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Real Estate Investing in Townhomes

Discussion in 'Real Estate Investing' started by Connor, May 5, 2018.

  1. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Alright, Fastlane Forum. Quick introduction here, and then we'll get to the fun part. First read TMF back in 2012, and I realized that I wouldn't achieve my goals by slowly climbing up the corporate ladder. Action faked for a while, and then I fell into the corporate trap for a few years, as I started to get comfortable with the regular raises, nice dinners I could expense, and the relief of the weekends. Finally realized in late 2016 that I was not going where I wanted to at all, and I decided that it was better to start slowly than continue to not start and wait for some inspiration to strike. I decided to start investing in real estate with my brother, as there will always be a need for places for people to leave, and we have some past experience in it.

    We bought our first townhouse in March of last year, and we've recently acquired another two of them. We are working to find value-ad properties that we can improve with cosmetic upgrades and then lease out- focusing on cash flow with any appreciation/equity as a happy byproduct. While townhomes come with HOAs, we've found some well-run developments with relatively low monthly costs, and it reduces volatility by not having to worry about landscaping, unkempt yards next door, etc. We also try to put in materials that will last longer than the lower-end materials used by other townhomes for rent in those developments, which allows us to not only rent our properties for more, but it will also help reduce turn costs, since they should last longer.

    I'll keep track of my progress on this thread, and I'm happy to answer any questions anyone might have. Hopefully can provide some value here after years of (mostly) lurking. Thanks!
     
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  2. Dunkafelics
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    Dunkafelics Silver Contributor Read Millionaire Fastlane I've Read UNSCRIPTED Speedway Pass

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    Welcome to the forum @Connor, thanks for the great introduction and an inside look into some great strategies for investing into townhouse investment properties.

    Can you give any more insight into the amount of money that you had to put down for these townhouses and what your long-term vision is?

    I ask as my family is looking to buy a property this year and am interested to hear more about your mindset in comparison.
     
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  3. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Thanks @Dunkafelics - hopefully people will find this to be of value, whether investing in RE or not. I'll answer your question with a question- what are you looking to accomplish with the property? And what is your risk tolerance? If you're investing for pure cash on cash return, it may make sense to lever up a bit more, thought that cranks up the risk. But if you want to make sure you have a good bit of equity and may not want to take on the risk, makes sense to put down a good bit of down payment.

    Right now, we're using private money, so we've got a lot more flexibility than a standard bank would give you. We put more than 20% down on our first two properties, but we then took out the whole purchase price on the 3rd, as we knew the LTV would be great once we rehab it and cash flow well. The goal for us would be to keep iterating this and scale considerably. Once we get to high single-digits or low double-digits, we plan on getting a portfolio loan to pay back the private money and then do it again.

    Hope that makes sense- if not, let me know!
     
  4. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Happy 4th of July everyone! Thought I would give you guys a quick update- 3rd townhome is about to be listed for rent, after taking too long to fix it. While it's easy to make excuses, weeks matter especially when you start to scale. Fortunately, it looks like we should be able to rent it for a bit more than initially expected, so that will help. Always good to learn lessons like this earlier than later, but you really have to fight for every dollar if you want to be a serious investor.

    We also executed our first turn (renters moved out, fixed up the unit, and re-rented) on our first townhouse. Due to some issues with our property manager, we ended up withholding less of the security deposit than we should have and spent more on the rehab than initially expected. While a difference of $600 might not seem like much, again, that matters when you want to scale to hundreds of units one day. Probably will end up costing us a bit more on our turns due to increasing labor costs, but we did iron things out with property management, so the net cost shouldn't be as high next time.

    Acquisitions right now are hard to come by, as most people can attest to. Units in the desirable areas are being bid up by owner occupants to levels that don't make them attractive, so we're having to expand what we would consider. Will be interesting to see at what level interest rates have to get to in order to cool off the owner-occupants' bidding.
     
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  5. Get Right
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    Get Right Platinum Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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  6. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Well, first fun issue for us, naturally while I was on vacation. Pipe burst in our newest rental and caused part of the ceiling to fall in. Fortunately, the damage is probably less than $2k worth, but that will take care of most of our profit on this unit for the first lease term.

    Trying to look at it as a positive that we are discovering these sorts of issues when we're still small so we don't encounter as many major issues further down the road. But it still sucks to have happen, especially when we just got the tenant in the place.

    Finding deals continues to be a challenge- looked at another off-market deal right before they got on the MLS, but they wanted way too much for the area, especially since 1 of the units was rented out at a very low rate. Hoping things cool off as we enter the fall, but we'll keep hunting regardless.
     
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  7. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Just closed on #4 today. We were able to get an off-market deal through a wholesaler we have connected with, and we paid a little more than I would have liked, given the condition. However, the tenant has been there for a while and plans to stay, which should help us on turn costs. This is also our first unit in the nicer county, which has a lot better schools, employment, etc. Also lower property taxes, which should help make up for it over the long haul. This wholesaler is new to us, but he seems eager to get after it and is willing to target townhomes. The MLS is just way too overpriced right now for what we are targeting, so trying to put more effort into finding off-market deals.

    Now that we have 4 units, we are looking at portfolio loans. With interest rates creeping up, I'm not sure we'll be able to get a loan close to what we're getting with the private money. I was hoping to get to 7 or 8 units before refinancing, but, due to some circumstances I won't get into here, we're not able to access as much private money as we previously thought from that source, so we're trying to pay back what we've taken out and then repeat. Hopefully more to come!
     
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  8. WJK
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    WJK Gold Contributor Speedway Pass

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    Congrats! Be sure and take the time & effort to stabilize what you have. Build a strong investment base with your income stream and an adequate emergency fund for rainy days. I'm big on paying debts down and building up equities. In my investing experience, everything goes wrong at the same moment, in the worst way. I assume those days will come, and I'm prepared for them. That preparation work makes those moments just another bump in the road, rather than a total disaster.
    I've been slammed for being too conservative, but I'm still here in the real estate business 42+ years later. When real estate was really hot, others made fun of me for being picky about deals and too careful about using O.P.M. (other people's money). When the market fell on its face, I watched a lot of them go broke. Their portfolio assets failed like a line of dominos, falling one after another.
     
  9. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Thanks @WJK! My background is in insurance, so I'm always thinking of the worst case scenario lol. Both my brother and I work full time jobs, so that helps us reduce the risk. Plus the refi will probably be on a 20 year am, so while that will reduce cash flow, it will help expedite our paying down debt. I want to be excited about the next recession, with all the properties going on sale, not wiped out by it!

    Do you have a particular percentage that you allocate for emergencies? We've got maintenance and vacancy allowances built in, but I'm curious as to your approach.
     
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  10. WJK
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    WJK Gold Contributor Speedway Pass

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    I don't have a percentage. Instead, I use a "sinking fund" system. It comes from years and years as a commercial real estate appraiser. All "short-lived" item has an expected usable life. By creating a saving system to replace those parts, you are always ready for issues that most people would consider to be emergencies. For me, these are expected events.
    We do have true emergencies here in my mobile home park. Three years ago we had a 7.1 earthquake in January, the depth of our Alaskan winter. It damaged my small community water system. We had water running down my private streets from underground breaks. And we couldn't dig up the breaks and fix them. The ground was hard frozen, and the system is 10 feet deep. We had major pipe breaks in my Laundromat. We had to take up part of the floor since we couldn't get into the crawl space. We had several feet of snow on the ground. We had to close down for a few days. There was water everywhere. I own 40 mobile home rentals. Several were jarred from their supports. The doors and windows wouldn't close properly and it was -20 degrees.

    It took a while and a lot of out-of-pocket money to get back to normal. No, none of the damages were covered by insurance.

    But, we were lucky to not have more damage. 3 houses up the highway from us blew up and burned to the ground. They had natural gas leaks.
     
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  11. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Yikes! That is one of my biggest fears, especially if I ever get into sizable multifamily. Thanks for the cautionary tale- will use that as a good reminder to never shirk on my allotment for repairs/things happening.
     
  12. WJK
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    Also set up funds for seasonal/yearly expenses -- like insurance and property taxes. In my case it's winter utility bills. Most repairs and expenses can be easily forecasted. They are an extension of expected component life, vacancy rates, and scheduled maintenance events.

    Also, inspect, inspect, inspect. I change the furnace filteres and checked the smoke/CO detetectors myself on a regular schedule. It's my stated reason for doing a regular inspection. I take my clip board and my flash light. Everyone knows that I am coming to inspect every squre inch. And they sign a paper saying that I was there and what I checked. I note what I find and schedule repairs right above their signature.

    I've had people stand up in court when I'm evicting them and say that I don't do maintenance. Those signed inspection sheets, coupled with my maintenance records, put the brakes on their argument. I win the case, and they end up sitting out the curb burping and chirping.

    This is a business. I make sure that I treat it as such.
     
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  13. Merging Left
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    Merging Left Silver Contributor Read Millionaire Fastlane Speedway Pass

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    I'm looking at getting into condo/townhome investments as a way to get my feet wet with real estate. The prices are considerably lower, and the cash flow appears to be about the same, there' just less equity upside to the deals I'm looking at.

    What price range are you looking at, and how much cash flow is ideal for each unit? On a similar vein, what kind of allowances are you giving yourself for capex/maintenance and vacancies?

    I'm targeting condos ranging $20-30k, which will hopefully put out $200/mo in cash flow. Allocating 3% to maintenance and 10% to vacancy. I'm curious if your numbers are significantly different than mine.

    Thanks!
     
  14. Connor
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    Connor Contributor Read Millionaire Fastlane I've Read UNSCRIPTED

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    Yep we also segregate our funds for insurance and taxes from the rest of our operating expenses. And your comments about evictions is exactly why we don't PM them ourselves haha. I definitely don't want to get involved in eviction proceedings if I can help it!

    @Merging Left Sounds like you're targeting the low end (potentially Section 8 or otherwise) with your going after townhomes that are only $20-30k. With that being the case, I think you're likely way under-reserving for maintenance with 3%, unless you're doing a full gut on everything. Also not sure if you're budgeting separately for turn costs or not.

    You can certainly make arguments for going lower end, as the margins do look better on the front end. However, since we want to eventually scale this big time, we're aiming for more of the upper-middle end of things, where we get the biggest tenant pool with the least amount of risk. Our margins probably would look worse than yours on the front end, but we're going to have less volatility of tenants (and thus cash flow) over time. You're right about appreciation- when things are doing well in the economy, everyone wants to have their own yard and space. But I'm ok with that- cash flow is what I'm after, and you're not going to see (typically) a 50-60% swing to the downside in a recession in the space we are targeting.
     
  15. WJK
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    My vacancy rate and maintenance rates are about the reverse of yours. And my net cash flow is higher. I've been rehabbing for almost 20 years now, one after another. I'm just about at the end of that program. I'm on my last two rehabs, and then I won't be adding to my rental inventory. It's enough to manage and I want to spend more time on my trust deed business. Becasue it's mobile homes, I can't expect the appreciation. I'm just happy with the income stream. My next goal is be debt free, and that's coming along. The rehabs were soaking up the cash flow. I sure be happy when they are all done.
    Keep going. I like condos too. The normal danger in those is the association dues and being subject to the boards management decisions. Condos make a lot more investment sense than many SFRs and small units. The price of multi-families has also gone bananas in some markets. The good part about your cheap condos is the accessible resale market. The problem with the low end of that market is getting too many low income people into the building -- which can bring crime and a high vacancy factor.
     
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