Did you not have a good property management company handling the units?
I've got 10 units right now and for the most part it requires very little work for me and my partner. We have pretty good management and these are in very low income areas.
Building A Real Estate Empire
- Thread starter schockergd
- Start date
I've got 10 units right now and for the most part it requires very little work for me and my partner. We have pretty good management and these are in very low income areas.
Some banks/lenders have billions to loan and no where to put it (No where with good enough of a track record at least).
The big insurance companies, REITS, and other financial firms all have debt financing programs to continue operation into the billions per year in terms of revenue. Of course, if you're making net profits of $500mm/yr there isn't a HUGE amount of sense in continuing debt financing if you can do it all from income.
I want to see less than 3%. Right now our vacancy rate cost is something like one quarter of one percent or less. My hope/goal is to implement iron-clad background check systems that prevent bad tenants from getting in our properties in the first place.
"Low income" in my area is <$400/mo rents, our properties average around $650/mo so we're decently higher than what low end is considered.
High end rentals essentially don't exist, and mid-range ones have extraordinarily low ROI (Talking 10% or less per year). So, we're working on the low-to-mid class of rentals. We have a slight discount on our rent and offer tenants properties that tend to be nicer than what the other landlords offer. So, for us $600/mo gets you a property that a landlord down the road might try to get $700-$750 out of. We make sure people understand our properties are nice by publishing everything on our facebook page and post up interior/exterior photos. Most realize we're low on our prices and it allows us to pick say the best of 10-20 applications during the screening process.
I always had good luck with properly screened section 8 tenants. They stay forever and are usually low maintenance. If you have a multi unit, finding disabled/elderly tenants is perfect, at least for the ground level units. Also usually their credit is complete shit which makes it hard for them to leave, and you get the majority of the rent from hud guaranteed.
Me too. I own a few rental properties and around 75% of the tenants are section 8. I really lucked out because I've had the same tenants for 7 or 8 years and I've had only minimal issues. But I have heard some fucking horror stories.
Nice thread and impressive keeping it up to date.
Can you give more of a breakdown of your time commitment? Average hours per month? Average hours per week for good week/bad week? Hours per day?
Are you finding yourself working almost entirely on this business, or are you spending time on other ventures (websites?) as well?
Can you give more of a breakdown of your time commitment? Average hours per month? Average hours per week for good week/bad week? Hours per day?
Are you finding yourself working almost entirely on this business, or are you spending time on other ventures (websites?) as well?
I sold off the SEO biz last September to concentrate on this thing full time. It wasn't needed but with a goal of 500 properties I'm sure i'll get busy soon enough.
I have a little under 50 rentals right now and a little under half of them are "low" income rentals. If you can really screen tenants well (and I don't mean a credit check, because that's worthless) you can do fine. My average tenant stays 3 years. I evict 0.5% of my tenants on average.
Yes you will have ups and downs, you will have unexpected expenses ($7k for a new roof is a bad week), you will have tenant caused damage....but at the end of the day if you budget correctly it's still a hell of a lot more stable than IM.
One thing most people don't realize is how much of your gross rent will go to expenses. When you factor in management, vacancy, taxes, insurance, repairs, and capital reserves (for major repairs) it will generally work out to be about 50% of your gross expected rent. A lot of people just assume their profit will be rent - (debt service + taxes + insurance) and that's why they end up failing.
50 properties or units? In either case, you're where I want to be by mid next year
You're right in the gross expenses. They're high, but the nice thing is using leverage to increase your ROI on your original investment. Without including vacancy allowance (because we just don't know where we're at) our average expense per property is right around 30% of gross rents. Additionally we do not hire management for our properties and I take care of most of that.
Additionally , our goal is to rehab all the properties we acquire to the point that all mechanicals have an effective lifespan of 10-15 years. On a QUALITY job, the plumbing, electrical and roof should easily last 15 years. Going forward on all our roofs we're working towards having the amish do metal standing seem roofs. These roofs are rated for MINIMUM of FIFTY years with maintenance intervals of 10 years. Most should last 100 years with a cycle of 7-10 years as the roofs actually get stronger rather than weaker over time.
50 properties or units? In either case, you're where I want to be by mid next year
You're right in the gross expenses. They're high, but the nice thing is using leverage to increase your ROI on your original investment. Without including vacancy allowance (because we just don't know where we're at) our average expense per property is right around 30% of gross rents. Additionally we do not hire management for our properties and I take care of most of that.
Additionally , our goal is to rehab all the properties we acquire to the point that all mechanicals have an effective lifespan of 10-15 years. On a QUALITY job, the plumbing, electrical and roof should easily last 15 years. Going forward on all our roofs we're working towards having the amish do metal standing seem roofs. These roofs are rated for MINIMUM of FIFTY years with maintenance intervals of 10 years. Most should last 100 years with a cycle of 7-10 years as the roofs actually get stronger rather than weaker over time.
50 units, 40 properties. I have mostly single family with 1 5 unit, 1 4 unit and 3 duplexes. You're going to quickly get to a point where you can't self manage so you will have management expenses. A property manager will generally charge 8-12% of rent collected plus a 50-100% tenant placement fee. You have to figure those expenses in when you're looking at your numbers because you can't manage 500 properties by yourself and even if you could there has to be a value for your time.
Right now I do a lot of my own management but I have a full time maintenance guy who handles all service calls and also does all of my showings on vacant units. I handle tenant screening, bills, paperwork, legal, insurance, etc. We both handle rent collection. It probably takes up 15 hours of my time each week but my employee spends 50 hours a week on his end of things. It's hard to say exactly how much of his time is only on the existing units because when he's not running service calls or cleaning up a vacant property he's also working on whatever new property I've purchased (I've been buying one every month or two for the last 6 years).
I guess I'm trying to figure out where you're spending that extra 20%. Right now I don't see where it will go on my side, unless I start heavily relying on outside management.
Do you take cash from all your tenants? We're looking at going to a deposit system that verifies that their rent is received by the limit on each of their rents. There's a really easy way to do it with commercial banking accounts.
50% expenses is pretty much the rule of thumb when evaluating residential rental property. It can end up higher or lower but it's generally fairly close. Some of it is pretty standard and easy to figure like 10% management and 8% vacancy (1 vacant/unpaid month per unit per year) but taxes and insurance can vary a lot by location. Your repairs can also fluctuate a lot over time but you need to account for the lifespan and replacement of everything in the unit (roof, HVAC, water heater, appliances, cabinets, etc). You need a large data set before you can get accurate expenses, if you look at any one year it could be well off of the mean. I run at around 40% myself but I'm also putting my own time into it and that has to have a value too. As you scale up you will have more overhead and your expenses will increase.
I take cash from some because it's always nice to not have to go to the atm. I also use electronic payment (erentpayment.com and sparkrent.com) and I have a box at a UPS Store where the tenants can either mail or drop off their rent in person in the form of a money order or cashier's check. I don't take personal checks.
Sounds like you have a pretty solid system.
I'm still working out some kinks in my processes but overall the 50% figure sounds about right. A few of our properties are 30-40% and the bad egg has been 60-70%.
I'm hiring property management from the get go because I have a full-time "job" and few SEO contracts I can't give up yet. Ideally, I will start a property mgmt company once I have 75-100 units and find a decent partner to start up the company.
Almost all of our tenants only pay cash because these are in pretty bad areas.
I prefer Real Estate Investing to IM but it just takes a shit load of $$ to get to the level where it's fun.
Apt Complexes are next on the agenda as well but that's in the form of a fund that I won't make much $$ off.
As I grew I learned some things the hard way:
#1. Owner/operators are lot better at tenant selection. I self managed until we got to 60 houses (taking on 3-4 new ones a month). After that we contracted a person that works for just us. His gut on tenants is much worse than mine. Cost of doing business and I sure appreciate not meeting tenants any more. In my experience, property manager companies are usually worse (either way too picky or way too loose).
#2. Low end houses, rent under $800, your expense ratio will be 40% minimum probably more (even if you're good). I'm in California on my $1,500/month rentals I run in the 30% range. You will beat the average when you're small, but as you grow I cannot.
#3. Financing/borrowing money is the KEY to this business especially if you want fast growth. Don't write everything you can off, banks won't lend to you. Don't buy super low-end, banks won't lend to you. Don't try to explain to banks how you buy substantially under market value, they won't believe you. Refinance those properties after they are performing. Most regional banks have a customer lending limit and some rules (I think 3% of the outstanding loans to one customer). Learn how to calculate a debt service coverage ratio and bide your time. It took me 2 years of solid taxes for banks to start lending to me. I can go on and on about this. Fast growth also scares them. In my experience, the bankers I deal with didn't like the hedge fund approach, I own 12 properties with a hedge fund and they didn't like lending to that. Banks, hard money lenders, private lenders and family and friends money all have there place.
#4. Convert your maintenance requests to an online email form. This was huge for us, it sucks to sometimes get 3-4 in one day, but they will only go to the site and type it out so I can make sure it gets done and track who is always whining.
#5. Make the cash tenants deposit rent directly to your bank. The Teller gives them a receipt and does the customer service. Make the other ones ACH you money.
#6. Have a solid long-term vision: what is the benefit of owning 500, 30k houses versus 250 60k houses? For a small market, is your concentration too high? Why not sell and buy commercial or apartment.
#7. Know where you make your money. You have picked up 366,000 in cost with a value of 605,000. The time you spend on finding GREAT deals is what is important versus trying to make your expense ratio 40% instead of 50% with brute force.
Good luck. It is cool to see so many people here are into real estate.
#1. Owner/operators are lot better at tenant selection. I self managed until we got to 60 houses (taking on 3-4 new ones a month). After that we contracted a person that works for just us. His gut on tenants is much worse than mine. Cost of doing business and I sure appreciate not meeting tenants any more. In my experience, property manager companies are usually worse (either way too picky or way too loose).
#2. Low end houses, rent under $800, your expense ratio will be 40% minimum probably more (even if you're good). I'm in California on my $1,500/month rentals I run in the 30% range. You will beat the average when you're small, but as you grow I cannot.
#3. Financing/borrowing money is the KEY to this business especially if you want fast growth. Don't write everything you can off, banks won't lend to you. Don't buy super low-end, banks won't lend to you. Don't try to explain to banks how you buy substantially under market value, they won't believe you. Refinance those properties after they are performing. Most regional banks have a customer lending limit and some rules (I think 3% of the outstanding loans to one customer). Learn how to calculate a debt service coverage ratio and bide your time. It took me 2 years of solid taxes for banks to start lending to me. I can go on and on about this. Fast growth also scares them. In my experience, the bankers I deal with didn't like the hedge fund approach, I own 12 properties with a hedge fund and they didn't like lending to that. Banks, hard money lenders, private lenders and family and friends money all have there place.
#4. Convert your maintenance requests to an online email form. This was huge for us, it sucks to sometimes get 3-4 in one day, but they will only go to the site and type it out so I can make sure it gets done and track who is always whining.
#5. Make the cash tenants deposit rent directly to your bank. The Teller gives them a receipt and does the customer service. Make the other ones ACH you money.
#6. Have a solid long-term vision: what is the benefit of owning 500, 30k houses versus 250 60k houses? For a small market, is your concentration too high? Why not sell and buy commercial or apartment.
#7. Know where you make your money. You have picked up 366,000 in cost with a value of 605,000. The time you spend on finding GREAT deals is what is important versus trying to make your expense ratio 40% instead of 50% with brute force.
Good luck. It is cool to see so many people here are into real estate.
Solid advice. Do you mind sharing your long-term vision?
Mine is:
1. Buying 50-100 multi-family properties
2. Packaging commercial developments and apartment complexes to make a small % on
I stay far away from anything that doesn't drive consistent cash-flow like rentals (occasional exceptions for large projects). For the same reason I stay away from flips
That's a good question:
I own about 100 multi-family doors (4 unit at the smallest to 22 units). I have to have a completely different person manage these (it's a different caliber of tenant) and have really struggled to buy them at a return that is enticing based on real numbers. The way I have bought two with the best discount is purchasing a non-performing note and foreclosing on it. I don't see enough deal volume at a price I am willing to pay within 80 miles of where I live to get me excited.
Lately, I have been working buying and pursuing some medium sized light industrial buildings and the numbers appear to be great. If things go as planned I will started 1031 exchanging my houses into industrial/commercial buildings over the next 5 years.
I buy 60 miles east of Los Angeles. I wouldn't call it a weak market, but it really swings.
The reason the expense ratio is shocking, you have a $50,000 house that rents for $1,000, a roof still costs $4,000. In Santa Monica you have have a $1,000,000 house that rents for $4,000, a roof may cost $5,000. There are a lot of costs that are fixed and not variable. An eviction on a $500/month unit, costs the same as an eviction on a $4,000/month unit.
It's on the menu in the future. We kind of want to roll out a airbnb type thing with vacation properties.
We've got one area we want to buy into, daily rental rates are usually $150/night and the properties start off at $40k-$60k. The maintence is much higher (shocking!) but the reward is there. The key from what I can tell is replacing property managers as most want 50% of what you take in.