All Forum Posts by: Michael Hayworth

Perhaps this is market specific. Here in DFW, we not only have a million or so real estate investors (ballpark estimate) trying to make money, we also have a constant influx of people moving in from high-tax states, so we're fighting both investors and owner-occupants for that crappy 1970s house that needs updating throughout.

When I was getting started several years ago, all my early deals were from MLS. And I still do one occasionally. But under current conditions, it's very hard to find anything on MLS. Even the "wholesalers" down here are often peddling schlock.

As a contractor, I can occasionally find an MLS deal that involves big structural work, a room addition, or something like that that makes the numbers work. Or there are a couple pockets where I can still buy rentals off MLS and make a decent return. In general, though, my deals are coming from my own marketing, from a couple of good wholesalers who stand out among the frauds and wannabes, and from trustee auctions. If you're in a tight market like this, those are the kinds of things to look to.

 I invest in and remodel a lot of homes in the 100-year old range. Just bought another one last month. I love making them beautiful again. But I'm a contractor, so I know what I'm getting into, and I have the resources to deal with it. Just be aware that in older homes, you have to leave a wide margin for "unexpected" - you just never know what you're going to find when you open a wall or pull a floor.

Here are some of the common things you'll run into that you need to take into account:

1. Does the house have central air? Most tenants in decent rental areas don't want to get by with window units. And retrofitting ductwork in an old house can be ungainly.
2. Knob & tube wiring (sometimes mispronounced as knob & tooth). This is very, very common in old homes. Sometimes a home has been partially, but not fully, rewired - and often done poorly. Many times, we'll pull sheetrock or plaster and find knob & tube that's so worn it's just a fire waiting to happen. This would be my biggest concern in a house from this era. I would go beyond just a home inspection and have an actual electrician inspect the wiring.
3. Plumbing. If a house is from 1900, pipes have probably been replaced at least once already, but it's very likely that you'll have old, rotting cast iron drain pipes, corroded copper water lines, and sometimes even gas lines that are done unsafely. As with the electrical, I would go beyond just a home inspection and have an actual plumber inspect things. Have them video the drain lines - it costs about $300, but it's not at all uncommon in homes that age to find rotted drains that are just dumping waste under the house.
4. Mortar beds, plaster, etc. - if you're updating floor tiles or wall tiles, they're not going to be stuck to sheetrock or hardie backer. They'll be stuck in a mortar bed that'll be like taking up several inches of concrete. I recently redid a bathroom in a 1920s house where demo that would have taken a half day in a 1970s house took 3 full days days. And for walls, dealing with plaster is more difficult and expensive than dealing with sheetrock.
5. Framing and structural loads may be odd, particularly if the house has been added onto multiple times. So any wall moves should be done by a true framer who understands structure, not just a carpenter who thinks he can frame a house. (Plus, in Virginia, you'll probably have more permit requirements than I have here in Texas - you may have to get a structural engineer sign-off on any substantial changes.)
6. Can you insure it cost-effectively? I just got a quote from my insurance agent today on another property I just put under contract, and it's several hundred dollars a year higher because the house was built in 1929 than it would be if it was built in 1930 or later.

These are just a few of the things that come to mind right away. As I noted, I love those old homes, but as an investor, you have to be very careful about your costs on them.

I am fine with 3/1s, particularly if there's room enough for me to cram another bathroom in there. I'm a remodeler, so it's pretty inexpensive for me, but 3/1s are often older homes, which in our area means pier & beam foundations, so the plumbing is much simpler than dealing with a slab. If I can make it a 3/2, it's much more in demand.

With 2-BR houses, I look for neighborhoods where the sale price per square foot is significantly higher than the cost of construction. I bought two smaller houses in the last couple months. One is in a neighborhood where property goes for about $140/sf, the other in a neighborhood where property goes for $200/sf. I can build on a new master suite with bathroom much cheaper than that, so every square foot I add to the house makes me money.  I'm renting each of them for a year so that I'm into long-term capital gains, which will cut my tax burden almost in half, and then I'll do the room additions and put them up for sale.

If you have a good contactor who you know does right by you, these can be good investments.

 Michael is right, this is pretty situation dependent. If you have a lot of high interest rate debt, that's the first thing you want to get control of.

Another thing to consider is your tax bracket. If you sell it right away, your capital gains will be treated as ordinary income. Depending on your tax bracket, that may be no big deal, or it may be a big hit. When I was a newer investor, I sold a lot of them right away, because I was in lower tax brackets. Now that I'm in the top tax bracket, there's a 20% tax rate difference between long-term capitals gains (20% + a 4% Obamacare supplemental tax) and short-term gains (39.6% + the same Obamacare tax). That means if I make $50K on a flip, I keep $10,000 more of the gains by holding if for a year than if I sold it quickly. 

Consider your own financial situation and decide wisely. I'd say if you're in a lower tax bracket and have personal debt, sell the thing now and pay off debt. Just remember to set aside reserve for taxes.

@Venky B., I remodel a lot of historic homes. I really enjoy them, but I own a remodeling company, so it's somewhat easier for me.

There are all kinds of problems you can run into with homes that old, and many of them don't really appear on the surface. Mostly, things like the small steps you mentioned will be grandfathered in under code, but if you go to remodel the home, the city may make you bring things up to date. Many other things, they'll leave alone. That varies by city.

However, there are a lot of things below the surface to be aware of. Some initial thoughts:

1. Does the house have central air? Most tenants in decent rental areas don't want to get by with window units. And retrofitting ductwork in an old house can be ungainly. 
2. Knob & tube wiring (sometimes mispronounced as knob & tooth). This is very, very common in old homes. Sometimes a home has been partially, but not fully, rewired - and often done poorly. Many times, we'll pull sheetrock or plaster and find knob & tube that's so worn it's just a fire waiting to happen. This would be my biggest concern in a house from this era. I would go beyond just a home inspection and have an actual electrician inspect the wiring. 
3. Plumbing. If a house is from 1900, pipes have probably been replaced at least once already, but it's very likely that you'll have old, rotting cast iron drain pipes, corroded copper water lines, and sometimes even gas lines that are done unsafely. As with the electrical, I would go beyond just a home inspection and have an actual plumber inspect things. Have them video the drain lines - it costs about $300, but it's not at all uncommon in homes that age to find rotted drains that are just dumping waste under the house.
4. Mortar beds, plaster, etc. - if you're updating floor tiles or wall tiles, they're not going to be stuck to sheetrock or hardie backer. They'll be stuck in a mortar bed that'll be like taking up several inches of concrete. I recently redid a bathroom in a 1920s house where demo took 3 days - we normally demo a bathroom in half a day. And for walls, dealing with plaster is more difficult and expensive than dealing with sheetrock.

These are just a few of the things that come to mind right away. As I noted, I love those historic homes, but as an investor, you have to be very careful about your costs on them.

A lot of things in life aren't really black & white- you have to balance competing principles.

Principle 1 is "an itchy trigger finger" tends to make you jump at bad deals.

Principle 2 is you've gotta get in there and do something sometime.

Being a new real estate investor is a lot like being a horny teenager - all the buildup, hopes, expectations....and the first experience often turns out to fall way short of your expectations. But you learn from it and the next time is better, and eventually you might even get pretty good at it.

This is probably not the best of all possible deals, but it's hard to find awesome deals anymore in many markets. When BiggerPockets membership numbers are larger than lots of small cities, you know there are loads of investors chasing any good deal out there right now. As one to lose your virginity on, it looks fairly OK.

My first house was one much like this - I got it under contract for $32,000, realized during inspection that the basement was collapsing (we rarely see basements here in Texas because of shifting soils), and got the bank to lower the price to $22K. Put about $45K in it, sold it for $86K, made a little bit of money, but learned a lot. And I had to start somewhere.

If you're pretty sure on the rent numbers, you'll come out OK on cash flow - assuming you're also OK on the renovation numbers. I'd get it under contract, and find a contractor you can work with to get firm bids during your option period. (That may not be as easy as it sounds - search under my previous posts for lots of perspective on why many contractors, including me, shy away from investor business. But if you're actually in your option period, not just "thinking about buying this one", you'll be able to find a couple contractors to walk through it with you and give you a detailed bid.. Just be clear about deadlines.)

Good luck!

Interesting exercise.

Your best bet among the three options you've presented is to pay $135K cash, then refinance with a local portfolio lender ( a small chain of banks that holds their own paper). That gives you the best purchase price, and then you can get the cash out relatively soon so it's not tied up forever.

This is the BRRRR strategy referenced in various places here on BP. I use it regularly buying houses for cash at the courthouse steps auction, the refinancing so I can do it again the next month.

The assumptions here are that you have the cash, and that a lender will work with  you on a refi. Your profile says you have decade of experience, so that shouldn't be a problem. Of course, if that's the case, you should also be able to develop a relationship with a local portfolio lender, get a guidance line set up, and buy the property with that financing, rather than having to pay cash in the first place.

 Al, are you certain that the car belonged to/was abandoned by the previous homeowner? Vacant houses tend to attract criminal activity. I see you're in NRH - I bought a foreclosure in Fort Worth a few years ago and between the time I did my final walk-through and the time I closed & got the keys, someone abandoned a stolen & stripped car in the back yard. (With some college textbooks and a collection of gay porn movies from the local video store still in the back seat! Guess those weren't worth stealing, but the owner probably had some stiff late fees.)

Unless  you're sure it's property abandoned by the previous owner, I'd call the police & have it checked out.

(FYI, I've got three reno projects going in NRH right now. Love that area. One of them is about to go under contract and I have barely started reno.)

How many of us have had a bad feeling about a potential tenant, but been unable to quantify an objective reason why? And then later, your gut proved right when he was  a deadbeat, or tore up the property, or.......but we rented to him because we were afraid of getting sued, because of rules the government, that bastion of efficiency, set up. Nobody wants to make judgment calls, because they open you up to having your judgment questioned if a pissed-off applicant sues. So many landlords went to using the best objective criteria they could - no criminal record and a minimum credit score. It's objective, at least. Can't get sued for it. Except now, maybe you can.

Brandon has it right. Multiple applicants makes a big difference.

I make sure my rental properties are well renovated, fairly priced and will rent quickly. I only do showings at open houses. So far, I've always walked away with multiple applicants. That allows me to approve the best applicant, not just try to find a reason to deny an applicant my gut says is wrong, but meets minimum standards on paper.

And yes, I will approve felons - there was another recent thread on this - but I have to see evidence they've turned their lives around. (Or it's  a conviction for weed, booze, or something I couldn't care less about.) One of my best tenants had a record, and had trouble finding a place. I know he's going to treat my house well, pay rent on time, and be a good tenant because he doesn't want to have to look again for someplace that'll approve him.

Oh my god, there's some really wrong advice on this thread.

@Doug Watts, please consult your CPA. But I've worked through this extensively with mine (I've bought and sold businesses as well as real estate, so tax minimization has been pretty important to me). Here's my understanding. If your CPA tells you differently, shoot me a message back - I'd like to know that and discuss it with mine in that event.

There's no "intent" box to check on your tax forms. It doesn't matter what your intent was when you bought it - it matters how long you held it.

If you sell a property in less than a year, it's regular income, taxed at your regular tax bracket. Mine's 44% (39.6% plus a 4% Obamacare Supplemental Tax on, so that's a bigass bite for me.  If you're in a lower tax bracket, capital gains matter less.

If you hold it a year, then sell it, you're at long-term capital gains, 24% (20% plus that same lovely Obamacare Supplemental Tax), regardless of your regular income tax bracket. So if I expect to make significant gains on a property, I'll usually put a renter in there for 6 months to a year, so it closes after the 1 year deadline. I have three houses in that situation right now.

But if you're in a lower tax bracket, like I was when I started out, the difference matters much less. So it may not make a big difference to you to hold it for more than a year until you get into the upper tax brackets.

I've analyzed 1031 exchanges a couple of times and didn't like the way they tied up my money and tied my hands on various things. I set an internal guideline of I'd need to be at $80K profit or more on a flip to make it worth doing a 1031 Exchange, and that's pretty rare in my market. You may look at things differently when you analyze them.

Good luck!