All Forum Posts by: Ross Denman

@Jose D. Martinsville is a small City about halfway between Indianapolis and Bloomington. We are selective about managing properties that far out as a tough property would put a strain on our efficiency if we had to visit the property very often for maintenance, high vacancy, or other types of drama. The crime in Martinsville isn't terribly high in most areas as it is a more rural lifestyle than Indianapolis. The housing market is similar to the median in Indianapolis as far as rents and sales prices go.

I can provide some insight on OOS investing and purchasing tenanted units.

Several things to consider. You mentioned properties being run by slum lords... Understand that until the last 10-20 years, the majority of the prospective tenant demographic was pretty poor and had little means. Most people preferred purchasing homes and the banks were very easy to work with. This means that properties that have been rental properties for a while have not usually been kept up. Deferred maintenance and neglect are very common in a lot of markets when sourcing investment properties. This is actually a benefit to investors looking to BRRRR properties as the best deals need a moderate to major rehab anyway and can update the property in to the modern rental market. You do have to understand the risks to taking on large rehabs though. There's almost always something that doesn't go according to plan. Problems may include weather delays, vandalism, problems with contractors, unforeseen issues, and more. Always run the most conservative numbers that you can find reasonable to ensure that you have a cushion included in the project.

The majority of people do not sell their "cash cows," they unload their headaches. Often times a lot of these headaches can be remedied with renovations and good management, but it takes time and money to turn-around and stabilize a property. In dealing with multi's sometimes you are also dealing with an ongoing reputation problem from poor management and even a good renovation will not likely turn things around immediately. Always go in looking for the untold part of the story.

When deal with tenanted units... I recommend "not" paying a premium for tenanted units unless buying from a trusted turn-key provider. When I am working with clients looking at purchasing tenanted units, we always run the scenario of having to evict the tenants within the first few month's and renovate the unit. If option kills the deal, you need to reevaluate. Be sure to obtain the following information before closing.

• Get copies of the leases for the tenants. This will ensure that you understand the actual rent rates, lease end dates, security deposits held, and terms and obligations for the tenants. The deal may not look the same if you find out that part of the lease commits you to pay utilities, responsible for lawn care, landscaping, and lawn maintenance, etc. I've seen situations where the marketing description claims that a tenant is paying $850/mo to find out they are only paying $750/mo.
• Ask for copies of the rental ledger. This will show you the tenants payment history and also let you know if the tenant is current... while you can't go after back rents to a previous owner, purchasing a home with a resident who hasn't paid in several months is probably a bad sign. Why aren't they paying? Will they start paying again? Will you have to evict the tenants? Do you want to pay a premium for a tenant who always pays 3-4 weeks late and never catches their account up?

Last thing to leave you with is a surprise situation I had back in December with a client. He was purchasing a tenanted duplex. One side was going to move out and he owner was aware. While he was planning an extensive remodel, we made sure that the alternate scenario of a full vacancy and remodeling both units at the same time was still a viable option. Within an hour after closing... he received a call from the previous property manager as the police had kicked in the door, arrested the tenant, and seized a large amount of drugs from the home. The unfortunate part was that the family was still left to reside in the home during this legal situation. The remainder of the family had to be evicted because they no longer had the ability to pay the rent. It was a really sad situation for everybody. The point is, verify anything and plan for the worst as if you do this long enough, you will likely see it.

I speak with clients all the time about being risk aware and planning to mitigate various types of liability that come along with investment properties. I always recommend building a solid team in your target market. There are several quality providers and professionals in this market and probably almost any viable market that you may research. Having a good team will help you navigate a variety of potential complications and have systems and processes in place to avoid or mitigate them as much as possible. OOS investing is not only possible but also profitable. There are a lot of people who do it successfully, but they have built a network and relationships with a variety of local professionals to assist them.

@Sara Swift we do not have termination fees on vacant units. I have asked your PM to reach out to you and discuss this.

Regarding the rest of the story. I've reviewed your account... You had 211 email correspondences with our office between Nov 15th and July 31st. That's not including the phone conversations. Most of those are back and forth on the same or next day. I understand that you feel that you haven't had adequate communication, but I would prefer some insight so we can ensure that our clients feel they have adequate communication. We communicate to owners via email, phone, and text on a frequent basis and everything is recorded, so I'd be happy to share our records with you.

As far as not "properly" screening the tenant... I would like more insight. The tenant who was placed in the home has worked for the US Post Office for 4 years and makes about $50,000 annually, which is adequate income. She had little credit history and no rental history as she had lived with her parents up until this point. She has no felonies, as I don't believe that the US Post Office hires felons. She did have a misdemeanor in 2013 for public intox and another infraction in 2015 for not using her turn signal. She didn't pay the ticket and had her license suspended and also received a citation that year for driving on a suspended license as well. I will not share the tenant's name on a public forum, but you can find her records in the courts database at mycase.in.gov. Since she has a pretty good job like, you will likely be able to pursue a judgement for damages and be able to garnish her wages. This is why we like job history like this in the event that something like this happens. It gives our clients a better position to recover money for the damages and lost rents.

Unfortunately, the tenant did not pay April rent. Supposedly, her bank account was hacked (this actually just happened to me last Friday and I am in the middle of a dispute over it right now) and she claims that her bank account was locked at that point. I do not know if we verified this... but we tried working with the tenant through this. We had a missed promise to pay and were in communication with you about this several times in April. We discussed eviction on April 30th as it didn't appear that the tenant was going to be able to bring the account current.

After filing eviction, the tenant did not move out. This isn't a common thing that we face, but it does happen. In that event we had to file a "Writ for Assistance" request a constable to forcibly remove the tenant from the home. We were prepared to possibly have to pack out her personal possessions and store them for the legally obligated time. Unfortunately, the tenant's phone was disconnected. We did receive an email asking for more time to recover her possessions, but we were firm with the date for her to get her possessions removed. We were on standby to meet the tenant to allow her to remove her items (at no cost to you for our time) but she instead broke in to the property over the last weekend in July. We sent one of our maintenance technicians out and secured the property again, but it didn't appear that she retrieved much, if any of, her personal possessions. As you mentioned, we did ask for increased money to be held in reserves in case we needed movers or a storage facility, but if you review your account, you will see that the money in that account is still there and will be returned if not used.

In reviewing your statement, the only work that has been done at the home was to repair a water leak at the washer that the tenant had called in, you were charged for some of the multiple inspections and occupancy checks performed at the property, and preventative maintenance and lawn care issues after you were notified by the HOA.

He have been waiting for direction from you regarding how to proceed with this home. We have also talked to several people who would be interested in leasing your home, but we are not even sure when it will be ready. In terrible situations like this, we typically waive the tenant placement fee, because it's important to us to have performing homes.

I do understand your frustration as we are frustrated with the situation as well on our end. This is an uncommon occurrence, but it is something that happens with even the best of homes. We're poised to get the home reperforming again, but at the end of the day, it's up to you. If you move elsewhere, we wish you the best of luck and expect that anything moving forward will be a much better experience whoever you are working with. You have a great home and there are great prospects who would love to live there, but unfortunately life takes unexpected turns that makes it difficult for even good tenants. Please reach out to our office and let us know what your plans are. Up to this point, this home is costing all of us money, including our office. We've spent much more time with this home and situation than 90% of our homes and all of us are ready to see it performing again.

@Zach Hoereth thanks for the shout out.

Caveat: I have not read the new "BRRRRR" Book. This is just based on my understanding and experience of working the BRRRR method for my properties and our clients.

BRRRR can be very tricky. Here's my honest opinion, if you can BRRRR a home with a long term-investment of less than 20% of the cost you're in a better position than conventional financing. Of course, as @Jay Hinrichs mentioned, it's a lot of risk to get there.

Infinite rate of return... is a lie. Unless you can cash-out refinance with enough money to fill reserves (I like 6-12 months of rent in reserves) and still cash flow beyond the debt coverage and through the next vacancy... but that deal really is a Unicorn.

Leverage is the investors most powerful tool. We leverage money, people, technology, machines, time, and whatever else we can come up with. Leverage is also very dangerous. It would be the equivalent of taking a smaller boat in to the deep ocean. Every move can become very overwhelming because volatility and lack of cash flow.

Here is some food for thought for anyone looking to BRRRR.

• Don't worry about refinancing all of your money out, but try to leave no more than 20% of your capital invested long term. That puts you in a leveraged position of 5:1. This means that instead of 3%-4% equity growth every your, your COC equity ROI will be 15%-20% annually.
• Consider the rental income when determining how much you want to refinance. I am an advocate of the 50% rule. While your NOI should be higher than this on years without a vacancy, it will average somewhere between 40%-60% over time if you turn tenants. If that holds true, then your mortgage break-even amount for cash flow is 50% of the rental income. I recommend shooting for a mortgage of 40%-45% of the rental income.
  
• Keep reserves. I can't tell you how many big ticket items I see come up every year. Two trees fell on homes last year. Fire two years ago. Lots of wind and hail damage this year. Car ran into a house 3 years ago. This doesn't even consider the more normal expenses. Appliance, mechanical, or structural repairs or replacement. Evictions or other legal issues.
• Rental increases. Be sure to let the property manager know that you want some kind of rental increase every year if the market allows for it. Many of these homes will only cash flow $1,000-$2,000/year. A $10/mo rental increase is a 1.2% increase on your COC ROI. For instance, if you have $10k tied up (long-term) and cash flow $1,000, that's a 10% COC ROI. If it's $1,120, it becomes an 11.2% COC ROI.

There are other considerations as well, but these are some of the more important concepts. I highly recommend working with a team familiar with the BRRRR strategy or have investing expertise. There are lots of ways to make money in real estate... and one of the most profitable ones that I tend to see is sell poor deals to out of state investors at a profit. Education, deal evaluation, and due diligence are vital.

I hope that people take note that there are a lot of experienced investors here who are advising to be cautious with the BRRRR strategy. I believe it's a great model that can work in the real world, but there are lots of moving pieces to be managed and a lot of ways to leak capital while doing it. That's investing in general, but with the limited cash flow to offset some problems. BRRRR is like a flame thrower. Awesome weapon... but if used poorly, you'll get burned. (Sorry, watched "Once Upon a Time in Hollywood" this weekend.)

@Krissia Sheehey, here is the article by @Mike D'Arrigo

https://www.biggerpockets.com/member-blogs/3992/83758-is-it-still-a-good-time-to-invest-in-real-estate

I think this is one of the best articles I've read on the subject.

@Jan Van der vorm I would speak with your accountant as there are plenty of tax write-offs available for your property. If you can't write off all of the income, you may consider investing more money in the home if the area can sustain a rental increase. Depreciation, property management, maintenance and repairs, capital expenses, etc. You may even consider refinancing and purchasing another property with the equity payout. That would create even more tax write-offs but probably lower your immediate cash flow depending on the financing terms.

Ryan knows his stuff and specializes in these areas. We had similar problems on Dearborn on the 1100 block last year. Multiple break-ins and thefts and the neighbors were making it impossible to lease the unit. Personally, I hear more violent crime near Sherman Dr than any other part of town. I think that a lot of the problematic residents in the area are being pushed East due to the gentrification of the near East side and they are consolidating in the middle between Rural and Irvington. The western edge of Little Flower already seems as if it's deteriorating. Not that it's a big deal, but I've been solicited in the area a few times. There was a murder in the street on the 1100 block of Tuxedo just a couple of weeks ago, shootings at bars and in parking lots, drugs, theft, gangs, prostitution, etc. There will be a good upside here one day, but I really recommend letting the locals invest here for now as there's a lot of opportunities for problems and you'd want to make sure that you have a responsive team. 

@Amil D. Pricing for market value is going to change based on the neighborhoods. You also have to understand that if you are in an area that is dominated by investment properties, your retail value is going to be based on its ability to produce and income, not what Johnny and Suzy are willing to pay for it.

I think that tougher neighborhoods should be handled by the locals. There are a lot of things that can go wrong and it's very difficult to babysit a property from afar. As @Zach Hoereth said earlier, you will live and die by your local team and the core of that will likely by your property manager. The problem is that even the best property manager cannot visit your property several times each month to ensure that there are not problems that you need to be aware of. I received a call from the neighbor of one of my personal rentals about 2 weeks ago complaining about my tenant having friends over who were parking on the grass and cooking out on the front lawn. They were being problematic and the police had to be called. Now the neighbors are mad at the tenant and it's likely to turn that tenant this year. He's been a good tenant overall, but he's young and has some questionable friends that like to hang around that tend to cause problems.

It's not an issue for me as I drive by the property every week or two to make sure that there's nothing unusual going on that I need to have the property manager address, but that's not something that you can do investing out of state. While I know that the numbers of turning a $30k home in to a $50k home sound enticing, but I would still recommend something that will likely expose you to a little less risk. Having a tough tenant pool to select from can make things challenging.

I find that my OOS investors do best in a $70k-$90k range. They have $10k-$15k tied up long-term, cash flow about 6-10% until their vacancy wipes out most of it, but the equitable appreciation is often 10%-30% annual ROI depending how the home is positioned. For this to happen though, you have to be somewhere with a retail sales market. The biggest possible upside is when a neighborhood is gentrified from an investment neighborhood to an neighborhood full of nice homes and homeowners. This happened in Fountain Square, briefly in Bates-Hendricks, and is about a year or two out from happening in St Claire Place/Brookside Park area. Unfortunately, crime has been compressed around Sherman Dr and it's slowing down the expansion as it moves East. For the most part, I prefer the West side to the East side, because the crime tends to be less violent.

Real estate is a long game and while you can try to flip tough homes for quick profits, I really recommend making a long-plan as well that allows for equity growth over time as it naturally compounds in to a nice nest egg over time.

I think doing a live in flip sounds great... until you do it, but I think it will be a great experience. I love the neighborhoods that you are targetting. I believe that Sterling upgraded Christian Park as it used to be a D, but I've loved the area for almost 2 years now. You might consider checking in to an area just west of Christian Park that doesn't usually show up on most neighborhood maps called Twin Aire. There is a city initiative going on there that should increase your momentum over a couple of years. You can check out some information here. 
https://www.greatplaces2020.org/twin-aire-1

BRRRR is a great model mathematically, but reality has too many unaccounted variables. I don't believe that you have to be an expert at everything to invest, but having a team with experience will expedite a lot of things. As @James Wise said above, nobody is going to add true value to your team for free. Why would we pass on a great BRRRR ourselves? Usually, it's because we don't have the liquidity to take it on (which is an ongoing problem when using the BRRRR method.) Having a good team is what will make your investing experience profitable and having a team experienced with understanding the different issues with different types and locations of investment properties within their local market.

 As @Mike D'Arrigo mentioned above, I hesitate with SFR's that can't demand at least $750/mo in rent. I find the safest place to be is above $850 or $900/mo. If you're rents are lower than that, you are probably subjecting yourself to a lower demographic of the tenant pool. Local investors can do it and it may be great for section 8 or other strategies, but for bread and butter rentals, I find the sweet spot to be $900-$1,200/mo. The lower end of the spectrum you go, the more time intensive it becomes. Drama, late rents, damages, excessive maintenance, evictions, etc. Even a good property manager can't babysit a property/tenant on a daily or weekly basis.