All Forum Posts by: Jeff Takle

Not planning for the big cash expenses like roof, windows, siding, decking, exterior painting, lead paint abatement...

Every few years I got surprised with a new $5,000-$45,000 improvement. It wasn't hard to separate out the cosmetic ones from the necessary ones, but still.

In addition to PITI, positive cash flow must also cover the operating expenses (daily maintenance, PM, advertising, turnover...) as mentioned above, but also the long-term costs of the asset class: improvements.

I've tried this in the DC area and ran into two problems. First, doing lease-options wasn't common practice there in 2003-2004 and renters were extremely wary...they always felt they were somehow getting screwed.

And second, it requires that the renter have several thousand bucks to front up for the option fee. In an environment where rents are $1,500 on average, their total cash outlay to move in was:

1. first month's rent = $1,500,


2. last month's rent = $1,500,


3. security deposit = $1,000,


4. option fee = $5,000,


5. total cash expense before move in = $9,000,

A lot of folks don't have that kind of cash.

That can be a tough stretch. I love the concept--it adds real value to all the players -- and I've heard of people using it in other places around the country; I've found it to be a tough sell.

Technically, Owen's suggestion is an illegal marketing technique called "bait and switch". Aside from its legality is the question of whether you'd be running an ethical business if your model was to lure partners in by deliberately misleading them as to the value you could deliver.

It wouldn't be my recommendation.

A low-volume but potentially higher yield plan is to look around your area for homes that have unkept lots or show other signs of serious neglect. Contact the owners and open a dialogue with them. The rule of thumb is that if it's already listed on MLS or the Internet, the opportunity for a killer deal has already passed. Other options include: following up on obituaries, new entrants to nursing homes, hooking up with a divorce lawyer, or advertising at the unemployment office. It isn't sexy, but those are the people most likely to be motivated & distressed sellers.

-Jeff

No. If your goal is to separate your business assets from personal assets...to protect you from getting sued, losing, insurance not covering the difference, and failing to settle...then your business LLC/land trust should accomplish that.

If you're doing something that's likely to get you personally sued (not as the business but as a private individual), I still don't think it would hold up in court b/c essentially you'd be giving ownership of the property to the LLC and then, what, renting it back from the LLC? The IRS is pretty clear that you cannot rent from yourself or your spouse and I think a judge would look at the asset as clearly a liability protection scheme (aka not running as a legit business), pierce the corporate veil, and not provide you any protection.

It's fun to start LLCs, but it's also expensive and time consuming to maintain properly (separate accounts, K-1s, 1099s, accountants...) just to provide liability insurance. If you're a "newbie" you really don't need one. If you want to start an LLC, then just make one and put all your business assets into it.

Sorry, bad link: Here it is: https://www.rentingyourhome.com/forms/State%20Security%20Deposit%20Laws.pdf

Here's a link to state-by-state security deposit laws provided by the Institute for Real Estate Management. (sorry for posting from my site, but I don't know where on the web it sits otherwise) http://www.rentingyourhome.com/forms/State_Security_Deposit_Laws.pdf

That has your legal guidelines. Wheatie nailed it on making sec dep slightly less than one month, in my humble opinion.

I'll take check if we're not handing them keys. No keys ever get transferred until all funds have cleared or they provide a bank certified check.

Christian,

I do weight the answers based on rental dollars, if the results are feeding a financial assessment. It gives a clearer financial impact of a $500 studio going vacant over a $2,200 3bdrm in DC.

But, if you're running numbers to schedule actions (advertising, cleaning) or measuring PM effectiveness (improvements in re-renting speed), then I group them by type (studio, 1bdrm, 2bdrm...) which I think just helps cluster the comparable products closer together.

I don't add total rental days-- I generate an average -- mostly because I don't think the qualitative difference will offset the difference in the amount of time it'd take me to run the numbers.

How's Harrisburg, by the way? Wife and I may be coming down in a couple weeks to check it out.

You can also go to the local Realtor's association. Most have local data on their websites that show rental and seller vacancies. Long-term national average has been around 8%.

Dave,

My advice is to partner with someone doing these kinds of deals and go along for the ride on the first one. Apartment building is a profession, inside a larger profession umbrella called "real estate investor". Books are great to get you motivated enough to take action, but respect that this is a profession that people spend years perfecting.

The best way to learn on a deal is to go in as a minor partner (put in your $20k or offer to do the property management) and then learn everything you can.

You can make a very good living do this, or flips, or smaller rentals. It all depends on what kind of job, life, and skills you prefer. If you're not deeply immersed in the numbers...know how to calculate them and exactly what they mean in context (i.e. relative to those same numbers in nearby substitute apartment buildings) then you're not ready to lead a deal yourself.

Put another way, you'd be diving into a complex profession with no experience, massive risk exposure, and no support network. It's a great profession. Make an investor friend and learn the ropes a little.

Also, commercial lenders around here are looking for 30%+ on any loan these days. Any book that talks about no money down or <20% was probably relevant in 2004 but not today.

In lower end rentals I use flat paints because they're very easy to touch up. Higher end places, I use eggshell or satin b/c it looks better.

I stopped using "rental white" a few years ago and now use a faint green Benjamin Moore "sea mist" or a half-tone "sand" color and contrast it with bright white on any trim. Neither color is too bold but they just feel a lot warmer than the old, cold, lifeless rental white.