new to investing, a little advice please?

General Real Estate Investing
1

Well, allow me to preface my questions by saying that my goal is to dip into the commercial markets, namely apartment buildings and parking garages but I need some cash and experience to reach that level so I was advised to start smaller.

My general consensus is that I should start my venture by purchasing an inexpensive foreclosure and rent it under the section 8 program in maryland. Problem is, I don’t know what steps to take first. do I assemble my team (lawyer, real estate agent, mortgage broker, etc) first?

And now, I have a question and one of two things will be the result of the answers, 1. my bubble will burst or 2. I am correct.

Let me just explain my understanding of what I am about to get myself into and you all can adjust it so that it is realistic.

  1. purchase a low cost house 50k or so (all these numbers are for the sake of argument)
  2. get it to pass the section 8 inspection
  3. let’s say my mortgage payment (again for argument sake) is 500/mo so I rent this place out for 900/mo and the government direct deposits let’s say 550/mo on time in my account and I collect the remainder from the tenant which becomes my cash flow.

oh boy, ok, so how likely is that?

2

Ok, I will be the first to bust the bubble. You will be the safest with a multifamily home rather than a single family.

For the “team” you will be best off talking to a large residential landlord in the area first to get some recommendations on lawyers, REO agents, title insurance company (use instead of lawyer in most cases), bank, etc. This will help you not waste time and this step can also be done in the process of purchasing a house. I have found that landlords are a pretty tight bunch and we all like to help each other out.

Relating to your section 8 question.

  1. purchase an investment multifamily (rent x 30-50 minus repairs is a good place to start)(Repairs include splitting the utilities up if necessary and make sure you can with the zoning)
  2. Fix it up so it will pass section 8. Ask your questions you want to know here.
  3. Rent it to a section 8 tenant from your sign outside, craigslist ad and newspaper ad only if the other two aren’t bringing in enough prospects.
  4. Section 8 tenant says yes (they don’t care about the rent price) and they fill out half of a form that they give you and you fill out the other half. They bring it down to the section 8 office. You can see a voucher from them to confirm that they have section 8.
  5. Section 8 office calls you and says if the unit is “Affordable” for the tenant.
  6. Then another person calls you from Section 8 and wants to set up a meeting at the building to see if they approve it. They then tell you that the unit has been deemed “affordable” for the tenant based on their income but they have found other 3 bedroom units in the area that are renting for $595 and they will not allow the tenant to rent from you at $900 a month!!! What they say is the rent, IS the Rent. If other 3br units in the area are renting for $900 than they will give you $900. If they are renting for $400 they will give you $400. They will base their decision on other Section 8’s in the area, they will go to property management companies web sites and look what they are renting their properties for (which would never pass section 8 criteria anyways). They will look on Craigslist to see if they can find any within a few blocks, etc.
  7. They give you a small punchlist of things to do and come back out again for a final check.
  8. You sign your lease with the tenant and bring it down to the Section 8 office for them to copy. They tell you that the tenants rent payment will be ???20.00 or whatever and you will get a check in the mail for the rest the start of every month.
3

Thanks so much for the reply. Unfortunately, all of your answers spawned new questions and now I am seeing how lost I really am. please be patient.

So that I don’t get overwhelmed with all of this new information, I will take this nice and slow and ask only a couple questions at a time.

ok, first, where would I find a “large residential landlord”? Perhaps I should talk to the management guy that managed the property I used to rent. Maybe he has some names?

second, I googled the multi family home thing but I still can’t grasp exactly what it is that you’re talking about, can you be really specific? and what does “rent x 30-50” mean?

I’m so glad I found this forum, this is really what I’ve wanted to do for 10 years and looking back I’ve always been “just about to take the leap” and never have. so, I spoke to a guy I know out of town who is a monster commercial investor and he told me “mike, there’s no secret to any of this, the truth is, most people don’t do this because they fear failure and aren’t willing to accept the risk. if you want to move forward, you just HAVE to do it!”. He’s the guy that gave me the section 8 idea seeing as how I have no cash to start with. I will continue to learn from you all that know so well how this equation is operated.

oh yeah, concerning the state “determining the rent”, I know this is a semi-loaded question with no single answer but can you give me a rough, and I mean rough idea of the sort of cash flow that section 8 investors work with? I mean, let’s say for argument sake rough numbers, if a person bought a 50k property in a low income area with the intent of being a section 8 landlord, what would be a typical cash flow return on a monthly basis? $50 bucks, $200 bucks? Since I don’t know anyone doing this and don’t have the benefit of being taken under their wing so to speak, I’m just trying to know the rough size one’s portfolio needs to be to make a reasonable living through investment alone. I’m sure this is something that will take a good 5 or so years for me to build to the point that it’s paying my bills or whatever you want to call it.

ughhh… I even frustrate myself thinking about how little I know in this field and how question embattled you have become!

thanks again. :banghead

4

What experience, if any, do you have in the arena of real estate? If you are truly starting with no experience and no cash, then I would recommend starting off with a SFH, based on the lower amount of money you’d need to put up to acquire such a property. Also, if you don’t have any experience landlording, its relatively easier to deal with one set of tenants vs 4 sets of tenants if you started buying a 4unit.

Any particular reason you want to start out doing a Section 8 property? You can just as easily cash flow with a regular rental, and if its your first deal, you’re going to want to keep the process as simple as possible while you’re learning.

5

I was looking into the section 8 idea because of this guy’s advice. He is tied into commercial really well, I mean, 15 years down and extremely well to do. His suggestion was such because I think he was imagining low income housing equating to low purchase price which would ultimately equal a low mortgage payment which is something I need. that and the fact that the rent is paid on time, by the government or whoever it is that subsidizes this program in this area.

The key with me is no cash. I’ve got to be able to afford my first deal until I can make and save a bit of money to work on some better deals or multiple deals or whatever it may be.

I have absolutely zero experience in real estate and absolutely zero experience landlording. What I do have on my side is that I’m a very intelligent person and extremely organized, almost OCD about things at times. I was planning on managing my own properties until the cash flow is such that it makes financial sense to hire someone else to do it so that my entire life isn’t wrapped up 24 hours a day.

I do know this couple who own a management company. They seem awfully busy but they manage about 45 properties (as of a year ago when we last spoke). All I can remember from my conversations with them at that time was the husband telling me “yeah, you get calls at 3am and there are many headaches and sleepless nights but the money is so good you just forget about it the problems”. that’s all I know about management.

My plan is to just keep my mouth shut and my ears open around people like you and always take the advice that’s given. That ought to steer me more in the right direction than anything else out there.

6

Hooch from what I have experienced Section 8 rental requirements vary from city to city as well as state to state. I can tell you in my area, Broward County Fl, we have 2 different section 8 offices, a county and a city one and both pay different amounts to landlords. Also here section 8 rent is based on bedrooms. It does not matter what part of town your in, 3 br will rent same in a $100K home as well as $200K home… Difference is, will you get money from the tenant.

Talk to section or goto the website and find out there requirements like also, by me, if I do not have all paperwork in by 15th of month, they will not start paying to follow month. (EX. in by April 15th and May 1st I get check, in April 16th, and first check will be June 1st)

As for easier. That is up in air. Some enjoy them so do not. TO each is own. I will say this. The rich get rich catering to the POOR, the poor stay poor as they cater to the rich.

I have seen crappy renters from both sides of the fence.

As for first purchase. Some say duplex because you have better chance to keep some cashflow coming in from one unit.

As for the 30-50…what he means is expenses. A guideline used is rental expenses will equal half your rent. So if your renting for $1000, then $500 for expenses. Its a guideline. Honestly it is one I never used because in my market it would never work and I know few investors locally that believe in it and well, my books prove my point why I do not. But then it boils down to tenant screening and advertising. Advertising can be a big expense, a newspaper ad can cost $200 a week or so depending. Craigslist is free, but do you have it in you area???

7

“”“Unfortunately, all of your answers spawned new questions and now I am seeing how lost I really am. please be patient.”“”

No problem, landlords are a tight group of people that enjoy helping others get involved.

“”“ok, first, where would I find a “large residential landlord”? Perhaps I should talk to the management guy that managed the property I used to rent. Maybe he has some names?”“”

Yes, if you look in the newspaper you will see some for rent ads that have multiple properties for rent. They are probably a large property management company. Call them up and ask them if they know some names of the largest landlords in town. Most landlords will know who the big guys are. The reason I say to speak with a landlord with a lot of property is for one thing, they likely know what they are talking about. They also have likely used many lawyers, title companies, etc over the years and know who is good and who to stay away from. A small landlord would be more than happy to give you references but remember that they are still learning too.

“”“second, I googled the multi family home thing but I still can’t grasp exactly what it is that you’re talking about, can you be really specific? and what does “rent x 30-50” mean?”“”

This is for any type of property, not just multifamily. Also, remember that the good deals aren’t just sitting around on MLS. You have to actively search for them by looking for hardship problems. You find people with problems and solve them. There is a deal here and there that you will find through an REO agent as well. You make your money on the purchase of a property and don’t realize it until it’s sale. What’s in between is very little. This is why it is so important to buy right. When you think you have a deal post the numbers here and people will analize it.

I buy low income houses in the Section 8 areas of town that you are looking at and this is what I do to consider if it is something worth while looking at or not.

Rent times 30 scenerio on a multifamily. Do the same thing for a single family. (typically the lowest you will find a deal) Rent amount MUST be verified.

Triplex example
1br - $425
1br - $425
3br - $595
Total rent = $1,445 X 30 = $43,350 total value of the house
Now lets say that you have about 5k in repairs.
$43,350 - $5,000 = $38,350 This is the total that you will offer in the rent X 30 scenario. Personally this is what I look for. I will do rent times 40 minus repairs though.

“”“mike, there’s no secret to any of this, the truth is, most people don’t do this because they fear failure and aren’t willing to accept the risk. if you want to move forward, you just HAVE to do it!”. “”"

He couldn’t be more right. If you learn as much as you can, don’t rush things at first, make sure you buy right, you will win.

“”" can you give me a rough, and I mean rough idea of the sort of cash flow that section 8 investors work with? I mean, let’s say for argument sake rough numbers, if a person bought a 50k property in a low income area with the intent of being a section 8 landlord, what would be a typical cash flow return on a monthly basis? $50 bucks, $200 bucks?“”"

It depends on the deal but most investors here won’t touch a property unless they are making at least $100 per door. Lets analyze my rent x 30 scenario and it’s cash flow after paying the banks interest of 7% on a commercial loan over a period of 20 years.

Gross Income: $1,445/mth = $17,340 annual
Expenses (50% rule of thumb) -8,670
NOI: $8,670
43,350k@7%/20yrs: $1,865
Yearly Cash Flow $6,805
$567 per month or $189 per door.

So you need to figure out how much money you need to live on so you can determine how many properties you will need to get by and quit the job. Once you have one house completely paid for you will be able to quickly grow, getting a loan on the paid for house to buy anther. Now the other you just bought is paid for because the loan is on the first so get a loan on that one and buy another, etc. etc. etc. (make double payments on a 15 year loan and it will be paid off in 5 years not 7.5 due to the savings in interest). Buy right and you will be able to make double payments.

“”“I’m just trying to know the rough size one’s portfolio needs to be to make a reasonable living through investment alone. I’m sure this is something that will take a good 5 or so years for me to build to the point that it’s paying my bills or whatever you want to call it.”“”

Reasonable living means what specifically? You can figure out by the $100 per door per month to determine how many you will need to make a living. The junkers pay more cash flow but you have to deal with more drama. Section 8 decreases the drama to some degree.

You should consider buying a book from Bryan Wittenmyer. This is my favorite real estate book and this guy is very experienced with the type of property you want. It’s also a nice read and too the point. The book I think is called Perpetual Income.

8

“”“Hooch from what I have experienced Section 8 rental requirements vary from city to city as well as state to state. “””

I’m sure you are right about this but I will bet that the different amounts paid are related to the fair market rent in the area.

In Roanoke VA it looks like this for a house that the tenant pays all utilities.
1br $425
2br $525
3br $725

They then come by your house and try to negotiate a lower price for the tenant. And they will easily accept rent increases by 3.5 percent each year to cover for inflation, higher taxes, etc.

“”“As for first purchase. Some say duplex because you have better chance to keep some cashflow coming in from one unit.”“”

Agreed, I would search for a duplex, triplex or quad.

“”“As for the 30-50…what he means is expenses.”“”

No, I actually use this formula that I came up with myself. I don’t know anyone who uses it. One day I was trying to figure out an easy and quick determination of a property that has a capitalization rate of 15 to 18%. On every property I was running the cap rate and I started doing some rent X different numbers scenarios to see what would end up being within my desired 15 to 18% cap rate. I determined that rent X 30 gets you around an 18 percent cap and rent times 50 gets you at a 14 or 15% cap.

NOW, Important consideration. If the landlord is paying more than just the water, sewer and trash than the rent x 30-50 scenario is not what you want to use. That is why I always go by these guidelines. Rent X 30 minus repairs *** and repairs includes splitting the electricity or gas if needed and if zoning will alow. I am strongly against a landlord paying utilities other than the water for tenants. I have seen too many landlords go under when one day the gas or electric company jacks the bills across the board overnight and the next thing they know their gas bill in the middle of winter with the tenants keeping the windows open is through the roof and that $100 per door is completely gone and eating into all of their more profitable property. Then they all go down like a stack of cards. Utilities can eat you alive.

A guideline used is rental expenses will equal half your rent. So if your renting for $1000, then $500 for expenses. Its a guideline. Honestly it is one I never used because in my market it would never work and I know few investors locally that believe in it and well, my books prove my point why I do not. But then it boils down to tenant screening and advertising. Advertising can be a big expense, a newspaper ad can cost $200 a week or so depending. Craigslist is free, but do you have it in you area???

9

Sorry, I tried to go back into the post and remove the last paragraph that I copy and pasted when quoting you but it won’t let me back in.

I suggest everyone try out the Hooch Valuation Method of buying property along with your standard property valuation method and see if you like it. It’s simple, quick and will make you good money as long as you stick with the Rent X 30-50 minus repairs including splitting utilities if necessary. Don’t go over 50. If your real estate market is over 50 than you may want to look at surrounding areas as there is an over saturation of investors. Also consider that maybe you aren’t looking to solve hardship issues and are too focused too much on MLS.

10

ok, again, thanks to all that have a hand in this. you all are amazing and I thank the lord for this type of support. to help all that are on this forum, I will post my first deal step by step. not in this post though.

ok, I am going to call my management guy right now and find a “big name landlord” I will let you all know.

11

Hooch,

If you have followed propertymanager’s (MikeOH, Mike Rossi) posts in these forums, he has repeatedly espoused gross monthly rent x 50 as his maximum purchase price. He calls it his 2% rule.

12

I see, that would be a little on the high side for a junker property. If you search online the standard rule is the 1% rule but that is completely insane in my opinion. Does his 2% rule include subtracting repairs and splitting utilities?

13

well, I’ve got 2 big dog management people but I can’t seem to get in touch with either so I think I’m going to have to seek out my own team. I’ll update on how that goes.

anything I should ask prospective mortgage brokers, insurance people, etc? I mean in terms of determining whether they will be well suited to this or not?

14

Ask if the insurance co will insure NOO (non-owner occupied) properties. If you’re going to form an LLC, see if they’ll insure houses in the LLC name. Some companies won’t. You’ll get the same vibe from banks. Some won’t want to lend for investment properties. Some won’t lend to LLC’s. I’d call around and ask who will lend on these properties, what they look for as a down payment, terms, etc. Seems pretty common to find 10-15 yr amortization on a 3-5 yr fixed rate.

15

Also with the insurance company make sure they will take whatever you give them. There are a bunch of them out there that only want the ideal perfect property and won’t take the good with the bad. Bad being a vacant property that you have to do a little work on to get in shape prior to tenants living in it, etc.

That is why I suggested a big dog landlord in the area as they already know which title companys will do creative deals (double closings, etc) and which won’t, which insurance companies the landlords work, what lawyers specialize solely in real estate and don’t charge an arm and a leg, who the REO’s are, who the wholesalers are, etc.

Take a couple to lunch. Good friends to have when you need to know about local stuff like how to sweet talk this or that code enforcer or how to get them off your back, what local tax abatement programs or tax credits are available, etc.

When I am looking for property on my mailings and accidentally run across a landlord, at least half of them have said we should go to lunch. Nice people that don’t feel like they are a competitor of yours like in other industries. We all know there is plenty for the taking. Now, don’t get me wrong, they will help you out and tell you some good techniques for making money but they will hold their true moneymaker concepts close.

16

well BOTH big dog property management people I know won’t give me the time of day, dodging my calls, not calling me back, whatever. Not going to deal with that. I have a customer who is a commercial real estate investor/broker and I am sure he will help me. I will call him monday on my lunch break. Let you all know tomorrow.

17

You will meet MANY landlords that are more than willing to help you if you go to your local REI meeting.

Property management companies I have found to be a little nasty in attitude as well. I think it is because all day they deal with nothing but other peoples problems, angry tenants, and court.

18

How would one locate an REI meeting in this area?

19

City and State?

20

forest hill, MD 21050