All Forum Posts by: Michael Ealy

I am new to multi-family investing. I have been doing SFH investing for some time now. I found a deal in Ajo, AZ (population around 5000 people) for a 10 unit complex for 335K. Will be fully occupied next month. I need some opinions to see if this would be a good deal. My concern is that the town of Ajo is very small and jobs are not plentiful however there is a lack of rentals and tenants waiting for rentals. Any opinions are would be welcome. Thanks!

Total gross annual income: 76609 (at 100% occupancy)

Total annual expenses: 29677

NOI: 46932

Purchase price would be no more than 300K

Without knowing the details, I would say your expenses is low. A building built in 1949 will have a lot of deferred maintenance and on-going repairs. You should use a 55% expense ratio (meaning, the operating expenses will be about 55% of your gross income).

And probably you should use a 10% cap.

The math will work out something like this:

Gross income x (1-55%) = $34,474 is your likely NOI (not the $46,932 the seller claims)

At $300K purchase, that's a 11.49% cap rate which is good.

One thing you can do is order a Professional Inspection and have the inspector come up with a Deferred Maintenance List. You can then give this to a contractor to give you an estimate of how much the deferred maintenance items will cost you, say over 12 months, 1 year and 3 years. Whatever amount you get, especially the first year - you need to get a Deferred Maintenance credit for that. That means you get this amount as credit when you close to reduce the cash you need to bring to closing.

For example, if your Deferred Maintenance items will cost about $50K, you can negotiate a credit for this when you close. So, if you're bringing 25% of $300K - that's $75,000..with the $50K credit, your cash to close is now only $25,000! For an old property like that, you need to keep that $50K to take into account for the deferred maintenance items you need to address over the next 12 months.

Hope this helps.

4 Votes

Originally posted by @Account Closed:

I am looking to make an offer to an investor to help with down payment. He is not a big investor just knows his money should be doing something. What is a good offer to make it sound good as I am looking for half of the down payment. Thanks.

It depends.

It depends on...

1. is it equity or debt?

2. what does your investor want? a certain predictable return or a portion of the profit of the deal?

3. how much is the investor earning now with how his money is invested?

I've gotten private debt as low as 7% to as high as 11%.

On the other hand, I've gotten investors OK with equity and gave them as little as 15% of the deal to as high as 50% of the deal.

0 Votes

Originally posted by @Andy Crawford:

@Michael Ealy

I appreciate the feedback. I’m waiting for my EIN and then plan to open a bank account for the llc to indeed keep my accounting straight. Cab rents, deposits, and property expenses all be kept in this 1 bank account?

Also, I like the idea of privacy with land trusts. Can I use my children as the trustees?

On the trustees - it's better to have people who don't have the same last name as you as trustees. The point is to have privacy. Moreover, trustees don't own the trust - the beneficiaries are. Their name appears on public record as "John Doe, Trustee" and they can sign for the trust. So, yes, these people have to be people you trust but it's advisable for them not to be related to you.

Again, not a legal opinion so seek legal counsel before you do anything.

0 Votes

Originally posted by @Erik W.:

@Wally Klosner, market rent, by definition, should be the rate at which renters and willing and able to absorb the inventory within 60-90 days, assuming you are marketing properly. What are your fears?

1) Insufficient cash reserves to handle 60-90 days vacant?

2) Your measure of market rent is inaccurate?

3) Something else?

There's a balance between irrational fear and irrational exuberance when raising rents. Our job as investors is to find out the facts and act accordingly. Too many land lords are afraid of raising rents, but when I probe for the reasons I find often they either don't know their market well enough or haven't built up the necessary cash reserves all investors should have. Or they are just afraid for no real reason other than "the tenants might move." So what if they move? Even tenants paying cheap rent could decide to move tomorrow, if their needs change. Cheaper rent doesn't guarantee you long term tenants. Tenants move when tenants decide to move. Plus, a reasonable vacancy followed by a higher rent isn't as bad as one might think.

Think of it like this: $750 rent bumped to $950 ($200 extra) means you can "eat" about 1.6 months of vacancy per year and still come out even financially compared to bumping only $100. Also, in most cases, higher rents attract better quality tenants, which is an often unmentioned benefit of catering to a higher income clientele. As much as we'd all like to think a dollar of rent is a dollar of rent, the truth is a $950 / month rental attracts renters that are often more stable and less likely to tear up your property. There is also less of a sense of entitlement among tenants who pay fair market value, whereas those who are getting a bargain seldom remember to be grateful or appreciative toward you for subsidizing their living expenses by giving them cheap rent. That has been my experience over the past 15 years, anyway.

Bottom line: I am not advising you to act irrationally either way. I would like you to examine your fears, find out if they are valid, and then act accordingly. I hope this helps and best of luck!

I totally agree with Erik's answer.

If you've done your due diligence and found out the rent is undermarket by $200, then you should be willing to increase the rents by $200. Yes you can stagger it to avoid "sticker shock" but you can justify the rent increase by improving the apartment (new paint, new flooring, new appliances, landscaping, etc). When they see how beautiful the unit is they will be more than willing to pay the higher rent.

And Erik is right in saying higher rent will attract better quality tenants anyway. So yes, you can have all units empty as a consequence of increasing the rents but once you fill them with better tenants, those tenants will stay longer and not trash your apartments.

Let me give you an example. We bought a 96-unit building, 20% occupied and people told us you can never get rents higher than $500-$550/month in that area. Well, we got the Tapestry report showing that the median income in the area is $44,000/yr. So we know that they can afford a higher rent BUT WE NEED TO GIVE THEM A BETTER PRODUCT than what they were used to. Our philosophy is to deliver a "B" looking unit for "C" areas so they feel the higher rent is worth it.

The result -we proved the naysayers wrong and simultaneously increased the occupancy to 94% and the rent (we got an average of $679/unit/month a 29% rent increase!). We sold it 2.5 years later and made $1.5 MILLION profit because we INCREASED THE RENTS TO MARKET (but justified it with great looking apartments).

1 Vote

Originally posted by @Nhi Nguyen:

I know about getting a list and contact them using different methods. I don’t have plan to do that yet since I’m only looking to get my first 1-3 deals. Also, I don’t have the resources set up for it at the moment.

So, at this time, I mostly search/get deals from:

- loopnet

- mls

- local agents relationships

I’m also looking into getting deals from wholesalers but I don’t know any good wholesalers in this space around my areas (Bay Area, CA). Tips would be appreciated.

There are a couple of deals I looked at, but the listings have been expired. I really want to approach the sellers on my own. What should I do?

Thanks

I am assuming you want to get apartment deals right? I need to ask because how you get houses is different than how you get apartment deals (and I am talking about 20-50 units or larger).

If apartment deals is what you're after, then your number 1 source of deals are commercial real estate agents. You can find them on Loopnet - email everyone you know your criteria and ask to meet them for coffee (your treat) so you can submit an LOI on their listings.

There are other ways to find apartment deals. Here's a post I did a few months ago and I got some interesting responses from experienced apartment investors:

https://www.biggerpockets.com/forums/432/topics/769196-how-to-find-off-market-apartment-deals

1 Vote

Originally posted by @Marcus Linehan:

Is it worth going the section 8 route for the income, or are there too many cons? I’d like to hear from current section 8 landlords.

I have 500 units that are section 8 and the other 500 are market tenants.

You can make section 8 successful but as in anything, it requires work :)

Your apartment unit and building has to comply with section 8 requirements and yes, the inspection process can be frustrating. But here's the secret to "Hack" section 8 ...

Hire a PM who knows the section 8 inspectors and currently have section 8 tenants so he/she knows all the guidelines, rules, tricks and pitfalls of section 8 housing.

Doing that will save yourself time, money and frustration.

4 Votes

Originally posted by @Account Closed:

@Michael Ealy. Dude. How can you own 1000?

It's no big deal Jeff.

I've been doing this since 1999. Other apartment syndicators here on BP own more than 1,000 units.

I've actually acquired more than 1,000 apartment units but I've sold a lot of apartment units that I used to own. I continually buy every year and I continually improve my portfolio by selling some of my buildings.

But to answer your question "How", the answer is a combination of three things:

1. Being great at finding good apartment deals

2. Focusing on "value-add" deals so I can create significant value for me and my investors. Deals like these:

41 Units : $627K profit after 15 months

https://www.biggerpockets.com/forums/52/topics/802703-41-units-no-money-down-deal-627k-profit-in-15-months-how

30 Unit Townhomes: $2M Profit or $15,000/month Cashflow (this project is still on-going)

https://www.biggerpockets.com/forums/432/topics/753858-brrr-actual-deal-2m-profit-or-15k-mo-cashflow-with-pictures

48 Units, $1 MILLION Profit After 6 Years

https://www.biggerpockets.com/forums/311/topics/644570-how-i-made-over-1-million-on-1-deal-after-6-years-of-headaches

96 Units, $1.5 MILLION Profit After 2.5 Years

https://www.biggerpockets.com/forums/432/topics/765918-whats-your-most-successful-apartment-deal-ever

3. Due to a track record of successes like above, I was able to attract private investors (OPM). When you have OPM and good management system, you can scale and buy tens of thousands of units if you want to.

Hope this answers your question.

0 Votes

Originally posted by @Kris Wong:

First and foremost, you need a warranty deed, not a quitclaim deed. You can check with a title attorney, but a quitclaim deed will likely void your title insurance. Second, with regard to tax returns, LLCs can be taxed as disregarded entities, so you don't necessarily need one return per entity. These are questions an attorney can answer easily, and I am guessing by your question that you are not working with an attorney. If you are not working with an attorney, then you probably don't have a reasonable company agreement, and aren't privy to the formalities involved with keeping your entity "valid". In this case, a competent prosecuting attorney could easily make an argument that your entity is not a valid business, and could likely "pierce the veil" of your entity, as it's called.

Lastly, if you put multiple assets into one entity, then a lawsuit arising from any one property puts them all at risk. You should understand how your liability insurance for each property would cover you in the case of a frivolous (or otherwise) lawsuit. For instance, a personal umbrella policy would not cover your business, or assets owned by your business (unless written to cover these).

Kris Wong's answer is the best answer.

In addition to putting 1 property into an LLC, you need to open a bank account (and prior to that, you need to get an EIN for that LLC) so that it's clear that you are separating your personal and company accounts. That will lessen the likelihood of your corporate veil being "pierced".

Now, I buy bigger apartment buildings so to me it makes sense to have 1 property per LLC. To you, one way for you to reduce your cost of putting up multiple LLCs is to deed the property to a LAND TRUST and assign someone you know & trust as the trustee (and have different trustee per property). You or an LLC that you own can be a beneficiary of that trust. There are no filing fees for putting up a land trust. You just pay for the cost of recording the deed to your trust.

By doing this, you have PRIVACY - no one will know what you own (except your trustees - who should be people that you trust and not any of your tenants). If people search you and find you don't own anything, chances are good it will stop the lawsuit right there.

Having said the above, I am not an attorney so you should talk to one.

4 Votes

Originally posted by @Andrey Y.:

Originally posted by @Patrick McGrath:

https://q13fox.com/2020/02/10/seattle-city-council-unanimously-votes-to-ban-evictions-in-winter/

Thoughts?

This is why I'm slowly selling off my single family rental portfolio. Too much headache for not enough reward. Much better to find an expert you trust and invest passively in their syndication which has economy of scale on many fronts. SFHs/condos encourage scarcity mentality and this is another example of this.

I agree with you Andrey. I still own 45 houses and there's too much headache for not enough reward as you said. I recently JV with a Property Management company that has operations/boots-on-the-ground in 50 cities across the US. This allows me to buy properties in cities that are landlord-friendly. I will definitely avoid Seattle.

2 Votes

Originally posted by @Gerino Alejos:

I am working with an investor who is purchasing a 14plex that has 4 units under housing/ section 8. After completing purchase my client will increase rent on all 14 units. Is he legally able to do that on the housing/section 8 units... does anybody have experience on this? what kind of hurdles and challenges will he face? if any. Thank in advance.

He can request for rent increases from section 8 in your city and, if approved, it will become effective once the leases expire. If your section 8 housing authority is the same as what we have here in Cincinnati, my guess is you can ask for rent increase once a year (if he missed the deadline, he might need to wait until next year). Moreover, part of the approval process, section 8 will likely ask for an inspection to see if the units and the building are compliant with section 8 requirements.

Hope that helps. I have about 500 units under the section 8 voucher program.

2 Votes

All Forum Posts by: Michael Ealy

Michael Ealy has started 68 posts and replied 1506 times.

Post: 10 unit multi-family....a good investment?

Post: What should be a return for an investor?

Post: New Investor- Best Asset Protection Strategy?

Post: Raising rent on inherited tenants??

Post: Advise on Ways to get deals

Post: Section 8 tenants - yes or no? (Cleveland area)

Post: Is it bad to focus on only getting a 3-4 unit for your first?

Post: New Investor- Best Asset Protection Strategy?

Post: Seattel Bans Evictions in winter!

Post: Increasing rent on Housing/ Section 8