Newbie -- Pls. help me get started

General Real Estate Investing
1

I have a decent amount of cash available but have never done RE investing before. Having now read material I am very keen on starting. I have a few questions:

  1. Is it possible to do this business without finding/dealing with tenants and maintenance on a day-to
    day basis (I absolutely do not want to do this)? Hire Property Mgmt for all of this?
  2. I would rather invest in Multi-family but the spouse insists we should start with Single Family homes
    to “get our feet wet” (I don’t want to make $100/mo. I would rather plunk down more initial
    investment and make higher cash flow from a Multi-family).
  3. If I have excellent credit (790+), good outside income, and am willing to put 15-20% down, what are
    the chances that a lender will lend me the balance to buy an apartment complex (lets says $1M
    price)?
  4. What is the minimum no. of units I should have before I can hire a really good Property
    Management Company?
  5. What are the things the Mgmt. Co will do (everything? finding and managing tenants etc?)
  6. Should I look at condos (like 15-20 of them in one location)? In this case I would have to find/deal
    with tenants?
  7. Do lenders routinely allow one to take the loan in personal name and then transfer the property to
    one’s LLC at closing (to get a better loan rate)?

Any help on these questions will be greatly appreciated.

VV

2

Lotsa good questions here, VV…

1. Is it possible to do this business without finding/dealing with tenants and maintenance on a day-to day basis (I absolutely do not want to do this)? Hire Property Mgmt for all of this?

Yes! You can be as hands-on or as hands-off as you want. As REOConsultants says “Do what you do best, outsource the rest!” There are property management companies that will do as little as collect the rent to as much as full “turn-key” operations.

2. I would rather invest in Multi-family but the spouse insists we should start with Single Family homes to “get our feet wet” (I don’t want to make $100/mo. I would rather plunk down more initial
investment and make higher cash flow from a Multi-family).

This is between you and her…but, (Get ready, Robb, here comes “Life Rule #2”): “If momma ain’t happy, aint nobody happy!”

3. If I have excellent credit (790+), good outside income, and am willing to put 15-20% down, what are the chances that a lender will lend me the balance to buy an apartment complex (lets says $1M price)?

A lot of the answer to this question has to do with the subject property. As you progress up the “Property Ladder”, and move into the larger properties, it’s all about the income stream (including the property’s value!)…your credit score, obviously will come into play, as will your down payment…

4. What is the minimum no. of units I should have before I can hire a really good Property Management Company?

If you really don’t want to deal with the hands-on part, 1.

5. What are the things the Mgmt. Co will do (everything? finding and managing tenants etc?)

Probably, just about anything (legal) that you want them to…it all, however, comes with a price.

6. Should I look at condos (like 15-20 of them in one location)? In this case I would have to find/deal with tenants?

If you bought condos and had no tenants, what would you do with them? If I wanted to do large properties, I personally would not do condos for a variety of reasons. A good many condo associations prohibit investors from owning large percentages of the development.

7. Do lenders routinely allow one to take the loan in personal name and then transfer the property to one’s LLC at closing (to get a better loan rate)?

You’re going to be in the commercial lending world – whole new set of rules!

Hope this helps, others will pitch in here, too!

Keith

3

VV,

Your wife is right - start with a SFH and see if you are cut out to be a landlord. I strongly recommend that you learn to walk before you try to run. Also, you appear to still be lacking in knowledge as evidenced by saying that you don’t want to make $100/mo on a SFH. I agree with you, if you only make a $100 positive cash flow on almost any SFH, you will soon be out of business. On all but the cheapest houses, a $100 cash flow does not provide you with a sustainable business model. In my book, the positive cash flow MUST be AT LEAST 1/3 of the mortgage payment. Otherwise, a small percentage of vacancies can put you out of business quickly.

These are the kinds of lessons that you should learn with a few SFHs rather than a $1,000,0000 apartment complex.

Hiring a management company is no panacea. A manager will have all the problems that you would have if you were managing the properties, except they don’t own it so they don’t care as much as you do. What do they care if someone trashes YOUR property? The worst that will happen is that they will lose you as a client. So, don’t believe the late night TV guru hype - it is NOT easy to find a good property manager. At best, you’ll have to manage the manager, at worst having a manager will be a disaster and you’ll lose your business.

So, follow your wife’s advice - start with a SFH or two and manage them yourself.

Good Luck,

Mike

4

Hi,

I on the otherhand think small appartments are better. If you’re going to do it you can make more cash flow and to me that’s what it’s all about. You don’t have to start big. Do 2 to 4 units. If you’re handy, do all the work yourself. Maintenance repairs can kill the cash flow and like Mike said, so can property managers. They have no interest in your property so what do they care what a repair cost. Will they shop around for the best deal? We have always done the work ourselves. Now that we try using others, we find it very diffiult to find anyone who is good. There is a lot of poor quality work out there.

Read my blog below and it will give you an idea how we invested. My hubby was able to retire at 40! He was an auto mechanic before that and i’m a stay at home mommy to 6 kids. Again, for us, it was all about the cash flow.

Good luck

5

Thanks for the detailed replies folks.

Keith – very helpful thank you. On 1. your opinion seems to be different from the rest. I should have mentioned I am partially disabled so doing any physical work myself is virtually impossible. Hence if I cannot rely on prop. mgmt. then I better not start this biz. On 7., can I get a loan in personal name and then transfer the loan/property to my LLC at closing?

PropMgr – Thanks for you insight on the cashflow; I now remember reading that somewhere (yeah I doubt I will ever have all the knowledge but as long as I keep increasing it I’m happy). If I cannot outsource to Property Mgmt. I am now apprehensive about getting into this biz.

Diane – Read your blog in its entirety. Great story! Like I mentioned I cannot do any physical work due to disability so I will need to hire a prop. mgmt. firm. If I find out that is not feasible (either from a financial perspective or because of the other reasons mentioned here, then I think this may not the right biz for me :frowning: )

6

Actually, my posting on item #1 does not reflect my opinion on the matter. You asked if it is possible and it is…I think that the best way to learn the business is to do it but that is not to say that you cannot hand it over to a property manager. I, personally maange all of my own properties. I think that you ABSOLUTELY must know how to do it yourself.

I am not in a position to advise you about moving properties around between personal ownership and LLCs. I recommend that you post in the “Asset Protection, Legal and Contract Issues, Income Taxes, 1031 Exchanges” and ask the experts there or seek professional legal advice.

Keith

7

Hey,
Question for propertymanager: you have said here and in other posts cash flow must equal 1/3 of the mortgage payment. I am assuming that that is after piti, vacancy allowance, maintenance, and management fee, etc. Right?
My grandmother was almost disabled due to arthritis but owned 3 apartment buildings, 2 sfr, and three commercial buildings. She did what she did best (cashed the checks) and outsourced the rest. You can be the owner/manager and just decide what you want to manage. It is still a hands on business - just depends where you want to put your hands.
Peace,
Richard

8

Richard,

The mortgage payment for most investment properties would only include P & I, so that’s all that I am including in this calculation. The purpose in requiring the positive cash flow to be at least 1/3 of the mortgage payment (1/2 is much better) is to ensure that a string of vacancies doesn’t destroy your profit.

Question: is it a good deal to buy a rental property and have a $100 positive cash flow after ALL expenses? Many people would say yes, but I would say maybe. Let’s look at two examples:

Example 1: Fred has five rental properties that have a positive cash flow of $100 each. Fred lives in an expensive part of the country and the mortgage payments on these houses are $1,000 per month each. Things have been going well and Fred is enjoying spending the extra $500 per month. In the short period of only one month, 2 of these rentals become vacant. Fred’s mortgage payment is $5,000 per month, but his income is now only $3,300 - he’s losing $1,700 per month!! Fred works at the local hardware store making $2,500 per month (all of which he spends) and he has been spending his vacancy allowance also. He is now in deep trouble. Fred simply can’t come up with $1,700 per month to keep his mortgage paid. Fred is forced to sell his property at a loss to prevent foreclosure and never invests in real estate again. This business model was not sustainable.

Example 2: Lori also has five rental properties that have a positive cash flow of $100 each. Lori lives in flyover country and the mortgage payments on these houses are $300 per month each. Things have been going well and Lori is enjoying spending the extra $500 per month. In the short period of only one month, 2 of these rentals become vacant. Lori’s mortgage payment is $1,500 per month, but her rental income is now only $1,200 - she’s losing $300 per month. Lori works at a local restaurant as a manager making $2,500 per month (all of which she spends) and she has been spending her vacancy allowance also. It’s difficult to come up with that extra $300 per month, but she cuts her discretionary spending, works a little overtime, and eventually gets both houses rented. Lori has learned a lesson - keep her vacancy allowance in a bank account and try to get an even higher percentage of rent to mortgage payment in the future.

So you see from these examples that the ratio of positive cash flow to mortgage payment is very important. Both Fred and Lori were getting $100 per month positive cash flow but Fred only had a cash flow to mortgage ratio of 1/10 while Lori had a ratio of 1/3. The difference in these ratios made the difference between one business succeeding and one business failing!

The things do happen. In the past two years, I have had virtually no vacancies. In August, I suddenly had 6 vacancies out of 25 rentals. Fortunately, my positive cash flow to mortgage payment ratio is about 1/2 and I still made a nice profit even with almost 1/4 of my properties empty. (Fortunately, we have already re-rented 3 of these rentals).

On the other topic, I agree with you that anyone is free to manage their own property or hire a management company. My point was that you’re incurring considerable risk by hiring a manager simply because that person/company has no vested interest in your business. As we all know, finding someone competent to do anything is very difficult.

Mike

9

Hey,
Thanks for the clarification. Do you figure, say 25% for vacancy, and what figure for maintenance, or is the 1/3 to 1/2 an arbitrary amount? Thanks Mike and Keith for your posts and the help you give all of us out of your storehouse of life.
Peace,
Richard

10

Richard,

I use 5% of the gross rent for vacancy allowance and $40 per month for maintenance allowance. Of course, these numbers would vary with your local market and the cost of the house. These have nothing to do with the 1/3 rule that I use.

The 1/3 (1/2 is better) positive cash flow to mortgage payment ratio does not change with the cost of the house or property. I use this same 1/3 rule for SFHs, duplexes, and apartments/apartment buildings also.

The point of the 1/3 rule is that bad things do eventually happen and your business needs to be able to weather the storm. If it takes the positive cash flow from 10 houses to make up for one vacant house (or other financial equivalent problem), then you’re in a very weak position - i.e. you would need 20 houses to cover only 2 vacancies. On the other hand, if you only need the positive cash flow from 2 or 3 houses to make the payment on a vacant house, then you have a MUCH better chance of making a profit in the long run.

I hope this clarifies what I’m trying to say. It’s a little complicated, but it is critical to understand that just having a positive cash flow does not mean your business can survive. What’s important is the percentage of positive cash flow that you make.

Good Luck,

Mike

11

Hey,
That helps, thanks. I got the 25% vacancy factor from my financial advisor who, of course, wants me to be conservative. thanks again for your time and answers.
Peace,
Richard

12

Richard,

A 25% vacancy rate contemplates over 91 days a year of vacancy…if you have a 25% vacancy rate in your area, I would be very suspect of buying there.

Perhaps your financial adviser doesn’t understand ‘vacancy rate’…?

Keith