All Forum Posts by: Troy Zsofka

My 2 cents on this one:

@Ann Bellamy - I'm assuming that the reason the heat costs are so low is because the utilities are in fact split and the only heating expense is that for the common area (laundry + whatever). That would explain why the electricity expense is present but also so low.

@Peter Brooke - 20% for vacancy? Seems awfully high for a good neighborhood. I run the numbers below using 5%, but add in 10% for management. Also, I see lawn care but what about snow removal?

Gross Scheduled Rents: $33,480

Other Income: $1,200

Total Gross Income: $34,680

Vac. & Credit Loss (5%): $1,734 (I include the laundry income in this calculation because it is safe to assume that when you experience a vacancy, you will experience an equivalent proportionate loss in laundry usage).

Gross Operating Income: $3,2946

RE Tax: $5,237

Insurance: $1,200

Lawn: $870

Fuel: $636

Electric: $240 (seems low for 12 months of laundry)

Water/Sewer: $2,029.94

Property Management (10%): $3,294.60

Repairs & Maint (5%): $1,647.30

Total Expenses: $15,154.84

OER: 46% (Lower than 50%, yes, but the 50% rule is for quick assumptions and somewhat worse-case. 46% is realistic for a multifamily, but you still need to verify all of the known variables to be accurate).

NOI: $19,525.16

CAP (assuming $245,900): 7.94%

Now, I don't know the prevailing CAP Rates for 3-families in that part of Manch, but I would have thought they would be better; thereby suggesting that the price is too high.

Cash Flow: I'm going to have to make some assumptions here. We mostly stick to single fams right now, and we use cash derived from a line of credit cross-collateralized over a a few of our properties (as opposed to taking out loans to buy properties), so I really don't know what the rates and terms are for 3-unit purchase money right now. However, after the N/O/O bump, and probably a bump for 3 units, let's assume 6% on a 30-year term.

Loan Amount (75%): $184,425

Monthly P&I: $1,105.72

ADS: $13,268.64

CapEx (2%): $658.92 (First off, CapEx is not an operating expense; which is why I'm putting it down here. Second, with a 100+ year old property, you'd better factor it in, and 2% may even be light depending on the condition of the building at present. For example, if there is any significant deferred maintenance, I would want to back it right off the purchase price at the very least.)

CFBT: $5,597.60

Monthly CFBT: $466.47

@Ola Dantis - You came up with a much lower cash flow than I. Were you using different loan terms?

Cash-on-Cash Return: More assumptions here. Specifically that you will only be putting in your 25%; which means seller concessions are covering all the closing costs. This is important because if you have to put out more cash for closing costs, this measure is going to change potentially significantly.

Annual Cash Flow Before Taxes: $5,597.60

Cash Invested (25% Down Payment): $61,475

Cash-on-Cash Return: 9.1% (I don't know about you, but I wouldn't be super excited about this result.)

To do a real analysis, you should be more concerned with projecting out cash flows and resale value as best you can and running IRR, but I think that the Cap Rate and Cash-on-Cash shown here at least indicate that the price is too high for this property. Sure, you can force some equity by raising rents, but you should purchase based on current numbers, and save any value-add for yourself, not the sellers.

Good luck,

Troy

Where's your southern hospitality @Account Closed. 

Fortunately, the cost-benefit analysis there is not exactly rocket-surgery. Simply capitalizing the return by dividing the expected increase in NOI by the cost of the improvement will do the trick, and if the resultant Cap Rate doesn't look better than you can get elsewhere, it's not a fiscally sound move to do it. Sure, you can go a little more complex to account for TVM, but capitalizing an improvement like that is more than adequate unless utility rates are expected to change significantly (such as natural gas lines being installed, new expected energy taxes, etc); in which case a more complex analysis discounting future cash flows would be in order. Anyway, it depends on the property, like everyone said.

@Kimberly H.

I have the leases between the tenant and property ownership entity, and that entity also holds the deposits. However, I don't know conclusively that this is the best way to do it; I haven't run that by my attorney. 

We do have written management agreements, but since it's all the same ownership, they're pretty basic.

I did a lot of research (many hours)a year ago on a wide array of property management software options. Came down to Appfolio, Propertyware, and Buildium.

Propertyware had horrendous reviews relating to customer service, and Appfolio was too expensive for our situation (geared toward larger management portfolios; whereas we only manage properties we own).

I went with Buildium because:

1) Pricing was reasonable

2) Customer service is free (whereas some of the others require you too purchase units of time for use on the phone with customer service).

3) They seem to be constantly expanding and improving their features

Here's my experience after using it for a year:

1) Pretty intuitive and easy to use

2) Accounting features could be more robust. However, they have indicated that they are in the process of working on changing the reporting feature so that reports generate on-screen and have drill-down functionality. I'm looking forward to seeing how that turns out.

3) Lately, it seems that most of their efforts to expand features are concentrated on adding new profit centers (like their new electronic leasing feature and a new partnership with an inspection software). I don't have a problem with having new features be fee-based (in fact I prefer it because it allows you to opt in or out and doesn't force you to pay for the added feature unless you want it; whereas if it were free then the costs of administering it would have to get rolled into the subscription price for everyone, whether they use it or not), but I would prefer if they would focus on fixing some of the minor issues with whatthey've alreadyrolled out first, rather than rolling out new stuff. Fact is that's how businesses grow and it will be that way with any company you choose. They do have a feature recommendation system whereby users can recommend improvements and even vote on them. That is great, although there are a few items that have received a lot of client support but seem to have been ignored. For example, if you sell a property and therefore want to make it inactive (so as to remove it from the number of managed units on which your monthly fee is based), it will remove transactions associated with it from many of the accounting reports (balance sheet, income statement, etc.) in the past. Therefore, if you want to do a year-over-year comparison (or even do your taxes for last year), your books will simply be incorrect unless you reactivate that property. To me this is fairly egregious - if I run reports for a holding entity for 2015, I expect them to be accurate, not minus all transactions for a property I owned for part of 2015 but which is now "inactive". I still haven't figured out why they do this but it really doesn't make sense to me. Why not just remove the ability to manage it (new leases, rent collection, new bank transactions associated with that property, etc), but allow the past transactions that occurred while the property was active to still hit the reports? Anyway, I, among others, have failed to get an explanation on this.

4) Tenant screening is cheap and effective. $15/applicant including credit (with tradelines listed), background, and evictions. At $15, I just have the applicants pay for it when they authorize the reports. It's cheap enough for them not to balk, but it worksto weed out tire-kickers and those who have been less than forthcoming about their qualifications.

5) Customer service is pretty fantastic and not under-staffed like is typical with most companies these days. You don't sit on hold forever or wait hours for an email response, and you don't pay extra for customer service.

6) The electronic banking features eliminate the need to do things twice and are reasonably priced.

7) The smart-phone integration is pretty good. You can use the app layout on the phone to keep it streamlined, or you can switch to the full version and do basically everything you could do if you were in your office at your computer.

8) There are plenty of other helpful features that are shared with their competition but definitely function well in Buildium (tenant portal, tasks and to-do tracking, recurring transactions, rental ad posting, appliance warranty tracking, etc, etc).

Overall, I am extremely pleased with my choice. Sure, I can find some things to complain about, but that inactive property reporting thing is the only one that truly aggravates me. The pricing is reasonable, the features have streamlined my management workload (definitely saves me hours per week as compared to my self-generated Excel system that I used prior), the customer service is super responsive, and they do constantly make upgrades and improvements. I would definitely recommend going with Buildium.

Oh, one other thing worth mentioning is that I had originally set Buildium aside when researching options because it doesn't sync with QuickBooks, and I originally had that in my must-have features column. However, I changed my mind and, looking back, I'm glad. Its reporting features are adequate (and under improvement with the new drill-down capability they say they'll be launching soon), and if I were to be able to sync into QuickBooks, that would just add one more step and result in additional time-consumption. The biggest improvement over QuickBooks is that, with QuickBooks, only one company file can be open at a time (at least with my computer system). We have 9 companies (8 that own properties and 1 that handles management and operations). That means that every time I pay bills, book rent deposits, etc, I'd have to load QuickBooks 9 different times (what I did instead was to have an Excel check register with a tab for each company's bank account, but then I'd have to copy it all into each respective QuickBooks file later). Huge time-saving improvement using Buildium's accounting and saying goodbye to QuickBooks. I can give my accountant online access to Buildium, but can control the degree of that access, and his ability to make changes, however I choose. I can also run an audit log to see exactly what was done by any employee, accountant, or anyone else to whom I've given any degree of access so that I can see exactly what changes were made and by whom. I do miss the more robust accounting features of QuickBooks, but Buildium is continually making improvements to their accounting platform and they are definitely headed in the right direction. More importantly, they already have all of the accounting features that are truly needed.

So yeah, I'd say Buildium is your best choice; I'm definitely happy with it overall.

Not sure about the financing availability, but it may result in a rate bump for how rural it is.

Of equal importance, it will likely be an issue for homeowner's insurance. It may just mean that the premium will be higher, but if it connotes an availability issue, then that will have direct implications on their ability to obtain financing as well. No insurance, no mortgage. I kind of doubt they will be unable to secure insurance or financing, but it's definitely worth investigating the potential implications before laying cash on the table (or lock it in with a due diligence contingency for this matter). 

Lob a call to your banker and insurance agent?

Hi @Stacy Davis

A lot of information flying around here. Some of it accurate, some of it, well, maybe not so much.

Coincidentally, I just took my 4 hour RRP refresher course 2 days ago. That does not make me certified to perform lead inspection, lead abatement, or even dust sampling, and it certainly does not make me an expert. It only allows me to perform lead testing, renovation work in areas with lead paint, and cleaning verification.

I think that 95% of what Derreck said is correct, but some of it may be a bit incorrect due to the differences between MA and NH. Let me be clear, Derreck has obtained much more education in the lead industry than have I, and he is likely some degree of an expert (whereas I am certainly not), but the following is what I learned on Tuesday from a certified NH trainer who has been doing it since the beginning. I'm certainly not looking to call Derreck out for a few inaccuracies like he did to Flavio.

1) NH did not adopt its own lead laws, it left it up to EPA (and HUD for HUD housing). MA took the federal grant money and added the regulatory framework to their own bloated bureaucracy. They have some of the most strict rules in the nation. I believe HUD still gets involved for HUD housing.

2) I'm not sure what a "High Risk Deleader" is but I presume it's something MA-specific that is similar to what EPA and NH refer to as Lead Abatement Contractors. In NH, a Certified Renovator (someone with the RRP certificate like I have) can scrape lead paint if the proper procedures are being utilized (signs, plastic, HEPA vacs, shrouds for power tools, wet-scraping only in HUD properties, proper documentation, etc), and you do not have to be a licensed "deleader". However, one has to be a State of NH Lead Abatement Contractor to do any work for the purpose of mitigating lead, as opposed to renovating. In other words, I (or my employees trained by me) can remove a lead-painted window for the purpose of replacing windows (upgrading to EnergyStar or whatever); whereas I CAN NOT do it for the purpose of mitigating the lead. Remember, this is NH, not MA, and I have no idea about the MA laws other than that they are more stringent.

3) Derreck is correct that there are currently grants for lead abatement in NH ($10M, in fact). He is also correct about the 10% property owner injection requirement. However, where he is incorrect is that the job must be bid, and you can not simply hire him without bidding it if you want the grant money.

If I were in your shoes, I agree with Derreck 100% that the best play is to use this as a negotiation tool and get a better price, then get a grant to resolve the issue. First, however, I would speak with someone who can advise you on the process, as well as the likelihood of getting the grant. Kate Kirkwood (http://www.kkirkwood.com) can act as a consultant in this regard, and then as a liaison between you and the red tape associated with the whole grant and bidding process. The only reason I know this is that she taught the 4-hour RRP refresher I took on Tuesday, and I asked her specifically about the grants and process. I have no idea what her fee structure is, or whether it can be rolled into the grant, or anything else. I just know that if I were to go after any of that grant money (to date I have not), I would enlist the services of someone like her to navigate the process so I could continue to focus my time on other priorities. Someone like her would also make sure that the contractor with the winning bid follows all the rules regarding occupant notification, etc. Oh, I'm also unsure as to whether the grant money can be used for the temporary housing you may need to provide to your tenants, or if you could vacate the tenants for the renovations without any obligation to them. It typically takes a few months to get the grant approval and everything ready, so that may give you time to vacate the tenants, if that is acceptable to the program. Otherwise, you may have to provide temporary housing; I do not know.

Best of luck,

Troy

The "no late fees in the Demand for Rent" rule in NH is problematic because it allows them to beat the eviction by paying the amount in the notice, and then where do you stand on collecting the late fees? In regards to your former services being valid or not, does it even matter when it comes to satisfying the 3 services in 12 months rule? I'm not sure. It may be that the minutiae of the notice only comes into play if that specific eviction is challenged in court by the tenant. In fact, I believe this may be the case because, in my very first eviction proceeding, the judge pointed out to me that I had included the late fees, but since the tenant was a no-show in court, I won anyway by default. There is a solution, however. Put in your lease that all fees, once incurred, shall be considered part of rent, and any payments received on behalf of tenant will be applied to back-rent first. Having this lease clause allows you to include late fees on the Demand for Rent, because they are no longer considered late fees, but are now part of rent. This was hinted at by the judge from that very first eviction I mentioned above, and it is now my policy. However, it has not been tested in court yet (for me, anyway).

My lease is clear that all fees become "rent", and both my lease, and my eviction notice, state that I may accept partial payments without constituting a new agreement, and the eviction remains in force unless and until all monies owed are received in full.

@Renee R.-

@Nicole A. nailed it. 

We are way beyond 3 units, so I only focus on the laws governing "restricted properties". Owners of "Nonrestricted properties" have much more leeway in how they manage tenants, since much of the L-T law does not apply.

I'm assuming you attended the J. Durante seminar that I recommended in a different post; which focuses on L-T law as it applies to landlords owning "restricted property". As far as your lawyer, I have always found that attorneys are more likely to advise against taking action when they are unsure of the ramifications. They are simply practicing the legal strategy at which they are best: covering their own arse. If you find that your property is "nonrestricted" and you can indeed terminate the tenancy without cause, I would get a new attorney.

My interpretation (*not legal advice, blah blah blah):

1) If it is an owner-occupied rental (meaning you live in one of the units), and the whole property is 4 units or less, it is a "nonrestricted property". See 540:1-a.

2) If it is a SFR, and you do not own MORE than 3 SFR's at any one time, it is a "nonrestricted property". (Clarifying that you can own 3, but no more). Again, see 540:1-a.

3) If you read 540:2,I, you will see that you can terminate the tenancy by issuing a 30-day Notice to Quit, on "nonrestricted property", without having to have any of the reasons set forth for "restricted properties" in 540:2,II. You only must do so in accordance with RSA 540:3 and RSA 540:5; which go into the process. 

4) The only remaining uncertainty, in my opinion, is with RSA 530:3,III, which says that the notice shall state the reason for eviction. However, I would interpret it as to not apply to "nonrestricted properties", as I think is made clear by comparing the first sentences of 540:2,I and 540:2,II.

5) I am also unsure how this applies to landlords who own several multifamily properties but 3 or less SFR's. I am inclined to believe, based on 540:1-a,I(a), that the single families would be considered "nonrestricted", whereas the multifams would be considered "restricted". Seems clear enough, but also seems like a bit of a loophole for professional investors who happen to only own a couple SFR's. I also wonder if the owner's primary residence and any second homes count towards the limit of 3. I would have to assume that they do given how the statute is written.

I would revisit this with your attorney and ask what he or she thinks about the idea of "nonrestricted properties" (assuming that this property does in fact qualify based on your portfolio). If it doesn't qualify (you more than 3 SFR's, or this is a multifamily), or if it does qualify but you still believe that you need just cause to terminate the tenancy, you may find means in 540:2,III or 540:2,V.

I'm interested what your attorney has to say about this, so please post comments if you decide to explore it with him or her.

Good luck Renee

@Renee R. - 

I agree that it may be a bad idea in NH just to issue a notice to vacate for no reason.

No problem though. You just purchased the property and your intentions are to do some remodeling so that it will rent at the higher end of the market. You need the property to be vacant so you can make those improvements. 

Issue a notice to vacate that corresponds with the end of the lease term, and state that your reason for terminating the tenancy is to perform remodeling and updating of the property. 

I have never terminated a lease just to get rid of a tenant if they are not behind on their rent, so check with your attorney first on this.

@Nate Wilson-

I agree with @Walter Key and @Jay Hinrichs, the 50% rule is good, and the 2% rule, well, not so much. Here's a link to a post I wrote where I explain exactly why the 2% rule should be used with caution, if not stricken entirely from your memory:

https://www.biggerpockets.com/forums/88/topics/254...

As far as the 50% rule, you can justify your own numbers all you want; just remember that 50% OER is tried and true over the years so if you think you'll do significantly better, you better run the numbers or you may be setting yourself up for a surprise. It's a good safe place to start an analysis and make sure you're covered. If you want to delve deeper and be more accurate, here's a breakdown:

Potential Rents: $24,000

Vacancy & Credit Loss (5%): $1,200

Gross Operating Income: $22,800

Repairs & Maintenance (10%): $2,280

Management (10%): $2,280 (Even though you'll likely manage it yourself, you should include this because 1) Your time has an opportunity cost, 2) If you grow your portfolio you may eventually hire out management, and 3) It's simply how the analysis is done, don't reinvent a wheel that's already round)

CapEx / Replacement Reserves (2%): $456 (This is something that you would likely leave out of a pro forma when selling your property, but a bank would include it in the underwriting analysis, and I suggest you include it when analyzing as a potential buyer. Also, many would argue that it is low at 2%. I have full-time employees doing my renovations and repairs, so my costs are less than an investor who hires contractors. You might want to bump this up a bit).

Real Estate Taxes: $3,900 (BTW, the town has this property assessed at $174K. I own property in Weare and I know that the tax rate is $22.41. I do not know the equalization rate though, so I can't say how that assessment jives with the $200K purchase price. I wonder though, has it been reassessed since renovations, or are you facing a higher tax bill after reassessment? Something to consider, because a reassessment at $200K would boost your tax bill $582).

Insurance: $1,000 (This is an estimate based on duplexes that I own, but it may be a little light because I have $10K deductibles, something your lender will not allow).

Total Operating Expenses (43.49%): $9,916 (This does not include vacancy. If you include vacancy to get something comparable to the 50% rule method, your numbers become $11,116 or 46.31%). Also, the OER and 50% Rule DO NOT include debt service. 

Net Operating Income: $12,884

CAP Rate: 6.442% (I don't know if this is a good CAP Rate right now for duplexes in Weare. I focus on single family homes when we're on the way out of a down-market. However, maybe a local Realtor could let you know where current market CAP Rates are ranging for small multi-family properties).

Last thing to determine is cash flow. Backing $3,900 for taxes, and my assumed $1,000 for insurance out of your $1,100 monthly PITI estimate, leaves $8,300 in Debt Service.

CFBT: $4,584

DSCR: 1.55x. (This is not bad, but current DCR's tend to be higher because interest rates are so low).

I don't know your downpayment, but here's one more piece of advice: Calculate your Cash-On-Return based on your downpayment and any other out-of-pockets. Also, project a gameplan into the future, and calculate your IRR for a few different scenarios (sell after 5 years, 10 years, 20 years, whatever scenarios you think are most likely). If you don't know how to do these calculations, buy a book and learn, because you have no business investing in real estate if you can't accurately calculate (and comprehend) financial analyses such as NOI, OER, CAP Rate, ROI, DCF, and IRR. Knowing these will replace the subjective and often emotional decision-making process with an objective and analytical one, and may just save your arse.

Overall on this deal, the numbers look decent. I wouldn't touch it personally because I'm a value-add investor (meaning I would have bought it for $100K in terrible condition and put $40K into it to make it worth the $200K), but that's just my strategy. If your strategy is to purchase turn-key, this deal may be right for you. Whatever you do, at least run similar analyses on other comparable properties so you know you're making the best investment available.

Happy investing,

Troy