All Forum Posts by: Drew Sygit

@Daniel Windingstad congrats!

You've learned:

1) The basics of landlording

2) That it's not for you

Now, how can you apply your landlording knowledge to "manage your manager"? 

Do NOT assume they know everything. Yes, they will do many things better than you, but some things it's not possible for them to be as attentive and quick responding as you.

Also, no one's perfect, so keep tabs on them in general.

Regarding holding or selling: why did you buy this in the first place?

Value and rents should eventually increase to turn cashflow positive and build your wealth.

You're next learning experience will be, now that you are out of day-to-day management, how will you be able to handle the inevitable expense challenges? Will you "freak out" when you have to write a check for maintenance or eviction?

The next 3-9 months will tell you...

@Ming Huang

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?

Similarly, if you put several Class D tenants in a Class A 4-plex, what do you think will happen to the property?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

@Jack Cottrell You Vacancy & Maintenance percentage are aggressive and may only work for a Class A rental/tenant.

If the is a Class B or C rental that will attract Class B or C tenants, you should strongly consider increasing those percentages.

NOTE: we deal with a LOT of Class B & C rentals, so we replace "Vacancy" with "Vacancy/Tenant Nonperformance". Tenants in lower Classes will have lower credit scores, which means higher chance of defaulting on their lease payments.

@Hank Bank where are you located?

Probably better to DM me so we can better connect...

@Tristan Kelly tenant performance and damage is what you want to watch, along with squatters & theft of mechanicals.

Update us in 6 months:)

The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property to Class A standards in a Class D neighborhood and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results. In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy+tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.

@Lou Haidous no one can answer this question but you!

Some questions to consider:

1) How much negative cashflow can your other income stream(s) support?

2) How long can your reserves support the negative cashflow

3) What's your plan to solve negative cashflow long-term?

@Isaac Hanai make sure you FULLY understand the negatives of S8 programs, not just the mirage of consistent government rent payments.

@Mary Jay what do you really want to know?

How many other landlords are experiencing what you are?

There are MANY landlords with properties on the west coast and in the New England states, that deal with negative cashflow - but, depend on appreciation to make their rentals "profitable".

@Wenyu Zhang get your 2024 1040 filed ASAP, so lender will use properties income/loss there versus the 75% of lease.

Lenders add back depreciation (paper loss only), but you may want to be careful how many other expenses you claim. 

Any losses you show will be counted as a debt payment against your DTI.