Thinking about investing in Real Estate, some concerns...

General Real Estate Investing
1

Hi everyone. I’ve been reading these forums for a little while now and there seems to be a lot of great advice, so thanks for that!

A quick bit about myself… I’m 26 and currently make about $66k/yr, but I live on, at most, half that. I already max out my Roth IRA, have another index fund, and have some money in a brokerage account, so I’ve been thinking about real estate as being the next step in investing and just wanted to get a little advice on how to go about it. I ran my credit a few months ago and it was 767. I have no debt and pay all my bills on time. Feel free to tell me if any of my ideas or assumptions are way off.

What I’ve been mostly looking at is purchasing a duplex/triplex/fourplex and renting it out. The biggest concern here is location. I live in Orange County, CA, so nothing here is within my budget. I’ve been looking at the metro Atlanta area since prices are much much lower there, and that’s also where I’m originally from, so I’m quite familiar with the area. I also travel there usually at least once a year to visit friends and family.

While we’re on the subject of budget, I’ve seen a lot of multifamily homes in the Atlanta area for around $50-$80k that need some substantial work, and a good number in the $100-$150k area that seem like they’ll be good to go with minimal work. For finding these properties I’ve mostly been using the MLS search at realtor.com, or Craigslist. Depending on the area, the rents for the individual units seem to be around $600-$750 (I discovered rentometer.com and it’s an amazing tool!) I’m leaning to purchasing a building that needs minimal work since I won’t be there to physical do work on it myself, or to oversee a contractor and make sure I’m not getting ripped off.

This goes back to the location problem. How practical is it to buy a home on the other side of the country? I do have friends and family in the area that could check out the place and verify its physical condition. My mother is an accountant at a home builder, so I’m sure she could help a bit. Would I be working with a mortgage lender here in CA, or one in GA?

I don’t have the money for a down payment now (which is good, so I can’t do anything stupid), but I figure that in about a year I should be able to save up a solid 30k or so. I’d like to make as large a down payment as possible in order to minimize my mortgage. I’d like to have positive cash flow from the start. I’d like to not finance any more than $100k. Doing some quick numbers on that, a 30 year loan at 6.5% would be $630/mo, add taxes and insurance, maybe $800 a month, which would allow me to have positive cash flow right away, assuming I get renters. These are just very rough numbers, so please tell me if I’m way off base.

What are your opinions on property management companies? I can see the pros and cons. It’d be nice so I don’t have to worry about phone calls in the middle of the night or dealing with nightmare tenants myself. On the other hand, is it really necessary if I’m only going to have one building with 2-4 units? I would purchase a home warranty on the building which seems like it would take care of a majority of common small maintenance things that pop up. Also, I’ve been reading up on eviction law in GA and it seems pretty straight forward. Oh, that’s another question, if I do eventually need to evict someone, can all of these forms that have to be filed with the court be done so electronically? If not, could I call my mother my authorized agent and have her do it in person? I’m not as well versed in this area as I’d like to be, but I’m still doing research.

One last thing: do any of you have any thoughts on incorporating myself as an LLC? It’d be nice to have to worry about someone tripping on my doorstep and sueing me for everything under the sun, but from what research I’ve done, common opinion seems to be that it’s not really worth it until I start owning several properties.

Thanks a ton for your advice and reccomendations!

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Welcome!
We started much in the same situation as you. We were located in an area where rentals didn’t make sense because of the acquisition cost of the property. We started with a small apartment building near where I grew up. My parents said they’d help show vacant units and do what they could. I traveled back and took a couple weeks to rehab a couple units. We got the building filled up. That was three years ago and it’s been a great building for us. Some plumbing problems came up along the way, but we got that handled.
If you do something like this, you will be working with a bank in the Atlanta area. Banks generally aren’t going to want to finance something across the country.
Property management companies may not be necessary if your mom could help out here and there like my parents do. Our tenants are good and pay on time so it’s not very much that my parents have to do most of the time.
If you have to evict there, you will have to have some type of local representation. How that happens will be dictated by local laws. If you form an LLC, state laws may require your business be represented by a lawyer. Sending a letter to the court probably won’t be an option.
For LLC’s - If you’re not repairing things at the property yourself and things like that, the LLC may provide you with some liability protection. The best thing you could start with is good insurance. When you get quotes for LL insurance for a building, see what the liability amount is they’re quoting you. Then try to bump up the liability amount up to either 500k or 1MM. You’ll probably find that the difference in the premium isn’t really that much.
Try to run some numbers on 15 yr or 20 yr amortization. Some banks may not want to go out 30 yrs on an investment property unless it’s really expensive.

3

Thanks for the advice!

Has anyone ever rented a property to someone long distance, without meeting? Off the top of my head, that sounds like a pretty bad idea, but I could still do a proper credit/reference check I suppose. If I needed, I could have my mother or a friend of mine show them around the house and get their input on the person, which would probably be a good idea.

For having them sign the lease/other paperwork, is it feasible to have them fax it to me with their signatures, then I’ll fax them back a copy with my signatures on it so we each have a copy with all the proper signatures?

It seems like the distance between myself and the rental unit will be the biggest logistical hurdle. I’ve been reading a good number of books on real estate investing, focusing on rental income, and most the books emphasize close physical proximity in order to do your own repairs and keep tabs on the tenants, but I’m hoping with enough research I can make the long distance plan work without TOO many headaches.

4

Well, what you’re describing is pretty much what we do regarding us not meeting the applicants. My parents show the units and give us a general impression of what they thought of the applicants, but we still perform our own background checks. Because of the county our building is located in, I can search for civil and criminal offenses online for free. If everything checks out AND my parents got a good impression, we’ll rent to them.
We usually type up a lease with the rent/deposit amounts, address of unit, etc then sign them and send two copies to my parents. They arrange the meeting w/ the new tenants and do the lease signing, key swap, money swap, etc.
It is possible to do this, but the people you are trusting locally have to know LL/tenant laws. You wouldn’t want your mom going over there and changing the locks because their rent is behind and then you get sued.
IMO, the most important thing is finding a good local plumber. Electrical things don’t usually just go bad. Electrical is either old and it sucks & you know it going into buying the building or it’s been upgraded and should be fine. Plumbing stuff is different. You might have a slow drain that’ll get you by for awhile, but then you may have to replace the sewer main. Most of your problems will probably involve plumbing.

5

Hi,

I agreed with you. Any way, your ideal make me thinking about some thing for my project.

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Please try to keep posting. Tks and best regards

6

One book I’m reading has made the suggestion that an alternative to evicting problem tenants is to “buy them out” of their lease. Since going through the full eviction process can take a lot of time and money, it says that you could offer to give the tenant something like $200 if they and all of their belongings are gone and clear from the property in 24 or 48 hours, then you get your unit back right away and you never have to deal with each other again.

Does anyone have any input on this? Obviously you’re loosing out on any outstanding rent the tenant owes, but you aren’t spending any additional money on a lawyer, and you get to rent the property to someone almost immediately, instead of waiting possibly months for the court process. The book wasn’t clear, but would you be giving them $200 on top of their full security deposit back, or would you withhold most, if not all, of their security deposit in order to at least partially cover the unpaid rent?

7

Some people do this, but it’s basically paying someone to steal from you. When someone doesn’t pay rent, it’s virtually the same thing as you owning Wal-Mart and watching your tenant load up a shopping cart and push the unpaid items out the door.

If your area has LL/tenant laws that are really anti-LL, then this may be an option, but if word gets out - this will teach your other tenants that they can be late on rent and then they’ll get paid money to move.

We’re lucky to be in an area where we can evict someone within 1.5 weeks of providing notice.

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I’ve also read about the idea of ‘buying out’ the tenant instead of evicting them. While this may be expedient, it misses the broader impact. Now, the next LL (maybe someone on this board!) will not be able to see that the Tenant is a deadbeat because they won’t have the evict on their record.

This is like when I call up another Manager in my office to get a reference on someone I’m about to put on my team, and they say, ‘yeah, they’re fine’ just to get them off their project (instead of “counceling them out”), now I’m stuck with the trouble person (or tenant).

LL need to be on the same “team”… I know, I’m making the broad assumption that LL care about one another, when in reality we’re all kind of in competition with each other. My point is, if you’ve been able to profit in any way from investment and LL discussion boards, REI meetings, etc., then return the favor and report the crappy Tenants so they don’t continue to make life hell for others.

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Who do you report them to? Do evictions show up on background or credit checks?

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Real Estate is having a big part on the business world, on real estate, selling is not as easy as eating peanuts, you need to have the guts, proper marketing and being honest on what you are selling but definitely real estate is really a great investment because it gives a lot of opportunity.

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Part of your background check should include contacting the local civil court to see if they’ve been evicted. That will be on record. There are certain companies that you can register with to report them as part of a bigger database. You can search for National Tenant Network for more info. That’s just one of them.