All Forum Posts by: Ronald Perich

You sure you make $10K/mo in cash flow or is that income? We really need more details to provide a meaningful answer. 

 I realize Ali Boone just had a great blog post about PMs (the good, bad, and ugly) and how it is worth it to pay them for their services (if they are good). Having just gone through the lease-up process during a winter month, I can tell you that it is time-consuming! And then dealing with the 20% of residents who cause 80% of your time to be used - what a pain. They seem to have this down pretty well with a "less than 1% eviction needed" claim.

It looks like RW is a decent franchise. They seem to have all of the tools and provide a lot of back-end support to their franchisees. 

But I hate lease-up fees. They are counter to the goals of an owner. An owner wants their rentals rented; lease-up fees encourage the PM to let the rental to go vacant so they can get the fee. 

Give me a "low-vacancy" guarantee. If the PM can keep the "rental payment default rate" below 8%, he/she can keep 75% of that difference. If I don't get paid at least 92% pf the rent, for any reason, there is no bonus. That would be a model I could support. 

That model encourages PMs sign long-term leases. That model encourages them to re-lease quickly on a resident-turn. That model encourages the PM to have people pay on time. It also encourages me to keep the maintenance up because I get a bonus for a quick placement and I don't risk getting fired by the PM for maintaining my property poorly. Under this model the PM's financial interests and my financial interests are well-aligned.

Under their current plan, a $12K/yr rental costs me at least $1,960 in fees with no guarantee I have a low vacancy rate. And the PM is encouraged to not to renew the lease so they can earn another $1000 lease-up fee. If it sits empty for two months, they still get paid. And if they don't encourage a re-lease, I have turn costs as well. 

Under this new plan, vacancies and non-paying tenants cost the PM their bonus. They would make less under this plan, but the amount of work they have to do should be lessened because they are really looking for the very best, long-term resident they can find. 

Agree with waiting. Especially in the winter months, when the pool of potential clients is low and the vacancy tends to last longer than you want, it is very tempting to take the first person who "looks good". One of the things I do is give every potential resident a copy of the application process which outlines exactly what we use in our screening process.

A few still set up appointments, but most who wouldn't qualify stop communicating as soon as they realize we actually do check these things.

For those who do decide they'd like to look it over, it might actually take a little more effort to get them to sign the lease. Why? Because they are responsible and they can be more choosy about where they live. And they take this process seriously.

I was very tempted over the last month to let the screening criteria slide because one unit stayed vacant. But I resisted and am glad I did. The folks moving in have great personalities, seem very responsible, and were able to exceed our criteria. It may not work out in the end, but at least I'm not going in with a hand tied behind my back.

Wait for the qualified resident and don't deviate from your screening criteria.

@Mike Butler

Love your book Landlording on Autopilot. I've based a lot of policies and procedures on what you wrote about. 

One of the things I put into place was the discount for paying early or by electronic payments. I am having trouble figuring out how to "account" for it. It's not really "income", it's not really an "expense". I want to show the discount on the statement without creating a nightmare for my accountant.

Any suggestions?

Thanks!

I've heard good and bad from members in the REIA. Same could be said of property management, contractors, etc.

The former owner of one of my properties had a resident doing odd jobs and on-site maintenance for her. She would reduce rent as payment. He did a great job from what I could tell. And moved a week before we closed. Since I got his deposit at close (she didn't send to him), it was my responsibility to send to him.

I sent 100% of it back. His place was the cleanest I've ever seen after someone left. And that includes when I have moved.

If he were still living there, I'd have him performing these functions for me. 

And I would speak with my CPA about what tax regulations impact me with this. I thought I remember hearing that reduced rent and paying with cash get treated in different ways by tax code. Not sure (which is why my CPA would have to chime in).

I have missed every one of these and I have to miss yet another one. Such an enjoyable time. Hope to get back there eventually! But Ash Wednesday and singing in the choir means my talents are needed elsewhere.

Some nice points in your response.

I used the $200/mo savings as an example precisely because that's today's reality. Most people do not save enough. But my example spreadsheet doesn't care if you save $200/mo or $2000/mo for retirement. You can extend it out however you like.

Completely agree that index funds are the best alternative for most investors, especially in a 401(k) fund. The CAGR for the S&P 500 through the last 30 years is now at 10.09% when you include dividend reinvestments. Someone challenged the spreadsheet because it will reinvest all cash flow back into the business. It has to in order to do a comparison with the 401(k) returns. I did not factor in 401(k) expense ratios since they vary wildly between plans.

Agree that the investor in index funds "owns each and every penny" of the fund, but they don't control it. Did you have any control over the China influence on our markets last month (S&P down 5% YTD)? Did you have any control over the influence Sept 11th had on the world economy (S&P down 16.9%)? 

Agree 100%. That's why I stated most people should not use REI as a vehicle for their retirement. Fact is, most people have no clue or don't care about their retirement plans. Or simply don't want to invest the time. The vast majority of people never re-allocate their 401(k). They never change their investment choices. They rarely look at their statements.

The whole point of my spreadsheet was to remind those who are investing in real estate that they could do much better with their money if they are running a solid real estate plan. The biggest problem I have with the 401(k) fallacy is that the company match is such a great deal. A well-managed real estate portfolio will outperform a company-matched 401(k) in the long run. Short-term... not so much. Over the long haul, absolutely.

I expect an intelligent REI has factored in a realistic vacancy rate when they bought the place. I expect an intelligent REI has factored maintenance, Cap-EX, and property management into their purchase.

Completely agree for those who have chosen the market as their investment vehicle of choice. 

Disagree if people are actively involved in building a real estate investment portfolio as their retirement vehicle and they still have more than 15 years to retirement (again starting at $200/mo). Less than 15 years? Get the match and use the rest to buy. 

You can't buy your first rental until the 67th month at $200/mo. 

I re-ran the calcs at $1500/mo. REI starts generating more cash around the 145th month than a matched 401(k). That assumes your employer is matching 75% of that $1500. Highly unlikely.

Let's assume that's a 20% savings rate and your employer only matches 75% of your first 8%. In that scenario, real estate starts generating more cash flow at the 85th month than the 401(k) throws off in earnings.

Again, I don't think real estate investing is a good retirement vehicle for most people. But I disagree with the notion that a smart REI investor will do better for retirement by putting their money into their 401(k) before they invest in real estate.

@Scott Trenchmade a really good point when he reminded us that most people move around from job to job. According to the Bureau of Labor Statistics, the average worker hops to a new job every 4.4 years. 

Let's assume you move jobs every 8 years. Get the company match! When you leave the job, roll into a self-directed IRA that allows for real estate investing. And then buy a nice fourplex within that IRA.

Work the numbers and the scenarios. Put some thought into this and don't let the fallacies being spread by Wall St and the "gobbler"ment fool you!

@Nathan Alton, awesome to take massive action like this! 

What kind of background search are you doing on your potential partners? I mean, if I was going to start investing with someone I'm probably going to do at least as thorough a job of screening this new partner as I would with any of my residents. Checking court and public records, that kind of thing. Make sure you know who you are about to get in bed with. But I digress.

You should be really sure of this potential deal. Yes, it meets around the 2% rule. But you're only paying around $20K /unit for $400 each. Your Cap-EX is going to make this a really tight deal.

@Caleb Davis, welcome to BP! You've been a member for a couple of months so I assume you've been following some of the forums and know your way around a bit. Since one of your goals in B&H, consider coming over to the Metro East Real Estate Investors Association. We meet on the 2nd Monday of the month over in Collinsville. There are a lot of Granite City investors over there like Scott and Julia Green and Lewis Simpson (he's leading the fight against alleged GC housing discrimination).

I've learned a ton of great stuff. February will feature a mock eviction court. There's another BP member who often shows up, @DeAngelo Clark, too.

On my lease, they have to pass the screening like any other potential resident and there is a $200 one-time fee. Otherwise it is a ten-day notice.

If you haven't seen Elizabeth Colegrove's post on lease terms, look it up. She specifically talks about this issue.