Approached By Motivated Landlord...

General Real Estate Investing
1

Hello All,

I’ve been lingering around for a few weeks now and doing research on getting started in real estate investing since I’m working on starting a lead referal business while I work my way into preforclosure investing. I’ve been looking around catching myself seeking out FSBO’s when out running errands and the cummute to and from both jobs. I never really noticed them before… now that my mind set is different about REI… I find myself wanting to get something going and find my first investment opportunity.

Well… recently my landlord has had a tennant problem that finally moved out. But the apartment needs rehabbing so he’s working on that lately. Also, an apartment down stairs is about to become vacant because that tennant is in the process of purchasing a house. So soon there will be two vacant apartments… one of which is currently under rehab. The lot has two buildings on it. The front building being a four aparment/1 bed room/1 bath complex and the rear house is a two bedroom/two baths three story that needs some repair. The property is in an excellent location in town. Both buildings are in good shape but in need of some new windows.

I have been a renter from this landlord for four years. My parents have been renting the rear house for 17 years & one of my brothers rents the aparrment below mine and has been there three years. My family is in good relations with the landlord & as he has been working on the rehab project on the apartment across from mine… I have been talking with him about how I’m interested in getting into real estate investing. I’ve even helped him tear out the old bathroom & have assisted him with handling materials from his van. He even took me out to lunch one day for helping him out.

So today when I pulled up to the apartment… I saw him walking out to his van. I walked over to him to see how things were going with the rehab since I’ve been thinking about moving into that apartment after the project is finished. As we were talking… he asked me if I was interested in purchasing the rental property. I told him I may be interested but that I’d need to think about it. He told me that the real estate agent he talked to wants to list if for $260,000.00 but he offered it to me for $225,000.00 I’m very excited at the moment… but I’ve never done any kind of real estate investing… just read a lot about it. I’m very interested in this offer… but I’m clueless as to what the next step is or how to come up with the money.

I would greatly appreciate any advice on this one…

Thanks…

RREIA

2

RREIA,

I am a bit confused by your post. If I understand your situation, you will buy the entire property and become the landlord for your parents and brother. I do not recommend renting properties to friends and family. Renting becomes personal when you do so. You can’t raise the rent for fear of hurting someones feelings. You tend to spend more money to keep everyone happy. The bottom line tends to suffer.

I’m not trying to burst your bubble, I’m just suggesting that you study this situation very closely. When you buy Real Estate, you need to think about what you can do to increase the income from the property. If a property will cash flow when you buy it, and you can do something to increase the cash flow, you will be much better off than when you started. If the property does not cash flow or you cannot increase the cash flow, you are going to be stuck with a mediocre dog. There are too many properties out there that you can do better with than to be saddled with mediocrity.

Wilson

3

problem #1: i agree with wilson about renting to your family and firends–bad idea.

solution: have you considered partnering with them on the deal?

problem #2: if i understand the property layout correctly, there are too many units (more than 4) to get a conventional mortgage in your name, it would have to be a commercial loan. commercial loans usually require much more cash down, like 30%+!

solution: talk to the owner and see if he will carry the note for you. meaning, you make your monthly mortgage payments, and probably a down payment, to him instead of to a bank. ideally the payments should be low enough for you to cashflow (well, because your family occupies 1/2 of the place, this is relative to the other units only). he won’t have to deal with landlord issues anymore, and he’ll get a steady amount from you each month for the whole place, of course the downside for him is he won’t get completely cashed out of the property until you pay him off completely, or more likely when you re-fi.

if the owner agrees with the idea, then you could form an LLC with the rest of your family to run the property. it is just as important for you to think about this situation as renting to them–i know they are family, but do you want to be in business with them (some people are just not cut out for it).

For a while you’ll all probably pay more than your current rents in the form of the mortgage, but get the other units rented and you should all be in better shape.

make sure that you look at what he has been getting for the empty units, plus what his other expenses are, don’t just take his word for it, look at the books and talk to the other tenants.

so, you will have the 2 units to rent out, you need to cashflow on those, your family’s units you should break even on, figure any other expenses (including vacancy rate), and thats how to determine what your max mortgage payment to the owner can be. from there, negotiate the interest rate and purchase price, but the monthly payment i think is the most important to you.

don’t just say ok to his price because its lower than what some realtor thinks–that’s meaningless to you! you have to look at the big picture, and basically in reverse of how he and his realtor will look at it: your net income, then mortgage payment, then purchase price and interest rate.

it will be a pretty big undertaking, especially for your first deal, but the plus side is that more than 1/2 the building would be owner occupied by you and your family, so hopefully you will have a lower risk of not getting your rents.

if you can’t get your family to partner with you, AND have the owner carry the note, i don’t think it will work, and i don’t think you should try to make it work, because it will be bad.

just my $0.02, there are probably some better ideas out there.

4

Thanks Wilson and Pip… I appreciate your advice very much

I understand what you’re saying about renting to family. The thing is the family are great tenants & we all have paid our rents in full on time.

I have talked with my brother who rents downstairs about it & he is interested in partnering up with me. I was thinking the same thing this morning about owner financing being the only way I would work the deal. I was thinking about a lease purchase option on the property with an option to buy within 5 years at an agreed price. I would control the property and could have the option of flipping the property to an interested investor within the five year agreement or walk away from the property after the five year lease option. I figure the deal gives me a couple of exit strategies. I can buy out the property within the five years… flip it… or control the property for the five year period and walk away from it if I choose at the end of the contract agreement.

Opinons? Advice?

Thanks…

RREIA