Rental Property Advice?

[TStrike]

Hi all!

Before I begin to explain what I am looking for some tips on, I will explain my situation so you can get a better grasp of what we're dealing with here.

I own a website design agency where work usually looks like me sitting on my couch in my PJs. Location isn't that big of a deal for me.

I have some pretty significant investments in stocks, precious metals, and, my tools of the trade, websites. However, I would like to move into real estate.

This is a great time for me to do so, since I have never bought a home before. I'm currently renting a little place in the country.

I would like to utilize an FHA loan and buy a quadriplex where I live in one unit, then rent out the other three. Eventually, I would like to move out of my unit, rent it out, and rinse and repeat the process with another quad.

I have never done anything in the RE market before, have no one in my family who knows jack about it (they don't know jack about fastlane either. Pretty sure my immediate family thinks I'm a drug dealer, bank robber, or other name-your-delinquent-here), and I'm not connected with anyone who I would trust to advise me in this area.

I would love to get any and all advice. If you think it, type it down for me. How to deal with bad tenants, your arguments for/against buying, etc. I want it all.

Understand that this is strictly an info gathering stage. I have not even considered any properties. As such, I would like absolutely any relevant information.

I would appreciate RE related responses from only people who actually know about being a landlord.

Thanks in advance and looking forward to hearing from you Have a great day

 

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[lowtek]

I've owned and later sold a 4 plex, and currently run a 12 unit rental.

Here are some things to consider:

1) How handy are you? If you're not good with your hands, you have to rely on trademan, and this can get expensive quickly. Learn to do as much as you can to save cash in the beginning.

2) During the buying process, you will be required to have the property inspected. Don't trust the inspectors to find the shit that matters. If you have a friend that is really good with handiwork, bring them in to inspect it with you (supplement to the inspectors). Find an electrician and plumbing company that is reputable to do an inspection of the property as well. Do not rely on the seller to disclose anything material, because they won't, even though they are required. This mistake has cost me tens of thousands.

Also, make sure you get to see the inside of the units. If you can talk to some of the tenants, that's even better. Ask them what is broken, how the neighborhood is, and how the current management is.

3) Know the type of people you are going to rent to. This will change based on the neighborhood of the property, but know that if you are getting " a deal " then you are probably renting to lower income people. Not a problem per se, but know what comes with that territory. Have a solid late fee structure built into the leases and enforce it without exception. Make it absolutely clear that you get paid first and you will evict them without hesitation. This may seem ruthless, but if you give an inch they will take a mile.

4) Don't let them know you're the owner. You're just the manager. This makes point #3 much easier, since you're just doing your job.

5) Roll it up into an LLC to limit your liability. File for the LLC before you make the offer, since changing the name of the buyer during the process can give the seller grounds to back out. This step isn't critical, as you can probably just transfer the property later, but that means more paperwork and paying a lawyer.

6) Make sure to get copies of the lease when you're buying - if all 4 units just signed new leases, then you can't move in unless you buy one of them out. This means you can't get the good residential financing.

7) To deal with bad tenants, refer to point #4. Just be fair, reasonable, and firm. Bad tenants mostly come in 2 categories: those that complain about everything and those that don't pay on time. Those that complain, treat them with respect ( particularly if they pay on time ) and do what you can to alleviate their concerns. Don't get involved in disputes with other tenants, that's for them to work out. For category 2, make sure you have a good enough late fee structure to cover the inconvenience. Know the laws and stick to them.

There are also degenerates that break the law. Dealing with them means getting the sheriff involved. Don't hesitate to do this, as waiting only makes the problem worse. Illegal activity is grounds for eviction, and you should be prepared to do that at the first sign of shady dealings.

8) Do background checks - the more stuff you look into the more grounds you have to deny someone the apartment. Surprisingly, pedos are a protected class. This means you can't deny them residency just on that basis. So if they happen to have bad credit ( likely ), you have good reason to deny the tenancy without risking a potential lawsuit down the line.

9) Two types of properties: Those that have max rents for their market, and those that have room to increase. Pros and cons to both, and really depends on too many factors to list here. Make sure to ask the realtor about this, as they'll have an informed opinion.

10) In light of number 9, don't buy a property counting on the rents going up. A bit contradictory, but if the deal doesn't make sense today, then don't do it today. If the property needs an extra $300 a month in rents to make it a good deal, it's not a good deal. You never know what the market will do, or what the tenants will do. Far too many unknowns.

 

[MidwestLandlord]

2) During the buying process, you will be required to have the property inspected.

Not necessarily. I've never had an inspection done on a property I've bought, ever.

I consider it a pointless expense, and my lender does not require it.

I use commercial loans, not mortgages, so maybe that is the difference. Maybe differences in state laws too, I don't know.

The only things my lender(s) have ever required is a pro forma statement of cash flow, a seller's disclosure, and an appraisal.

10) In light of number 9, don't buy a property counting on the rents going up. A bit contradictory, but if the deal doesn't make sense today, then don't do it today. If the property needs an extra $300 a month in rents to make it a good deal, it's not a good deal. You never know what the market will do, or what the tenants will do. Far too many unknowns.

Good advice.

ALL of my rentals, save one I just bought, are renting out for less than they were when I bought them. One of them is 38% less. (waiting for the lease to expire, then selling that SOB)

@TStrike

Best advice I can give you is don't get emotional. People get super emotional over homes, and I have never understood why that is.

Don't "fall in love" with a property and assume good tenants will too. If you buy a shit property, you WILL get shit tenants, regardless of your personal feelings towards the property...ya know?

Look at cash on cash return. If it doesn't work, WALK.

If I didn't have a wife and kids (or she was agreeable to it haha), I would buy a multi-family, and live in one and rent the others in a heartbeat.

 

[lowtek]

Not necessarily. I've never had an inspection done on a property I've bought, ever.

I consider it a pointless expense, and my lender does not require it.

I use commercial loans, not mortgages, so maybe that is the difference. Maybe differences in state laws too, I don't know.

The only things my lender(s) have ever required is a pro forma statement of cash flow, a seller's disclosure, and an appraisal.



Good advice.

ALL of my rentals, save one I just bought, are renting out for less than they were when I bought them. One of them is 38% less. (waiting for the lease to expire, then selling that SOB)

@TStrike

Best advice I can give you is don't get emotional. People get super emotional over homes, and I have never understood why that is.

Don't "fall in love" with a property and assume good tenants will too. If you buy a shit property, you WILL get shit tenants, regardless of your personal feelings towards the property...ya know?

Look at cash on cash return. If it doesn't work, WALK.

If I didn't have a wife and kids (or she was agreeable to it haha), I would buy a multi-family, and live in one and rent the others in a heartbeat.

With respect to the lower rents, what caused that? Is it market dependent? Did the neighborhood take a dive?

I'm here in Phoenix, and the entire real estate market is hot. When we had a unit up for rent, there were several inquiries daily so I know demand here is quite high. It's hard to imagine rents dropping substantially in the current market. If the economy takes a dive, that's a separate story.

 

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[MidwestLandlord]

With respect to the lower rents, what caused that? Is it market dependent? Did the neighborhood take a dive?

Almost 1000 new apartment units built in the last 5 years, in a town of about 100,000. So rents are down, but house prices are the highest they've been in years, and inventory is the lowest its been in years. (apartments are abundant, houses are scarce)

My sharpest drop was for a 2 bedroom condo. Went from $1,200 a month to $750. Hard to compete when my new competition is renting out 2 bedroom apartments for $850, with amenities I don't have (pool, gym, carwash, underground parking)

The rest are down but not significantly. A home I was getting $1,100 for is renting for $1,000 for example (still, that's like losing a whole month of rent)

I've got big equity in them through appreciation (except the condo), so I'm selling them as the leases run out. Putting the cash into my other business, and buying rentals in the state next to me where rents are the same as here, but cost a good 25% less to buy.

 

[Brian C.]

Some super solid advice from @lowtek and @MidwestLandlord .

It's a blessing to have a contractor you can trust (like a friend) to walk the properties with you. For someone like me, it's essential.

I own a website design agency where work usually looks like me sitting on my couch in my PJs. Location isn't that big of a deal for me.

Not to speculate about your situation, but securing financing for your FHA just might be.

If you don't have a W2 job or a way to prove your ability to sustain a steady income on paper, you might have a more difficult time with conventional lenders. They're generally looking for 2 years of a W2 income.

The only reason I bring it up is because I'm in a similar position where I own a marketing agency, yet don't have a W2 income - and haven't since high school. I'll probably need to get creative with my financing, maybe using co-signers, hard money lenders, a larger downpayment - or perhaps I'll get lucky with conventional lenders based on my business's financials.

But regardless of your exact situation, figuring out your financing for certain and being pre-approved (if you want to go the FHA route) is the best place to start.

 

[TStrike]

Here are some things to consider:

Great points. Thank you very much sorry for the late response. I've had a busy few days. Your information is extremely helpful!

 

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[TStrike]

Not to speculate about your situation, but securing financing for your FHA just might be.

If you don't have a W2 job or a way to prove your ability to sustain a steady income on paper, you might have a more difficult time with conventional lenders. They're generally looking for 2 years of a W2 income.

I've already gotten that taken care of, but it was a pretty close call as far as the timing went.

 

[TStrike]

Not necessarily. I've never had an inspection done on a property I've bought, ever.

I consider it a pointless expense, and my lender does not require it.

I use commercial loans, not mortgages, so maybe that is the difference. Maybe differences in state laws too, I don't know.

The only things my lender(s) have ever required is a pro forma statement of cash flow, a seller's disclosure, and an appraisal.



Good advice.

ALL of my rentals, save one I just bought, are renting out for less than they were when I bought them. One of them is 38% less. (waiting for the lease to expire, then selling that SOB)

@TStrike

Best advice I can give you is don't get emotional. People get super emotional over homes, and I have never understood why that is.

Don't "fall in love" with a property and assume good tenants will too. If you buy a shit property, you WILL get shit tenants, regardless of your personal feelings towards the property...ya know?

Look at cash on cash return. If it doesn't work, WALK.

If I didn't have a wife and kids (or she was agreeable to it haha), I would buy a multi-family, and live in one and rent the others in a heartbeat.

Great advice. I'm certainly not too emotional about it. I agree that a hug problem with a vast majority of people managing their own money is that they do get emotional.

Never really understood it either.

Great to know about what you'd do is the missus wasn't around ;D

I think living in one and renting the others out is a great plan. Ideally I'd like to do this for a while, buy another one and do the same, then rinse and repeat. If I get married eventually, I'd like to do it with at least 20 people sending me a check every month for giving them a place to live, you know?

Thanks for the great response, Mr. Landlord.

 

[becks22]

Some super solid advice from @lowtek and @MidwestLandlord .

The only reason I bring it up is because I'm in a similar position where I own a marketing agency, yet don't have a W2 income - and haven't since high school. I'll probably need to get creative with my financing, maybe using co-signers, hard money lenders, a larger downpayment - or perhaps I'll get lucky with conventional lenders based on my business's financials.

I just bought my first property and they wanted two years of tax returns and 2 years of business records. They didn't care that I didn't have a W2. This was a local credit union and not a big bank. They also preapproved me based on the business profits not what I took home. Sometimes local banks/ credit unions are more flexible because they don't have a corporate boss to go to for loan approval.

 

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[TStrike]

I just bought my first property and they wanted two years of tax returns and 2 years of business records. They didn't care that I didn't have a W2. This was a local credit union and not a big bank. They also preapproved me based on the business profits not what I took home. Sometimes local banks/ credit unions are more flexible because they don't have a corporate boss to go to for loan approval.

I think mine and Brian's problem stems from the nature of an FHA loan - a government backed loan. For any conventional loan, I'm sure you hit the nail on the head though. Sometimes more "mom-and-pop" places can be a lot easier to deal with.

 

[becks22]

I think mine and Brian's problem stems from the nature of an FHA loan - a government backed loan. For any conventional loan, I'm sure you hit the nail on the head though. Sometimes more "mom-and-pop" places can be a lot easier to deal with.

Correct even though I went with conventional- I was approved for both. 3.5% down or 5% down wasn't a big difference to me so I just went with the conventional because my rates were a little lower

It's outdated (2016) but this is what a quick search came up:
FHA Self-Employed Borrower Income Guidelines for 2016 – FHAHandbook.com

 

[Bottomsouth]

5) Roll it up into an LLC to limit your liability. File for the LLC before you make the offer, since changing the name of the buyer during the process can give the seller grounds to back out. This step isn't critical, as you can probably just transfer the property later, but that means more paperwork and paying a lawyer.

I make my offer contracts assignable. Usually it isn't a problem.

 

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[MattR82]

+1 For background checks.

My first tenant in my first rental property, a brand new 5 bedroom house, trashed the crap out of it with her junkie meth head mates. The background check the property manager did came back clean. However, I googled her name and it came up with her going to court numerous times when she was 17 for going around in a gang bashing girls. Charming. I think because she was under 18 it didn't go on the record the property manager checked. Or something.

I don't know as much as the guys above but all good points. It's a great learning experience. It's nice when you find something cash neutral or positive that has good growth potential, rather than one or the other.

I was surprised how much difference even one block can make to potential growth though. I wouldn't rely on just suburb statistics.

 

[MattR82]

Question for you guys in the states (I'm in Aus ). Do you also get to write any loss from your rental property (including depreciation) in your personal tax return? Negative gearing is popular here. Too many people simply invest for that reason and get into trouble though.

 

[Striver]

ALL of my rentals, save one I just bought, are renting out for less than they were when I bought them. One of them is 38% less. (waiting for the lease to expire, then selling that SOB)

I felt the aggravation in that part of your post! haha

 

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[CashFlowDepot]

There are several ways you could accomplish your objectives without getting an FHA loan.

Instead of buying a 4 plex, find a motivated seller and offer to lease the entire property. Agree to pay the owner a certain % of rents collected (only when collected). Ideally you also have an option to buy the property at some point in the future with the right to renew that option. This locks in today's price. By leasing the property instead of buying it, you can test drive your
with no loan needed and no up front expense.

It's easy to get out of a lease. But it is not easy to get out of a loan or sell a property when prices are falling.

Same as above but instead leasing the property, buy with seller financing.