Author Topic: Amateur Hour; Rental Home Edition  (Read 3872 times)

ampersand

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Amateur Hour; Rental Home Edition
« on: July 21, 2014, 08:42:55 PM »
So I just got a job offer to move to a city 4 hours away for the same company; long story short, its a no brainer move for a lot of reasons. The only downside is I need to start the next job in <2 weeks and currently own a house.

The pertinents:
Approx 115k left on the mortgage
I overpayed for the house at 151k, with a 30k downpayment (121k original mortgage) and it would likely sell on the market for $145
So I have 14 years left, payment is 806. (15yr, 2.5%)
I have a garage apartment with a renter that pays me $500 a month but I pay his utilites since the house/apt are piped together for electric/gas/water.
I had the house looked at today by friend of a friend who says she can rent out the main house for probably $1000. She will provide a "good" renter for 75% of the first month's payment. She will also manage the renter for 10% if I want. The house has new heating/air/roof, and is generally in great shape. Alternatively, I trust my renter in the Garage Apt (old owner's son) and could probably get him to manage the place in exchange fore knocking $100 of his rent.

Question 1: Rent or Sell. My initial instinct is to keep it with the ability to pull 2 rents and the house being in good shape.
Question 2: Do I put this under a LLC, or incorporate in some form/fashion. Any suggestions on where to learn more about this?

I've been playing with the idea of getting into the rental business for awhile, but wasn't necessarily looking to rent my own house. That being said, not that I'm moving I have this idea that it might be worth trying to buy a multi-unit and then owner occupy it. I found two adjacent properties from the same seller at the new job site. I'm going to look at them this weekend. I got the "pro forma" from the seller, and thought you guys might advise. There is a Triplex/Quadplex. They are houses that have been converted over. I've attached the Combined Pro-Formas, along with my own house written up in a similar fashion. The triplex is selling for 100k and the quadplex for 135k. Structurally they look decent from the pictures but the apartments are definitely very dated and haven't been updated in a long long time.

Heres what I have to work with; assuming I get a decent moving allowance I'll have 35k in cash/taxable stocks (including the emergency fund). Which to my mind is enough for a 20% down on either of the apt's, and allows me to keep a emergency fund. If its worth it to try and buy both at the same time, I might be able to buy the second under contract/seller finance/another creative method. I may also have the opportunity to solicit friends/family for a business investment. If I do solicit money I want to make sure its strictly as a business deal, not a friend helping a friend kind of thing.

I have no other debt and gross 73k, but have a take home pay of about $700 a week after maxing out my 401k. I live frugally, but probably not quite up to the level that the MMM community strives towards. (I'm new to this and accept that I enjoy a few vices enough to work a few more years).

Questions 3-6
3. Do these properties even perk the experienced eyes here?
4.What is the current interest rate/term for rental loans?
5. Has anyone gone the route of using a self directed IRA to invest in rental property? Is this a feasible/worthwhile endeavor. I don't mean pull it out of the IRA, I mean have the IRA actually own part/all of the business. This would allow me access to another 45k.
6. I have a higher risk tolerance (I'm 26), if the reward is worth it... but is this setting off alarm bells for anyone? My thought is I move into one of these apartments and save up cash, for a downpayment for a house that I actually want to live in, though I probably should also set aside money to update these apartments.

Alternatively the other option is to take the pressure down a notch, rent my current place, put my stuff in storage, and then rent a place for 6 months till I have a better idea what I should do. This is the default plan if these two places fall through/ or I arent worth the effort. I just think the idea of pulling stock out of the market right now and investing in real estate while interest rates are so low seems like a good move.

I'm open to any thoughts/opinions/criticisms. Thanks for reading.

gimp

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Re: Amateur Hour; Rental Home Edition
« Reply #1 on: July 21, 2014, 09:22:18 PM »
Don't do the IRA thing. I think it prevents you from doing any work on the property yourself. There was a recent discussion about it.

It does seem that your house can qualify for the 1% rule, so it's definitely worth looking at. It can also be a nice insurance policy if your job transfer doesn't work out.

escolegrove

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Re: Amateur Hour; Rental Home Edition
« Reply #2 on: July 21, 2014, 09:33:12 PM »
My husband is active duty military so we have moved a lot. We started out with a personal property we gutted. When we moved we rented it out. In the areas we live 2-4  are not located in areas I would feel safe as a women when my husband is gone. So we buy single family homes that will rent for $200+ when we leave at the time we bought them. As the market has recovered we have experience rental increased. We have also bought pure investments. Over the last 3 years we have grown to 5 properties.

We personally put as little down as we want to leave our other money in higher interest baring accounts (stocks, retirement, etc). Therefore we now use 5% down conventional loans.

One of our biggest strategies in our business plan is self-management. I work full time and live thousands of miles away. Through a little help I have been able to rent my house out on my own and manage it from a distance. If you are willing you can truly rent it out yourself saving yourself the money. The listing sites, postlets and craigslist are free.

I am created a website reluctantlandlord.net to provide the steps in order for you to manage the properties yourself. We have grown our mustache significantly by buying mustachian houses that we can rent when we leave.

Personally I would recommend you buy your next house with as little down as possible and reinvest the other money in other ventures. This will help you grow you "baskets".

waltworks

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Re: Amateur Hour; Rental Home Edition
« Reply #3 on: July 21, 2014, 11:44:19 PM »
Place sounds like a keeper as long as you're ok doing business with your friend. She's not giving you an amazing deal, though - 10% is on the high end for management costs and the finder's fee is a little weird to me since usually finding great tenants is a big part of the manager's job (and hence covered by the 7-10% they'll charge). So that's a small sticking point but you could certainly hire some other management company if you're worried about it - or just go along with the fee and the 10% and see how it goes.

As a rental property it's not bad, though it's also not amazing. Given that you're employed and have no debt I'd hang onto it.

-W

johnhenry

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Re: Amateur Hour; Rental Home Edition
« Reply #4 on: July 22, 2014, 09:23:32 AM »
I agree with Walt.... as usual.

I re-read your post and saw that your potential PM is a friend of a friend, not necessarily a friend of yours.  I agree that the finder's fee is a little much considering she's asking 10%.

If you had any faith in your current tenant to manage things effectively, I'd explore that possibility with him before I signed up to give someone a 10% cut.  An onsite "manager" like that is often willing to keep an eye on the place, report problems, etc. but they may not want to provide the full service of screening, placing, evicting tenants.  So it's not likely to be an apples-to-apples comparison.  I'm not sure I would knock a full hundred off his rent unless he was doing significantly more, but some smaller amount for him to keep an eye on the situation is a good idea.  If you can negotiate an arrangement like that, and self-manage by finding tenants on your own, that's what I would do.

If you can't make that happen, I'd go with a PM company.... or your friend's friend.  But in that case I'd still try to talk her down from the 10% and the finder's fee.

I would also steer clear of holding within an IRA.

Daleth

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Re: Amateur Hour; Rental Home Edition
« Reply #5 on: July 22, 2014, 10:19:47 AM »
I agree with Walt.... as usual.

I re-read your post and saw that your potential PM is a friend of a friend, not necessarily a friend of yours.  I agree that the finder's fee is a little much considering she's asking 10%.

To me it sounded like an either/or deal: either I can find you a good tenant for 75% of the rent, and that's the end of our transaction, or I can be your property manager for 10%. Did I misunderstand?

waltworks

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Re: Amateur Hour; Rental Home Edition
« Reply #6 on: July 22, 2014, 10:53:34 AM »
Yeah, I wasn't totally clear on that either but it's not a very good deal either way. For $750 the tenant better be freaking amazing. For 10%, the management better be freaking amazing. Sounds to me like the PM friend of friend is trying to take advantage but maybe 10% and a finders fee is normal where the OP lives? I have had places managed pretty competently for 6%, though, and in really high end markets too, so I'm dubious.

-W

ampersand

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Re: Amateur Hour; Rental Home Edition
« Reply #7 on: July 22, 2014, 12:32:04 PM »
I had heard that operating management usually costs 10-15% but it sounds like it can be had for much less (awesome!)
My friends experience with her is that she has brought in great tenants... I'll make sure to ask how she screens. Unfortunately I don't have enough time/knowledge to screen.
I'm working on having the guy in the back do most of the management which hopefully is just collecting rent.
I don't know if anyone opened the original excel file and looked at the other properties.


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waltworks

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Re: Amateur Hour; Rental Home Edition
« Reply #8 on: July 22, 2014, 12:47:29 PM »
How much do the other properties rent for? IMO you are short on oh-shit money to be buying places that are super dated and will need lots of maintenance.

-W

ampersand

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Re: Amateur Hour; Rental Home Edition
« Reply #9 on: July 22, 2014, 01:14:31 PM »
1600 for triplex and 2065 for qua duplex. (It's in the rent rolls almond with taxes/utilities)
As a rule of thumb how much do you set aside for SFR/multi unit in oh shit money? Is it a constant amount, of fixed amount per door.


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waltworks

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Re: Amateur Hour; Rental Home Edition
« Reply #10 on: July 22, 2014, 01:49:41 PM »
I'm not a multi-unit property expert so take this with a grain of salt - but if you are going to imminently need to do major repairs OR the stuff that's there might fail at any time (ie 20 year old water heater, 15 year old furnace, old roof, whatever) you need to get some estimates of worst case scenario repair costs. If there are multiple 5-figure potential repairs, you better be liquid enough to handle it. If it's just minor stuff (carpets, paint, etc) maybe not as big of a deal but I'd probably want to have at least $10k/door available if needed in most cases.

-W

ampersand

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Re: Amateur Hour; Rental Home Edition
« Reply #11 on: July 22, 2014, 01:54:11 PM »
Oh wow... That's a bigger commitment than I expected, but is a much needed source of reality.


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waltworks

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Re: Amateur Hour; Rental Home Edition
« Reply #12 on: July 22, 2014, 05:10:03 PM »
Yeah, I'm pretty conservative about any deal where I'm heavily leveraged (as you would be here). You really, really do not want to get hit with a couple of big repair bills and suddenly have to miss mortgage payments or do crazy shenanigans to stay solvent. I "like" to war game a worst case scenario (ie a really bad repair that makes the place temporarily uninhabitable so that I have no rent coming in AND a big bill to pay) and make sure I can swing it. That scenario might be unlikely, but I've seen plenty of shit-happens things at this point and I'm only 10 years older than you are...

You make good money and you're kicking ass so far - just give it a little longer and save up a bit more and this kind of deal will make perfect sense. If you have a nice little chunk of stocks or bonds or something else relatively liquid so you can swing some emergency repairs if you have to - go for it. You're young and you can take chances.

-W

Oh wow... That's a bigger commitment than I expected, but is a much needed source of reality.


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richschmidt

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Re: Amateur Hour; Rental Home Edition
« Reply #13 on: July 24, 2014, 04:13:27 PM »
I haven't checked, but I hope you're asking these same questions over at biggerpockets.com. There's a much bigger community of real estate investors over there who are usually happy to help with these sorts of evaluations.