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The Update is In!!!!
As promised I will update all of you on the test property of paying all utilities…
I will say that this even surprised me, and it is now official! We will be paying all utilities for those owners who have authorized us to make the change. To date, we are in the process of converting 22 of our properties to all utilities paid!
Additionally, my partners and I will be converting one of our apartment buildings to all utilities paid. This building is 10 units, and we estimate picking up an additional $600 per month NET in rent! The conversions will cost around $3000, so in 5 months it will be paid for! We will take about a $1000 hit on the 1st month, as the notices to change rent carries a 30 day notice with it. We polled our tenants and they overwhelmingly approved a $200 per month rent increase. In fact over the next 18 months, we will be converting all of our properties to all utilities paid.
Now the results….This test property delivered in a really big way, much better than I was projecting with the owner.
The December gas bills came in, and it has been a pretty cold month, and I know the furnaces were doing some work. With the meter readings being nearly triple of what they were in November (in all fairness, November was a pretty mild month for us), the gas bill for December was just under $700. I took the same meter usage for December and applied it to November’s bill (before the full conversion), and the gas bill for November would of been just under $875, or not quite 20% savings.
Now the good stuff! We raised the rents in this building to $750 per month, all utilities paid. So now we are grossing $3000 per month in rents, with the light bill at approx. $400 per month, gas bill $700 per month and the water bill at $150 per month, that’s a total of $1250 in utilities. He collects an additional $100-125 per month in laundry income, to bring his gross to $3125, less $270 per month in management fees, and $135 per month insurance, for a NET income of $1470! I did not calculate maintenance, only because for the 2 months I have been managing it, we have had no maintenance calls what so ever! We will have some maintenance as soon as the snow starts falling!
His net for November, $1237.88, that’s the check I cut for him on the 5th of November!What does this mean to him, in the very cold months when the gas bills will be high, he can expect an additional $150-200 per month in income, but when we turn to spring and summer, and the furnaces get shut off, he can expect an additional $700-800 per month in income!
This just shows you that if you put together a plan and carefully think it through, you can succeed! This proves the power of relying on facts to conduct business, and not opinion’s!
I am in the process of completely changing “The Renovation” to include setting up the properties to be all utilities paid! I will never go as far as saying this is how we will do it from now on, but we strongly encourage every owner to look at this option. If it is done correctly you will actually make more money, if it is done incorrectly, you will lose 100s of dollars a month!
Let me add this, I am still a huge fan of all electric everything, as the savings would be even greater. In this scenario the owner does not want to convert to all electric at this time, as the costs are a bit high for a 4 plex.
To recap: We netted the owner nearly $200 per month in additional income, but probably more important, we have 100% eliminated the risk of utilities being shut off for non payment, and causing 1000s in repairs! That’s managing! The other factor to keep in mind, tenants will be beating down your door if you tell them it’s all utilities paid! I don’t think there is a PM out there that would disagree with me on that. The number of calls I receive daily from tenants wanting to know if that property is all utilities paid, is staggering.
One other thing to keep in mind, your NET NET will actually increase as well, because you are now paying utilities, which is a legitimate expense, therefore will reduce your “earned income” therefore your taxes go down! It’s what is defined as WIN WIN!!
I hope everyone has a awesome New Year!!
John
Say it ain’t so!
After a wonderful holiday weekend, I receive an email from my closer ( god I love her), stating there was an IRS lien on this building for 175K! She has been in talks with the seller about what to do. The seller, in her words, does not seem to enthused to pay it off. I have not been contacted by the seller, YET!. I have a really bad feeling on where this is going to end up…
Oh I really hope the New Year doesn’t start off with one of these…
I have not tried those specifically.
Looking for an accurate convention schedule for 12…
Thanks for the tip!
John
jayhinrichs wrote:GreaterKCHomes wrote:jayhinrichs wrote:The absolutly most risky US real estate investment is the Super high cap rate multi family properties in the bigger mid west cities of the US.— I don't know that I would neccesairly agree with this statement. The midwest is the best area to invest if you are looking for cash flow, always has been and always will be. The midwest offers something no other region can, and that's tenants in massive numbers. This is the very 1st rule of business after all, be where the customers are. But to be fair, if your looking to buy and sell, there are much better options than the midwest (well except maybe Dallas, geez that place is tearing it up), I'll be the first to admit that.Talking about a city in Tennesse is most likly talking about Memphis, and if you drive around memphis you will see 50% or better of the apartment complexes big and small boarded up, waiting for the next group of investors to come in and make a run at their cash cow 30% cap multi property. Only to have it boarded it up after they have lost hundreds of thousands and then the next group comes in. And its a never ending cycle.—I really can't speak to Memphis, as I have not studied that market, but I have heard things from both sides of the fence. If any MF deal is being advertised at 30% CAP, then there should be major flags being thrown. This number is simply not attainable in apartments, without making serious cuts to the renovation, in which case that property will not perform at 15% CAP, let alone 30%. I know there are those that seem to believe that because they say it, then it must be true,and it's too bad that it is that way. Of the complex's I am partners in, we consistently see high teen returns, I imagine we could get this number into the low 20s, but since we do convert to all electric, this is a major expense in an apartment complex and causes are NETs to drop a few points.
For those on this Forum these super high cap rates are extemely risky and I can flat guarantee the only people that can make these work are ones that do it for a living and live with in miles of the properties. Have their own in house management that are employees and have full time security guards at the property.— The properties are only risky, if they are not professionally managed and renovated. The deal never fails (unless you overpay), it always comes back to management or the renovation, that caused the failure. My associates and I have bought and renovated several properties in this exact scenario that you describe, a local investor bought it, renovated it as cheap as possible and thought that management was "EASY". In fact the building we close on next month, is this exact scenario. This owner had no mangement experience, renovated these units as cheap as possible, and was broke within 5 years, as he could not get the rents where they needed to be, and constantly paying for maintenance as well as renting to the wrong tenant.
Property management is pretty easy for those that have the experience in dealing with tenants, and understand that you have to think like a tenant, not an investor. To toot my own horn, this is why I do exit polling, I can't think like a tenant without polling tenants, as I have not been a tenant for over 20 years.Fact. over 50% of single family homes in Memphis are rentals. So the better renter goes for a SFR the worse renters end up in apartments. No one chooses to live in apartments in these areas they are forced there by income standards and usually super bad credit criminal backrgrounds. The high cap rate apartment is a constant turn over property as people come and go. A one year tenant would be long term.—From my experience in dealing with apartments, the information seems to suggest otherwise. The tenants tend to stay longer in apartments than they do houses. I cannot speak to Memphis, and maybe this is reversed there. What I am seeing with tenants, is they are starting to understand the costs involved in renting a house, it is about 30% higher to rent a house than it is an apartment, and they are wising up and moving to apartments. Those that are choosing houses over apartmetns, are doing it solely for the fact they need the room, due to children. As far as the worse tenants being those in apartments, I have seen no data to support that here in KC. There are plenty enough bad tenants to go around, if turnover is that big of a problem….that can be directly placed in the lap of the manager. There are simply to many quality tools available to propery managers these days, that making a sound decision on a tenant is not a difficult process anymore.
Yes they can work but you need to run them like a prison literally. Duplex's not so much we buy some duplex's. but anything that is 10 untis and up and you have this sociodemographic living in units that are 20 feet apart, your talking major work.–The one key factor to remember is when you do a professional renovation, this by default, raises the rents to top of the market or just above. This will eliminate alot of the problem tenants associated with lower rent buildings, as they will never qualify, if for no other reason than their income does not meet the requirements. This is how you eliminate the very things you talk about, don't do cheap renovations, so that you can't get to the top of the market in rents, and can only rent to those questionable tenants.
As far as dealing with the multiple personailities, this is much easier to do when your dealing with tenants who actually have respectable jobs, and just don't qualify to buy a home these days (who does?). These tenants simply stay to themselves and live their lives like a responsible person should. When you ask top of the market for rent, these are the tenants you will end up with, as they are the only group that can afford it.Best play for these is to buy one fix it get it rented and then flip it to the new guy who see 's star's and thinks they will get this super high cap…. then in 2 years it will be boarded up again.—I don't know about that, you risk giving up several 100s of thuosands of dollars in equity, trying to retail flip an apartment building these days. There simply is no retail market for apartments, and investors are looking to pay 60-80% of value for buildings. If you wait for the market to turn ( and it will at least twice as fast as the residential market will) you will capitialize very nicely on your apartment building. [/quote]
Have a great day!
KC
Your a professional who works the business everyday, my comments are targeted to the Owner investor thinking they are going to buy a boarded up building in the mid west for 5k a door that the broker has written proforma on showing 15% to 20% cap rates.
Price is low enough to entice the investor that is unaware of how difficult these properties are to manage.
If someone wants to PARTNER with YOU aand you had personal FINANCIAL risk and they vetted you as a person with FINANCIAL capability and exerience then I think that is a much better play for most investors. And most investors should pay YOU a premium for this experitise and FINANCIAL risk that you take when your recommending a deal.
There is no question an art and experince level to owning multi family that is class B C D which is what i think we are talking about.
At the end of the day No property manager in US is going to personally pay for anything out of their personal pocket vis a vi the running cost of any property.
At the end of the day those buying in the single family realm on the low end cash flow rentals will deal with the ups and downs.
Jay,
I agree with you, if your purchasing Single Family properties in bad areas, it is just going to fail. I have never seen these properties produce anything other than headaches. You can't rent anywhere near top of market, unless you get Section 8 of course, and those particular tenants with Section 8, i seriously doubt would get pass level 2 of my background checks.
I guess it's what I have been trying to say for ever, is if investor's don't look for the correct "partners", then these bad deals get passed on and on and we have to hear about their terrible experience. It's an unfortunate reality, in any place in the world, greed makes people do very unethical deals, and gives the entire industry a black eye.I will be honest here, and I am sure I will raise some eyebrows with this one, but I'm fine with it. This grading of neighborhood's for apartments, just does not make sense at all to me. To me it's a lot like an appraisal, based 100% on opinion's and there is nothing factual about it. I am aware that there are some places you just don't put money into, because you can never get your money back out, and those would definitely be classified as "D" areas, but I don't look at areas like that, I analyze the deal by itself with no regard to the area, until it's time to actually do that. If I or my partners feel we can redeem the property, we pull the trigger, with very little regard to it's location. It seems to be working out just fine, as 4 of these properties are some of our most profitable.
This building we are purchasing in January, is without question in a terrible neighborhood, and I would NEVER consider buying anything less than 20 units in this area. What drove my partners and I to this building was nothing more than it's potential and our experience with these types of properties. We knew we could turn this building into something extremely profitable and effectively change at least 1 section of the area. It's the same principal developers are using across the country, when they spend millions to renovate old buildings in downtown areas and turn them into lofts or condos. This strategy works, because it forces a change with the demographics, and if all the proper DD has been done, you will succeed in these so called "D" neighborhood's.
Have a great New Year!
BuyLandOnLine wrote:Thank-you John. Like most things, if your good at something it is easier. When I was an educator and counselor working with gang effected teenagers it was easy to get up for work and easy to feel good about what I did, the work…well, it was never easy but most of my college educated friends thought the job seemed impossible let alone difficult.If you are an effective PM then you are obviously taking to heart what people say in those exit polls and care about the conditions within which they live. in the long run happier tenants make fewer problems. and that in turn reduces costs and keeps the rent flowing and makes for happy owners. It is an old fashioned idea that good business keeps everyone happy not just merely satisfied. Your buildings likely have a good reputation, on the street where the renters lurk, and among owners. Keep up the good work'
Did urban sprawl lead to urban blight and is that as large a problem as it has been made out to be in KC?.No problem, I appreciate the spirited, yet professional opinion's. It's what makes this board the best I've seen to date.
I would have to say that KC is very defined in it's neighborhood's, the suburbs are as advertised. I don't know if it's a good thing or bad thing, as this cities demographics are constantly changing, with redevelopment. I think the challenge any investor that purchases residential properties in any city, and plans on making a true buy/hold property, is the changing of the landscape around it. It's not only important to look at the area now, but do some research into what it might look like in 5-10 years.
I will say that KC is showing a trend of reversing that, as our downtown area is going through some major development projects, more professionals are moving back into the downtown districts, and some of the more affluent areas immediately outside of downtown. If your familiar with KC at all, you may be aware of the West Bottoms district. This area has always been warehouses and office buildings, it now is being purchased in groves by developers and being converted into condo's. It will never replace the suburbs, but the city is very excited in the response to their 2 billion dollar investment into downtown.
Have a great New Year everyone!
BuyLandOnLine wrote:I obviously don't see eye to eye with Jay, just read the most recent posts here, however, Kansas City, really, I own a lot there. The author unknown in the above wrote
Property management is pretty easy for those that have the experience in dealing with tenants, and understand that you have to think like a tenant, not an investor. To toot my own horn, this is why I do exit polling, I can't think like a tenant without polling tenants, as I have not been a tenant for over 20 years.PROPERTY MANAGEMENT IS NEVER EASY THAT IS WHY OWNERS PAY GOOD MONEY FOR THE SERVICE, TENANTS ARE ALWAYS VEXING. Before becoming a homeowner I was a renter for the better part of two decades, several apartment in two states. I was vexing to the owners. It is easy to think like a tenant, Needs come first, if circumstances require me to move and my budget is tight then I gather my funds to establish my new place and make the move at the expense of rent and utilities. I may or may not feel bad about it and I may even hope to eventually make good. This is why tenants are required to pay last month's rent up front, is it not?
I guess PM is as easy as you want to make it, or as hard as you want to make it. For me, it's not all that challenging, because I use the tools that are provided, to keep some kind of control on the headaches. There is no 100% sure fire method, as there are those that slip thru the cracks, but if a PM is actually doing a professional job, these should be few and far between.
John
jayhinrichs wrote:The absolutly most risky US real estate investment is the Super high cap rate multi family properties in the bigger mid west cities of the US.— I don't know that I would neccesairly agree with this statement. The midwest is the best area to invest if you are looking for cash flow, always has been and always will be. The midwest offers something no other region can, and that's tenants in massive numbers. This is the very 1st rule of business after all, be where the customers are. But to be fair, if your looking to buy and sell, there are much better options than the midwest (well except maybe Dallas, geez that place is tearing it up), I'll be the first to admit that.Talking about a city in Tennesse is most likly talking about Memphis, and if you drive around memphis you will see 50% or better of the apartment complexes big and small boarded up, waiting for the next group of investors to come in and make a run at their cash cow 30% cap multi property. Only to have it boarded it up after they have lost hundreds of thousands and then the next group comes in. And its a never ending cycle.—I really can't speak to Memphis, as I have not studied that market, but I have heard things from both sides of the fence. If any MF deal is being advertised at 30% CAP, then there should be major flags being thrown. This number is simply not attainable in apartments, without making serious cuts to the renovation, in which case that property will not perform at 15% CAP, let alone 30%. I know there are those that seem to believe that because they say it, then it must be true,and it's too bad that it is that way. Of the complex's I am partners in, we consistently see high teen returns, I imagine we could get this number into the low 20s, but since we do convert to all electric, this is a major expense in an apartment complex and causes are NETs to drop a few points.
For those on this Forum these super high cap rates are extemely risky and I can flat guarantee the only people that can make these work are ones that do it for a living and live with in miles of the properties. Have their own in house management that are employees and have full time security guards at the property.— The properties are only risky, if they are not professionally managed and renovated. The deal never fails (unless you overpay), it always comes back to management or the renovation, that caused the failure. My associates and I have bought and renovated several properties in this exact scenario that you describe, a local investor bought it, renovated it as cheap as possible and thought that management was "EASY". In fact the building we close on next month, is this exact scenario. This owner had no mangement experience, renovated these units as cheap as possible, and was broke within 5 years, as he could not get the rents where they needed to be, and constantly paying for maintenance as well as renting to the wrong tenant.
Property management is pretty easy for those that have the experience in dealing with tenants, and understand that you have to think like a tenant, not an investor. To toot my own horn, this is why I do exit polling, I can't think like a tenant without polling tenants, as I have not been a tenant for over 20 years.Fact. over 50% of single family homes in Memphis are rentals. So the better renter goes for a SFR the worse renters end up in apartments. No one chooses to live in apartments in these areas they are forced there by income standards and usually super bad credit criminal backrgrounds. The high cap rate apartment is a constant turn over property as people come and go. A one year tenant would be long term.—From my experience in dealing with apartments, the information seems to suggest otherwise. The tenants tend to stay longer in apartments than they do houses. I cannot speak to Memphis, and maybe this is reversed there. What I am seeing with tenants, is they are starting to understand the costs involved in renting a house, it is about 30% higher to rent a house than it is an apartment, and they are wising up and moving to apartments. Those that are choosing houses over apartmetns, are doing it solely for the fact they need the room, due to children. As far as the worse tenants being those in apartments, I have seen no data to support that here in KC. There are plenty enough bad tenants to go around, if turnover is that big of a problem….that can be directly placed in the lap of the manager. There are simply to many quality tools available to propery managers these days, that making a sound decision on a tenant is not a difficult process anymore.
Yes they can work but you need to run them like a prison literally. Duplex's not so much we buy some duplex's. but anything that is 10 untis and up and you have this sociodemographic living in units that are 20 feet apart, your talking major work.–The one key factor to remember is when you do a professional renovation, this by default, raises the rents to top of the market or just above. This will eliminate alot of the problem tenants associated with lower rent buildings, as they will never qualify, if for no other reason than their income does not meet the requirements. This is how you eliminate the very things you talk about, don't do cheap renovations, so that you can't get to the top of the market in rents, and can only rent to those questionable tenants.
As far as dealing with the multiple personailities, this is much easier to do when your dealing with tenants who actually have respectable jobs, and just don't qualify to buy a home these days (who does?). These tenants simply stay to themselves and live their lives like a responsible person should. When you ask top of the market for rent, these are the tenants you will end up with, as they are the only group that can afford it.Best play for these is to buy one fix it get it rented and then flip it to the new guy who see 's star's and thinks they will get this super high cap…. then in 2 years it will be boarded up again.—I don't know about that, you risk giving up several 100s of thuosands of dollars in equity, trying to retail flip an apartment building these days. There simply is no retail market for apartments, and investors are looking to pay 60-80% of value for buildings. If you wait for the market to turn ( and it will at least twice as fast as the residential market will) you will capitialize very nicely on your apartment building. [/quote]
Have a great day!
I had a really good Friday.
My associates and I met with the City Planners to discuss some of their “wishes”, on this building.
It seems that they want us to conform to neighborhood preservation designs on this building. So we asked the obvious question, please explain.
They do not want window units facing Linwood (the main street in front of building), this won’t be an issue as we are installing PTAC units, so they won’t be seen from the front of the building. When we told them that this was our plans, they hesitated at first. Their concern was having to cut into the brick sides to install the PTAC units, and they were worried that we would have mold growing on the side of the building from the condensation put off by these units. We explained that we have the solution to that. The building, of course, has a flat roof. We are going to cut in 4 new drainage ports in the exterior of the building, and run new gutters down, and collect the condensation off of each PTAC, by simply piping them into the gutter.
They of course wanted the usual done, nice clean building with no major changes to it’s appearance.
The one that almost got us laughing in the meeting was their desire to have super efficient windows in the building, as they appreciate the steps we are taking already for a energy friendly building, however they would like us to take the windows up about 10 notches. The windows they have in mind cost around $1600 ea! Keep in mind that’s my wholesale cost! The windows we use cost us about $135 ea, as they are 2 steps above the cheapest. We asked them if they had any idea how many windows were in the building?
We politely said that is not an option, as it would run the costs of this renovation through the roof, and they would end of having it vacant again. They understood.
We also discussed the scheduling of getting new water service to the building, as the water main is located in the middle of Linwood( which just happens to be a really damn busy street). They are going to have to close Linwood for 8-10 hours, which will cause all kinds of issues. The city graciously agreed to only charge us $17,000.00 for the tap on the main, like that was some deal or something. They did say it would usually run 20-25K for this type of job. We will have 1 3″ water main for the fire sprinklers, and a 2-3″ main for the building supply, trying to get this down to 2″, to save about 5K.
Over all it was a great meeting, the city is really excited about us taking this project on, as they are spending millions to revitalize that area, and they have some concerns with some of the buildings there.
Not sure why I shared this, just thought it would be an interesting read.
Think we are crazy? This neighborhood is very easily a D- area at best (and that might be giving it to much credit). If anyone is interested, I’ll share with you why we could not care any less than we do.
Take Care!
John
jayhinrichs wrote:KC homes.I know you have put a lot of stats together that are very helpful for those investing in SFR rentals.
What would you say is your average length of stay for your tenant's,
I think this is a factor that folks would like to know and to put in their cash flow analysis, not including the unexpected vacancies from lack of payment or tenants creating waste…
If turnover is happening once every 18 months on average and an average "make ready is 1k to 1500 buckaroos and if someone owned the home for any length of time this would affect your overall rate of return
JLHRight now our average tenant is staying with us just over 2 years (this is calculated on those properties that we have managed for over 3 years. I am not calculating those that I have managed for under 3 years, as most of these our not our tenants, as we inherited them with the property.) I am working on a rewards program to get these tenants to stay for a good amount of time, I'm pleased with 2 years, but I really would like to see this around 3.5 years, to really maximize the client's return.
Right now our make ready is costing just under $700 as a norm. My company performs quartely inspections of all the properties so that we can keep an eye on how things are going. If we see a situation that looks like it's getting out of control, we take action immediately. The one great thing about Section 8, is that if we see a tenant abusing the property, we will contact their case worker and demand an inspection.
I agree with you 100%, if there are no property inspections happening, things can spiral out of control really quickly. The biggest thing we fight here, is the tenants not getting their trash out weekly, and allowing roaches to nest. This makes no sense at all, as in Kansas City, MO, the trash pickup is 100% free (2 bags per week, then $2 per bag after that), so this is nothing more than being lazy.
John
KnoxOff wrote:John are you sure your tennet wasnt Egertis Butchee
http://www.youtube.com/watch?v=FWojouNbl6Q&feature=related
the cars on fire and he parks it next to the petrol pump
Wow. What a great idea…see smoke out of your car, so let's pull over near a gas pump…
And he's not insured….
One has to wonder.
jayhinrichs wrote:I just have to wonder what our audience thinks of these conversations.I have just got to think they have no clue as to what we are talking about.
Tenants that trash units, Tenants that the US governement pays for their rent and they still trash the units…. Just think how RICH a country the US would be if we did not support all of these people. I am dead certain a person could not just wash up on the shores of Aussie land and live for free….. Sec 8 rent EBT card for food….. steal cash where you can.. then have generations of off spring do the same.
How the heck we are still afloat with the amount of money we pay to support all these people I will never know.
Then you have the Mexicans that come accross the border and use our medical care. They use the emergency room as there everyday doctor. B/C in the US NO one can be TURNED DOWN for medical care because of lack of payment… The African AMercians do the same…. Obama care has some merrit with regards to this.
Its just insane what the tax paying americans pay for.
Now we are hemeraging our properties to foriegners and we are too stupid to figure out what a great deal these rentals are.
Although those Aussies that buy in the hood and low end rentals, will learn a lesson when they loose all their money. Home depot will get the last laugh.
JLH
Jay,
Your exactly right..the free rides in this country are a bit much…it's time people pick themselves up and get a damn job!
I have always wondered what the "true" statistics of unemployment are, not calculating those that just don't want to work, because we as a nation, will continue to support their drug habits, by offering them free housing and food.As far as where the money comes from…it's called the "PRINT" button! LOL
I don't know about other major US cities, but I see a trend developing here in KC. The city is "redeveloping" it's neighborhood's. Right at the outbreak of this foreclosure mess, KC started a very ambitious plan to redevelop downtown, there was even talks about moving our pro sports teams down there, until someone woke up and said.. "Parking Anyone"?
What came out of this was the Power & Light district, a 2 billion dollar plan to wake up downtown. We got a new multi-purpose arena, multiple restaurants, H&R block world headquarters building, NCAA Hall of Fame and many many more business'. I have to admit, it is a remarkable turn around and has made KC's downtown a safe place to be.
What this is doing is bringing in higher priced rentals and lofts, forcing the lower income residents to look elsewhere. The expansion is slowly moving south out of downtown, as hotels are renovating, or being developed, housing developers are building new town homes, and other MF units. Again, all of these are asking higher rents for their buildings.
The city just announced plans to construct a new Crime lab, that will level 4-6 blocks of a very undesirable section of KC. And without question, developers will look at this opportunity to move in. The city will use it's muscle to get whatever properties that are in the way, eliminated. They are offering 125% of current assessed value for these homes, however in this area, these homes might carry an assessed value of 15-25K, on a good day. It's easy to see why the city is moving on this project now…it's time to buy Real Estate!
I think KC, has seen it's errors in the past of offering up low income public housing, in desired areas like downtown and the business district (between downtown and country club plaza), and they are taking "legal" steps to correct it.
When you add everything up, it's quite clear to see why developers and commercial investors are buying up everything they can get their hands on in this area. When the transformation is complete, the values on these buildings will sky rocket.
Just as an example, the country club plaza, which is world known in Kansas City, is home to very upscale shopping and very very upscale living. If you want to buy down there, it will be well into the 7 figures, to even be considered. This area is literally in midtown, by definition, and is about 40 blocks south of downtown. Now it is right on the state line, and across that state line is the wealthiest neighborhood per capita in KC Metro.
This trend of "redeveloping" in KC has been going on for about 10 years, and I honestly think it's the city's way of saying it's time to change things up and over price the living opportunities in these areas, to drive out trouble.
Great feedback, I appreciate it!
John
jayhinrichs wrote:slum lord is the name of the last owner.what I have seen happen is after you get sick and tired of the tenants tearing your properties up you then just get calous and do as little as possible.
In San Francisco we called them Projects pretty much 100% african americans and Mexicans. With average home prices in SF at 750k and rents far above 2k… The city builds these big low income PROJECTS and they just turn into war zones.
Same in all cities in the US. Detroit has pretty much torn all of theirs down, and other markets as well thats why there is a strong rental market per se for single family. Although as we all know have to be very careful who you put in your property.
Like I said most Mid west citys are littered with these type of properties, KC, St. Luis, Memphis, Indy, Chicago,
One can make a run at them but if your going sec 8 and your putting these people in tight living conditions you need armed security 24 /7 to have any hope
Jay,
I agree with you 100%, this guy was something else.
The great thing about this one, is it's located in area known as apartment row, as there are one large building after another lining the street. There have been several large commercial investors, buying up these builidings over the last half dozen years or so, and they are putting their money where their mouth is. I wholesaled a 137 unit building to a client out of Minnesota, and they dropped 2.5M into this building, and it took them 2.5 years to renovate it. They are doing very very well out of that building, as they are in a very prime location and they are getting almost 900 per unit on 2 beds, and 550 on 1 beds. I don't think we will be able to go that high with our rent, unless we pay utilities, which we are looking into. With all these investors coming in, and changing the mentality of this area, it's chasing Section 8 tenants out of there, as they simply cannot afford it.
I have never been a fan of having Section 8 renters in apartments, for the very reason you mention, way to many problems to corral. I don't mind them in duplex's or even 4 plex's, but anything over 6-7 units, I feel your asking for trouble. I love Section 8 for houses, and will not hesitate to place one, but I look very closely on my apartmtents that I manage. As they say, don't want to rock the boat, when it's on smooth waters already.
I don't think we will go with armed security guards, as this will definitely send the wrong message. We are going to have gated entry parking, well lit, and will be installing a state of the art surveillance system, with 24, very very expensive cameras. We will be able to have web access to the cameras, and turn off and on any camera we choose, at anytime. They are motion activiated, and will record to a DVR, on any motion detected, and will continue to record, until the motion is no longer detected.
Thanks Again!
JohnAlex SC wrote:Well we looked at section 8 204 unit in Atlanta , think our client passes we so did we.Taking on a large head ache just don't have the stomach for it. Yes I like section 8 for cash flow on single family homes .Not sure if I am ready to tackle a big 204 unit head. Bank foreclosure. So looks like another investor lost on it already.Good luck John with large properties we are just getting into the commercial side of things. Slowly I might add.
Hope all is well
Alex
Alex,
Good to hear from you again.
Everything is going great, thanks for asking.
I love commercial projects, especially in this market.
I hear you, sometimes dealing with Section 8 can be a test of one's self control. They can sometimes make you walk out biting your tongue.
I don't see this project as being viable to Section 8, simply because we are putting way to much into these units, to justify accepting the rental decrease. The housing authority of KC, likes getting their nose in these types of projects because it means 100+ new vouchers that they will get paid on, so they jump at this stuff. We would of never approached them ourselves, they came to us with this offer, and we acknowledged our appreciation, but knew well in advance we would not do Section 8.
Have a great week!
John
jayhinrichs wrote:Mortality rate is very high for these props That's why apartments are rated in classes. If this apt in KC is so great why is it vacant and blighted one has to ask the question There was the day those props were transformed to lofts. But that was commercial to resi conversion not one landlord failing and another buying ones dre ams of 18 percent returnsJay,
My best guess as to why this building has set vacant for all those years, is simply the money it will take to turn it into a profitable complex. The building prior to being in its current condition, was a low income building. The current owner, unfortunately did what so many do, and that is, do as cheap as renovation as possible. Never upgraded anything substantial during his renovation, and only fixed it when it was necessary. We saw pictures of supposed renovated units, and they were pathetic at best. He rented 2 beds for around 425-450, and one beds for as little as 300, he stood no chance at making any money.
When we were looking over his financials (not that we cared about them, we knew what needed to be done) his maintenance expenses were, not suprisingly, way to high. It simply ate him alive, and given the fact he was way below market rate for a 2 bedroom unit, just could not generate the revenue, like he had been taught or believed, one of the two.
John
jayhinrichs wrote:Most section 8 that I am aware of pay a more than market rents ergo that's why landlords wil take that caliber of renter not withstanding the payment directly from hudJay,
Yes in most cases on typical renovated homes, Section 8 will pay more for that property. However on apartments,they will only pay $625 net or $833 gross if the landlord pays all utilites. They no longer grade the properties like they used to do it, there was time when you could do some minor upgrades and get more money, but you had to know how to get it out of them. They stopped doing that here, about 4 years ago. It's now based on their spreadsheets.
So in this case when we will be putting more into these apartments than we would typically, we will be able to demand $850-875, with the tenants paying their own light bill. We are going to construct a 1500 sq feet fitness center in the basement, as this space is pretty useless, along with storage units. There will be laundry rooms on each floor. And of course they will be all electric units.
John
Jay,
I appreciate the feedback.
Yea, we are not crazy about the Section 8 offer, as we can easily go 25-30% over what Section 8 would pay us to rent to open market tenants. They came into play when we were negotiating with the city on what our plans were.
This building is in the midtown area, but it is surrounded by nothing but apartment buildings, and our research shows we have a competitor less than a block away, that converted to high end units. They are asking $825 for 2 beds, and are currently at 96% occupancy, so we don't believe we will need the Section 8 offer.
We have a local lender that will do 80% owner occupied loans with a 700 FICO, if we decide to go that route. Of course that is subject to change, much like the weather…hehe!
Thanks Again!
JohnAlex SC wrote:John how are you. Like wise the old tax man is coming. For sure after 3 years. So true.. Bottom line you can make and lose money in real estate. I am only 15 years in this business. I don't have the mortgage or bank back ground like others. I have purchased and rehabbed homes from $10k to $5m . Now not going to lie the higher priced rehab homes over $1m was worse then dealing with the $10k rehab project.Don't get me wrong I buy both ends of the spectrum today for cash flow ( hoping for future appreciation). The 67 house package my partner and I have been working on now going on 3 years. Is in a 5 block radius. All located in a small area of Rock hill , SC..Just below Charlotte NC. Yes even as a head ache I see major profit for long term. And for the town of Rock hill, this area is a war zone but we don't have crime here to be honest. Charlotte yes Rock hill far and few. Still little quiet town . Heck my road if I see two cars go by , I think some thing big is going on. ( yes I am a laid back country boy from NY )
So likewise KC or any other market at the end of the day comes down to the team the investors choose to work with and can they handle the types of products they sell.
John your homes and you work ethics , have heard nothing but good things about you.( No I don't work with John or not affiliated in any way ) . The boys over at Peak ( Jp and Shane ) stay in constant touch with them. Actually conference call yesterday about partnering with some financing for other markets.
Well stay in touch and hope all is well
Alex
PS We still flip if the deal has tremendous up side..Besides once it gets in your blood it is hard to not buy , rehab and flip…Working on purchasing a lake house. Tax value $2.7 m came on market for $700k we offered $400k rehab $400k . Would wait unit spring to put on market at $1.8 looking for $1.4m So yes we still do the flips and no cash flow there on that house.LOL
Alex,
Small World!
JP & Shane fund some of my homes, in fact they are doing a deal for me on Monday on a 6 plex we just bought.
I'm glad to hear they speak kindly of me…hehe!
Take Care!
John
Alex SC wrote:Quick investment thoughtsNewer homes 3 bed 2 bath or larger = future appreciation ( speculation of course ) good cash flow less headaches
Older investment homes = Great cash flow , higher turn overs and more head aches. Not always….
I do deal with both types of these investment homes( for my own portfolio and our clients ) but would much rather buy what we call the prettier homes factoring in future appreciation with cash flow( no we don't offer 15 to 18 % returns there.) When we collect rents over $850 dollars per house. Seems the whole process is much easier, less head aches and less turn over. Not saying that the lower end homes are horrible. It does however come with higher risk , reward factor built in. Along with many sleepless nights.
The lower end I still play there but after dealing with newer nicer homes always hard to step back. Again not knocking any one for doing what they do. I am just agreeing with Jay, lower end homes bring more head aches. Sorry don't care what any says there. My partner and I own plenty of these lower end investments so I can relate what I have gone through.
again just my two cents
Alex
Alex,
I completely understand your point about "less" headaches in higher valued homes, I wouldn't say there are no headaches but fewer for sure.
The problem with settling for lower returns, especially under 15% as a high, and worse if it's around 10%, is the fact that the NET return calculated there, only accounts for the property. The issue is, there is still one more expense to pay, and it can get pretty expensive in a hurry. It's the wonderful corporation that is the IRS!
At a miniscule 40K NET per year, you are thrown into the 25% tax bracket (according to my CPA, he actually said it was like 36K), and the reality is, it's not hard to hit a NET NET income of 40K per year, when you have rental property. One property can generate in the area of 10K gross per year, by itself. If your getting low double digits in NET returns on the property, this will no doubt throw you into single digit NET NET returns, and make the risk just not worth the reward. I don't know how comfortable anyone would be with rental properties only producing single digit returns, after ALL expenses. We all know rental properties never duplicate the exact same results, but if you keep adding to your portfolio, it will be difficult for you to stay out of the 25% tax bracket, and more than likely you will be graduated to higher tax brackets.
Now most of us know that any new business is given a 3 year pass, if you will, to start making money, or the IRS will want to have a discussion. As my accountant told me when I started in real estate, in the 1st 3 years of business your chance of getting audited is less likely than hitting the lottery twice. After 3 years, in Real Estate, you should almost expect it! I was audited my 4th year in Real Estate, nothing more than a routine audit, and my CPA and IRS agreed, that they owed me an additional $700, give or take. Other than the 3.5 hours of feeling like I was on trial for my life, it was really no big deal. LOL!
I'm not sure where the low end homes comes in, or I guess the appropriate thing to do, is what is the definition of low end?
It's no issue getting mid to high 5 figure homes in KC for well under market value. These homes are in B to A+ neighborhoods, and would make great rentals or great flips. The difference with these areas, is the cash flow is well protected, as the RE taxes are drastically lower because of all the foreclosures. In KC, when you approach homes over 6 figures in value, they will NOT cash flow, the RE taxes are murderous, and destroy any hope of cash flow. I manage a home in one of our suburbs, this home has a current assessed value of 175K, the owner was not willing to sell it, as he would of taken about a 75K hit. He was forced to relocate as his job moved him to Arizona. It is rented for $1400 per month, which is about $150 over market value for that area, as this home has some awesome features. The home is only 6 years old, is, yet his NET cash flow per month, is a pathetic, $227! The RE taxes are absolutely killing him, along with his insurance. Now fortunately this is not an investment property for him, so he's not concerned with his return. The reality here of course is, if maintenance issues come up (and they have not as of yet, since everything is new in this house), but as the house gets older, maintenance issues will come up, and he will more than likely have to come out of pocket for those repairs.
Obviously everyone has a different strategy, and they all can be productive, without question. I have always kept the two strategies apart from each other, as they are 2 totally different strategies. I always buy homes to rent, that are under 100K in value, to get the cash flow. If I am looking to flip, I only purchase those homes with a value over 100K. In KC anyway, homes with a value over 100K and closer to 150K are selling like crazy, those homes under 100K are selling, but not near the pace, on a retail level that is.
I appreciate your comments, I really enjoy reading your replies, always well thought out and professional.
John
baruchmax wrote:Hi John, Good post. I have some comments. 1) Property Management – Property Management is a necessary evil for long distance property owners. The simple fact is no one will care about your property as much as you would, but you have to have a property manager involved if you own a property overseas. The best thing to do is find a property manager that is recommended by other investors. 2) Renovations – The best thing to do here is go with a contractor who is licensed, insured and bonded with the local government. Call the local city and confirm that their license and insurance is active. Ask the contractor for 3-5 references and follow up with every single reference. 3) Brokers – Agreed with your comments on brokers. 4) Insurance – I agree with you on this. For all my properties, I have insurance to cover my investment, demolition and about 25% money on top of it to walk away with some cash if the property needs to be demolished. One thing I don't completely agree with is about the last paragraph. No matter how well you renovate the house, you can't always make the house fully "tenant-proof". There will always be some maintenance calls. There are always be some water leaks, some toilets, bath tubs, kitchen sink, etc that need to be rodded. The best thing to do is keep a separate reserve for these maintenance calls, because it's not a matter of if, but a matter of when you get these calls. Another thing that can make or break a deal that not many people think about is real estate taxes. On a good deal, it should not take more than 2 months of rental income to cover annual property taxes. Also, I agree that in this market where there are TONS of GREAT deals, anything less than 15% net ROI is not worth investing your time and effort Otherwise, a great post.baruchmax,
I appreciate your comments.
The one thing I will comment on is about taxes. Keep in mind that everyone is allowed to protest your taxes on real estate. The fact is that all values have declined, regardless if your living in an area that sees very little foreclosure. Every county has a tax appeal process that you (representative) can make your case to. If you believe your RE taxes are too high for that area, you can request a hearing in front of the board of appeals and make your case. You or your representative have to bring in comparables of recently sold properties within a .5 mile of your location, and any other factual data to support your claim. The board in most cases will rule right then and there. If you have done your homework, you can get a reduction in your taxes.
I appealed my taxes on my personal home and was able to get a 75K deduction in value, not what I want to hear if I am trying to sell it, but it did reduce my taxes about $700 year.
Just because you live out of country or even state, does not mean you can't do some homework yourself, before deciding on hiring an attorney to represent you. If you visit realtor.com, which is basically an extension of the MLS system for us non realtors who don't have access to the MLS, your able to pull up a comparison of properties sold. I will caution you on this though, don't take the MLS for being the all mighty value indicator. The MLS system is very bias, as it only accounts for those properties that have been sold thru the MLS. By definition, this is not a true comparable. The best way to reach a true value, is search the county records, all legal RE transactions go thru the county, so they will see all those transactions that occur outside the MLS. This is a much slower process, as you have to search house by house, but much more reliable as a value indicator.
The other site I caution you against is Zillow, very unreliable for values. Their values are all over the place, because they take into account those properties that sold at the courthouse steps. The problem here is simple, when a bank decides to foreclose in Missouri, state law requires that property to be auctioned off at court. For those properties that the bank has no desire to let go of, they will bid the amount owed on the loan, which is almost always more than the house is worth today. This is a legal RE transaction and will be recorded in the county as such. The problem, is zillow picks up on this as a retail transaction and enters into their database, this is why on Zillow, has a huge window on their values. I have personally seen a 40K difference between high and low, how do you arrive at a value on that?
Keep in mind if your already paying under $1000 in RE taxes, don't expect a massive deduction, the county won't be far off on their estimates, but I have seen a deduction of $125 or so, yearly. Not a huge money maker, but hey, cash flow is cash flow!
John
Elle Dee Esse wrote:Thanks John, that is helpful. So just to get my head straight the steps I should take go something like this:-First decide which state I want to invest in before setting up the accounting requirements as these will be dependant on state law?
If I get an LLC this is a one time only procedure or is one needed for every investment? If I do engage an organisation such as American Real Estate Investments I should expect them to be able to advise as part of their service?
For the Aussies out there who have invested: if we are paying tax in the states then we are being taxed on foreign investments back here as well where does that leave us? Perhaps this is getting off topic and I should start a new thread with that question.
Lynne
Lynne,
Yes you will want to establish your company in the state you will be doing business in. An accountant or an attorney might discuss a tax haven with you, by establishing in another state, and then creating a foreign entity in the state you will be buying houses in. They should be able to help you all the way thru the process. Each state has it's own taxing systems, some states do not have an "income" tax, where others do. Just keep in mind, just because the state does not have income taxes, there will always be federal income taxes. It's a huge confusing mess, what we call our tax system in this country. It's much easier to have a CPA or attorney working for you!
As far as creating an LLC, some attorneys will advise you to create new LLC's after you build up a certain number properties in that LLC, this will help protect you from those attorney's who look to create a situation out of any old scenario. By limiting the number of properties in your LLC, this chases those attorneys off, by creating the illusion your income is not as large as they would like to see.
I would probably recommend to you, that if you have yet to decide on a location to invest, talk with a CPA or tax attorney that will give you the benefits of each state, if there is more than 1 option here. This way you can be well armed with information as it regards to taxes. The deals can be found in any state, so regardless of where you choose to invest, finding the right deals should not be difficult.
John
