reputable PM company in the Logan square area?  

Thanks in advance

@Michael Noto I bought my first two properties (pre-BP) under my own name, using traditional financing. Moving forward, I may need to use some HML, esp for BRRRR because banks don't lend on distressed homes. And like you mentioned, HML want to lend to LLC, So the refinance, LLC, and the liability mix becomes even more complicated. That was the essence of my original question- how to address all these different variables?

It sounds like acquiring the property under LLC and then getting a commercial financing at a slightly higher rate offers a good compromise for all the concerns.

Also, commercial loans- it’s not going to be a fixed rate over the term of the loan right? Is it typical to have variable rate?

@Nicholas Settoon

When you get a personal mortgage using your name, there is a "due on sale" clause that allows the banks to demand the full payment of the loan when you sell the property. When you transfer the title from you to LLC, it is considered a "sale" and the bank can call your note due. In reality this doesn't happen often because banks aren't necessarily tracking everyone closely. This typically happens when the bank sells your mortgage to another bank(which happens somewhat regularly). To avoid this you can transfer the interest of the property to land trust. And when you structure it properly and designate the beneficiary as your LLC, the bank won't know that your House is under LLC. Land trust beneficiary is confidential and not public info. Furthermore, designating the interest of the property to a land trust is fairly common and is not considered a "sale." So this ensures privacy as well as avoiding the "due on sales" clause. Let me see if I can find a video on this and I'll send it to you via PM.

@Nicholas Lohr banks will certainly balk at you putting the loan in your name and then transferring it to LLC. One way around this is to establishing a land trust and then having the beneficiary of the land trust to the desired LLC.

@Nicholas Lohr Yes, It is for a 3-unit.  @Jason D. and @Kenneth Garrett can you verify that this is a viable strategy for 3-unit house?  

It's my personal opinion, but I'm not sure if adequate insurance is enough.  Insurance will cover instances where a tenant has an injury on the particular subject property(internal threat), but if the owner gets sued from other properties(external threat) or from something unrelated to Real Estate(personal litigation/business lawsuit), the rental properties under his/her name can all be foreclosed to pay for damages.