All Forum Posts by: Michael Gansberg

@Alex Schukin, sorry for the long-winded response. I often post on BP as a respite from RE admin work. Here's a short(I hope!) story that illustrates my point. 

My first purchase was in Hudson, NY, in '03. I bought a three unit in a challenged area of town after placing a bid on a two unit and losing out to another bidder(by a measly $1k.) I thought, no problem- the three unit has a higher cap rate anyway. The first year, my cap rate was astoundingly negative. It took two years to become cash flow positive on that property, and there was ample blood, plenty of sweat, and no shortage of tears. I was hoping to get my feet wet and cut my teeth- as it turned out, I learned to tread water while someone was stomping on my head(which I suppose is a valuable education??)

Years later, I still own it. Today, it is a vanishingly small part of my portfolio, yet it still occupies a disproportionate amount of my time. I guess I shouldn't complain- even though it still requires work, hand-holding, and some nursing along, it has more than quadrupled in value. The one with the "lower" cap rate across town that I just missed out on? That would've undoubtedly had a higher real cap rate and cash flow for the last thirteen years? That one is up tenfold in value. What can I say? Hudson finally turned the corner.

I certainly got an education from the difficult purchase, and continue to be educated by it. Mostly, I've learned to stop buying in lousy neighborhoods because life is too short, time is too precious, and I respect the money I've earned. I hope you don't make the same mistake that I did. As a new buyer, I cannot more strongly recommend that you build some experience(and a good team that you trust only after seeing repeated, positive results) before straying into difficult territory.

@Alex Schukin, 

You're definitely in a chicken/egg scenario. How can you attract excellent management when you have only several units? And how can you buy units before having excellent management? I believe most real estate investors start with this quandary- I certainly did. I also think it is the toughest hurdle to overcome on the path to successful real estate investing. Once you obtain excellent management, they can(and will) assist you in your expansion, by lowering your time requirements, enhancing profitability, and increasing the equity in your properties.

I think the solution to this quandary is to change your parameters a bit. It is unlikely that you'll be able to obtain excellent management with a small unit count, so lower your sights to just "competent" management. Hopefully, they'll grow and learn along with you. If they don't, by the time you have 10-20 units, you'll be able to attract the quality of management that you're currently seeking.  Further, you suggest an acquisition in a "C" neighborhood. "C" neighborhoods definitely require "A" management, but top managers will likely shun you if all of your buildings require continuous hand-holding. And if you do obtain just "B" management, that "C" neighborhood will eat them for lunch! And that'll be the end of those expansion plans you have. 

So the second parameter change I suggest is upgrading from a "C" neighborhood to a "B" neighborhood. That will turn a merely competent manager into someone who can shine a bit, perhaps. Take it from someone who started in "C" neighborhoods, and has experience in all sorts of neighborhoods now- the "C" neighborhoods are like stocks with very high yields. They are usually fool's gold, with assumptions about occupancy being too high, and assumptions about operating expenses being too low. And hey- you value your time, right? A "C" neighborhood will definitely take more of your time. Just like the high-yielding stocks(and their oft-illusory returns,) the "C" neighborhoods will generally prove tougher than you think. My best properties have always been in the more prime areas, and I now have a large enough sample size to suggest that this is the rule rather than the exception. 

Don't let the best be the enemy of the good. If you need a little more time to save up for that "B" neighborhood, take a little more time. You'll make it up in spades later on via reduced time requirements. And if you want to be in "C" neighborhoods, the best way to do it is to have fabulous management first.  So build your team first, and then walk further out on the tree branch, if you must! 

MG

@John Barnes, I'd go with baseboard electric, which will have to be hard wired. It's generally a terrible way to heat, as it's almost always the most expensive option on the utility bill(versus gas forced air or gas hot water, for example.) However, the upsides are very clear- no ductwork, as would be needed with forced air, and no pipe work, as would be required with hot water heat. 

Baseboard electric is also very robust- it's a heating element which converts current to abundant heat(basically the same thing an incandescent light bulb does, but without the light.) So it's unlikely to break or require any maintenance. The installation costs should be lowest for baseboard electric- and even though it's the most expensive way to heat, if it's only used one day per year, the impact on the electric bill is the last thing you should be thinking about, as it will be negligible.

I also like @Marelyn Valdes' idea- she's suggesting a heat pump, which essentially reverses the direction of the air conditioner(it "air conditions" the outside, thus transferring heat from the outdoors to the interior.) I don't know that it would fly with the section 8 folk- they probably have certain boxes they have to check, and heat pumps likely haven't made it onto their checklists.

If it were me, and I didn't already have heat pumps, I'd probably go with baseboard electric(in your circumstance. People up North, electric baseboard is bad. If you're anywhere north of Florida, residents will turn up their noses at the inefficiency of electric baseboard.) 

@Cary F., so glad you posed this question. I'm in the middle of RE admin work, and answering questions about policy and real estate certainly feels like a break to me. I also think this happens to be an easy one. 

First Rule Of Politics: Say whatever it takes to be elected.

Second Rule Of Politics: Once elected, do whatever you want- I mean hey, if the electorate picked the wrong person, what can those suckers do about it? I'm in for FOUR YEARS, baby! Impeach away, if Bill Clinton could survive it, so can I! (picture Alec Baldwin saying all this with a prune-face.)

All comedy aside, it is worth noting that no wall will ever be built, because it wouldn't work, and I'd like to think(hope) that Trump is not criminally insane/stupid. And all illegal immigrants won't be deported, because Milania worked prior to having her work visa, so he'd have to start with his own wife(or will she be an ex-wife by then?) And that quantity of hypocrisy would be tough for even him to justify. So if you take as fact that the promises made before the election will not be carried out, you're then left guessing as to what will happen once Trump begins inhabiting the Big House. Sorry, I meant the White House.

Here are my guesses:

1. All real estate tax benefits will remain intact(or possibly be expanded?) This is because those benefits directly benefit the president-elect.

2. Any legislation or tax benefits that only benefit plutocrats(sorry, dear reader, that isn't you, or me,) will remain or possibly be expanded. This is because those laws and benefits directly benefit the president-elect.

3. All isolationist rhetoric put forth during the election cycle will be just that. I mean, hey, we elected a Democrat after all(or did we elect a Republican? Argh, I can't tell, he switches party affiliation almost as often as he switches wives!! Don't believe me? Click here and here. Oh, my bad, he switches party affiliation more often than he switches wives.) So to summarize this point, Democrats correctly believe that open and free trade is good for everyone, so Trump will probably remain in the Democratic camp on this one.

4. He won't lock her up, so everyone stop salivating, schadenfreude is not an attractive quality, so just stop already. Yes, I know we all have base instincts, but seriously, a little less id, and a bit more ego and superego, m'kay folks?

5. If you're squarely in the lower-income bracket, and if he follows through on his "promises," you will not do as well. C'mon, what did you expect? He's rich, and he cares about himself and his friends, and you're neither. As a corollary, if you rent to people in the lower income bracket, your residents may become more financially stressed. Listen up, landlords! That means your tenant base might experience problems- so you might too. Sorry.

So Cary, I could go on for awhile, but this post is meant to be more fun than informative. We really have no idea what's going to happen when the president-elect is coronated(I meant sworn-in! Gosh, this keyboard keeps sticking today, typos akimbo, terrible apologies.) Since we have no idea, I suggest not altering your strategies based on guesses- we all must hope that the system of checks and balances is robust enough to prevent an apocalypse. 

Happy Investing! Xo,

Michael

@Edouard Pierre, don't forget about water-efficient appliances. 

It can be tough to swap out fixtures while residents are living there, but when a resident moves out, I'd recommend an ultra high-efficiency toilet(the Niagara Stealth at Home Depot uses only .8 gallons per flush, half as much as a standard toilet and about 38% less than what is considered a high-efficiency toilet.) The Niagara N2517CH uses about 17% less water than an average showerhead- and only costs $11. I'd also recommend faucets which are labelled "Watersense." There are a bunch of those at Home Depot and other such places. If you swap out all of the things mentioned above, your usage will probably drop by 20%-25%, and your resident's water heating bill will also decline a bit. I've used all of the above at my properties, it is my secret weapon, it lets me wipe the floor with my competition(shh...don't tell anyone...)

@Bill McCartney, it sounds like they tried a bait and switch on you. So sad- they showed the three best units to you, told you that they were  representative of the rest, and then you learned the ugly truth. Psychologically, the seller gave you a bit of a feeling of ownership(after which you now have some fear of loss,) and when people own things, they tend to place a higher value on those things prior to taking ownership.

Why not try this- estimate the annual cash yield on your initial investment(under the theory that the units were all like the initial 3 units,) then adjust your offer downwards such that your percent yield on capital and time invested is unchanged? For example, if you hoped to obtain a 15% yield on your capital and time, revise the offer downward such that you correctly account for your increased capital and time inputs and still come out with a 15% return(for example)? I'd also suggest reducing the offer a bit more to be safe- and it's a good idea to include your rationale for the reduced price along with the offer. Show them what your anticipated rehab costs are. The seller knows what he did- now it's time to punish him for it!

@Nancy Roth,

Happy to help. If you're getting a true 30% return, it would be hard to compete with that return by doing these simple upgrades. However, electric resistance heating is a big negative, so I agree that replacing that system is mandatory. If I could save $3k by not doing central air, that's what I'd do- I think it's pennywise and poundwise. Your resident will probably install 2 in-window air conditioners(or maybe 3 at most) for the summer months. So your resident can accomplish the same thing you're shooting for at a much reduced price($500-$900, maybe, for 2 or 3 in-window ACs?)

If you're still getting another $100/month on $6k or $7k invested, and reduced turnover, and a happier resident, then you're doing pretty well.

Thanks and hope that's helpful,

Michael Gansberg

Hi Nancy,

Here's how I like to do it. I compare the quantity of funds put into a rehab(or in this case, cosmetic fixes) with the likely yield on that money. So for example, let's toss around some simple numbers. Perhaps you can do all of the above work for $5k, and let's assume the new rental amount increases by anywhere from $50/month to $150/month(I don't know the Baltimore market, so I don't know how realistic this is.)

On the low end, your simple return is $600/yr/$5k invested which is 12%.

On this high end, your simple return is $1800/yr/$5k = 36%.

Let's say you calculate your return on investment in a new property to be 15%. In that case, the above modifications would likely give you a higher return on invested capital(except in the "floor" case, where you only net another $50/month, but even that is pretty close.)  If your return on invested capital is higher by doing the modifications, it's probably a better idea to do those. Even if it's close- it's still probably a better idea! Here's why.

If your rent is higher by $600/year, using a gross rent multiplier of 5X, you've increased your property's value by $3k. If your rent is higher by $1800/yr, your value is higher by $8,000. So that's the icing on the cake. The less tangible aspect of the cosmetic changes, but in my view, most important, is how it will likely affect the change in tenancy. A better apartment attracts a better tenant, and also tends to stay occupied a higher percentage of the year.  So if you go from a vacancy rate of 8%(perhaps the local average, but I don't know, I just pulled it from a hat,) to 3%, that will really improve your bottom line. And if a resident is happy with their apartment? That really changes things- instead of hearing complaints, you'll hear nothing. 

I also recommend swapping water and energy hungry fixtures(notably, the toilet and showerheads and any incandescent or swirly bulbs) to water and energy efficient counterparts. Specifically, go with LED bulbs(not the lousy ones from Ace hardware, but good ones with nice light quality,) and a .8 gallon per flush toilet(from Home Depot- Niagara Stealth) and a 1.75 gpm showerhead. Your bills and your tenant's bills will go down, and that will also increase the value of the building.

MG

@Andriy Boychuk, we've used heat tape in the winter on some outside lines- but heat tape isn't insulation, it's for active heating(I'm sure you know that already.) If you have lines that are outside, I'd use the highest R-value pipe covering and maybe a bit of heat tape as well(we use this.). Heat tape is just a resistive heating element, I don't think one is better than any other. On our outside lines, we've put heat tape under the pipe insulation. 

If your lines are indoor in well-insulated space, I'd still go with the higher R-value stuff- why not spend a few extra bucks if it'll help reduce the risk of freeze-burst damage, which can be extremely costly? If the space is well-insulated, you generally shouldn't need to use a heating element on indoor pipes, assuming the space is heated of course.

@Peter Stellato, 

Very glad to hear you're thinking of putting some capital to work in the Capital District. It is my favorite stomping ground, and it's where I cut my teeth(I started in Hudson, NY. That's where my teeth were kicked in, but it was so worth it.) 

My epicenter of operations is Troy, NY, a bedroom community to Albany. If you're looking in the Capital District, I'd recommend checking out the bedroom communities. In no particular order, you might want to investigate Waterford, Watervliet(really a part of Albany,) and Troy. Schenectady has some tax issues that can be challenging, and Cohoes has a court which stumbles all over itself to let non-paying tenants live rent-free. Come to think of it, maybe I should move to Cohoes...

And it's been 2 months since you've posted, would you share your experiences?