All Forum Posts by: Pearce G.

Are you allowing for maintenance? vacancy? capex?

@Brian Compton property management ranges 8%-12% of monthly rent.  10% seems to be most common.  They will find you a new tenant, but there is usually a one-time charge for that.  I'm sure there are some quality PMs from your area here on BP who would like to work with you.

You definitely need to include major repairs in your financial calculation of overall cash flow.  If you expect property management costs and major repairs will turn your cash flow negative over the next 3-5 years, then yes, it probably makes sense to sell.  Or if it's just going to keep you up at night, cash out and put that money to another use.

If you're netting ~$300/mo on ~$25K equity, your return is somewhere in the mid-teens.  Hard to beat that, especially after transaction costs to sell the townhome and buy something else.

But if you're just not into landlording, I get it.

Most obvious answer is to get a property manager.  It will cut in to your return, and you still need to manage the property manager, but it would allow you to continue building equity without the hassle of landlording.

Quick story:  I bought my first house in 1988 for 110K with 10% down.  Lived there 2 years and sold it for 120K.  I was young and single and didn't really have to sell it, but I thought I was brilliant for doubling my money in 2 years.  I looked it up recently, and that house is worth about 430K.  If I had kept it as a rental, it would be paid off and cash flowing at least $1500/mo.  In hindsight, it was about a half million dollars in lost opportunity.

That's a pretty big gap to close, but maybe you could rent it room by room.  Are you near a university or a major airport?  I have a pilot friend who flies for one of the big shipping companies.  He and several other pilots who live in different parts of the country rent a house together near their hub.  Pilots might be easier tenants and less price sensitive than college students.  And you may be able to up-sell some housekeeping services.

If you were already planning to have it repaired anyway (regardless of whether you were obligated to), then you're not out $360.  You're out $360 minus what your own contractor would have done it for.  So it's a relatively inexpensive lesson.

Pay the $360, but get something in return.  Specifically, tighten up your lease.  Require the tenant to sign an addendum that clarifies your policy on unauthorized repairs going forward.  That's a reasonable request...to avoid future misunderstandings and because you can't afford the liability of the tenant making their own utility repairs.  And if you need to, include additional language to clean up any other weaknesses in the lease language.  Keep him in his box.

You want $360?  Sign here.

PS:  I am not a lawyer.

Take the high road.  What is the right thing to do?

Nothing to be gained by confiscating his stuff.  It will escalate the conflict, maybe resulting in more damage to the property, and likely put you on a path to involving lawyers.  

Let him come get his stuff.  Give him a reasonable deadline to be completely out.  Then change the locks and move on.

Not sure why the renter would want to tear down the building on his way out if you want to keep it.  Seems like it would be easier for him to just take his stuff.

Depends on your objective.

If you're saving up to buy a car or pay tuition within the next 12 months, bank your cash.

If you want to build wealth over 20+ years, at least some of your diversified assets should be in real estate.

@Matu Ambaye Once you rent it out, you may be able to re-finance it with a conventional loan which would be far less expensive than hard money.  You would use the re-fi to pay off the hard money loan.  Then use the rental income to service the conventional loan.  But crunch your numbers and talk to some lenders in advance.  I can't stress that enough.  You want to make sure the property will generate enough rental income to service the loan and the other expenses of ownership.  Plus, there's no guarantee you will qualify for a conventional loan at all. 

If renting the property is an alternative exit to flipping it (and you should ALWAYS have at least one other exit possibility), then you need to read up on and listen to some podcasts about the BRRRR strategy.

Please don't take this the wrong way, because I applaud you for asking all these questions, but I think you might need to find a local mentor or partner for this first deal.  Maybe you contribute sweat equity on the rehab in return for a modest finder's fee and the opportunity to learn.  Maybe a mentor or partner will help you find a deal that has more room for error.  I'm just worried about you getting stuck with a hard money loan on a property you can't flip or re-finance.  What happens if the rehab costs more than you expect?  Can you borrow more from the hard money lender?  Or do you have to stop the rehab before it's finished?  What if you have to sell for less than you owe the hard money lender?

Granted, your intent is to flip rather than hold, but what is your prospective buyer's intent?  Are you selling to an investor or an owner-occupant?

Do the math as a rental property even if your objective is to flip. Once the property is rehabbed and rented, you can replace the hard money with conventional financing. Holding it as a rental property may be a good backup plan if you can't get the ARV you are expecting. A rented property with good cash flow may be worth more to an investor than it's worth to an owner-occupant.

Also as @David D'Errico said, 70% is a rule of thumb. When your repair cost is small and generally cosmetic, you may not need the same buffer you would need if you were opening walls, re-roofing, bringing up to code, etc.

@Matu Ambaye ARV suggests you intend to flip as opposed to holding for rental income. All-in, your cost of acquisition and rehab will be 145K-150K depending on closing costs. Unless you are paying cash, there will also be holding costs attributable to financing. If you finance 120K at 5%, 30yr am, it's $650 per month. If you fix & flip in 6 months, your holding cost is almost 4K. If you're financing with private or hard money, double it. Now, you have to sell it. Commission will be 3-6% of ARV. That's another 5.5K-11K.

Add it all up:

145-150K to acquire and rehab

4-8K holding cost during rehab

5.5-11K to sell

Total costs: 154.5-169K

That means you stand to net somewhere between 16K and 30.5K, assuming all your numbers are accurate and you don't run in to any surprises or delays (and we haven't mentioned Uncle Sam's share). 

That seems a little thin to me.  Maybe you can turn it quicker, because the rehab is fairly simple.  Maybe you have cheaper financing.  But this is why you have the 70% Rule.  The 70% rule builds in more buffer.

All of that being said, even if you only break even on your first deal, give yourself a big pat on the back, and use what you learned to go find your next deal.

Good luck!