All Forum Posts by: Shane Pearlman

@Kirk R. - Our local water district has real time data. Sadly it isn't accessible directly to us, but when requested they will pull it up on a computer and you can see water usage at any time of the day for months. It was clear that there was no slow leak during off house. 

@Jeremy Tillotson - I'm with you brother. First thing I looked into. The Water district quotes me between $14,000 - 19,000 dollars to split the meter. Madness!

I have a duplex with 3brs / 2.5ba on each sides which we have owned for 7 years. The property is Master Metered for water. The tenants pay a fixed water fee, which I base on an average monthly amount over the past 12 month of usage, and then adjust for family size should there be a turnover. 

One on side, the family is on their 4th year and is quite stable. On the other, A new family moved in at the beginning of May. As you can see from the numbers below, water usage has gone a bit out of control in the last 6 months:

12/05/14   24,450 Gallons

10/06/14   20,950 Gallons

08/06/14   20,800 Gallons

06/30/14   16,400 Gallons

04/30/14   16,100 Gallons

We did a cohesive check for leaks in case that was an issue, but it does not appear to be one (according to the water dept). 

The other factor which complicates my math, our county has been facing the worst drought in recorded history. As such, we have all been asked to stop watering lawns etc.. which has substantially lowered the bill in summer compared to other years. It makes the base harder to extract from my historical patterns. In addition, water rates are going up rapidly, but it is not quite as clear yet where they will land this year.

Do I simply try to bill the monthly overage to the new tenant for the time being? Could work, but I don't feel it is totally fair given all the other price fluctuation factors.

Does anyone have a nice spreadsheet they use which takes into account the price tiers?

Has anyone experimented with some of the more affordable sub-metering systems successfully? I know see that they don't necessarily hold up in court when challenged. 

Any good tips on creating greater water use awareness in my tenants? It goes beyond the cost to me, I live here and want my community to pull together during this challenging period. I already put in low flow everything. =)

If sub-metering could work, that would be a great things to include in my 4plexes up north and pass the actual cost onto the tenant. Seattle has an evil scam going on, in which I am not allowed to bill my low income tenants (ahem students) more than $25 /pp a month for water, but since it is master metered and I don't qualify as low income, I have to eat the difference. It is A LOT of money.

Hi @David Affonso - welcome to BP. 

I think that is a great approach. It is the one my wife and I took in order to live in a 3br in Scott Valley and was our first experience as a landlord. 

My wife needed to commute the 17 to a Biotech in San Jose and I didn't want to be too far from the surf. While we couldn't comfortably afford the monthly bill for a 3br house (avg price was 750k), we could afford a duplex and used the rental half to offset it enough to bring it into range. We learned the nuances of landlording as we built the capital to buy our next rental the following year. 

We ended up living in the duplex 4 years before buying a home and converting it into a full rental. Today it is our highest cashflow property (over 2k/m free and clear). The owner occupied loan is a great advantage in these cases, as is a first time home buyer if you qualify. 

I definitely think that @Assaf Furman is right about your area restrictions. That could be a challenge. On the other hand, if you get to know every street and start meeting people and building relationships, some times you can get the property under contract before it goes to market. We bought the duplex 3 doors up from our original in 2013 because everyone in the neighborhood knew we were active investors and looking. Th owner approached me as she was transitioning her home for retirement (she lived on one side and her kids on the other).

Bummer, not going to be able to make this date. Hope you can make it the following week for the coastal meetup at beer 30 in santa cruz: http://www.biggerpockets.com/forums/521/topics/159...

Hi @Account Closed and I are looking for a deal right now, so if you really can chase down a strong off-MLS lead, we could be interested. Lets chat it out over beer next week if you can make it.

Hey @Anil Sharma - Welcome!

I just bought my second fourplex in magnolia (10m from downtown seattle). It was just over a 5 cap, 2.8% Cash on Cash, brand new and fits my investing profile to a tee. This deal would probably give the midwestern cashflow folks a heart attack. The area is going through an explosion right now, with old homes getting nocked over and new large properties under development. Rents on my first fouplex (purchased at the end of 2013) have gone up 15% this year alone.

The 1% rule and the 50% rule are all rough guidelines. They are helpful in some cases, and not in others. You can't compare an equity market like Seattle core with a cashflow market in podunk montana and expect the same business/ financial models to apply. They are highly different environments. I find the more experience I get, the less I pay attention to broad stroke rules and the more I focus on analyzing deals carefully and structuring them to fit my personal goals and lifestyle requirements.

Your rental properties / business is a financial and lifestyle vehicle. The property type, location, deal structure, debt and management style all come together to create a specific set of outcomes. Why do you own these properties, and what are you hoping this will accomplish for you and your family? How involved do you want to be? Do you need cash today, or is this asset building for 3 decades in the future? Has your game plan changed since you bought them?

My family and I invest for equity growth at this point. I don't begrudge cashflow, but the purpose of my investments is the carful acquisition of high quality assets where I can force further equity. And one of the huge advantages of A-B+ class properties, the tenants are way easier.

Hey @Michael Newhouse - I just had the rent increase discussion with two tenants yesterday. Both of the tenants are approaching (4 months to go) the end of 2 year leases. All the leases I personally are spaced out to end between April and September, as to minimize their impact on my life and maximize choice in quality tenants.

I typically have the conversation about 2 months before the lease expires, but had a natural opening. I was doing my bi-annual walkthrough, and asking them questions about their life, family work and just being friendly. "Out of curiosity, have you and the family decided if you will be staying on and want to renew your lease, or are you moving elsewhere in town?" This helps answer a key question for me to plan my spring / summer, but I've found that you can almost guarantee the next question will be "are you raising the rents?"

I go into these discussions prepared. I do my market research, and discuss the tenant with my wife. Do we want to keep this person? Are we planning to sell at any point soon?

One of the tenants is a high touch, maintenance heavy user, who is substantially below market. We closed on the property in early February and had a duplex to fill. I picked a low price point on one side to make sure it turned over quick (we had 40 people walk through on the open house - probably a bit too low honestly). Now, I'd like to do the remodel on this unit, and get the price up to market (about $300 / month more).

The other tenant is simple, self-managing, and closer to market. She asked if we would increase it and I told her only a token amount.

I totally vibe with everyone's caution about vacancy. To provide an counterpoint to that view: it is SUPER IMPORTANT if your properties are MF to raise the rents when you can, as you are increasing property value. You never know when life will give you reason to sell, and you want to maximize value safely. After all, our local cap rates are 3-5%. ($300 / month * 12) / .05 = $72,000. That three hundred a month may not sounds much, but it is worth a minimum of 70k in sale price in my market.

hey @Seth Mosley - that is a super solid question, and I just went through that thought process myself recently!

On Metric Guidelines

Your rental properties / business is a vehicle for the life you are trying to create. The property type, location, deal structure, debt and management style all come together to create a specific set of outcomes. So let me ask you, why do you own these properties, and what are you hoping this will accomplish for you and your family? How involved do you want to be? Do you need cash today, or is this asset building for 3 decades in the future? Has your game plan changed since you bought them?

I see all these rules floating around on BP. They are helpful in some cases, and not in others. I find the more experience I get, the less I pay attention to broad stroke rules and the more I focus on analyzing deals carefully and structuring them to fit my personal goals and lifestyle requirements.

Why I Sold / Traded Up

We 1031 exchanged two properties in the last 14 months.

The first one was a pain in the *** to manage. It was my most profitable property at that point, but in a C neighborhood and the headache involved just wasn't worth it. I had to deal with my house being turned into a marijuana farm, people loosing jobs and going through a lot of apps to find tenants I was happy with. I was sick of it. I had enough equity in the property to reposition it into a 4-plex in a b+ class neighborhood with enough cashflow to pay for a PM and still give me the same monthly income. While on paper, the 4 plex didn't look as attractive as I had to put more capital in, lifestyle wise, I now have a newer, better asset in a higher appreciating area with no need for my day to day involvement. The neighborhood was also clearly in the path of progress and I have seen a year of ridiculous rent growth (1k / month increase since purchasing it).

The second property we traded a few months back when my tenants approached me with an offer to buy. I hadn't really planned to sell, but they made a solid offer. We had forced as much equity as I think we could into the home with the remodel, and repositioning the cash into a larger deal with more upside was appealing. I knew the property was due for a new roof, and this would let me use that equity in a new property rather than in the current one. I did the market analysis and saw a handful of apartments I would be happy to own in Seattle (my second market). My partners were interested in participating, so that gave us the opportunity to reach the next rung. The 1031 timelines can be tough, and as such I ended up having to get creative and bought a brand new 4-plex. It wasn't the apartment I was looking for, but time disappeared and it was the best deal I was able to lock in place. The new 4-plex is a good step up from the SFR I sold, but I'm still looking to do my first apartment.

Sometimes you reposition for profits, sometimes for equity, sometimes for lifestyle. Consider the 1031 carefully, as it is an epic vehicle and if the right deal is there you can really score, and if it isn't you settle or worst case, loose out. The key is to be strategic and have a clear set of goals for both your real estate business and your personal lifestyle.

On Cashflow & CapEx

You have owned these properties for a while. You know what your actual cash flow is. The only mystery is future capex, and you can do a reserve study to get a sense. If you have never done one it is pretty easy. List all your large expense items (roof, siding, HVAC, kitchen appliances....), when they were installed, what their reasonable working life is, what it costs to replace them and then do the math. It will give you an averaged annual number. Add that to your regular maintenance costs and you will have a better sense of your long term cashflow.

On Cashflow Vs Equity

Some of the largest growth in my net worth comes from forcing equity (fixer upper) & appreciation. While I would never tolerate negative cashflow, if you have bought in a market like the SF bay area that has strong appreciation cycles, your perception on minimum necessary cashflow profits might differ. I don't need 20%CoC like some of the midwestern folks. I need 2-5% minimum as that still beats what I get in my savings account, and then I get to build equity with the application of careful timing.

Good Luck and let us know what you decide.

Hi Amy,

This is a struggle many business owners deal with. I'm going to answer your actual question first since no one else did, then debate the wisdom!

Hiring your First Employee

Recruiting: You need to find the right person. While doing your interviewing, be careful not to stumble over the protected classes discrimination issue ( http://en.wikipedia.org/wiki/Protected_class ). That means, you can't talk about things like race, religion, family, disability etc. Make sure you have a clear list of requirements and a grading scale. This should sound familiar as a landlord, since it is pretty close to the issues we face from HUD. Key think is to really figure out what the right blend of skills are that cover the majority of your needs.

Payroll & Taxes: You can't just cut someone a check. You have to withhold the right amount of money for things like social security, medicare, local and federal taxes. You will also need to pay the employer portion on top. You can either do this yourself (suck) or pay someone, either a bookkeeper or a specialized payroll provider. I pay about $150 per month for 7 employees.

Benefits: Full time, part time, salary, except, overtime... all things you need to figure out as the rules are different for each approach. For example, if you were to use an hourly employee, then you need to keep track of their time, and if they work more than 8 hours in a day, or 40 in a week, you owe them overtime. There are also laws about the type of leave / sick pay people get, as well as other forms of benefits. 

Legal / Contract: Once you have the right person, you write them an offer letter. It will detail their job requirements and their compensation. Typically you also have some kind of company policy / handbook, that defines the rules of their employment. Things like, lunch breaks, or vacation policy, or how much money they can spend without written authorization.

Compliance: The laws around 1099s are vague, but ultimately simple. You just need to be sure they qualify using the IRS 20 guidelines. Compliance around employees is greater. People like OSHA now pay attention. Local government agencies want to collect paperwork and funding for employees: business license, office inspection are things we deal with.

Insurance: Workers comp is good. You will also need general liability. You might even want to consider E&O depending on the tasks they handle. If they drive, then make sure their vehicle is covered in case they hit someone while on the clock. You should probably also make sure they can make their repairs / fixes without a contractors license, or find someone who carries one.

1099s, and Why I think you Should Kiss More Frogs

Finding a good employee has been no easier than finding a good contractor. To put it in perspective, I have 33 part time contractors on my team. We added 11 new ones in 2014. 1 out of 5 made it long term. I think our best year ever was 1 / 3. You have to build good filtering systems, lean heavily on referrals, and always be recruiting. I just had a new handiman make some repairs to my home last that I could have done myself. It was a good opportunity to test someone. Sadly, he failed. Work was good, but he was stupid slow and was not organized in a way that would work unsupervised. I typically keep 2-3 handymen who passed on roster and try 3-5 a year on new tasks to keep my list current.

I could be wrong, but my experience having both is that employment won't solve this for you, but as @Paul Ewing eloquently stated, it will offer you a whole new family of migraines.

I did a talk in 2010 to a conference of business owners on how to find and manage independent contractors (Freelancers are slutty, but so are you: Strategies for the successful management of independent contractors). Maybe something in the slides might be of help: http://www.slideshare.net/shanepearlman/freelancer...

@Account Closed did a nice job on the against.).

In 2011, my parents called me. "Shane, we have never seen such a substantial dip in real estate prices during our life times tied to such low interest rates. This is bigger than the early 80s. I know you aren't quite ready yet financially for your next big move, but don't pass this up." We were living in a duplex in the mountains in a great town, a good investment, but not the dream. We had been talking about living on the ocean near some of my favorite surf breaks for years, but the reality of a 1.2M+ SFR seemed out of reach. I began our hunt and started to find some options. It took 3 months of persistence, but I found a treasure. 2,670 square feet of custom amazingness, just above the ocean for 735k. I thought they had made a mistake, but a mixture of poor marketing, bad timing, prices bottoming out and an unhelpful realtor gave me the opportunity to live in my dream village. We borrowed some extra family money as we had to put 30% down and put a bit of elbow grease into it. Now I walk with my daughter to the surf. In the last 3 years, prices have risen such that I could no longer afford to by my home. According to zillow (which isn't terribly accurate) it is now worth about 1.43M.

So, there are factors with market timing which could drive you to take advantage.

You could also find the perfect home / the perfect piece of land. I have 2-3 homes I have had my eyes of for a decade. I've introduced myself to the owners and ask them if they plan to sell about every 3 years.

Interest rates will rise. If you can lock a 4.25% loan at 30 years, that might have a serious impact on affordability. Realistically, this one can be resolved with an equation comparing the impact of a bigger down payment afforded by better investing the funds, but having to take a higher cost loan. I started to work on the formula for you but quickly realized it is so full of assumptions it rapidly became B.S. 

Net result was a bigger down payment, but of course the retirement property you are planning to buy will likely be more expensive AND the interest rates are going to be higher. I'm personally betting on a huge upswing in inflation / interest rates in the next few years, which reduces the amount of house you can cary with a loan. Hard to say which is better.

My advice (which is worth exactly what you paid for it)

If you can get a good enough deal on the right place, buy it now as long as it doesn't put your financial health at risk. Until then, invest wisely, and spend the time looking. The interest rates are a major part of the equation, but the super sale seems to be wrapping up, so don't get caught with someone you aren't positive is the one.