All Forum Posts by: Leo R.

@Katie Case as others mentioned, there's not enough info here to provide really specific feedback...so, I'd suggest doing two things:

1. create multiple financial models for each approach (including "worst case scenario" models that involve unanticipated capex, extended vacancy, etc., etc.).  

2. Then, make a list of all the pros and cons of each approach. 

Once you do those two things, you'll  have a much better idea of which approach fits you best.

Things to consider when you make your list of pros/cons:

-How easy/difficult will the property be to manage? For instance, what's the tenant pool like for each property, and how easy will it be to find high quality tenants? (this obviously depends on things like the location, the grade of the neighborhood, the grade of the property, etc.). 

-What would the rehab entail, and how much experience do you have to do that type of rehab? I've done live-in rehabs before, and (no surprise) living in a construction zone sucks! Would it be viable to do the rehab before move-in?

-Right now, it's relatively easy for you to move to a new property (since you don't have kids)...presumably, it will become much more difficult to move to a new property once you have a kid (so this might be one of the last opportunities you to move to a new property for a while).

-What effect does each approach have on your DTI and your ability to qualify for more loans in the future?

-What's the outlook for appreciation with each approach?

-What (if any) value add opportunities do the two approaches provide?  

-What are the pros/cons of the various financial models you created for each approach?

-What exit strategies are available for each approach?

etc.

Good luck out there!

I frequently hear inexperienced investors say things like: 

"The property doesn't cashflow now, but I'll refi when rates come down."   

...they use the word "when" as if rates dropping is as predictable as the sun setting!

Bottom line: NOBODY knows what rates will do in the future.

It's fun to discuss, and we can make educated guesses, but ultimately, it's just speculation...

@Melanie Collins if you're a beginner, starting with a large multi fam or multiple single fams all at once is a bit like trying to surf a 50 foot wave before you know how to swim.  

I'd suggest starting off with a simpler strategy that has a higher likelihood of success, and THEN build up to more advanced strategies as you gain experience. For instance, house hack a duplex, and you'll learn a TON of the most important lessons you need to know about real estate investing, and you'll be in a much better position to succeed with a larger and more complex strategy.

Similar to most things in life, when you're brand new to something, it's wise to start off with a beginner-appropriate strategy. Run a few 5k races before you try to run a 26 mile marathon, in other words.

Good luck out there!

Here's my take on what makes for a good "investor-friendly" agent:

An investor friendly agent is an agent with investing experience--but what does that mean? ("investing experience" could mean experience with house hacking, flipping, STRs, syndication, or any of the other many investment strategies). An agent may be a total rockstar when it comes to BRRR'ing, but they may know nothing about STRs. So, you probably want an agent who has experience with the investment strategies you plan to pursue.

Also, IMO, successful investing requires an agent who 1) facilitates a strong due diligence process, and who 2) has the ability to see opportunities that other buyers miss. Because of this, my agents need to be highly experienced in assessing the potential problems of a property (my agents are often as good or better at spotting problems than the inspector!), and my agents also need to be able to envision the value-add opportunities the property presents.

I'll give you an example of each:

First, an example of an agent going all-in on due diligence, and saving me a ton of cash and headache: When I was an inexperienced investor, I found my "dream house", a property that I instantly fell in love with. I was ready to buy that place on the spot. However, while I was succumbing to shiny object syndrome (admiring the fancy new kitchen, new hardware, and beautifully tiled bathrooms), my agent was crawling around in the basement crawlspaces, collecting cobwebs and assessing the plumbing. The basement had some un-finished spaces, but most of the basement had just been beautifully re-finished with a mother in law apartment (which I was going to rent out). I tell my agent to write the offer, and he says "OK, but before we make an offer, you need to understand that the entire house has galvanized steel plumbing, which will fail. It may fail in 5 years, or it may fail in two weeks, but it will fail in the relatively near future. When that plumbing fails, you will need to demolish substantial portions of that brand new basement MIL apartment to replace the plumbing. It will cost you approximately $35k-55k to demolish that fancy new finish work in the basement, re-plumb the house, and then re-finish the basement again. Are you prepared to take that on?" (the answer was no, and although I was incredibly disappointed, we walked). Point being: my agent began the due diligence process the moment we walked into the property. He did not wait for the inspection to begin the due diligence process. ...and it saved me $35k-55k and a massive headache. A NON-investor friendly agent (or an agent looking to make a quick commission) would have said "yes, this house is SO CUTE! LET'S BUY IT!", and I would have ended up with a serious problem. That's the value of an agent who goes hard in the paint on due diligence.

Now, an example of an agent thinking creatively and seeing a value-add opportunity that everyone else missed: There was a house that had been on the market for a long time, and the reason was obvious: it was only a 2 br 1 ba house, and the floorplan was very, very weird, so nobody wanted it...however, my agent spotted that the listing had unusually large Sq footage, so we went to check it out...10 minutes after walking into the house, my agent says "we can turn this loser into a winner". The floorplan was arranged in a way that some non-load bearing walls could easily be removed, some new walls framed, and with about $40k, the house would be transformed from an un-appealing 2/1 that would lose $300/mo as a rental into a very appealing 4/2 that would cashflow about $500/mo (incl. the debt service for the rehab)... We bought the place and executed the plan--not only did it become a solid cashflower, the property value also increased by about $125k. It's critical to understand that the agent who recommended this rehab knew about building code, construction techniques, and the costs associated. For instance, he identified the load bearing walls when we walked the property, he understood where the existing plumbing was, and where new plumbing would need to go, he assessed where HVAC ducts were, and where new ducts would need to be routed, he understood the changes that would need to occur to the electrical system, etc., etc., and he understood the costs of all of those issues. Plenty of people (agents included) can come up with pie-in-the-sky ideas of how to change and improve a house, but few have a real understanding of what that work entails, what challenges will need to be overcome, and how long it will all take and what it will all cost. ...how did this agent know all this info? Because he had personally rehabbed many of his own properties--and had done that work himself, and also via GCs!

We'd all love to buy turn-key, A-grade, cashflowing and appreciating properties, but those properties are almost non-existent. Because we have an extremely challenging market (high prices, increasing rates, limited supply), being able to envision and execute value-add strategies that everyone else misses is often the only way to make a property succeed--so, having an agent who understands value-add strategies is a huge advantage!

Agents with this type of expertise are worth their weight in gold to an investor--especially when the investor is relatively new and inexperienced. This is true in most areas of life--we are most in need of an experienced coach when we're learning something new (particularly if what we're trying to learn is a high-stakes process like RE investing). The less experienced the investor is, the more experienced their team needs to be!

Good luck out there!

@Ainsley Logan sorry to hear about your problems.

It sounds like you're a beginner, but you started off with a very advanced strategy. 

Multiple multifam properties are a challenge to manage--but you don't have experience in property management (and yes, having property management experience is super important even if you have a PM. A person with no property management experience managing a PM is a bit like a person with no legal experience trying to manage a law firm, or a person with no mechanical experience trying to manage a mechanic shop). It's extremely difficult to correctly manage a PM if you don't know anything about property management (and this is 100x more true for C and lower properties).

You mentioned that the properties "were not expensive", they're in low income areas, and you've already had evictions and tenants trashing the place--which leads me to assume these are C or D properties in C or D areas. C and lower properties are notoriously difficult to manage--even for an experienced property manager--and even the most experienced real estate investors tend to avoid C and lower properties for this reason.

You asked whether the properties might ever "turn around"...if they are in C or D areas, this will be an uphill battle (you can make a property the nicest spot on the block, but you can't transform a C area into an A neighborhood). ...talk to local agents and PMs about this question, and you'll get a better idea of whether it's possible to turn these properties around...

Buying a portfolio of C/D multifam properties with no prior REI or property management experience is a bit like trying to surf a 50 foot wave before you even know how to swim. ...so, don't be too hard on yourself, but also try to learn from this--if you're a beginner, start off with a beginner-appropriate strategy.

You mentioned that the properties are producing tons of unanticipated expenses--if most of the expenses are unanticipated, that means there was a failure in the due diligence process (proper due diligence is one of THE most important parts of REI). Due diligence requires the investor's involvement, and it does not rely solely on the inspector (some inspectors are great, but some miss huge problems).  Because of this, the investor needs to understand how to run a thorough due diligence process that goes well beyond just the inspection (for instance, my agent and I know how to assess the condition of a property, but if we didn't, I would pay contractors, plumbers, electricians, etc. to walk the property with me...in fact, I sometimes still do this for certain types of properties).

As others mentioned, providing the forums with the relevant performance metrics (e.g.; property grade, neighborhood grade, current cashflow, projected cashflow at full occupancy, appreciation, etc.) would help folks on the forums give you better feedback, but you mentioned "I'm not sure what numbers would help..."  --if you're not clear on what metrics are needed to assess the performance of your portfolio, then I'd suggest studying up on your financial models ASAP and scheduling a call with a real estate-savvy CPA to get a handle on the financial picture of this portfolio.

So, what to do?  

...only you can answer that question, but at the end of the day, you'll want to run multiple financial models--including ones with worst-case scenarios (e.g.; vacancy, more unanticipated capex, etc.), and project what your returns will be given those various scenarios (a real estate-savyy CPA can help you with this, and there are tons of free resources on BP about how to create financial models to analyze properties)...when you create these models, you'll want to estimate how much of your time/energy is being consumed by these properties, and the value of that time/energy... Once you've run your models, you'll have a much better idea of whether this juice is worth the squeeze.

Regardless of what you do, I'd definitely suggest taking a step back and trying a REI strategy that's more in-line with your experience level (for instance, house hacking a B grade duplex)...start off with the easier, simpler strategies, and then build up to the more advanced strategies as you gain experience.

Don't try to run a 26-mile marathon until you've completed a few 5ks first, in other words.

Good luck out there!

@Evan Bunce yes, I've house hacked while owning a pet, and I've house hacked with a tenant who had a pet.

Based on those experiences, I usually don't allow pets at my rental properties anymore--it's just not worth the headaches and liability. This is 100x more true with a house hack (compared to a traditional single unit rental).

With a house hack, a pet can deter other would-be tenants (for instance, if there's a cat in the house, that automatically disqualifies any would-be tenant allergic to cats). Pets can also be a source of innumerable problems with housemates; for instance, a dog might make noise that bothers the housemates...if a pet damages belongings, or bites a tenant, you're liable...tenants with cats often flush cat litter down the toilet, which can block the sewer main...housemates might start to complain about the dog crap in the back yard, etc., etc.. Some of these problems are relatively minor (tenants complaining about the pet's fur on the furniture), and some could be major (the pet attacking a tenant), but all of them make your job as the landlord more difficult.

When househacking, one of the TOP issues you'll face is preventing housemate disputes (I could write a whole book on that topic!) Unfortunately, a pet can easily be a source of all types of housemate disputes--so, it's easiest just to avoid those problems from the get-go. Since you already have a cat, I'd suggest considering how to prevent your cat from creating disputes--for instance, keeping the cat in a part of the house where the tenants aren't staying, putting the litterbox somewhere the tenants don't see, etc.  ...basically, minimizing the potential impact of your cat on the housemates...

In a nutshell, all the potential problems and liabilities a pet brings are not worth the small additional pet fee you might be able to charge.

I should point out that I have a dog, and he's my best bud--I'm a huge fan of pets--so, I definitely understand why a tenant might want a pet...but, I'm operating a business, and I have to do what makes business sense; and tenants with pets just don't make much business sense in my experience.

Good luck out there!

@Jason Thompson if the numbers on the deal work right now, I'm buying it right now. 

Most of my portfolio was acquired during one of the worst buyer's markets of all time...but, I worked hard and found deals that made sense. If I had sat around saying "this is a seller's market, I'll wait until it cools off", I wouldn't have a portfolio.  

Nobody knows what the market will do in the future, but I know how to make a property cashflow today--so I stick with what I know.

Good luck out there!

342/month cashflow, and 73k down would be a cash on cash return of about 5%...unless this is an A property in an A area, 5% CoC seems pretty thin--especially for all the effort and risk of an OOS property. ...if that $342 cashflow number doesn't include the HELOC repayment, then it's obviously a worse CoC than 5%...

...I'm assuming this is not an A property because you mentioned wanting to do a BRRRR--so I assume that at least one of the units is in need of a rehab?

You mentioned you're a beginner, but you're attempting pretty advanced strategies (OOS, BRRRR). I'd suggest stepping back and starting with a simpler strategy. Don't try to run the Boston Marathon until you've run a few 5k's, in other words.

Good luck!

Definitely a worst case scenario, but I see people on the forums describing this type of scenario on a surprisingly frequent basis.

(Just to be clear, I've never personally experienced a situation like this, thankfully)...but, I've weathered my share of equally significant challenges. REI is a tough game, and setbacks are inevitable.

@Vincent DeLucia first and foremost, I wouldn't buy anything OOS that's lower than a B property in a B neighborhood.

We see lots of folks on the forums who are inexperienced who buy OOS in C or lower areas--they get lured in by the A-grade rehab on the property and the seemingly excellent cashflow, and then learn the hard way that it's not worth the small returns for a PM to put in the serious effort required to correctly manage a property in a C or lower area...  the story is always the same: PM goes MIA, property sits vacant, when they do find a tenant the tenant stops paying, causes endless headaches, and eventually trashes the property... Now they have a trashed, crime magnet property that nobody will manage, that nobody wants to rent, and nobody wants to buy--all because it's in the wrong area.

Location, location, location.

Good luck out there!