All Forum Posts by: Leo R.

@Turner Wright I'd be very skeptical of any ARV right now. The market has already changed so much that most comps are almost meaningless, and the market will likely only continue to depreciate in the near term. Bottom line: now more than ever, NOBODY knows what the market will look like in the future, so if your plan depends on hitting an ARV, you're making a gamble.

I didn't run all your numbers, but at 11%+ interest on your current loan, I can't imagine that your current loan isn't a significant problem to your numbers...

If it's in the right area, turning it into a STR could work (though, that comes with its own challenges and risks, and the STR market is also getting very difficult right now).

Can you move into the property, refi into an owner occupant 30 yr fixed, and house hack?

If the property is in an A or B neighborhood with appreciation potential, house hacking it for a couple years and then holding it as a LTR might be a viable option....

...if it's in a D or F area (or even a C-), that's a whole other set of issues to contend with (and you'll want to read up on that topic)...

Good luck out there!

@McKenzie Bagan sorry to hear about your troubles. As others have mentioned, this is why location is the #1 rule of real estate...you can do a million things to improve a property, but you can't do much to improve a neighborhood.

Misery loves company, and it might make you feel a bit better to know that this type of scenario is somewhat common--so here's a recent thread of another investor experiencing similar problems (I'd suggest reading, since there are some solid recommendations):  https://www.biggerpockets.com/...

Investors (esp. inexperienced investors) are often lured into buying properties in  D & F neighborhoods because on paper, these properties have the best cashflow (and new investors are often most focused on cashflow)...but, of course, the hassle of owning in a D or F neighborhood is often not worth any amount of cashflow. This rule is 10x true for OOS investors, because if you're OOS, you're relying on a PM, and there is almost zero incentive for a PM to put in the massive amount of work needed to correctly manage a property in a D or F area.

On the bright side, there are lots of lessons to learn from this type of scenario.  

At the end of most BP podcasts, they ask the guest "what separates successful investors from those who give up, fail, or never get started?" ...one of the most common answers is "perseverance" --the ability to repeatedly bounce back time, and time again from failures (especially really big failures)...so, try not to get too discouraged; every successful investor experiences setbacks and failures--it's not possible to succeed in RE investing without some major bumps & bruises along the way...

Good luck out there!

@Cheryl S.  based on your description, I'm guessing your property is C class or lower, in a C or lower area?

I assume it's a C or lower property because tenants in B and A properties/areas rarely behave the way you describe.

If it is C or lower, the problem is probably the property, not the PM!

Most investors--especially inexperienced investors--should NEVER try to do a C or lower OOS property. Why? Because a C or lower property is usually at the absolute bottom of a PM's priority list, and there is almost no financial incentive for a PM to put in the considerable amount of work required to successfully manage a C or lower property. 

It's different if it's a large multifamily complex that pays the PM a lot of money, but assuming it's just a single house or small multifam, the considerable amount of effort to manage it is not worth the relatively low amount of money the PM is making from the property--and that's why your PM is ineffective. More importantly, if it's a C or lower property, it's doubtful that ANY PM will put in the significant amount of effort needed to successfully manage this property (unless you pay them accordingly).

Think about it from the PM's point of view: would you put in effort to manage the SERIOUS problems of a C or D class property (e.g.; deadbeat and unruly tenants, vacancy, non-payment, crime, property destruction, etc.) for a few hundred (or even a few thousand) a month?  ...personally, I wouldn't take on those types of problems for ANY amount of money; life is too short, and I can make money through much easier channels. Because of this, any PM with any skill will quickly begin focusing on B's and A's, and will avoid the C's and D's like the plague (unless they're being paid very, very, very well for their time).

If the property is C or lower, I'd be more concerned about getting rid of the property than getting rid of the PM.

Unfortunately, this is a somewhat common trap that inexperienced OOS investors fall into (and it's the thing that gives OOS investing a bad name).  All too often, inexperienced investors are lured in by the incredible cashflow opportunities of C and D properties, not realizing that many C's and D's aren't worth the hassle and expenses they produce--regardless of the cashflow. 

Here's a thread of another inexperienced OOS investor with similar (arguably even worse) problems at a C or lower property--I'd suggest reading this thread, as it provides some solid suggestions:

https://www.biggerpockets.com/...

On the bright side, there's a LOT you can learn from this type of situation (a lot of the lessons are outlined in that thread), and if you take the time to learn those lessons, it can make you a better, more effective investor. 

In theory, it could be possible to rehab the property and turn it into a B or A--which ***might** make it less of a headache, and therefore a higher priority for a PM... but, that depends on a lot of factors--for instance, how much the PM's income would increase as a result. Also, if the property is in a C or lower area, rehabbing it might be a complete waste of time and money (you can change the property, but you can't change the neighborhood).

Try not to let it make you too discouraged--all RE investors experience big problems like this eventually; it's almost an inevitable part of RE investing. I've gone through similarly major RE problems myself. Persevering and overcoming these types of problems is what separates successful investors from those who give up and never succeed.

Good luck out there!  

@Qui Chau awesome numbers--congrats!

I'm curious--where did you find a duplex for 84k?   (it says you're in Austin, but $84k sounds like an impossibly low purchase price for Austin...though, I'm not an expert on that market).

What grade was the property before your reno, and what grade is it now?  ...also, what grade is the neighborhood?

Thanks!

@Luciano Suehara two suggestions:

1. Assuming you don't have a huge net worth that can weather a loss on the property, don't buy a property that doesn't cashflow, or that you can't force to cashflow (which is a whole topic in and of itself--and one I'd suggest reading up on). 

2. NOBODY knows what rates will do in the future. Your financial models should not depend on hypothetical future outcomes. Moreover, your financial models need to be able to withstand worst-case scenario stress tests.  I keep seeing people say "when rates come down" as if it's a certainty.  There is no guarantee rates will come down, when they'll come down, or how much they'll come down. If your financial model depends on hypothetical future outcomes, you're not investing, you're speculating.

Responsible RE investors hope for the best, but we prepare for the worst--which means using non-speculative financial models.

Now, having said all that, speculative purchases can be OK for some people who have very high net worths--if they can afford to lose the whole thing. Warren Buffet can afford to make a few speculative purchases because he can withstand big losses; losing a few million dollars is nothing to him...but a typical person doesn't have the net worth to withstand a loss on a speculative purchase.

Good luck out there!

@Ravi Chhabra sorry to hear about this--that's the type of situation that would make any new investor (and a lot of seasoned investors) want to sell and run as far away from RE as possible.

At the end of most BP podcasts, they ask the guest "what separates successful investors from those who give up, fail, or never get started?"  ...one of the most common answers is "perseverance" --the ability to repeatedly bounce back time, and time again from failures (especially really big failures).

Back when I was a relatively inexperienced investor, I got a 2 am phone call from a tenant. The finished basement (which included bedrooms their children were occupying) was flooded with 6 inches of water! Worst of all, it was ground water--coming up from underneath the foundation of the house, and there was no way to stop the flooding...I eventually discovered that the entire house was built on top of a subterranean river.  That's a problem that isn't easily resolved!

Every bone in my body wanted to sell the house, sell all of my properties, and quit RE investing.  The next several months were extremely stressful; the tenants left, I watched my bank account dwindle, and I spent every waking hour trying to figure out a solution. ...for weeks, I thought I was headed for bankruptcy, and I assumed the entire house would need to be razed (who would buy a house that has regular, unpreventable floods?). Plenty of people made fun of me for this debacle... It was one of the most demoralizing experiences of my life.  I felt like a complete failure.

Eventually, after a LOT of work, I was able to solve the problem (a long story). It's been 5 years--during which time we've had the rainiest spring on record--and the house has never flooded again. Today, that property is the highest cashflowing property in my portfolio.

If I had given up, I'd still be totally financially dependent on a W2 job...but, because I kept grinding, I'm now happy to say I'm financially independent. Almost all RE investors experience some type of catastrophe at some point in their careers--failure in RE is virtually inevitable...RE is a tough game, for tough people.

Now, does this mean you should keep this property? I have no idea; that's for you to decide... If it's A or B class in an A or B neighborhood, then I'd likely assume those tenants were a fluke...but, if it's C class or lower, it might be a sign that this property, and this neighborhood, attract some pretty shady characters (and that's a problem that I don't want to deal with for any amount of money). ...based on your description, it sounds like it's C class or lower...

Regardless of what you decide to do, there's probably a LOT you can learn from this situation, so it's worth taking the time to figure out what lessons can be learned (probably lessons about location & property selection, tenant screening, PM management, etc.) It's also considering the first year--which you said went pretty smoothly...why did the first year go so well? ...and why did the whole thing nosedive so abruptly? ...are there lessons to be learned from that? (probably). 

Try to learn as much as possible, and try to stay solution-focused...I don't know what the solution is, but I can guarantee you there is SOME solution to the problem. ...and usually, finding the solution requires some very frank conversations with people and professionals you trust. For instance, when my house was flooding, I had a LOT of serious conversations with a realtor, a hydrologist, a GC, etc....none of those people gave me the solution, but our discussions helped me think through the various potential solutions, and eventually zero in on one that worked.

As the saying goes: "you alone can do it, but you can't do it alone"

Good luck out there!

Hi @Tomoko Hale  I'm an investor in Salt Lake City.  Message me, and I can send you the contact info of my investor-friendly agent (who I've worked with for years).

@Daniel Shuler I grew up in WV, and go back usually once a year.  A typical house in my current city costs over half a million. The same house in rural areas of WV would cost $120k, and in the more urban areas of WV, it would be about $200k-250k. Housing is typically the largest segment of most Americans' budgets (by far); it accounts for about 35% of a typical household budget, whereas things like groceries and restaurants only account for about 3-10% of a typical budget (i.e.; when measuring "affordability" of an area, housing is usually the largest factor in the index).   ...and houses in WV are definitely on the cheaper end of the national spectrum (in fact, it's often ranked as having the LOWEST median home price of any state in the country).

And, WV is usually ranked as one of, if not the oldest populations of any state in the country. In many parts of the state, you can already see how this--combined with economic decline and the youth brain drain--is interacting with the RE market ...there's no shortage of abandoned houses and semi-abandoned towns in WV (sadly).

@Thomas O'Donnell I think that what you describe is fairly common for RE investors (I've experienced similar things myself).

First, let's break down the possible reasons for why your old friends act this way, and then I'll provide a few actionable suggestions for what you might do to address the issue...

The issue often begins because people (including RE investors) naturally want to talk about 1) their successes, and 2) what interests them. RE investors are, of course, interested in RE investing--and especially when we first start succeeding at RE, we naturally want to talk about it with everyone. Success is often sweetest when it's shared, so when we succeed at our first house hack, BRRR, etc., our natural inclination is to share that with our friends!

The problem, of course, is that most people are NOT interested in RE investing (hard to imagine, I know!).  Moreover, some people aren't good at being happy for their friends' successes--and some people even resent their friends' successes (more on that in a moment). 

Side note: This is a big difference between investors and non-investors: As investors, whenever we see someone succeed at investing, our natural tendency is to be curious about how they succeeded--we spend countless hours listening to podcasts and watching YouTube videos about other investors' successes...sometimes, we even pay to learn about other peoples' successes (for instance, we buy books on the topic). A NON-investor reacts the opposite way; they see others' investing success, and they're either disinterested, or actively repulsed. In a nutshell: investors are drawn to other peoples' investing success, and non-investors are often pushed away by other peoples' investing success.

Why are non-investors repulsed by investors' success? A lot of this comes down to the fact that, as a successful investor, you have something your old friends don't have (and if they had it, they would be happy for you!). If your friends were also successful RE investors, they'd be cheering you on, but because they don't have that type of success, they resent you. This phenomenon occurs in other contexts too; for instance, a person who's happily married will be happy for their best friend's happy marriage...but, a person who's unhappily single (or unhappily married) might resent their friend's happy marriage. Someone who's overweight and struggling to get in shape might resent their friend who seems to effortlessly have six-pack abs. etc., etc.   

Try to put yourself in your friends' shoes, and it will be easier to understand this type of resentment. For instance, imagine you're working a dead-end job you hate, barely managing to pay the bills, and you see no future for yourself ...but your real estate investor friend has a 7 figure net worth! You work so hard and get nowhere, but your investor friend skates by doing something they love, and they make millions! You drive a clapped-out, twenty year old Civic, but your friend drives a new S class! Your boss makes your life miserable, meanwhile your friend doesn't even have a boss! Why is life so unfair to you!?

...See how easy it would be to become resentful? It's almost unavoidable. In fact, I think it's very important to remember that most of us would become resentful in that scenario!  ...It all boils down to: "you have something I don't have, but I wish I had it, and that makes me resent you."

I'm not necessarily saying that's "right", I'm just saying it's how people often naturally behave.

A strange irony is that it's often the resentful people who will ask the successful friend to share what they have (for instance, by asking them for money, or for an opportunity), but when their successful friend gives them what they want, they resent them for that, too!  ...life's weird.

So, what can be done?

I'd suggest trying the following three things:

1. Try to empathize with your old friends by understanding why they react this way. Importantly, try to remember that if you were in their shoes (no success, no future, working a job you hate), there's a solid chance you would react the same way--it's just human nature.

2. Cut back on how often you talk about RE investing with your old friends...in fact, don't bring it up unless they bring it up. It's clear that RE investing just isn't common ground you share with your old friends. However, you became friends with them for a reason--you shared common ground on something (e.g.; maybe you liked the same music, maybe you had the same sense of humor, etc.). Think about that common ground, and see if you can use it to re-kindle the old friendships...or, try to find new common ground...

As you do this, keep in mind: being interested in RE investing shouldn't be a prerequisite to friendship (if it is, you'll end up with a very lopsided friend group!). Also, being disinterested in RE shouldn't be viewed as a problem, or character flaw (if it is, you'll start seeing a lot of people as pretty flawed--which isn't an enjoyable way to go through life). There are lots of other things you can find in common with your old friends, while discussing RE investing with your new friends!

3. Speaking of that, try to make new friends who are RE investors (as others mentioned, there are lots of ways to do this--I'd suggest checking our your local REIA).

Doing these three things won't be easy--they take maturity, impulse control, and effort. Also, there's no guarantee of success--no matter what you do, some friendships just aren't made to last (that's just a reality of life that we all face).   ...but, put in the effort, and you might find yourself with two very different, but very meaningful friend groups.

Good luck out there!

@Chad Smith

RE: interest rates. Unfortunately, there's no guarantee that rates will go back down...it would be nice if they did, but bottom line: nobody knows what will happen in the future. Because of that, financial models need to stand up to worst-case scenarios (incl. scenarios where rates don't come back down).

RE: LLC. This is a frequently debated question. Even without an LLC, you can cover some of your liability by having a strong landlord insurance policy (in fact, I'd suggest doing this regardless of whether you do an LLC...an experienced insurance agent can help you determine what type of policy you need).

You are correct that most conventional lenders won't allow you to put the property in an LLC, and many mortgages have a clause that would make the mortgage due if you transfer to an LLC (google "mortgage due on sale clause" for more info). However, according to many investors, it's uncommon for the lender to discover that a property has been transferred to an LLC, and it's uncommon for them to enforce a due on sale clause because a property was put in an LLC. Often, as long as the lender is getting paid on-time, and they don't see any other red flags, they'll leave the owner alone...on the flip side, now that we're heading into a recession, lenders are getting much stricter, and it's possible that some lenders will start enforcing due on sale clauses (but, that's just a guess)... 

Regardless, it's important to understand that an LLC is not a foolproof method of protection. For instance, if the financials of the LLC are improperly managed, it can remove the limits of liability, and make you personally liable...so, it's worth reading up on this topic, and discussing it with an experienced CPA and attorney to understand how to run the LLC in a way that actually helps limit your liability.

Good luck out there!