All Forum Posts by: Michael Hayworth

I've had multiple houses sell before completion. I generally like it, but I probably wouldn't move walls. I've let them pick their own finishes. So what if you've already purchased the tile? Return it, buy what she wants, and adjust the cost if need be.  (If it's non-returnable, you're buying your tile at the wrong place.)

This business is about making money. You've got a customer that wants to buy your product badly enough that she'll probably overpay. Charge her extra for using her finishes and doing it her way. If she's too much of a pain in the butt, then sell it to her as is and let her finish it herself. Figure out what it's going to cost you to finish. It it's gonna take $20,000 to finish from here, then give her $10-12K off list, pocket the extra profit, and go buy another one. Do like a wholesaler and make her EM a NON-refundable deposit if you want.

We rarely have trouble selling our houses, but things can always go wrong  - buyer's financing falls through, inspector creates problems, whatever. Having a buyer who's that committed to the sale is great!

You're in Texas, so you can create an LLC in minutes on the Sec'y of State website, SOSDirect. If it's a single-member LLC, an operating agreement is not required, either. So that's pretty quick.

Overall, lack of an entity is not an impediment. When I bought my first multifamily, I did it under my existing entity, then created a new one specifically for multifamily as the deal moved forward, and assigned the contract to the new entity. It's very common when partners are involved for one partner to have a deal under contract, then create a new entity with partners specifically to own that property.

But whether you have an entity or not, unless you're sitting on a ton of cash, you're going to need financing. Even if a lender will lend to the entity, they're going to want you to personally guarantee the loan. Where are you at in the financing process?

Usually, commercial has a little longer lead-times built into the process than SFR, so you may be able to get it under contract, as long as you have sufficient EM, and then deal with financing issues.

I do custom cabinets week after week for my homeowner remodel clients, but it's very expensive to do it right. I've tried many different things for my rentals and and I ended up just using the Hampton Bay cabinets from Home Depot. Yeah, they're particleboard, but they're incredibly inexpensive and they have a lifetime warranty.  You can put a coat of poly over the particleboard bottoms to help with water resistance.

For higher end rentals, I use ones from ProCraft, but they're not in every city.

Here's one with the Hampton Bay cabinets. No idea why the photo is appearing sideways. It looks fine outside of BP.

@Russell Brazil is completely right about the reviews. I'd be interested in the reviews of landlords, not the tenants. Any of us with tenants in C/D/F areas know that you're sometimes dealing with irrational people. (Hell, that's sometimes true in A&B areas, too.)

One note addressing the BBB issue....the BBB is a thoroughly fraudulent organization. They are not a consumer protection organization - they sell advertising. My remodeling company has one review on the BBB with an F rating. Every week, we get telemarketed by the BBB telling us we can get an A rating if we just sign up for one of their advertising packages. Screw those guys. We have 125 ratings on Angie's List with an A rating, and get 50% of my business from there. I won't even bother to respond to BBB ratings, and I hope they go out of business.

Oh, gawd. You've got the cash flow guys all riled up again. Now, honestly, most of them are pretty sharp guys. And if cash flow is what they want to focus on, that's fine. But that's small-ball.

Six years ago, my divorce wiped out most of my savings. Net worth after the divorce was around $300K. Today it's $2.2MM and rising 20% per year (would be rising more if I was keeping it all for myself instead of spreading it around trying to help my kids, fiancee and key employees build wealth for themselves.)

Cash flowing $200/door won't do that for you. Appreciation, leverage, and having other people pay your mortgages does.

(And I recognize that my wealth is small compared to many others on this forum. But for growth in 6 years, without taking a penny of investor money, I'm happy with it.)

I would never specifically seek out a negative cash flow situation, but I've had a couple that I was able to buy with basically no money out of pocket, and sell three years later for a $40-50K profit. it's not something I'd recommend to a new investor, but it can work. And one in a gentrifying area that had -$150/mo cash flow for the first year I owned it, but appreciated $25,000 in that year and another $30,000 in the 2nd year when I was able to raise rent to break-even. I'll take that deal all day, every day.

I have multiple businesses that bring me a nice income, so properties are a wealth builder, not an income source. And I'm a big-picture guy, so I honestly find it hard to get interested in whether a property cash flows $100/mo or $250/mo. The difference between those is $1800/year. Take that times 20 houses and the difference is $36,000/year. My lowest paid employee makes more than that.

I buy 15 or 20 properties a year at 25% down using 15 year notes so equity builds faster, sell 10 or 15 that I bought in previous years, enjoy the appreciation and equity. I never keep more than 30 in my portfolio at any given time, and the cumulative cash flow is always very positive, so if we have a market correction, I'm fine. 

BOTTOM LINE: Negative cash flow properties aren't something to seek out, but occasionally they may make sense. 

OTHER BOTTOM LINE: Cash flow is a very slow way to build wealth. At $200/door/mo, you've got to have 42 doors to make $100K/year. I'll make that selling 2 properties that have appreciated, and use it to buy 4 more.

I disagree with the previous two responses....with the provision that you're a reasonably experienced investor and you don't mind holding onto a house for a few years.

Cash-flowing rentals are great. But they're like buying a CD at the bank (back when CDs paid reasonable rates).

When you buy a property in an area that's just on the cusp of gentrification, it's more like buying Amazon or Google early in their lives. 

Cash-flowing rentals will make you a good income. But dramatic appreciation on your houses can make you really wealthy. If you put 25% down on a house that's $100K when you buy it, and it cash-flows a little bit each month, and then 7 or 8 years later that house is worth $450K, you've created far more wealth than a house that brings better monthly returns, but only appreciates at the same rate as the general market.

This should definitely not be your ONLY strategy. Like, if all you can afford is one or two houses, this isn't the strategy for you. But if you have several  houses, and are in a position to be buying a few houses a year, then seeking out areas that are ripe for gentrification is something that should be part of your strategy.

That answer is completely dependent on your area. In some of our more communist states, they check houses for unpermitted work so the state can be sure to claim their tribute. In most states, they do not. It tends to be mostly a blue-state thing, but Ohio is kinda purple, so I have no idea what practices are like in your area. is it part of the law, or common practice, to check for permits on work when a house is sold?

If it's not, then get the job finished, do it well, and move on.

Permits are supposed to be about ensuring quality work, but they're mostly not. Most building inspectors couldn't build a bathroom if their life depended on it. If they could, they'd be doing it and making a hell of a lot more money. Oftentimes, they're guys who flunked out in construction, but really like being able to tell others what to do. I've seen terrible quality work get passed, and I've seen inspectors hold up quality work for some inane interpretation of a regulation that only that particular inspector believes. In general, they're only useful for calling out the most egregious violations, where you may have hired someone who has no actual idea what they're doing. Try to avoid hiring people like that.

For an investor, the only reason to be concerned about permits is if it's going to make it hard for you to sell the house or cause trouble for someone down the line. If that's not the case in your area, then get the job done and move on.  

I run a full-service remodeling firm with 10 full-time crews working. 

HomeAdvisor is profitable for us, but it's not a big part of our mix. We get over 50% of our business from Angie's List, 25-30% repeat customers and referrals, and the rest is a mix from various other sources.

We're 7 years old. Our business really changed about 3 years in when we started making a big push for clients to review us on Angie's List, and then bought AL's paid advertising so people can find us when they search. But for that to work, you have to make sure your reviews are going to be very good. We have 125 reviews, and most people stop reading after the first page or two, but every now and then, I'll go out and meet with someone who's literally read every one of them!

I have a few properties in gentrifying areas. Overall, I love them. But there are some downsides.

The main downside I've seen is that, even with strong rent demand, rent rates may not keep up with increases in property taxes and insurance. Rent rates in my area are nowhere near what they are in yours, but it's not uncommon for me to have property tax increases of 20-25% in a year. (Some of this is due to homestead laws in Texas, which limit increases in appraised value to 10% per year when owned as a primary residence. Then when an investor buys it, the appraisal district often socks us with 20-30% increases several years in a row. Things may vary in your area.) When I'm giving my tenants $100-150/mo rate increases every time their lease renews, and that's just keeping up with property taxes and not increasing my cashflow any, that can cost me good tenants.

On the other hand, it's very common for me to be able to buy a property in a gentrifying area, do a basic rehab on it to make it rent-ready, and then in 3-4 years it's worth $150-200K more than when I bought it. Do a nicer rehab, sell it and reap the profits.

So I look at them as appreciation plays. Make sure the rent covers expenses and produces a little cash flow, then just determine where in the cycle you want to cash out.

Don't really have time for a long reply right now, but I want to make one point. Partnerships are hard. I've done several. It's very much like a marriage - and we all know that even successful marriages take a lot of maintenance. 

You say he's 100% trustworthy. He's not. No one is. I'm not, you're not, he's not. Even if you're both trying to be 100% honest, you'll still understand things differently, bring different assumptions with you, remember conversations differently, and so on. 

The best advice I ever got was to not only clearly define roles of the partnership, which is hugely important, but also to clearly define, up front, how each of you can exit the partnership: what are the financial implications, responsibilities of the exiting partner, and so on.

I've had one partner whose day job suddenly doubled in workload, leaving him unable to contribute to our efforts. I've had another partner who looked great on paper, but turned out to not be able to deliver once we actually started the business. In both those cases, having a predefined plan for terminating the partnership saved a lot of messy arguments and potential financial loss. 

Good luck with it!