Buying in low income areas

Rehabbing, Fix and Flip, Rental Properties
1

I’m just getting started in investing and am going to look at some properties next week. I’ve read the valuation techniques such as the 2%/50 rule and the Hooch method, but I’ve got another question. How do you handle deferred maintenance such as a roof that needs to be replaced in a year or two or kitchen appliances that are on their last legs? These expenses are a large part of the investment when you are talking about <50k properties.

So if I’m using the Hooch method and in it for the long hall 10+ years do I care about these issues or do I know that if I estimate 50% gross rents for expenses that everything will work out in the long run.

Next ?. What are the tricks of the trade for preparing a rental for tenants as most of them will be very hard on the property. Semi-gloss paint only?..no carpet?..no vinyl?

Last ?. I would think month to month leases would be the way to go on these properties as a number of tenants will leave before the lease is up anyway. This would give me more say if I wanted to not rent to the same tenant again. What do most of you do?

2

I would start by meeting a local that is doing the same thing and has been for many years and is obviously successful at it. I learned 10 times more from him than the internet or books.

Just my opinion, I could go on and on with how to deal with low income tenants, but most would be more or less locally to me.

3

Your post is about buying in low income areas… if you are new and just getting started i believe its better to go out after high rent areas as compared to low income areas…
I ve owned rentals in high rent areas and never had an issue compared to low income where you have to deal with issues…of low income…but to avoid getting burned out buy in areas you know well when starting out then you can branch out later. Before you buy get the deferred maintainance issues taken care of in the beginning .

4

thing is I’m trying to get cash flow and pay off properties in 10 years…i’m fine taking zero income until then…i want to buy enough to replace my current income in 12-15 years (after loans are paid off)…i don’t see how this is possible with higher rent areas…hopefully i’m wrong, but it just doesn’t seem like i can accomplish my goals unless i go the high cash flow low income areas…

5

Your post is about buying in low income areas… if you are new and just getting started i believe its better to go out after high rent areas as compared to low income areas…
I ve owned rentals in high rent areas and never had an issue compared to low income where you have to deal with issues…of low income…but to avoid getting burned out buy in areas you know well when starting out then you can branch out later.

I disagree with this but I can understand where you are coming from. Drama is heavy with the low income properties but personally, it doesn’t bother me. I can deal with drama when trading for a highly profitable property. BUT many landlords get involved in real estate not realizing that it’s work. They just thought they would buy a few houses and rent them out without problems. They didn’t realize that they will get sucked into court on a regular basis or that they will have tenants from time to time trash their places and the deposit doesn’t completely cover the repairs that your jacklegs do. The low income property business IS more work than the better neighborhoods.

How do you handle deferred maintenance such as a roof that needs to be replaced in a year or two or kitchen appliances that are on their last legs?

Rent X 30 minus repairs. The Minus Repairs includes getting that place into shape. Making it “safe” and “clean”. Basically the same things that your local code enforcement and section 8 will be looking for. Basically getting it into a condition that they will approve. Everything won’t be perfect like a flip. But it will be an acceptable place for people to live.

Lets say that you look at the property and it needs a roof right away because it is presently leaking. And the outside of the house needs to have the flaking paint scraped off. And the inside needs some holes patched in the walls and a standard in between tenant paint job. And there will possibly be some little BS things you need to account for to make your local Code Enforcer and Section 8 happy. Work up your repair costs and subtract them from the Rent X 30. That’s your offer.

So the house is now Rolling and bringing in some cash flow. The Hooch Method is nothing more than a real simple way of determining the value of property. I used to always figure my numbers by determining the Capitalization Rate on each and every property. Accurate but very time consuming. Then I ran a bunch of different scenerios and found that Rent X 30 is very close to a 18% cap rate which is what I bought low income housing for. Therefore I found a qiick and easy way that I could use to determine the value of a property without spending 45 minutes on each and every property doing a cap rate for it.

The Hooch method allows for enough cash flow to cover future maintenance of the property, taxes, painting in between tenants and the works. It covers the entire 50% needed.

You should also run the cash flow analysis on the property along with the Hooch method. I like to make sure that my bases are covered in all areas. I used to also determine the debt coverage ratio. If you have a DCR of 2.5 or above you will be able to pay a 15yr loan off in 5 years if you take NO cash flow and make double payments. In order to accurately determine the DCR you must do a full capitalization rate report. No need to do all of that. If you buy using the Hooch Method and don’t “TRY” to make the math work by being to liberal with your numbers, it will put you in a position where you will have around a 2.5 DCR.

As far as finding the deals goes, you must look for people problems. There are some Hooch deals from time to time on the MLS but for the most part you either find some good wholesalers and tell them what to get for you or you look for them yourself. I do both. You will look at many deals and put in many offers before that gem comes to you. You will learn through practice how to knock someone off their horse and show them some “other” numbers that prove how their house is worth much less than they think it is. You will use techniques like overestimating repair costs, telling them the cost to repair it as if you had a licensed contractor do it when in all actuality you will be using a couple of jacklegs off of craigslist. That is a key in the junker business. Get CHEAP labor. Some guys that can fix just about anything but charge very little. It may not be perfect sometimes but for the most part it is acceptable. You will be fixing things “landlord style”, not “flipper style”. You learn how to rehab things rather than buying new. Buy new only when necessary.

So if I’m using the Hooch method and in it for the long hall 10+ years do I care about these issues or do I know that if I estimate 50% gross rents for expenses that everything will work out in the long run.

Buy with the Hooch Method and everything will work out. Trust me! Just make sure that you accurately determine the rent and make sure that you accurately determine the repairs. Do that and you will have NO problems.

Next ?. What are the tricks of the trade for preparing a rental for tenants as most of them will be very hard on the property. Semi-gloss paint only?..no carpet?..no vinyl?

Around here there are a lot of OLD houses. Old wood floors and plaster. In my lowest income areas we go in the place and SPRAY the entire unit the exact same color of simi-gloss white. Every unit, every house, same color. That way you can come back in and paint one wall, clean another. Then roll the floors with a real dark brown that doesn’t show marks, etc. Make the needed repairs and we are out.

No carpet unless you have plywood on the floor. If there is plywood through out the house (not just a room or two) I would consider something else. I have put down VCT like you see in the grocery store. I’ve put down ceramic everywhere. Real wood is pretty darn expensive. Floating floors have a laminate surface that is real thin so I have been a little reluctant to use them. And I am not opposed to vinyl since it is cheap and quick to install. I’ll hammer a tenants deposit if they ruin it. Which in most cases it is not wear and tear that damages it. It is cigarette burn holes or tears from dragging a washing machine or whatever across the floor. The key here is to do checks on the apartment from time to time. Go in and write down a list. Your kids damaged the blinds $25 per blind, you burned holes in the vinyl, $500 or whatever. Then fix it. In my lease it says that if they damage the property I will fix it and they will be responsible for replenishing their deposit. If they don’t they are in violation of the lease and I can evict.

In my low income blue collar areas we do a little better job as it commands a higher class tenant. We will paint all of the walls in a semigloss bone white which is basically a very light khaki color and paint the trim the exact same white as on the other rentals.

Last ?. I would think month to month leases would be the way to go on these properties as a number of tenants will leave before the lease is up anyway. This would give me more say if I wanted to not rent to the same tenant again. What do most of you do?

I like to lock em up for a year. I also have a part in my lease that says:
a. NOTICE OF TERMINATION: TENANT and LANDLORD may terminate this lease by giving the other party written notice of termination at least 60 days before the date this lease is to end. The effective date of all termination notices shall be the last day of the SECOND full month following the month in which notice of termination is given, unless a later date (which shall be the last day of a calendar month) is stated in the notice. Time is of the essence of this agreement.
b. AUTOMATIC RENEWAL: If nobody gives notice to end this lease, then at the end of the lease term, this lease will AUTOMATICALLY RENEW YEAR-TO-YEAR at a 5% increased monthly rental amount, and the same terms and conditions already in effect.

If they default on our agreement I will throw a judgment with interest on them for a reasonable amount of time to find another tenant :wink: Like 2 or 3 months since they screwed me over. :rolleyes

And very few people remember to follow our agreement and give the 2 month notice EVEN with me specifically telling them about it and making them initial right next to it. They break my contract they just bought another year. So I will be nice and charge them just for the time required to get another tenant. And for my advertising expenses in doing so. I may be able to find someone suitable quick and they will only be out a half a month or so in rent + advertising expenses.

I have learned over the years how to squeeze blood out of a penny. :biggrin And when you are dealing with highly irresponsible people you MUST be firm and ALLOW for NO excuses. I don’t care if they tell you that they can’t pay rent because they need to get baby formula. They WILL take advantage of you and many of them are REAL GOOD LIARS.

I love it when they plea with me that they can’t pay rent right after telling me about the fun trip they just had to Myrtle Beach. EVICT them on the first late payment. Many of them are highly skilled at sucking off society and they will masterfully keep putting you off as long as they can until you wise up and find out they just hoodwinked you.

thing is I’m trying to get cash flow and pay off properties in 10 years…i’m fine taking zero income until then…i want to buy enough to replace my current income in 12-15 years (after loans are paid off)…

If you don’t take any cash flow and apply it all back to the mortgage, and bought using the Hooch method, they will be paid off in 5 years, not 10. And, if you come across some hard unexpected luck, you can always just make one mortgage payment for a while and use a nice little chunk of cash flow to level things back out.

i don’t see how this is possible with higher rent areas…

It’s not.

but it just doesn’t seem like i can accomplish my goals unless i go the high cash flow low income areas…

There you go. A man who is involved with real estate because they want to actually become wealthy quick. I love to hear it! Sure, you will have the drama but I promise you it will be worth it. Just think of it this way, the drama will add constant entertainment to your life. :biggrin

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Great tips Hooch!

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Buy with the Hooch Method and everything will work out. Trust me! Just make sure that you accurately determine the rent and make sure that you accurately determine the repairs. Do that and you will have NO problems.

Here’s the thing. I have little doubt that using the Hooch method will work. What I wonder is how much money can I really put to work in a year? If I buy on 4 to 1 leverage can I buy 1mm worth of property in a year (like 20 homes)? That seems unlikely, but I hope I’m really wrong. How much capital could you put to work in a year? Granted I’ve only looked on MLS, but there is stuff that is sitting at rentX40-50 so I have no doubt the Hooch recommended rent x 30 is there…just how much of it. I feel the urge to buy the loans down (or supplement) to get to rentX30 numbers. At that point it works it just is a smaller return. Is this just nuts?

Hooch you recommend a 18% cap which rocks but if I can put 100k to work at 18% or 500k at 12% what would you choose? Everything works the same just pay it off in 5 years. The net return is just smaller (only 12%??). With leverage both of these situations are better. Am I missing something here?

Though of another ? (wow I must be getting annoying). It sounds like you manage these properties yourself, have a staff that uses your management system, or use a management company.


If you don’t take any cash flow and apply it all back to the mortgage, and bought using the Hooch method, they will be paid off in 5 years, not 10. And, if you come across some hard unexpected luck, you can always just make one mortgage payment for a while and use a nice little chunk of cash flow to level things back out.

Now your talkin’.

I’m not afraid of the work with the low income properties I just want to be confident the system works. Which I’ll only be 100% convinced when a buy a few and try it.

Thanks for the tips.

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hough of another ? (wow I must be getting annoying). It sounds like you manage these properties yourself, have a staff that uses your management system, or use a management company.

? came out wrong. Which do you use of the above do you recommend?

  1. Manage yourself and build a staff down the road
  2. Use a management company

This area is about 2.5 hours from my home, but I’m there once a month or so. It just seems like the numbers work much better there than at my home location.

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Nobody cares more about your property than yourself, so don’t expect great results from a management co. I’ve never used one and never intended to.

2.5 hours away? You have more guts than I. am at my rentals every other day on average. And I only have 14.

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I realize I need to visit the properties from time to time, but I thought I could use a management company for the day to day. Because of the distance. At some point you have to delegate. I guess I was hoping to do it from the start. Aren’t you going to limit yourself to some fixed number of units trying to do it yourself? Realize I know nothing I’m just trying to educate myself. If doing everything myself is 100% efficient it seems I would rather scale and get bigger giving away some efficiency/profit by using a staff or 3rd party mgmt co.

Is it unrealistic to be profitable using a management company?

At what number of units is it a requirement to delegate to either a hired staff or 3rd party management?

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What I wonder is how much money can I really put to work in a year? If I buy on 4 to 1 leverage can I buy 1mm worth of property in a year (like 20 homes)?

I would suggest against buying too many too fast. I have bought landlords entire portfolio of property that have gone under from just that. Start out slow with a few the first year and then ramp it up once your feet are wet.

How much capital could you put to work in a year?

It depends on what you’ve got man, but like I said, I would ease into it with 2-4 properties the first year. You then will give yourself a chance to learn the business and control it rather than have it control you. Then you can take it to whatever level you want. Your only limit will be how fast can you find these solid deals.

Granted I’ve only looked on MLS, but there is stuff that is sitting at rentX40-50 so I have no doubt the Hooch recommended rent x 30 is there…just how much of it.

If I’m getting antsy and the property is in one of the better blue collar areas I will break my rule by just a little bit and pay rent X 35 to make a deal happen. Still a great deal. But I NEVER will go over that. If you see Rent X 40-50 on MLS you should put offers in on them. They are within range of you crapping on their property and convincing them to take your offer now because they just may not get another due to the extensive repairs needed or something else that makes sense. And when they don’t take your offer, give them another next month with NO increase. Keep doing that.

I feel the urge to buy the loans down (or supplement) to get to rentX30 numbers. At that point it works it just is a smaller return. Is this just nuts?

NEVER supplement a deal to make math work! At the most I may cut my repair costs and ride my jacklegs to get it done for less than they want, but I will never try to make an investment look better than it is by adding cash to it. If your itching to spend money ramp up the marketing so you’re going through more deals. Have various programs going on at once. One letter campaign to vacants, one to fire damaged property, one to probate executors, one to every multifamily property in town, etc.

Hooch you recommend a 18% cap which rocks but if I can put 100k to work at 18% or 500k at 12% what would you choose? Everything works the same just pay it off in 5 years. The net return is just smaller (only 12%??). With leverage both of these situations are better. Am I missing something here?

Yes, you are missing something. Capitalization rate is NOT a rate of return. In real estate the rate of return is called “cash on cash return”. Believe it or not, the LESS money you put on a property the HIGHER your cash on cash return (your roi). On a Hooch deal, putting 20% down for the bank on a commercial loan you can expect your cash on cash return in the 37-50% per year range! Real estate returns are NICE. And if you put less down your return would be even quite a bit higher than that. But I don’t recommend it because then your Loan To Value LTV ratio is too weak. The safest LTV is 60%. Putting 20% down gives you 80%. Back in the depression era the average LTV was 60% and only 2% of the people lost their homes. So 60% is pretty much depression proof. Worst case scenario thinking!

It sounds like you manage these properties yourself, have a staff that uses your management system, or use a management company.

Self on most but I have made deals with landlords that were going under. They manage the property MY WAY for some income and I buy their property and get all of their equity. All kinds of deals can be made. If you can think of it you can make it. Especially if you can come up with a nice little win win like that.

I’m not afraid of the work with the low income properties I just want to be confident the system works. Which I’ll only be 100% convinced when a buy a few and try it.

Junkers are where the money is. It’s not the most glamorous business but it pays well. If you don’t like the money in junkers you won’t like it anywhere in real estate as they pay off nicely and generate the most cash flow of any real estate that I can think of. BUT they don’t appreciate like the higher end property does. There are both benefits and disadvantages. I personally see more benefits than disadvantages though.

1. Manage yourself and build a staff down the road
2. Use a management company

Self, it’s not a big deal and I don’t like giving up 10% to a management company, many of which will let your places go to complete crap because they are trying to show you that you still can cash flow with them in the mix. They are trying to make that 10% seem like nothing while letting repairs go unfixed or rigged up in ways I wouldn’t even do it. The next thing you know you are dumping another 10K into the place to get it back up to speed. They aren’t all like this but the ones who aren’t you will feel the lost money. My objective is to quickly pay off houses. I then will put another loan on it that is NO more than what I would buy it for Rent X 30. . I will use that loan money to buy another for cash. Then that one I just bought for cash has no loans on it so I will throw one on it and buy another for cash. On and On. And never get a loan on it for full market value or anything near that. I have seen many landlords go under from doing that crap

This area is about 2.5 hours from my home, but I’m there once a month or so. It just seems like the numbers work much better there than at my home location.

Personally, I’m scared to buy property out of my element. I take only highly educated risks and don’t feel the comfort level that I like when I am out of this area which I have come to know like the back of my hand. But many people do it successfully. That’s just me. But their is a higher failure rate among out of town landlords so you must be aware of that. You will need some good dependable jacklegs THERE to do your work for you. And low income property is more “hands on” so expect to be there more. I have to physically collect rent from some of my tenants. I show up on Friday payday and stick my rent hand out or they will have that money spent before you know it. Some of these low income tenants are mentally like children and they have to be treated that way.

Is it unrealistic to be profitable using a management company?

No, but there is a real estate investor rule of thumb that some people go by. Over 30 units is where it financially makes sense to hire a property manager. I can’t help you here on advice since I manage most of mine. Loss of the 10% will slow you down a little. I always suggest to people, get hands on with it, get involved, do some rehab or whatever yourself or help on certain portions of it. That sweat equity pays off nicely! Then down the road when you are built up and established nicely back out and do what you want.

12

Schlag,

You do not have to buy at rent X 30 to have a profitable rental business. Don’t get me wrong, you should buy at the biggest discount you can get, but rent X 30 is not required. I screen all my potential deals at rent X 50. Then, I do a cash flow analysis by subtracting the mortgage payment (P & I) from half of the gross rents. If I end up with at least $100 per unit per month, then I consider that a good deal and I buy the property. You’ll find that it is difficult in most markets to find deals at rent X 50 (monthly rents that are 2% of the acquisition cost). If you wait for rent X 30, you may be building your business much slower than necessary. It just depends on your goal. If your goal is to retire from your 9-5 job, then waiting for a rent X 30 discount may mean that it will take you much longer to meet your goal.

I started out buying 10 rentals per year. As my business started building, that pace accelerated as desperate sellers started calling with their property. In less than 4 years, I was able to semi-retire and live a nice lifestyle from the cash flow from my rentals.

That’s the way I did it.

Good Luck,

Mike

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Yes, you are missing something. Capitalization rate is NOT a rate of return. In real estate the rate of return is called "cash on cash return". Believe it or not, the LESS money you put on a property the HIGHER your cash on cash return (your roi). On a Hooch deal, putting 20% down for the bank on a commercial loan you can expect your cash on cash return in the 37-50% per year range!

Here are the number I see. Let me know if I missed something.
Hooch Deal 15 yr am 80% LTV
Gross Rent=1,000
Acquire Price=30,000
Down = 6,000
15 yr payment (5%) on 24k= $189
Free Cash Flow= (1,000/2) - 189 = $310

At the end of 15 yrs.
Cash Flow = 310 * 15 * 12 = $55,837 (0% rent increase)
Equity = $30,000 (0% appreciation)
Annualized Return = (30,000 + 55,837 - 6,000) / 6,000 / 15 = 88%

If double payments are made it looks like:
Free Cash Flow = (1,000/2) - 189 - 189 = $120
At the end of 15 yrs.
Cash Flow (yrs 0-5)= 120 * 5 * 12 = $7,225 (0% rent increase)
Cash Flow (yrs 5-15)= 500 * 10 * 12 = $60,000 (0% rent increase)
Equity = $30,000 (0% appreciation)
Annualized Return = (30,000 + 60,837 + 7,225 - 6,000) / 6,000 / 15 = 101%

Schlag deal
I’m looking at doing something like this
Gross Rent=1,000
Acquire Price=50,000 (rent x 50)
Down = 10,000
10 yr payment (5%) on 40k= $424
Free Cash Flow= (1,000/2) - 424 = $75

At the end of 15 yrs.
Cash Flow (yrs 0-10)= 75 * 10 * 12 = 9,088 (0% rent increase)
Cash Flow (yrs 10-15)= 500 * 5 * 12 = 30,000 (0% rent increase)
Equity (Hooch acquire price)= $30,000 (0% appreciation)
Annualized Return = (30,000 + 9,088 + 30,000 - 10,000) / 10,000 / 15 = 39%

Still not too shabby and I should be able to put more capital to work quicker (after I buy a couple and get my feet wet).
Do these number look right or am I missing something. Thanks to all for helping me think this through. You guys are great.

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While I am certainly no expert, Here is a thought of how I will get my loans:

I think it is better to get a 30 yr loan and then make extra “principle only payments” as you can. In the above example, 40k financed for 30 yrs is about 200 / month. You can still make your $424 monthly payments with the $224 extra going to principle only. So you are paying at a 10 yr amortization rate. Then if you have a lean month or two you can just fall back to the minimum $200 payment until you get back on track. You won’t be “obligated” to the higher payment. No one can ever fully predict what will happen in the future. So I try to structure things to get as much downside protection as possible.

AltCap

15

Schlag,

Someone mathematically inclined such as yourself will do well. Keep your focus on the numbers and don’t get sucked into what a house looks like, etc.

[i]Schlag deal
I’m looking at doing something like this
Gross Rent=1,000
Acquire Price=50,000 (rent x 50)
Down = 10,000 I don’t account for the down payment. Remember, you are an investor and that money was LOANED by you for the house. You should be paid back with interest. That pay back buys another. That is why I don’t consider my loan to get it. You will see when people run the numbers around here their contribution is never considered.
10 yr payment (5%) on 40k= $424 More like 7%. You will want these houses in LLC’s and that is a commercial loan!
Free Cash Flow= (1,000/2) - 424 = $75

At the end of 15 yrs.
Cash Flow (yrs 0-10)= 75 * 10 * 12 = 9,088 (0% rent increase) You will increase rent 3% per year to account for inflation.
Cash Flow (yrs 10-15)= 500 * 5 * 12 = 30,000 (0% rent increase)
Equity (Hooch acquire price)= $30,000 (0% appreciation) These low income properties will appreciate 2-3% a year depending on the neighborhood and if the city is keeping the crime down.
Annualized Return = (30,000 + 9,088 + 30,000 - 10,000) / 10,000 / 15 = 39%[/i]

altcap
I think it is better to get a 30 yr loan and then make extra “principle only payments” as you can.

The problem with 30 year loans is that they don’t exist in todays market. We are talking about doing this on a large scale and schlag will need to put them in various LLC’s to protect his assets to some degree. Therefore we are talking about commercial loans.

I have heard some people around here say their bank will do a 20yr but 15yr is pretty much the standard thing right now. Sure, it may change, but we are talking about today. The banks are tightening up their loan criteria and I don’t see them loosening it any time in the near future.

16

Inflation and appreciation are the same thing you know. One of the reasons capital gains tax is so unfair. It’s a tax upon a tax (the hidden tax of inflation)

17

Not the same. Average inflation is around 3% or so. Appreciation depends on the location of the property. Low income property appriciates at a rate that closely matches inflation. So it didn’t actually increase in value at all. Higher end neighborhoods often appreciate at a rate of 8, 9% or more per year. This is one of the benefits of buying better property. But it can also drop by much more than the low income housing does.

18

I’ve got a plan worked out with a local lender in that I won’t have my name on any notes. Hooch your right on the high interest rate…(but it doesn’t make much diff as I’m looking at doing 10yr am). Also I agree that local lenders don’t want to right 30-yr paper in this interest rate envrionment (would you!). The banks I’m talking to really don’t want to go past 10. Because of the number of homes I’ll have to own to make this work I can’t get the loans in my name. I think the Fannie/Freddie limit is 10. Plus personal notes screws with my personal credit.

Also the whole setup thing is a bit of a mystery. For right now I’ll just start an LLC and put the first handful in there. It would be nuts to not put it in an LLC in my opinion in that I have other interests in other corps/LLC’s and all that comes into play if the properties are in my name. What happens if some slime ball lawyer gets a judgement of 10 mil and my umbrella policy is 5mil…i’m crying then!

Hooch one comment you said doesn’t make sense to me. I understand that the down payment is capital contributed to the project and that you want a return on it but…the return is the calculations I presented. I don’t see why we should calculate phatom interest on a down payment when it is an expense we will not have to pay. To me I run the numbers and the return that is caculated is exactly the rate of return of the capital contribution…this should not be at the interest rate of the mortgage…the reason it makes sense to use leverage is because we can exceed the rate on the mortgage with cash flows off the properties. I really don’t see one way as wrong/right just a different way to see it.

One more question for you gurus. If I go and buy say 4 homes (like in my example) to get going in this and I allocate 50k for down payments repairs startup. How much additional capital do I need to weather the storm? Is it a certain number of months of no renters? big expenses? It may be impossible to answer cause most of the events are unexpected that would cause additional capital to be required…but what is a conservative estimate.

My thinking was 2k per property for repairs and 6 months of zero cash flow for each. All together (2000 + (500*6) ) * 4 = 20,000

Is that in the ballpark? It seems really conservative but I’m not sure hence the question.

Thanks again

19

Inflation and appreciation are related but two different animals IMHO. Are you saying that inflation was 20-30% per year in vegas/cali/florida during the last runup and that now we have deflation in those areas. I see inflation as a general cost of goods/services going up in price. What we are talking about is a certain asset, a property, going up. I do agree that when we have moderate inflation there usually is appreciation in housing, but if interest rates explode and inflation runs wild as I think it will within 5 years I believe home prices fall (while rents stay flat to go up!)

20

Hooch one comment you said doesn’t make sense to me. I understand that the down payment is capital contributed to the project and that you want a return on it but…the return is the calculations I presented. I don’t see why we should calculate phatom interest on a down payment when it is an expense we will not have to pay.

That’s find that you don’t pay yourself interest back but your calculations are based on not even paying yourself back, aren’t they? Also, how do you plan to handle things at tax time? Take money out of one company and put it in another and you will pay full boat on taxes as a owner withdraw. “Loan” the money from one company to another and pay it back with very little interest and you will pay taxes on the interest earned.

One more question for you gurus. If I go and buy say 4 homes (like in my example) to get going in this and I allocate 50k for down payments repairs startup. How much additional capital do I need to weather the storm? Is it a certain number of months of no renters? big expenses? It may be impossible to answer cause most of the events are unexpected that would cause additional capital to be required…but what is a conservative estimate.

How long without renters is a local question. I often have my places rented before they are even fixed. I’ll have my guys go in the place after a tenant and in a maximum of a week or two, paint it, make repairs and it is back on line. It may take me at most another 2 weeks to rent it. Average vacancy rate in my area is 7%. In the real bad areas it can be 15%.

Go here, pick your state then pick your town. Consider the vacancy rate to be a little higher in the low income areas than the average.

My thinking was 2k per property for repairs and 6 months of zero cash flow for each. All together (2000 + (500*6) ) * 4 = 20,000

6 months zero cash flow is real high. The only houses I buy that are around there are the ones that are completely bombed out, raining in it for the past 5 years through big holes in the roof, extensive sheetrock damage from the rain, replumb it all, reside it, etc. Major damage is repaired in 6 months or less depending on how many people are working on it. And in that scenario I bought that multifamily for 5K and put 25-30K into it.

If you have 2K in damages you’re looking at something that is pretty much good to go, just needs paint inside and out. The average Hooch deal that is in decent condition will cost me around 6K to fix it. And that is with my jacklegs doing the work. Not some big shot licenced contractor. Just a few guys that can do pretty much everything for CHEAP. Guys that know that landlords FIX things and don’t buy new unless ABSOLUTELY necessary.

And the 6K may be painting the whole place inside and out and scraping off that old peeling paint. Buying some cabinets at the used building supply store, getting a used refrigerator and stove because they were stolen when it became vacant, rerunning the water supply lines because some a**hole stole the copper. (using pex, awesome product and very quick to install. whole house in a day) Throwing in some baseboard heaters because that same a-hole stole the furnace. And a bunch of little cheap insignificant things to make the code enforcers happy.

but if interest rates and inflation runs wild as I think it will within 5 years I’m think home prices fall while rents stay flat to go up!

In periods of hyper inflation home prices rise AND rents go up, not flat. Home prices rise because building materials and all other commodities rise. It is significantly more expensive to build a new house which brings up the value of the existing ones. Also, landlords for the most part don’t just stop buying houses. Even though it is smart to because they will quickly approach the top of a bubble. Their higher mortgage costs require them to jack the rent to make it cash flow and all rents go up with the new and higher fair market rents.