All Forum Posts by: Leo R.

@Niraj S. in addition to what others have mentioned, I'd add another important consideration:

Does the driveway slope toward the house, retaining walls, or any other man-made structures?  Wherever it slopes, there will be significant water flowing, and if that water isn't managed correctly, it will cause problems (even if it is managed correctly, it can cause problems--because you, or someone, has to manage the water management infrastructure to keep it operational).

If the driveway does slope toward the house, the accumulating water can cause foundation settling, masonry degradation, rot, possibly flooding, etc.

Water is the enemy of houses--and understanding the specifics of how water moves, accumulates, drains, etc. is probably the most underrated skill in real estate investing, IMO.

Good luck out there!  

@Johnnie Schneider if this is one of your first real estate investments, I'd suggest being very wary of chasing cashflow. It's the classic conundrum: C and D properties cashflow, but are nearly impossible to manage, A and B properties don't cashflow, but are manageable.

All too often, we see forum posts by inexperienced aspiring investors who bought an OOS property that had "incredible cashflow on paper", and it turns out to be a disaster--a lip-sticked pig house in a D grade neighborhood, non-paying tenants, vacancy, property destruction/crime, and MIA PMs (and an inability to find a new PM--because no PM in their right mind wants to put in the significant effort it takes to manage a D property for the tiny returns the property pays them). 

The best cash flowing markets are often not advisable for beginning investors--even less so for beginners trying to operate as a partnership, and even less so for beginners trying to operate as a partnership on OOS investments (all of which makes the operation exponentially more challenging, and nearly impossible in the C and D grade areas that have the best cashflow).

...now, if someone out there knows of a cashflowing A or B market with plentiful tenants and PMs, a strong and diverse economy, and low vacancy, I'm all ears  ;)    (but, as @Mike Dymski mentioned, if such a market exists, the local operators are understandably keeping it a secret).

Does this mean it's impossible to get cashflow on manageable property? No. But in my experience, cashflow on a good property isn't "found", it's created (i.e.; via value add strategies). 

Good luck out there!

@Michael Yi adding an additional bathroom and/or adding an additional bedroom can provide excellent returns. However, the caveat is: it has to be a relatively easy operation. The existing walls and the routing of plumbing electric & HVAC ducts all need to be conducive to the plans. If the existing layout is not conducive to the plans (for instance, if you have to remove a load-bearing wall and engineer new structural support, or if it's not possible to add a br or ba without messing up the flow and functionality of the house), then it might not be feasible and could end up costing far more than it produces...

Also, if this is your first property, I'd suggest against a flip. Any strategy that requires you to hit an ARV is exceptionally risky at the moment, given the state of the market (even highly experienced pros are staying away from ARV-dependent strategies right now). If you do proceed with an ARV-dependent strategy, it's advisable to be very conservative with your financial models, and to have multiple alternative exit strategies in case you don't hit your ARV.

Good luck out there!

@George Knetzger  the previous responses are correct.  

Additionally, any strategy that requires hitting an ARV to pencil is extremely risky right now, given the state of the market. The market today is completely different than the market 6 months ago, and the market 6 months from now will likely be completely different than the market today --so how can anyone accurately estimate the ARV when the comps that the ARV is based on are potentially irrelevant?

For instance, imagine you buy a property today for 100k and you assume (based on comps of recent sales) that the ARV will be 150k after a $25k rehab. You do the rehab over the next 6 months--during which time the market continues to adjust to the rate hikes. When the rehab is done, the property only appraises for 120k (because the market is a different universe than the market was when those comps sold). So, now you have $125k into a property that's only worth $120k (could be worse--some people are missing their ARVS by hundreds of thousands!).

Even highly experienced pros are having difficulty hitting their ARVs right now--and that problem will probably only get worse as the market continues to adjust to the rate hikes. Unfortunately, a lot of people are losing their shirts on ARV-dependent strategies at the moment. Personally, I would not recommend any ARV-dependent strategy right now, and that's 100x more true for beginners--and anyone attempting an ARV-dependent strategy should definitely be very conservative with their financial models, and have multiple alternate exit strategies available, in case they fail to hit their ARV. 

Fortunately, there are other, less risky REI strategies available.

Good luck out there!

@Cheryl J McGrath there are many calculators, spreadsheets, and resources out there for analyzing properties, but there's no fool-proof app that can tell an investor everything they need to know about a property--because REI involves a LOT more than just data.

For instance, a musty smell in the basement caused by water intrusion, a neighbor with a loud barking dog, a floorplan that's awkward but that could easily be re-arranged, significant settling, the location of load-bearing walls, the routing of electric, HVAC ducts, and plumbing  --these are just a few of the MANY factors that might cause me to buy (or not buy) a property, but none of these factors will be conveyed in data or on an app. 

Of course, data can provide an initial birds-eye-view of whether a property might or might not be a viable investment. If you're a relatively small scale investor (buying about 1 property per year, or less), then online calculators like the ones BP has, combined with your own spreadsheet customized to your preferences should suffice for the data analysis portion of your property analyses.

...but the data alone doesn't tell the whole story (Zillow learned this the hard way!). 

Good luck out there!

 @Carson DuVall I see you're in Ogden. I'm in SLC. I work with an outstanding mortgage broker, who I've done many deals with; he's excellent at helping me understand my financing options --PM me if you'd like his contact info.

@Carson DuVall as @Chris Seveney one option is to get a W2--which can unlock a lot of other options...

Another option (that you could combine with getting a W2) is to do a house hack of a single fam or small multifam property (I'm a huge proponent of house hacking--partly because it can simultaneously increase your income while decreasing your expenditures, thereby "unlocking" other investment opportunities that you might not otherwise have access to--which is the fundamental recipe for building wealth).

For instance, when I was younger, I house hacked a new property almost every 12 months for years on end. I started off living in the cheapest rooms in the properties to maximize my returns, but as my cashflow and net worth increased, I gradually moved up to occupying nicer spots in the properties. I eventually got my own place, but I was always careful not to let the increases in my expenditures outpace the increases in my income... House hack a property every 12 months, and in 5-10 years you can be sitting on a pretty solid portfolio.

Regardless of what you do, talk to an experienced lending pro who can help you better understand what lending options are available--and, importantly--what lending options could be available, given hypothetical changes to your finances (for instance, what options could be available if you got a W2 job paying $X/year). This will give you a better sense of what's possible, and what paths might work best for you.

Good luck out there!

@Mark Stevens it depends on a lot of factors--such as the grade of the property & neighborhood, the rent price, whether the unit is at, above, or below market rents, the availability of tenants, the supply of competitor rentals, the priority that the property has with the PM (which depends on the ratio of how much revenue the property is going to generate for the PM versus how much hassle the property is for the PM to manage), the PM's level of experience with advertising & placing tenants, whether the characteristics of the property match the needs and desires of the tenant pool, etc., etc. 

Personally, I like to have a tenant lined up before I even close on a property, but I manage all my own properties, and I have an existing pool of tenants who have rented from me in the past--which makes the process a lot easier for me...

If I didn't have that advantage, I would typically advertise the property for a week, and if it didn't rent, I would re-assess and consider things like: what response did I receive? What were peoples' reactions when they viewed the unit? How does my property and rent compare to competitors? etc.  ...if I had received a large and positive response from prospective tenants in the first week, I might let it ride for another week to see if anyone signed, but if I got a small or negative response from prospective tenants in the first week, I would re-analyze the market and probably lower the rent and/or do something to make the property more appealing.

If this is your first property, and if you want to become a successful real estate investor, I'd strongly suggest you manage the property yourself for at least a year--this will teach you invaluable lessons that you'll need to succeed in REI. In my opinion, it's very difficult to succeed in REI without any personal experience managing properties. Think of it this way: owning a portfolio of PM-managed properties without any personal experience in property management is a bit like trying to manage a mechanic's shop with zero experience fixing cars, trying to coach a team to an NBA championship with no basketball experience, or trying to manage a law office with no legal experience. 

Good luck out there!

@Karl Huther this seems to be one of the more common questions on the forums lately...

The age alone isn't really enough to go off of...we'd need more info to give you any good feedback on this house specifically. For instance, what grade is the house, and what grade is the neighborhood? What type of tenants will it attract, and how easy will it be to find tenants? What types of issues does the house have? Are there LBP and/or asbestos issues that need to be addressed? Does the floorplan need to be re-arranged? etc., etc.

Other than age-specific issues like LBP and asbestos, the things I'd look for on an old house would be much the same as what I'd look for on a newer house--these things would include: signs of water diversion failures (such as rot, peeling paint, masonry damage), settling/structural issues (one of my few "deal breakers"), the type and age of plumbing, HVAC, and electrical, condition of the roof, the condition of the sewer main (scope it), the type and age of windows & doors, a meth test, a radon test, etc. etc.

I have properties from the 1910s, 40s, 50s, 60s, and 2000s, and frankly--the older properties are often my favorites, and some of them are the best-performing properties in my portfolio.

Just being an old house doesn't--in and of itself--make a property "good" or "bad".

In some scenarios, older houses can have big advantages over newer houses.

In my opinion, the idea that “new houses always cost less to maintain than old houses” is one of the biggest misconceptions among inexperienced investors! 

A new house might be less to maintain, but there are plenty of scenarios where a new house will cost you WAY more to maintain than an old house. Why? Well, for one, some new building materials and methods are unproven at best, and junk at worst. For instance, many pros are very skeptical that pex will have the service life of copper plumbing. Sure, some modern building methods are far superior to what was used in the past, but lots of building methods used today aren't nearly as robust as in prior generations (ask an experienced GC).

....Additionally, a new house is still in its "growing pains" phase, and a lot of serious problems can emerge in the first few years of ownership--e.g.; foundation/structural settling, improper water diversion systems creating rot, etc. On an old house, those issues have usually been resolved--and if they haven't been resolved, they're often plainly visible (e.g.; big cracks in foundation, signs of water diversion failures, etc.). ...But on a new house, there's often no way to know what lies ahead. I know people who have bought new, beautiful, multi-million dollar, "turn key" luxury homes only to have to deal with major problems in the first few years of ownership.

Obviously, old houses come with their own issues (asbestos, LBP, funky floorplans, and the all time most reprehensible sin against humankind: the carpeted bathroom) …but, if you know how to identify and manage these issues, they’re usually things that can be fixed…plus, there’s the satisfaction of saving a cool old house!

Good luck out there!

@David Ingram that's not required by all lenders (in fact, I've never had a lender ask for this), but it might be required of some lenders...and it's possible more lenders are requiring it these days, since many are tightening their underwriting requirements. ..whether or not lenders require it may also depend on the borrower's overall financial picture and DTI (I'd suggest asking your mortgage broker whether they require this of all borrowers, or just in certain circumstances).

Also keep in mind that not all lenders/mortgage brokers are the same--if you go around to multiple mortgage brokers, they may give you different qualification amounts, different terms, different underwriting requirements, etc. --so it's worth shopping around.

Lastly, an overall suggestion--whenever a mortgage broker tells you something like this, it's always worth asking them follow-up questions like "is this a universal requirement?" "is there anything I could do to get different terms?", etc, etc.....most mortgage brokers are happy to explain these issues to you, and help you understand why you're being quoted certain terms--and what you could do to get different terms...I've had many long conversations with my mortgage broker about these types of issues, and I always walk away with a better understanding of my own financial picture, how the banks operate, what I need to do financially to qualify for what I need, etc., etc. --it's free (and valuable) education.

Good luck out there!