Looking for feedback - Posted by Dan Fletcher

import · July 30, 2003, 9:30am

Posted by GL - ON on July 30, 2003 at 13:52:56:

I take from your questions, that this is your first rental property? If so here is something you should know.

Get yourself a clipboard. You will find it very handy when checking out properties and planning work on them etc.

Before you buy, you have a right to inspect the property inside and out. If this is your first investment maybe you should get a home inspector to accompany you. If you are an experienced home owner maybe you know what to look for.

In any case, take along your clipboard. Start a nice conversation with the tenant. Ask how long they have lived there, how much rent they pay, whether they paid a security deposit, if they have a lease, how they like the place, if they have any plans of moving. Try to do this in a conversational manner, do not make a big interrogation out of it. But set down the answers on your clipboard and before you leave, ask the tenant to “OK” it. That means sign it.

There is a reason for this. You are going to check the tenants statements against the seller’s statements.

Example: Tenant says they pay $500 a month, the seller says $600. This makes a big difference to the value of the property as an investment, and whether it will cash flow.

Example #2: Tenant says they paid $200 security deposit. Landlord “forgets” to give it to you on closing (you are entitled to this money, as you are responsible to the tenant for it). You remind him, show him the signed statement, and ask if he wants to check with the tenant.

Example #3. Sixteen months from now, the tenant moves out and claims you owe them $200 which they paid the old owner as a security deposit. You check their statement, and the seller’s statement which you kept on file, and there was no security deposit. The tenant is trying to pull a fast one. When you confront her with her signed statement she shuts right up. If you weren’t prepared for this you could have been beat for $200 bucks.

You could even make up a little form and duplicate a few copies.

There are other details. You can pick up the fine points as you go along.

import · July 30, 2003, 9:30am

Looking for feedback - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 09:30:41:

I have put in an offer to make my first deal. It is not very creative but it will cash flow instantly. I guess I just wanted to get a second or third opinion.

Duplex - currently fully rented out. $575 per unit for total of 1150 per month.

Asking price is 78900. I offered 73k and seller to pay closing costs and inspection. I plan to put down 5-10 percent. Hopefully only 5%.

Factoring in insurance 1200/year, maintenance, and vacancy I am still figuring about 300 - 400 a monthy positive cash flow. Am I missing something.

thanks,
Dan Fletcher

import · July 30, 2003, 4:48pm

Update - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 16:48:21:

My offer was accepted. I close on sept. 15.

$73000 - seller pays for closing and inspection. 5% down.

Well, like I said before it wasn’t really creative but based on the 35% rule ken in SC shared I can expect approximately 57% ROI after the first year. Not bad for a first deal.

I AM PUMPED!!!

import · July 30, 2003, 11:54am

Re: Looking for feedback - Posted by Marcos

Posted by Marcos on July 30, 2003 at 11:54:34:

My issue with this purchase has nothing to do with is it a good deal. It looks to be a good deal to me.

But, that this is your first deal, and you’re buying a rental. Let me tell you a story.

This guy gets a quadruplex for a good deal. Man, he’s loving life. $70k for a quad, each unit rents for $375. Sounds great right? Well he has bad credit, so he gets a bad interest rate, but that doesn’t matter right? It’s got great cash flow. $1,500 a month. And a $750/mo mortgage. No problems. Well, all his cash is going to go towards the down payment. But, no problem, he should make plenty in cash flow. He gets the property, it takes a while, but finally it’s done. Then he gets introduced to the joys of being a landlord. The previous landlord had not done any repairs in five years, and there is much work to be done. The tenants won’t pay the rent without the repairs being done. But, he can’t make the repairs without the money from the rents. And then the compromises start to take over, he lets people be late on their rents, because after all late rents that pay the mortgage are better than no rents and having to find a new tenant, and fixing the place up and such. Within 3 months he’s in foreclosure, with no tenants that are paying and gives it up.

Story #2:
An investor comes in and helps the previous “investor” out. He gives him a few grand and then takes over the property. This investor doesn’t play games and has CASH to get the place in shape. He kicks the tenants out. Makes all the repairs. Ups the rents, etc. Refinances, gets about $30k cash out of the place. And puts it under reliable management where it is now making him about $800/mo.

So, what is the difference between the two investors?

Do you think it is that Investor #1 is a newbie and got in over his head and #2 was a much more savvy and experienced investor who actually knew what he was doing?

Wrong. Actually Investor #1 had been an “investor” for years. But, he had no cash reserves. Investor #2 had access to cash, but not nearly as much “experience”.

The point I’m trying to make in this post is that I truly believe that cash should be the point of every beginning investor. Don’t go for cash flow. You’re not ready yet. Sure, it looks really cool on paper, I can make $500/mo and pay for my car and insurance off of someone else’s sweat. But, the truth is when things start to go south, they go south in a hurry. What happens when a big repair comes up and you don’t have the cash to pay for it. Things go down in a hurry. Or when you have to evict someone. South.

I recommend finding a way to generate $25-50k in cash BEFORE you ever think of holding a property. You need a cash reserve because the truth that many people don’t tell you is many real estate investors fail because of under capitilization. How many of us have played shell games with our cash just to keep afloat. Take it from me that route is no fun.

That’s just my belief. Although I definitely applaud your ability to go out and find a deal. I just believe the deal isn’t right for you right now.

Marcos

import · July 30, 2003, 11:11am

what are your loan terms? nt - Posted by ken in sc

Posted by ken in sc on July 30, 2003 at 11:11:42:

nt

import · July 30, 2003, 10:44am

Re: Looking for feedback - Posted by GL - ON

Posted by GL - ON on July 30, 2003 at 10:44:37:

It looks like a good deal to me. Your GRM is only 5.28 so that is well into pos cash flow territory. If you don’t take it I will (just kidding LOL).

import · July 30, 2003, 10:32am

Re: Looking for feedback - Posted by Jasonrei

Posted by Jasonrei on July 30, 2003 at 10:32:33:

I don’t see property taxes mentioned. That could be another $150+/mo. Still seems like a potential deal. Don’t forget to factor in long-term maintenance (roof,AC,foundation). $73k for a duplex paying $1150/mo… are you in TX?

import · July 31, 2003, 7:23am

Congrats! - Posted by ken in sc

Posted by ken in sc on July 31, 2003 at 07:23:25:

Sounds good. Plenty of spread. You can even make stupid first time landlord mistakes and still make money. Be sure to follow the advice of a seperate checking account for the property. And learn your state laws in regards to damage deposits. That is the main way to have a problem with tenants IMO.

Welcome to being a landlord. It will make you wealthy if you stick with it.

Ken

import · July 30, 2003, 12:13pm

More feedback, please. - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 12:13:20:

Would anyone else please respond to mine or Marcos’s comments.

thanks,
Dan Fletcher

import · July 30, 2003, 12:07pm

Re: Looking for feedback - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 12:07:52:

You make several good points.

Have a reserve for repairs and unexpected expenses.
Don’t spend the income.
Find a way to generate $25-50k before holding a property.

Thanks for the advice. That is the kind of feedback I was looking for.

thanks again,
Dan Fletcher

import · July 30, 2003, 12:10pm

Loan terms - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 12:10:09:

30 yr fixed. 8.5% No PMI. 5-10% down. Financing is through a private lender. Still hammering out the details so I’m waiting to find out how much he wants down.

thanks
Dan Fletcher

import · July 30, 2003, 11:06am

GRM? nt - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 11:06:13:

GRM?

import · July 30, 2003, 12:11pm

Re: Looking for feedback - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 12:11:00:

I’m in Northern Kentucky.

import · July 30, 2003, 1:07pm

Re: More feedback, please. - Posted by GL - ON

Posted by GL - ON on July 30, 2003 at 13:07:49:

Dan, Marcos makes some very good points. He is right about being under capitalised.

Now, how much capital do you need? To handle a duplex?

Do you own your own home now? Then you have some idea what it takes for you to keep it in repair and cover the bills each month.

Do you have a job? Credit cards? A credit rating?

In an emergency you can use borrowed money to tide you over. The whole secret of successful investing is using borrowed money and credit. It takes money to make money - the secret is, it doesn’t have to be your money.

The real trick is, to know what has to be done, and FOLLOW IT UP. Business is business, and if you don’t take care of business you will wind up in trouble.

This is a lesson we all have to learn. It is easy to read some course, and think all you need to do is buy some real estate and wait for the money to roll in. Well you will wait a long time LOL. You have to get out and get it.

What kind of shape is the duplex in? It better be pretty good at that price, fully rented and needing at most, minor repairs. Like a few hundred bucks worth.

If you have nice rentals you can be choosy about your tenants. Do a credit check and check with former landlords. Go and visit them where they are living now, before you hand the keys over. Whatever their home looks like now, that is how your place will look in a month.

If I had a job and some credit cards, and knew how to do minor repairs, and knew how to do my work and get it done, then I wouldn’t worry about that duplex. You won’t have a problem big enough to hurt you. And if you do, such as the place catches fire and burns down,or the tornado comes and blows the roof off, well then that is what you have insurance for.

import · July 30, 2003, 3:59pm

Cash flow - Posted by ken in sc

Posted by ken in sc on July 30, 2003 at 15:59:09:

I have computed a percentage rate over the years. This percentage rate of rents is for ALL expenses which include vacancy, repairs, taxes, insurance, reserves, etc. Not mortgage payments and not property management fees. That percentage for me is 35%. This could change by region due to different tax and insurance rates, you may be able to get an idea of this percentage in your area by talking with local landlords and property managers. Using my percentage:

Rents 1150
less 35% 402
Avg monthly net income 748

If you pay 78900 and put down 5% at 8.5% for 30 years, your payment would be 576. Thus, using my percentage your cash flow would be 172/mo.

Again, speak with people in your area that can help you with these figures.

Good luck-

Ken

import · July 30, 2003, 12:30pm

Re: Yes,GRM - Posted by GL - ON

Posted by GL - ON on July 30, 2003 at 12:30:44:

Yes, GRM or Gross Rent Multiple. The magic secret formula for making big $$$$$ bucks in rentals. People have become millionaires by using this formula, while others who didn’t know it floundered around in uncertainty, never knowing if a deal was good or bad, until they went broke.

If you want a detailed explanation do an archive search for GRM.

import · July 30, 2003, 1:21pm

Re: More feedback, please. - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 13:21:43:

GL,
You said," If I had a job and some credit cards, and knew how to do minor repairs, and
knew how to do my work and get it done, then I wouldn’t worry about that duplex."

What do you mean by you wouldn’t worry about that duplex?

Also, it is fully rented, but it is not in mint condition by any means. The mechanicals are in great shape, but the interior could use some work. All the work is work that I could complete alone. You said it better be in pretty good shape at that price. What do you mean by pretty good shape?

Thanks again,
Dan Fletcher

import · July 30, 2003, 4:41pm

Thanks to everyone (nt) - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 16:41:28:

nt

import · July 30, 2003, 12:36pm

Thanks, GL (nt) - Posted by Dan Fletcher

Posted by Dan Fletcher on July 30, 2003 at 12:36:22:

nt

import · July 30, 2003, 1:37pm

Re: More feedback, please. - Posted by GL - ON

Posted by GL - ON on July 30, 2003 at 13:37:22:

I mean I would buy that duplex and I wouldn’t worry about not being able to handle it, and I wouldn’t lose a single minutes sleep over it.

It sounds like the place is in pretty good shape. Not mint, perfect, Buckingham Palace condition, but pretty good.

You don’t have to worry about the interior because it is rented. Well maybe a leaky faucet washer or something but no major work. As long as the tenants are happy and keep their apartments halfway decently clean you don’t need to worry. But if they move out you may need to paint, carpet etc. If this is the case you should be prepared for it by socking away that positive cash flow in a special account. In fact you should open a new bank account for the duplex, this is a very easy way to keep track of the money end of it. All the rent goes into that account, and all the bills get paid by checks written on that account. Then you know at a glance where you stand, at all times. Just look at the bank book or bank statements. This is good proof if the IRS ever audits, just hand them the bank statements and cancelled checks and all your proof is right there.

You should take care of the outside. A lick of paint, plant some flowers or shrubs, keep the grass cut. Maybe dress it up a bit with a new outside light or some fancy house numbers. Something that doesn’t cost much money, keep your eyes open for stuff on sale at the hardware store. If the house looks nice on the outside it will keep a good name, and you won’t have any trouble getting good renters when you need them.