All Forum Posts by: Leo R.

We're all aware of the changes the market has experienced in the last 6 or so months in terms of the numbers (higher rates, more days on market, etc.) ...but these numbers don't always convey the on-the-ground realities of how much the market has shifted--and, being the unrepentant real estate nerd that I am, I wanted to dig into this a bit...

Here's an interesting and useful exercise I just completed:  Imagine you're trying to buy your first home, and you have a particular monthly payment amount that you can afford. Take that monthly payment amount, and look at the type of property that payment would have bought you 6 months ago, versus what type of property it buys you today. You may be surprised at how radically different those two properties are (I was definitely surprised).

For instance, before the rate hikes, a mortgage payment of $3k per month put you in the lap of luxury in my city--A and B class properties in the best A and B class neighborhoods in the city were attainable (think: beautiful tree-lined streets, trendy bars and restaurants nearby, the best school districts in the city, residents with some of the highest income in the city, etc., etc.) . 

Today, a mortgage payment of $3k per month puts you in some of the WORST neighborhoods in my city! (think: a semi-industrial area right next to an interstate or 4 lane highway, unattractive urban sprawl, high crime, some of the worst school districts in the city, etc.) ....This is a pretty profound shift in a very short period of time!

We're all aware that our purchasing power has decreased recently, but looking at the actual properties people can afford now versus 6 months ago really puts it into perspective!  

I'm interested to hear if other folks have observed similarly radical shifts in their own markets?

I'd be particularly interested to hear what agents have observed in terms of what type of property a budget of X bought clients 6 months ago, versus what type of property that same budget buys today...

@Tanner Weaver congrats on saving up the cash--this puts you in a much better position than most folks.

It's advisable to start small, and with a simple strategy. House hacking a single fam or a duplex are both relatively simple strategies--these approaches are a great way to learn the lessons about due diligence, property acquisition, and property management that will be invaluable later on if you decide to go for bigger deals or if you decide to try a more advanced strategy... plus, house hacking can be a great way to make and save up some cash... It's also a relatively simple strategy with fewer "moving pieces" than more advanced strategies like flipping--and this is important.

As I always say: if you're a beginner skier, you wouldn't try to do a double-black diamond for your first run (if you're smart)...instead, you'd start off on beginner terrain so that you actually have a chance of success--and then, you'd gradually build up to more advanced terrain as you improve. RE investing should be similar--start with the lowest risk, simplest strategy first, and (if you want), gradually build up to more advanced strategies as you gain experience...or, if the simple strategy is working for you, just rinse and repeat.  We don't get extra points for originality in RE--so if a formula works, just keep doing it!

As for analysis paralysis--I'm guessing a lot of people (beginners and more experienced folks alike) are in that position because right now we're in a challenging, and quickly changing market. A few years ago, when rates were 3%, prices hadn't completely skyrocketed, and there were cashflowing properties everywhere, it was a lot easier to find properties that penciled out--and so analysis paralysis was less likely...today, that's a lot trickier because rates are much higher, but prices are also still very high in many markets.  On the flip side, a changing market usually produces opportunities--and the people who are paying close attention (and who are financially prepared, and maybe willing to think a bit outside the box) will likely find good investments.

Good luck out there!

@Will Stewart yep; that's the nature of the beast--proper preparation prevents poor performance!

But for someone with the motivation, rent-by-the-room can be a potentially lucrative strategy--a lot of houses that would not cashflow as a single family residence can cashflow quite well if they're rented by the room.

@Vladimir Gostrer as others have said, you can get a mortgage for a primary residence with as little as 3.5% to 5% down (and also get the generally better rate and terms that come with a primary residence mortgage)--this is why your plan of buying a new primary residence is such a smart plan. On the other hand, if you went out and bought a new investment property (which would require an investment mortgage), you'd probably need to put 20% down, and your rate and terms would be less favorable.

This is why it's advantageous to buy as many properties as possible with primary residence mortgages instead of investment mortgages. There are regulations about how long need to live in a primary residence before you can qualify for another primary residence mortgage--it's usually a year. There are also some regulations about how long you need to live in a primary residence in order to avoid capital gains taxes (I believe it's usually two years), but you'll want to verify all that yourself. There is also a limit on how many primary residence mortgages one person can have, but I can't remember that number off the top of my head...perhaps it's 10? (but don't quote me on any of these numbers; verify them yourself).

A lot of folks have built excellent portfolios with locked-in low interest debt simply by moving to a new primary residence once every year or two, and repeating that process until hitting the limit on primary residence mortgages.

Congrats on your strong equity position!

Good luck out there!

@Joe Villeneuve it's an open-ended question; obviously there is no "correct" answer that I'm looking for, and the answers presumably vary widely depending on the person. 

I'm asking, because I'm interested in hearing people's views on what they would, and what they would not consider an "adequate" cashflow situation, given relevant factors.

Another way of framing the question could be:  what is your current cashflow situation, in the context of the other relevant factors, and do you feel that your cashflow is "adequate" for you?

@Will Stewart in general, you will get more rent if you rent by the room than if you rent the entire house. For instance, in my area, a 4 br / 3 ba house might gross around 2,900 if you rent it by the room, but the same house would only rent for about 2,000 if you rent the entire house as one place.  Having said that, renting by the room usually is more work for you than renting the entire house. Obviously, a single room in a house will usually rent for much less than a 1 br apartment.

If you do rent by the room, you'll need to develop systems for preventing and managing housemate disputes, keeping the common areas clean (a cleaner might be worthwhile), screening tenants to find people who will be good housemates, etc....there are just more moving pieces to sort out if you rent by the room (but, as a result, you usually make more money).

@Kenisha B. gave you a solid strategy for how to estimate rents. Other factors to consider are: square footage of the room, whether the room has a private bathroom (and if not, how many housemates does the person occupying that room share their bathroom with...I'd recommend avoiding properties where more than two housemates have to share a bathroom), special amenities of the room (for instance, a skylight, vaulted ceilings, a separate entrance to the room, a walk-in closet, a location that is separated from the rest of the house, etc. are all amenities that can make a room more valuable).  

With a rent by the room property, three of your biggest concerns are: tenant screening, tenant-created noise, and tenant-created messiness in the house.

Screening and selecting high quality tenants is ESPECIALLY CRITICAL when renting individual rooms. These people will have to share a house together, and you don't want tenants who are messy, loud, inconsiderate of others, or immature--these types of tenants will just cause you endless headaches (and liability) in a rent by the room property. Because of this, you need to have an excellent screening process--get references from prior roommates/housemates, prior landlords, and anyone else who can verify whether the applicant is clean, quiet, and considerate. Ask screening questions like "tell me about a time you had a disagreement with a housemate", and "you'd be living here with housemates--how do you plan to avoid disagreements and disputes with those housemates?", etc.

Many rent by the room properties are aimed at college undergraduates--which, I think is often a terrible idea, because these inexperienced tenants tend to be the messiest, loudest, most inconsiderate, and most immature. Yes, there are plenty of college students who are not messy at all, and are highly considerate and mature...but, we're speaking in generalities here....The simple reality is that most college undergraduates have minimal or no experience living with housemates, and just like anything else, people are better at doing things that they have experience doing. A person who has 8 years of experience living with housemates may be better at co-existing with housemates than a person who has never had housemates. In order to attract those more experienced tenants, you'll need to have a higher quality property than the type of property that undergraduate students would usually rent (a new medical doctor doing their residency will probably require a higher standard of living than a college kid)...but trust me: paying a bit more for a higher end property so that you get higher end tenants is often well worth the investment.

Preventing problems with housemate noise and messiness is also critical in a rent-by-the-room house. Here are some tips:

Especially if you're doing rent by the room, you want a property where the bedrooms are separated from each other, and separated from common areas as much as possible to provide as much privacy for each housemate as possible. For instance, a bedroom that is at the end of a hallway, and which doesn't share walls with any other bedrooms or common areas provides a lot more privacy than a room that shares a wall with a common bathroom, a second wall with another bedroom, and a third wall with a common area...a house that has 3 stories with only 1 bedroom on each story might provide more privacy than a house where all 3 bedrooms are on the same floor ....extra privacy usually results in less likelihood of disputes between housemates about issues like noise, messiness, etc....If you plan to rehab the property, sometimes, it's possible to re-configure the floorplan of a house in ways that create more privacy for each bedroom, add bathrooms, add separate entrances, and generally make the property more appealing for rent-by-the-room tenants. Therefore, it's worthwhile to learn how to assess the potential "traffic patterns" of a house, and assess the ways in which a property's floorplan could be reconfigured (this involves understanding issues like load-bearing walls, routing of plumbing, electricity & HVAC, code restrictions, etc.)--but once you learn those things, it's a valuable toolkit.

To prevent problems with messiness, you can try to screen tenants to find the ones who are very clean. You can have policies in the lease that state what the standards are for cleanliness, and who is responsible for cleaning. You could hire a professional cleaner to come to the property periodically (you could either pay for this yourself, or potentially pass the cost on to the tenants). The layout of the house also has a big effect on how messy or clean the house stays--for instance, a bathroom shared by 4 housemates is inevitably going to be messier than a bathroom shared by 2 housemates (as I mentioned, I strongly suggest avoiding properties where more than 2 people have to share a bathroom...and ideally, if 2 people ARE sharing a bathroom, you want it to be a large, double-sink bathroom). You can also "set the tone" for the standard of living by furnishing the common areas nicely, and using mature, high-quality interior design in the common areas (i.e.; matching furniture, stylish rugs and throw pillows on the couch, no Star Wars or Pulp Fiction posters on the walls, etc.). In other words, if you create a home for a mature, responsible adult (not an immature irresponsible party animal), the tenants will often follow your lead.

Good luck out there!

@Anne W. this is an interesting question because some of what you describe sounds like legitimate tenant maintenance requests, and other items sound petty and needless...on the one hand, it does sound like this tenant is a bit high maintenance...on the other hand, many of the items you listed (particularly the plumbing issues) are legitimate problems that need to be repaired (and in fact, you WANT your tenant to report plumbing issues ASAP, because ignoring them can lead to much bigger problems down the road).

The items that jump out to me as "high maintenance" or "petty" are the complaint about the bullet on the ground (not really your responsibility--and you should not have taken that on as a responsibility), and the complaint about the quarter-sized paint chips off of the deck, which sounds inconsequential. Some of the complaints about the yard's sprinkler system could also be petty, depending on the severity of the problem (the blown and leaking sprinkler head was definitely an issue that needed to be addressed, but the complaints about the system watering some areas too much and other areas not enough sound like they could be petty).The fridge issue depends partly on the grade of the property and how much you're charging for rent--if this were an A+ luxury unit getting top market rent, then the tenant may have a legitimate reason to expect perfection and high-end, perfectly functioning appliances...but if this is more of a typical C or B grade rental, and your rent price isn't exorbitant, then the fridge complaints seem petty...

But, other than those items, many of the things that you listed do sound like legitimate maintenance requests, and many of them are items that you should want the tenant to report ASAP before they get worse or create a liability...for instance, if the deck really is rotting so bad that it's becoming unsafe, you would want to address that before someone gets hurt and you end up in a lawsuit....

Personally, I wouldn't do longer than a 12 month lease unless it's a tenant I have a long history with and who I trust--otherwise, (as you're learning) a long lease can get you locked into problems if it's a bad tenant... 

A good PM might be able to help you, but if you are not an experienced property manager yourself, then a PM may just cause you even more headaches. This is because you need to manage your PM, and if you're not an experienced property manager yourself, then you may not be able to effectively manage a PM. Also, if this tenant really IS high maintenance, then most PMs will not want to take on the headache of dealing with them (particularly if you're a small-time client).  ...most PMs want big-time clients with a large portfolio of low maintenance properties and low maintenance tenants, and they have little or no incentive to deal with a small time client with a problematic tenant--as a result, you would likely be a very low priority for most PMs (assuming you don't have some massive portfolio of real estate you can offer them).

If the tenant is taking care of the property, seems responsible and trustworthy, and is paying everything on-time, then sometimes it's worth putting up with some annoyances--particularly if 95% of their maintenance requests are legitimate...but if they're driving you insane, then it's probably worth asking yourself questions like: "Are there really significantly better tenants out there? ...or, is this tenant typical, and I just personally hate property management?"  (it's OK if you just hate property management--most folks do!)

Good luck out there!

I'm interested to hear how much cashflow investors think is "adequate"--given various other relevant factors (such as the number and grade of their properties, the equity/leverage position, the total valuation of the portfolio, typical annual appreciation in property value and rent, the cash reserves, etc.). 

(When I say "cashflow", I mean the average monthly net across the entire portfolio after mortgages/debt services, taxes, insurance, CapEx, vacancy, and all other expenses are deducted).

For the sake of simplicity, let's assume that the investor has NO other sources of income other than their rentals (they don't have a W2 job or anything).

Obviously, how much cashflow is "adequate" depends on an investor's unique situation (for instance, $5,000/month cashflow might be great for a person with one rental, but it might be totally insufficient for someone with 500 units....similarly, $1,000/month cashflow might be great if all you've invested is $5k, but $1,000/month cashflow would probably be terrible if you've invested 10 million).

So, what cashflow do you consider "adequate" given other relevant factors?

...interested to get folks' perspectives on this!

@Bruce Woodruff  definitely keep the stair carpet--you need to maintain the aesthetic flow with the carpeted bathroom :)

@Sam Mathew you mentioned you think it will take approx. 4-6 months to complete about $150k-200k worth of work...how sure are you about that? Do you have a long history with your contractor doing 200k-level rehabs, and has that contractor always delivered on-time?  ...what will this 200k rehab entail?   ...often, foreclosure sales are sight-unseen--have you and your contractor been able to inspect the inside of the property to confirm what work needs to be done?

As others have mentioned, 4-6 months to complete a 200k rehab sounds optimistic (perhaps too optimistic).  My most recent rehab was only about $60k, and it took about 9-10 months for the contractor to complete everything... If you ARE able to do a 200k rehab in 4-6 months, please let us know the name of your contractor!  ;)

Good luck out there!