All Forum Posts by: Phil Trietsch

1. How do extension/renewals work?  There may be projects that take longer to rehab, stabilize, or sell than you originally anticipate, so you need to know how they treat you when you are coming to the end of your loan.  Will they extend or renew?  If so, what does it cost and what is the process?  How long is the extension?  Will they foreclose based on "maturity default"?

2. What are all of the non-interest rate and non-points costs?  Most people think to ask about interest rate and points but may not ask about fees like underwriting, processing, application, commitment, credit report, attorney, inspection, construction draw costs, etc.  

3. What is the draw process, how long does it take, what does each draw cost in terms of inspection/processing?  When you have completed $10k worth of work, you need to know how fast and how much work it is to get the draw that you need to pay your materials/labor and refill your coffers for the next stage of your rehab.

Hope this helps. 

If the Cap Rate is at or below your cost of capital (interest rate and upfront costs), it will likely be the case tha your return on investment will be lower when using leverage than when buying all cash. This is a very dangerous investment in my opinion. If Cap Rates move up (and they typically will if interest rates rise), then the value of the property will go down (assuming NOI stays constant). This is exaggerated when dealing with small properties because most of your potential buyers (should you want or need to exit the deal) will likely be looking for higher returns than say a large REIT, hedge fund or insurance company that might buy a large class A property as a bond alternative.

If you want to consider higher Cap Rate deals in TX, let me know.

Phil

Have up to 22 single family rental homes in 3 cities within the same market area (Copperas Cove, Killeen, & Temple TX).  A few have been allowed to vacate so that the new owner can explore options such as selling to an end buyer via owner financing, fixing up to maximize market rents, etc.  Portfolio size subject to change as some homes are being offered for sale individually.  Too many possibilities to list them all, so please contact me if you have interest and we can go over options.  Link to LoopNet listing :  

http://www.loopnet.com/Listing/20314317/804-North-...

I recommend considering your operating costs relative to rents.  It costs the same to repair or replace a toilet, HVAC, appliance, etc for a one bedroom unit as it does for a two or three bedroom unit that brings in more rent.  Similarly, property-wide expenses such as landscaping, common area lighting, trash collection, etc are the same for a property of one bedrooms as they are for twos or threes.  

Consider joining your local apartment association... https://www.atl-apt.org/ .  Many small volume landlords don't realize the access and value they could have through their apartment association.  Our local association has resources for small volume landlords and the National Apartment Association has great information and resources through their IRO program (Independent Rental Owners)...

https://www.naahq.org/member-services/independent-...

Typically your local membership also joins you at the state and national level.  Often there are leases, applications, pet agreements, and dozens more forms that you can buy and use through the apartment association that are drafted specifically for your state laws.  You can also meet other small landlords and get referrals on best practices or vendors to use for things from flooring to window coverings to HVAC contractors.

Dues are relatively affordable and are an incredible value if you take advantage of some of the resources provided.  

Hope this is helpful!  Many of us started in the same way (long before it was called house hacking :)

Happy investing!!!

Phil

Maria,

I can't speak to any state other than Texas because that is where I live/work/invest.  But here are a few thoughts about investing in TX.

It is a generally good place to be a landlord.  I don't mean that it is unfair to tenants.  However, if a tenant doesn't pay rent, we can often complete the eviction process and regain possession of the property in 2-3 weeks.  I'm sure that you understand that vacancy and/or collection loss can be crushing to your returns.  

Occupancy is very strong in all the markets that I have done deals.  I consistently see mid 90% occupancy which is very strong. 

Rents have risen but most areas are still quite affordable.  You want to own property in areas where you can make money given that some landlord expenses don't vary based on rent rates.  What I mean is this:  a one bedroom apartment in a low rent city vs. a three bedroom unit in an average to higher rent location...replacing a dishwasher, fixing an air conditioner, or changing a toilet cost the same in the $300/month one bedroom as it does in the $1500/month three bedroom in a higher rent area.  That being said, I like two and three bedroom units in places where a couple that both work with modest incomes of $25-30k each per year can qualify and afford the rent.  That is a price point that will always have renters.  

Our prices are less volatile that the markets that experienced the stratospheric price appreciation but that also suffered the crushing retrenchment after the bubble burst.  

The economy has been strong for several years and seems to continue along that path.  Texas has a much more diversified economy that it did in the 80s.  Energy is a major player but tech, healthcare, financial/insurance, manufacturing, and dozens more employment sectors have expanded dramatically dues to a very strong pro-business environment, reasonable cost of living, and quality of life factors.

What are the downsides?  Property taxes are higher here (as a % of value) than in some states since we don't have a state income tax, so property taxes are a major source of revenue.  They can be as low as 2% but can be as high as over 3%.  That's a big factor in your operation expenses.  Certain areas of the state have higher insurance rates (coastal due to hurricanes and some tornado prone areas).  The lower volatility of prices means less chance of a "home-run" appreciation deal in a short window of time.  

I think that once you decide where you want to invest...focus your next efforts on building an exceptional team.  You need the following at least:

• Realtor and/or property manager (sometimes one in the same, sometimes not).  I think it is crucial that they be an experienced investor themselves.  There are a lot of fantastic Realtors that can help you find a home to live in or help you sell the one you have.  However, they might have less than zero knowledge about what makes a good investment property.  If they are not analyzing the deal with a budget for vacancy and repairs and operations in addition to your mortgage payment including taxes and insurance, then you should run far and fast in the other direction.
• Attorney and CPA to make sure you have the right entities and tax structure for your investments.  Again, I prefer these team member to also be real estate investors.  
• Insurance agent, loan officer, and others.  There are several aspects to a good investment and financing, insurance, etc. are certainly very important.  If you get with the wrong loan officer that can't close a deal in 30-45 days, you may lose out on a good opportunity because the seller moves on to another buyer.  

If you pick a good location (state, then city, then neighborhood) and you have a terrific team helping you, your chances of success will be exponentially greater.

I hope this is helpful!  If you decide to consider Texas, we're happy to be a resource.  If you like this post...how about a vote!  

Happy investing!!!

Phil

I'd start with a good attorney who has done multiple of these for similar groups.  Even better is an attorney that is also a real estate investor.  My attorney and my CPA are both real estate investors, so they see things from my perspective and are sharpening their skills and strategies on their own deals as well as on mine.  

We set up individual LLCs for each apartment community that we buy.  This allows for different investors to participate (i.e. one person in your group doesn't like a deal or doesn't come through at the last minute).  This also keeps risk from one deal separated from risks of another deal (whether slip and fall lawsuit risk or investment performance risk).  

Don't underestimate the work that the Managing Member is going to have to do for the LLC. We compensate them a modest amount. They have to maintain records, do reports to the group, shop for things like insurance, work with accountant to complete tax returns, etc.

Ability and willingness to sign guarantees for loans may play a role in what percentage a particular member may want to take in the LLC. Some lenders require all members with > 20% ownership to provide financial information and sign personal guarantees for loans.

Clear LLC documents that define what happens when something doesn't go well (such as needing additional capital) or when someone wants/needs out (they need $ for JR's college and didn't think you'd be in the deal this long) are critical. It's all good until it's not...then it's much easier to turn to the company agreement for the options forward.

Good CPA that can advise you on tax structure and strategies is also extremely valuable...again, preferably a real estate investor that just happens to be an excellent CPA is the optimal team member.  

Last thought...good real estate agent and/or property manager (guess what?...they should be investors too!)...will be worth their weight in gold.  They have access to the data you need to make wise choices and they have the experience to guide you through the analysis, acquisition process, and operations.

Hope this is helpful!  Happy investing and if you ever look at Texas, we're happy to be a resource!!

Phil

Brittany,

I'm going to assume that you are looking at a duplex or possibly a fourplex at most based on your intention to house-hack.  The reason I specify these types of properties vs. an apartment community is that they tend to operate a little differently and therefore are often analyzed a little differently.  

Let's start with vacancy rate.  In most Texas markets, I use 8%.  This is approximately 1 month of vacancy per year.  You may say that the property you are looking at has been 100% occupied for the past X number of years.  That may be true, and certainly having long term tenants is an important factor to success with duplex-fourplex rentals.  However, when you do have a unit turnover there can be a lot of expenses including: vacancy loss, utilities during make-ready/lease up, leasing commissions if you offer them to Realtors to help get the unit leased, some amount of repairs/cap-ex that cannot legally be charged to the prior tenant's deposit because it falls under normal wear & tear, etc.  Therefore, if you budget 8% of your annual gross rents...and set it aside in a separate account that you never touch until you have a turn-over...then over time you should have funds to cover these things.  

Next: repairs and other operating expenses.  Again, I advise our clients to budget 1 month of rent per year (and set it aside in the same account) for operations, repairs, cap-ex.  You will probably have years when you have very little repairs and others when you have big ticket items.  Over time these will likely average out.  

You might imagine that these guidelines work best when you are starting with a property that is in good to excellent condition.  If the property that you are considering is not in good shape then you must get it at a price that allows you to put it in good condition immediately.  Otherwise, you could have that expensive year of vacancy and high repairs in year 2 and be in real financial trouble.  Don't be a motivated buyer and go broke on a duplex.  

Most duplex and many fourplex properties are separately metered for water.  In these cases, the tenant is responsible for water, wastewater/sewer, and trash in their name just like their elec bill.  Therefore, you only pay utilities during a vacancy.  If there is only one water meter for a fourplex, you can bill back the water/sewer/trash to the tenants if you set it up correctly in your lease and follow the laws set out in TX for utility billing to tenants.  

I hate properties that don't cash flow.  And I mean cash flow after these vacancy and repair/operating budgets are set aside.  If it doesn't cash flow, you have limited your return to principle reduction on your mortgage and appreciation.  The principle reduction is easy to calculate but appreciation is unpredictable.  In duplex and fourplex properties, appreciation hinges largely on 2 factors...rents and interest rates.  As rents rise, all else being equal, valuations will rise.  However, if interest rates rise quickly enough, you may get flat valuations even in a rising rent environment because the next investor can't cash flow any better with the higher rents because the extra interest expense is eating it up.  I counsel our investor clients to invest first on cash flow, second on principle reduction, last on appreciation.  So my advice is to buy a property that will cash flow when you move out of it and rent the unit that you have been living in (taking into consideration vacancy, repairs, and your mortgage payment).  Then, while you are living in the unit, you will likely have a reduced but maybe not free cost of living there but you will have a nice cash flowing property when you move out.

If you start with a property that is in good condition (roof, HVAC, appliances, water heater, paint, flooring, etc) then there is a reasonable chance that you will accumulate funds to handle future expenses by setting aside the two months of rent each year that I discussed earlier.  You might want to consider a Residential Service Contract (often referred to as a home warranty) for your first couple of investment properties.  It is like having health insurance for your property...you pay an annual premium (say $600)...and you pay a "co-pay"/service call fee (say $75) when something breaks and they send a contractor to fix it.  Most cover HVAC, water heaters, appliances, some plumbing, some electrical, and optional coverage on things like washer/dryer.  

If you are working with a good Realtor that really knows investing (i.e. has done it themselves and/or does property management for investors) then they should be able to walk you through local vacancy trends and rent comps.  

Hope this helps!  If so, and you are so inclined...give me a vote on the response.  And of course feel free to reach out if you have other questions.  Happy investing!!!

Phil

I'm curious if anyone has any luck finding non-recourse financing for an apartment loan around $600,000.  This is below the threshold for Fannie Mae small balance loan (minimum $750,000).  We realize rates may be a bit higher than market but do not want hard money rates of 10% or greater.  Is there anyone that might know of something?  Thanks in advance!

Kristie,

As a property management company, we use Appfolio as our management software.  Not sure what their pricing is for small number of units but we really like the system and it might be worth you inquiring.

One other thing that may be of value...whatever system you decide on, you might also want to offer PayNearMe to any tenants that don't have bank accounts (a surprisingly high percentage of the population does not have a traditional bank account).  This service allows tenants to pay cash at 7-11 and other locations (I believe Family Dollar and Ace Cash Express are others).  They receive a receipt as proof of payment and you receive a deposit in your account the next day.  You can check it out at

http://paynearme.com/en/businesses/industries/prop...

Happy land-lording!

Phil