All Forum Posts by: Alexander Merritt

@Brandon Schlichter Wow! Great job so far! Very impressive! If you wouldn't mind, would you explain more in detail how you are able to achieve this level of growth with very little conventional financing? If I'm understanding this correctly, you buy a distressed property on the cheap (presumably with cash), rehab it and average 50% increase in equity, rent it out, then do a cash-out refi. Then rinse and repeat. Is that right?

How did you get started on your first proprety? Conventional loan? How long do you have to wait before a bank will allow you to refi?

This is really good stuff and I'd love to hear more from you.

@Tuan Le 

CAPEX is Capital Expenditure. Usually big ticket items such as a new roof, siding, HVAC or complete remodel of a unit(s). Sometimes also included when talking about unit turnover when repainting or replacing carpet/tile. Depends on who you ask.

Personally I include everything as a Capital Expenditure because it doesn't matter if it's a $5K new roof, $5.00 door hinge, or $1.00 for new set of keys it's still an expense associated with the property.

I'm factoring 10% of rent for vacancy cost, and 5% of rent for maintenance/repairs. If you want to be ultra conservate just jack up the percentages and see how that affects your numbers. Spreadsheets are so nice for this.

Do you have a HOA (Home Owners Association)? If yes, then typically snow plowing and lawn maintenance is covered in that cost. What about rennovations? Does the property need any upfront rennovations before you plan to rent it? There's no magic percentage on that, but it should be factored in. Do the tenants pay all of the utilities including water and trash?

Then, there are things that you will need to determine on your own such as how much you want to budget for advertising costs and if you are going to be your own property manager or hire someone to do it for you. If you're going to hire someone, figure around 10% of rent for that. Here's a nifty article i just stumbled across today about that.

http://www.managemyproperty.com/articles/property-management-fees-part-i-10

@Ryan Mellon 

Just curious; did you get an actual quote for the insurance or is that an estimate on your part? I think it may be a little high. The reason I ask is because I just got an actual quote on a 3-unit 2 story property in Baltimore listed for $150k and it was only $559/yr. They estimated the rebuild cost of $285k.

Hello BP!

I recently met an individual who has a few rental properties in his portfolio. The thing is, he is only marketing them as "student housing". The properties are located near a local college and he has worked with them to get on their preferred housing list.

A few things:

1) He says he only markets them as student housing and only places ad's in places where students visit / would see (like college sporting event programs). I guess he's able to get around the "fair housing" laws because he's marketing them as student housing so he doesn't get regular Joe's inquiring about them.

2) His leases are per college semester and he has parents co-sign and puts them as the primary

3) He doesn't do any background checks. He didn't really explain why not but I'm assuming it's because he probably figures that the parents are going to pay anyways. They aren't going to not pay and have their child be kicked out.

4) He collects a small deposit and security deposit at the time of lease signing and then the remainder of the rent for the semester by the end of the 1st week they move in. So payment is up front, just like you would pay for housing on campus.

5) The properties he has are a "per room" lease. Meaning, the propertty has 6 or so bedrooms but then everyone shares bathrooms and kitchen. I'm not really sure if that's even legal to do....?

He says it's great because he never has to worry about finding vacencies and it gives him time during the summer to do renovations since most of the units would be vacent, but his expenses are still covered for the year because he takes the "summer" months into account when determining the rent. I'm assuming the paperwork is a little more, but he says it's not too bad.

What are your thoughts on this? Does anyone else do this? What can you think of for pros vs cons?

I'm certainly no expert in this field but my take on this is that the 50% rule is great for a first or second round of financial analysis. If the numbers look good using the rule, then it's probably going to be a good deal. If the numbers don't look good, then you'll need to examine the property in more detail as Steve has suggested and maybe then the deal will look good. I'm not exactly sure why everyone is saying the expenses are under stated. I would ask the seller for a complete list of everything that was renovated. You might even ask them for a copy of the contract between them and their rehab contractor to see exactly what was done. It may be the case that this property was completely renovated and all the big ticket cap ex items were already replaced so that's why expenses are low because there's not much to fix; only small maintenance things now. Again, we don't know so finding that information would be key.

I do agree that since he's not very experienced in RE that this may be a good deal for him considering his experience level. A property that has a decent cash flow where he wouldn't have to worry about major repairs/rehab/expenses for a few years will mean he can concentrate more on learing the business of landlording instead of having to deal with major repairs and construction and inspections, etc....

Now financing the deal I'll defer to other seasoned pro's on BP.

I think this is real key point. You want to create a repore with him. This sounds like an informal meeting if you are just meeting at a restaurant and since this is the first meeting, I wouldn't bombard him with too many questions about property stuff. That can come in subsequent meetings.

I've seen that TV show "Bar Resque" and the host John always has problems with the bar owner where they won't cooperate with him. Then he sits down with them and has a "heart-to-heart" with them and gets to know them and such. He creates an instant level of trust and a nice bond that then makes them want to go along with Johns ideas about how to save the bar. Moral is, that getting to know someone and letting them do a lot of the talking and being personalble with them instead of just "business, business, business" can do more for you then you ever thought possible.

Of course you are going to want to ask questions and about the property and all that stuff, but maybe sit down and have lunch and just get to know the guy for 10 or 15 mins first.

As far as being prepared, do some homework. Look up how much property taxes are, take a drive by the place and see how it looks from the outside. If they are still open, ask if they have any units available and see what they offer you for options. Check out the surrounding area at night and see if it's a decent neighborhood or you see a lot of "sketchy" activity. Etc...

Brandon... crazy story. A couple of questions. For #2 above. If you are not liable to the landlord and the landlord is not liable to you (there is no agreement between you and the landlord, AND the original lease holder (Mr. W) is in breach of lease thereby voiding the lease), wouldn't you considered to be either tresspassing or squatting in which case the landlord can then have you arrested and removed?

For #3. How can a month-to-month lease be perpetual based solely at the leasee's option? It's my understanding the whole point of a month-to-month lease is that it will continue on a monthly basis until either party gives proper notice to terminate the lease after which time there is no more lease agreement. I don't understand that at all.

 Marcia... this is excellent advice! I didn't even think about that. But now I'm wondering... would you or anyone else have an opinion of video or audio recording interaction with the tenant? Of course you would have to get consent but do you think they would agree? Do you think it would cause a negative reaction with the tenant or make the situation worse? I'm thinking I would just tell the tenant that I was going to video or audio record the conversation for documentation purposes and then provide them with a copy for their records. Thoughts?

@Paul Kuegle When you say older, do you mean near retirement age or already retired but supplementing income with a part time job?

If selling their house is a concern, would you consider buying it and adding it to your portfolio? This may be a GREAT opportunity for a killer deal to get seller financing or make a deal with them "subject to" the existing mortgage (assuming there is one). Sounds like they are in a real bind and would be very motivated to sell.