All Forum Posts by: Michael Gansberg

@Kevin Nichols - if they have enough hot water for a shower and a half, you might consider a lower flow showerhead. The average showerhead is 2.1 gallons per minute, swapping it with a 1.75 gpm showerhead might bridge the gap. If that's the issue, anyway. I use the Niagara Sava spa, the chrome one is about $11 on amazon, and the dinky plastic one is $8. I'd go with the chrome version, it looks quite nice- it's linked here. Don't go less than 1.75 gpm, the tenants will complain about a lack of water pressure.

If the faucets(kitchen and bath) do not have aerators on them, I'd put those in too. They're about $3 each at a local hardware store. If you do those things, your water bill will also decline pretty substantially. It's practically free money.

@Eric DeVito Glad you're thinking about this, so many people are dissuaded by the negativity and never jump in. Here's a story that I find analogous to this situation.

When I was 16, I rode my bicycle(with a group of 12 others) from the West Coast to the East Coast. Specifically, from our warm-up in the Orcas Islands to Portsmouth, New Hampshire. We looked like circus freaks- imagine riding through the mid-West in lycra, we really stood out, and not always in ways we wanted to. I remember in WA state, people would often ask, "Where ya goin'?" To which we'd respond, "New Hampshire." They looked at us like we were crazy, and often thought we were joking. Same in Idaho, Montana, ND. Once we got to Michigan, they still looked at us like we were crazy, but when we said that we started in Washington, the usual response was "What? Really??" In Michigan and New York, people started believing us when we told them where we were headed, but they were incredulous when we told them we started in Washington.

When I started my real estate journey(12 years after my front bike wheel hit the Atlantic,) I wouldn't even tell people about my goals, because I knew they wouldn't believe me. Now-metaphorically- I'm in MI, and people can't believe where I started. Right now, you're in WA. Or more like the Orcas Islands- you haven't gotten your feet wet. Don't be afraid- jump in, buy some real estate, read books, improve your knowledge base. If you're not ready, usually the work will hammer you into shape, like the two overweight brothers on my bike trip who were woefully unprepared. By the time they hit the East Coast, they were lean, mean, pedaling machines! 

@Steve Wald - evict. Assuming you worked with a lawyer on this transaction, and that the money in escrow is to be used in case she doesn't GTFO, start the eviction process and see if your attorney will allow some of the escrow funds to be applied to any costs you incur. When your ne'er do well seller realizes that her money is going up in smoke(in the form of legal fees,) maybe she'll get out sooner than later.

Fascinating discussion, I've enjoyed reading everyone's posts on this thread. There are so many ways to approach this question. First, the average investor reliably underperforms the stock market(here's a link which shows that the average equity fund investor earned a little over half the S&P 500's return during the last twenty years.) Most behavioral experts suggest that the average equity investor buys and sells at the wrong times. What do stock investors do when there's blood on the street? They panic and sell. What do real estate investors do? They panic and wait. And then, when the news cycle has forgotten about the panic, the real estate investors do too. This is not uniformly true- during some crises, some real estate investors are forced to sell, and that will generally hurt their returns, but the proportion of panicked sellers is likely larger in the stock market than in the real estate market during panics.

So it seems to me that the stock market brings out the worst in us(by "us," I mean the average "us," not you whizzes out there who are beating the market, so pipe down in the peanut gallery) and real estate brings out the best in us- the less liquid nature of real estate, verse stocks, might be one of real estate's greatest assets to the average investor.

Then there's the question of measurement itself. Stock market returns are so trivially easy to calculate- pick an index, adjust for splits and dividends, look at its price at one date, look at its price at a second date, throw it into a compound return formula, and presto! You're done. You've found what the return on the index is, but of course the average investor underperforms that, so why not use the average investor's performance as a measurement instead of the more often-used equity index? My guess is that the stock market players want the capital of the average investor so they can...well, you know where I'm going with this. 

Good luck measuring returns with real estate! First, there's no simple and easy index(Case-Shiller tries to solve this problem, but it's not perfect.) The sales prices of homes in 2016 cannot be easily compared to the sales prices of homes in 2006. What if homes got larger? Or smaller? Or what if construction quality changed? Or what if people prefer smaller(or larger) homes in 2016 than in 2006, causing a distortion in price towards a small or large home? Or what if insurance got more expensive because a higher frequency of natural disasters? (I could go on all day with the what-ifs, but I think you get the point.)  

So even with Case-Shiller, which tries to adjust for many of these what-ifs, getting a solid read on returns in real estate is extraordinarily challenging. But then- as in the stock market- one has to adjust for how the average guy fares verse the index(a fool's errand, certainly.) But here's the real kicker. We in the US suck at saving money. Let's just face it- we generally are in the lower 50th percentile versus other developed countries(we also suck at picking qualified presidents if you look at the period from 2014-2016, but that's a whole other can of worms.) Investing in leveraged real estate actually forces us to come to terms with this inadequacy. If you have a mortgage, and you want to preserve your rental income, well then you're gonna pay down some principal, buddy(or buddette, let's not be sexist here. And you in the peanut gallery- I know, there are interest-only mortgages, but most investors don't use them.)

So in summary, and apologies for the extremely long post, I just got rolling and couldn't help myself, real estate enhances the best in investors by inhibiting panic selling during kerfuffles of one sort or another, and suppresses the worst in us, which is our unwillingness to save money on a regular basis. In the stock market, the cards are stacked against you. In the real estate market, a tailwind is the norm. 

Happy investing! Xo, Michael  

@Daniel J., I've probably had airbnb crop up, but I'm not aware of it. Many tenants probably operate home offices; just like prior posters, I'd say that should cause no problem, many people work from home nowadays.

One of my tenants ran a child-care center from her apartment without me knowing- when I found out, I decided I could either shut it down or let it go. I went with the latter, and required insurance indemnifying me, which the tenant subsequently got.

Another tenant set up a drug dealing operation from his apartment. That resulted in a fast and easy eviction, with the assistance of the ADA.

I'd say airbnb falls right in the middle of the above two offenses. You don't know who is living in your building at any time. If something goes wrong, it could bite you in the a$$! Especially if it can be shown that you knew about it(which wouldn't be hard to show 😉) I'd shut it down pronto.

@Jay Helms, interesting question. I started buying real estate in '03(the beginning of my RE career,) and bought until the end of '05. I stopped buying between '06 and early '09 because I thought things were a bit frothy. I used that time to optimize systems, improve management, and build up capital for better times. 

Those times definitely came in '09. The teams I'd built were then capable of dealing with all of the distressed assets that began hitting the market, so I dove in head first, and acquired very aggressively between 2009 and the end of 2014, quintupling the size of the portfolio I'd built between '03 and '05. All of those purchases were moderately to severely distressed assets- mostly foreclosures, with a dash of short-sales thrown in and a smattering of approximately half-occupied properties for good measure.

Since the end of 2014, I've been marshaling resources again, just like I did in the '06-early '09 period. I'm back to system optimization, investing in water and energy efficiency, and investing in people. But I think we face a very different landscape in '17 than we did at the end of '07 or '08. Back then- before the fit hit the shan- the average person thought real estate could only appreciate in value, and people paid all sorts of crazy for a stream of rental income. When sentiment changed, no doors were big enough to allow the herd of sellers to stampede through the exit without a significant portion of them being trampled. 

Now, we have a more measured market stress on our hands- Yellen gradually tightening the screw of interest rates- and we lack the universal sentiment that real estate can only increase in value. The former is generally a result of improved economic conditions, so I believe expectations are that a gradual rise in rates will have minimal impact on real estate. The absence of the latter is a good thing for everybody, and we should all be thankful that the bloom is off that rose.

Of course, we also have the wildcard, the elephant in the room...yes, you guessed it! There will now be mixed doubles in the curling event at the 2018 Winter Olympics. Kidding- of course I'm referring to Trump. Will he be good for the broader economy, or only his own economy and that of his cronies? Will Trump and Putin usher in the Armageddon in 2017, or will we have to be patient and wait until 2018 until the Apocalypse arrives? Or...what if, contrary to all reasonable people's expectations, Trump actually does a good job? Stay tuned! I'm expecting 2017 to be a real white-knuckle ride.

John (while writing Revelations): "So Lord, the end will be signaled by trumpets?"

God: "No... I said Trump/Pence."

John: "Yeah, trumpets."

God: "Never mind. They'll know."  

@Thomas S.'s tenant is doing? That's money in the bank, baby. If David raised the rental rate to $950, his residents would probably rent somewhere else- they are making a dumb financial move in paying late, but that shouldn't prevent the OP from profiting handsomely as he is doing.

@Jacob Pereira, glad we agree on this. I calculated the annualized return using the equation for simple interest(multiplied 5.6% by 52/3,) your calculation considered the interest to be compounded. I'd go with simple interest on this one- it would be compounded if the $50 stayed in the same account, and the 5.6% interest accrued on the new amount in the subsequent period(so for instance, the tenant would have to pay the late fee of 5.6% on $950 in the following month, then the late fee of 5.6% on (1.056)($950) in the month after that, and so on...)

Either way- compound or simple- the return is too good to ignore.

Hi @Sarah Smith,

Have you checked with your banker to see if you can cross-collateralize the equity in your other properties as a down-payment? As a going assumption- let's say your interest rate  from your bank is 5%. In that case, you're doing better than you would with a 6% loan from your friend for the down payment. Even if the rates were equal, I'd still go with the cross-collateral option if available. It leads to simplified operations, full retention of upside, and 100% say in decisions. Plus no risk of souring a friendship if things don't go well.

Further- your banker may balk at the loan from a friend being used as a down payment, as that way you have no skin in the game.

MG

@David D'Ambrosio, 

I respectfully disagree- mostly- with the responses thus far. Dude, you're getting free money. Imagine I told you that I owe you $900 each month, but for a 3 week delay in payment, I'll give you $950. That's a 5.6% return in a three week period, or 97% ANNUALIZED!! You can't get those returns anywhere, not even in a Ponzi scheme before it collapses. 

I think @Carlos Rovira is right, your manager is being a hog, most of the late fee should go to you. I don't think it's worth causing substantial static over it- maybe suggest a more equitable 70/30 split if your manager has to make two trips to collect the rent from this tenant. If your PM isn't expending extra effort collecting, the PM should just get 8% of the late fee.

Keep these tenants. If they ever go into the next month, that's a red flag worthy of initiating eviction proceedings, but if they're constantly 3 weeks behind and are paying you over $1k per year in late fees, I'd send them flowers and champagne.