All Forum Posts by: Leo R.

@Bianca Rodrigues if the numbers make sense, it's a great idea! There are many multi-millionaires who built their fortunes via single fam houses.

One of the best things about this approach is that it allows you to get the home with an owner occupant mortgage (which has the best terms).

A few considerations:

Single family properties often appreciate better than multifam properties (especially if they're in highly desirable areas).

If you decide to sell it, a single fam will often be easier to sell than a multifam

People rent single fam homes all the time, if the home is in the right area (you'll need to do your own market analyses to figure out where people are renting single fam homes, and what they're paying in rent).

If someone can afford to rent a single fam home, that does not necessarily mean they could afford to buy a comparable home. The rent being charged might be substantially less than the mortgage. Even if the rent is the same or higher than the mortgage, some people have the income to pay the rent, but they cannot qualify for a mortgage. Still other people could qualify for, and pay for a mortgage, but they prefer to rent for a variety of reasons...perhaps they rent because they don't plan to stay in the area permanently, they don't want the responsibilities of owning a property, they think that the properties are over-priced, etc., etc....  

I currently have a tenant who's probably in the top 1% of earners in his age group--he has a six figure salary and could easily qualify for a mortgage--I asked him why he was renting from me, and he said "the market's too hot right now--I don't want to pay $700k for a house that I think is only worth $400k"

And as others have mentioned, there are many reasons why some tenants might prefer to rent a single fam home over a multifam property, and these issues are often market-specific...

Having said all that, there are definitely advantages to multifam properties (they tend to cashflow better, for instance)...everything comes with pros and cons...

At the end of the day, it all comes down to whether the numbers make sense--which is why it's critical to know how to analyze properties & markets.

Good luck out there!

@Kaira Resch I'm no lawyer, and I don't know what your local laws/regs are for in a situation like this (so, you'll want to do your own homework on that)

However, in many leases, I think there are often clauses that terminate the lease if the unit becomes uninhabitable due to some uncontrollable event (like a fire, or a tree falling through the roof). In those types of situations, I doubt it's the landlord's responsibility to pay for the tenant's housing...does your lease have any clauses regarding what happens if the unit becomes uninhabitable? (if not, you may want to add one for the future).

Even if the landlord had another unit that the tenant could temporarily move to, the tenant would presumably still be responsible for paying the rent at that unit (although, if the tenant had a good history, the landlord might be well-advised to give them a discount for the inconvenience of moving).

...hopefully that helps...

Good luck out there!

@Houston Tullos I'm assuming I don't have all the relevant info here, but I'm wondering why you purchased a commercial space for your office? (it's more common to rent commercial space for an office)...I'm also wondering why you need commercial space for your office in the first place?

As for what to do with the money, in my opinion, house hacking is the single best way for people to get started in real estate investing.

Why? Because, house hacking can produce great financial returns, it teaches you essential RE investing skills, but (compared to more advanced strategies like BRRR'ing or wholesaling), it is comparatively lower risk, simple and beginner-friendly (and therefore has the highest likelihood of success).

More specifically:

1. A HH can produce great financial returns. A HH can substantially lower your living expenses, while creating cashflow, appreciation, mortgage pay down, and tax benefits. A HH can also involve opportunities to force appreciation and/or rent (e.g.; by adding an extra bedroom in a previously under-utilized space). When executed correctly and repeatedly, house hacking can be very lucrative, and there are multi-millionaires who built their fortunes on repetitive house hacking! Although it's a strategy that's good for beginners, there are plenty of very experienced RE investors who continue to HH, because it's such a powerful strategy.

2. A house hack will teach you the essential skills you'll need to succeed in RE investing. With a HH, you can learn how to analyze properties & markets, how to find an investor-friendly agent, how to spot value-add opportunities at properties, how to engage in a strong due diligence process, how to screen tenants, how to manage the property, how to build a network of contractors, plumbers, electricians and other pros, how to manage the book keeping of the property, etc., etc., etc. If you want to succeed in RE investing, getting this experience will be critical! In my experience, a HH can provide incredibly valuable lessons that no mentor, real estate course, book or podcast could ever teach (though, I'd still highly recommend reading up on relevant RE resources, listening to podcasts, etc.).

Plus, if you decide to do one of the other strategies in the future (such as BRRR'ing or out of state investing), you'll be much more prepared to do it if you have a few HH's under your belt--a ton of the lessons you'll learn from a HH can be used to succeed in other areas of real estate ...in fact, I'd say that a HH should be a necessary prerequisite to the more advanced strategies (like flipping) for most folks!


3. Compared to other strategies (like flipping, wholesaling, etc.), HH is relatively simple and lower-risk, and therefore has a higher chance of success. I always use this analogy: would you tell a beginner skier who has zero experience to ski a double black diamond (the most advanced terrain) for their first run? (obviously, no; a beginner could easily get themselves killed on double black diamond terrain!). Beginners should start off on beginner terrain, where they actually have a chance to learn and succeed. A house hack is like that beginner run (but BRRR'ing, wholesaling, and out-of-state investing are more like double black diamonds).

The fact of the matter is: real estate is often a high-stakes endeavor, and the more advanced strategies (like BRRR'ing, wholesaling, flipping, out of state investing, etc.) can easily bankrupt a beginner when they're executed poorly.

Now, having said all that, house hacking is not necessarily easy (if it were, everyone would do it!)...it's just easier than the more advanced strategies...House hacking still takes significant due diligence, skill in analyzing the market and the property, time and effort to learn about tenant screening and property management, the ability to anticipate appreciation/depreciation trends, etc., etc., etc....and even with lots of skill and preparation, things will still go wrong (vacancy, plumbing leaks, bad tenants, etc.)--but that's the nature of the game. As James Brown sang: you gotta pay the cost to be the boss.

Good luck out there!

The scenario you describe is EXACTLY why I'd want to see the property and neighborhood myself before buying. I have no interest in owning a property in a neighborhood where I (or anyone) would be harassed and threatened...and sorry, but taking other peoples' word for it just isn't good enough for me when I'm putting hundreds of thousands (or millions) on the line. 

Imagine this scenario: a PM, an agent (or anyone who's incentivized to get you to buy a property) tells you a property is "safe" and a "good investment". You buy the property without visiting it beforehand. Later, you discover that the neighborhood is a nightmare and your property is un-manageable. If you had only taken the time to see the area yourself, you wouldn't have touched it with a ten foot pole!

Not only is this type of scenario conceivable, it happens (often to inexperienced investors who end up bringing their nightmare property stories to this very forum, asking for help!)

If a PM tells me the neighborhood is a war zone, I'm not going. But if a PM (or anyone) tells me it's a viable neighborhood, I'm going to put my own eyes on it and judge for myself before buying.

"Trust but verify" is one of the fundamental rules of successful RE investing.

Caveat: if you have an incredible, proven, trustworthy team of boots on the ground who you've worked with for many years and through many deals, and they've never steered you wrong--in that scenario, I *might* take their word for it...but, most investors (esp. newbies) don't have that type of OOS team in-place.

@William Philipp re: #3. I've done BRRR's in the past, but personally, I'm not currently pursuing any strategy that hinges on hitting an ARV because--as you mentioned--the market is changing fast, and will likely continue to change...I'm always surprised (and a little worried) by how often I see newbies on the forums talking about wanting to flip or BRRR in the current market.

As for rehabs, whenever I look for a rehab candidate, I'm not just looking to make aesthetic improvements. I'm also looking for a property that can be functionally improved (with as little effort and risk as possible).

For instance, I recently did a rehab on an 100+ year old house that had sat on the market because it was on a somewhat busy street, and it had a funky floorplan (but, because it was in a trendy, A neighborhood, I knew that the busy street wouldn't deter tenants...and I knew I could improve the floorplan). 

The house originally had an unusually large entryway that was basically a waste of space. I added a bathroom in that space, and expanded a bedroom into part of it; creating a really nice master suite. Then, I built a mother in law apartment in the (very spacious) basement.  Before I did that work, the property would have lost about $400/mo as a rental...today, it cashflows about $1k/mo, and the value is also significantly higher. It's rented to top-notch tenants; an MD resident, a doctoral student, and a physician's assistant--all of whom are the best tenants imaginable.

It all boils down to: take the house that nobody wants (but which is in the best neighborhood in town), and turn it into the house that everyone wants.

Of course, the downside of this approach is that there's a lot that can go wrong when changing the floorplan/functionality of a property...tearing down walls often isn't as simple as HGTV would have us believe. Understanding the routing of electric, ducts, plumbing, identifying load bearing walls, asbestos, LBP, etc. is all critical for finding a good rehab candidate.

Good luck out there!

@Randy Smith additionally, I'd say location is arguably THE biggest factor in how one should rate the property...you did describe the location of A's a bit, but--since it's so fundamental--I think it should be something investors understand inside & out.

The grade of the location can often completely overshadow the grade of the property.

Seemingly every few days, I see an inexperienced investor on the forums who bought an OOS "turnkey" property that has become a nightmare (non-paying tenants, vacancy, non-responsive PMs, etc.)...the property itself looks like an A in the photos, but--surprise, surprise--the neighborhood is a D (or lower). 

You can have the nicest A-grade house in the world, but if it's in the wrong area, it will often be a disaster.

I would much rather have a C property in an A area than an A property in a C area!  ...and in fact, that's my bread & butter--cosmetically outdated (but structurally & functionally perfect) "C" properties in A areas. They rent easily, attract high quality tenants (doctoral students and young professionals), and they offer lots of value-add opportunities.  

In nearly every city in America, there is at least one neighborhood where everyone wants to live, and it's imperative for investors to understand which neighborhood that is, and why it's the spot of choice.

@Gurjot Grewal don't rely solely on peoples' opinions of neighborhoods. Spend some time in those neighborhoods and find out for yourself.  I suggest walking the neighborhoods at several different times--early morning, early evening, and night especially. 

There's so much important info you can learn about neighborhoods (and individual properties) that simply cannot be conveyed by peoples' opinions, photos, or even video.

As with all parts of due diligence: although you can (and should) seek the input of experienced pros, at the end of the day, the due diligence buck stops with you.

Good luck out there!

@Phyo Ko as @Barry O. mentioned, renting it by the room can often greatly improve your numbers (but, it also increases your work).

You can also usually get more if it as a STR or MTR, but that's even more work....

What do your numbers look like if you self-manage it as a LTR, and what do your numbers look like if you self-manage it as a rent by the room?

At the end of the day, it sounds like you were way off on your original analysis of the property, which often means that the only way to salvage it is to put in some work (and frankly, I'd say that anyone who wants to be a real estate investor needs to put in some time self-managing their properties and learning from that experience before handing it off to a PM...so, if self-managing this thing makes it salvageable, I'd say that's a blessing in disguise).

Regardless of what you decide to do with the property, take this situation as an opportunity to LEARN, because there are a LOT of valuable lessons here...

Good luck out there!

@Amir B.gross rent is total rent. Net rent is the same as cashflow--it's your profit (after all expenses). If a portfolio makes $10k/month rent, that's the gross...if that same portfolio has $4k per month in expenses, the net (profit) is $6k.

Earlier in the thread, you were mentioning your gross rent, but as others mentioned--gross rent isn't particularly relevant without knowing what the net is...  if someone says "I gross 50k rent per month", that isn't very meaningful without knowing what the net is (their net might be 45k, or they could be treading water and netting $0...or, they might even be cashflow negative; losing $2k/mo, etc.).

re: paying off mortgages...assuming a property is performing well with a mortgage, and assuming that mortgage is locked at a low rate (esp. if it's lower than the current rates you could get on a new mortgage at a new property), then it often doesn't make much sense to pay off the mortgage yourself--especially if paying it off makes a minimal difference to cashflow.

Here's an extreme example to illustrate that point:

Let's say you have mortgage locked at 3%, and the property currently cashflows $500/month. ...and let's say there's $300k left on the mortgage, and paying off the mortgage would increase your cashflow by $100/mo...and let's also say that today's rates are 7%....paying that mortgage off wouldn't make much sense (you'd be paying 300k just to get 100/month more cashflow, and you'd be losing your low rate that you can't get again with a new mortgage, because rates are now higher). ...that $300k could be put to much better use elsewhere...

On the other hand, if you had a property with only $2k left on the mortgage, and paying off the mortgage would increase your cashflow $500/month...then yeah, in that scenario it probably makes sense to pay $2k to increase your cashflow $500/month (even if it means losing your low rate).

So yes--theoretically, in some scenarios, it CAN make sense to pay off the mortgage. But in YOUR scenario, either it didn't make sense to pay off the mortgage, or people on this thread are confused about something...based on the info you provided, at face value, most of us don't see how it would have made sense for you to pay off that mortgage on this particular property.

As I mentioned before--read up on cash on cash returns, and ROE, and then calculate those items for this property...also, review articles/forum threads/podcasts/etc. on the topic of "when to sell a property", "when to pay off a property", etc.   ...doing these things will give you a better understanding of how this property is performing, and what course of action makes most sense for you...

Good luck!

@Saqib Raja  ...isn't it usually possible to borrow from the 401k and avoid the tax hit?

Would that be an option?