Anyone here own any rental property, apartment buildings, etc?

[papajohn56]

Looking at it myself down the road a bit, but wondering how you guys do it if so. Do you hire a property manager to handle the nitty gritty shit like 3AM phone calls about the plumbing not working? What's a reasonable rate for property management if so? Any other tips?

 

[dexter.ss]

In Australia it's 6%. Worth it if u dont know what your doing.

 

[cucaloco]

I have about 15 and growing houses right now, I manage them all myself. Property management here is typically 8%. Usually once I get a tenant in it's not very much work, but renting them out sucks, be prepared for 10-20 phone calls a day from all kinds of crazy people.

 

[motivebrendan]

Well you can do it on your own if you have time and you are in the area. I have rental properties and I use a Property manager, and they get about 20-25% but since I can't be there all the time it's well worth it. I can fill the house fine using CL and other sites but its not possible to manage when i'm out of town and honestly I'm just way to busy. So my advice if you live near the property and you have the time try to do it on your own for a while, its a better way to make $$, but you must have the time!

 

[papajohn56]

Are we talking 6-25% of gross income across the entire building? How about a live-in property manager?

 

[Roundabout]

PJ,
Have two uncles in the business whom I talk to often. One hilarious tip I've heard one of them tell me... when interviewing a potential candidate for an apartment, always look inside their car (as discreetly as possible). If the inside of the car is a giant mess, chances are this is how the apartment will wind up.

re: hiring a property manager.. can work, but you're better off to whip out the handyman books and learn how to repair boilers, etc. You will eat into the margins by hiring a FT handyman. I guess it depends on the size of the apartment/complex. 5-10 units, you can manage yourself. Beyond that you have to deal with lockset switching, toilet issues, heating units, etc. All perfectly learnable, but it sounds like you want to approach this as an investment only, without getting the fingernails dirty, which can work, but it's best to always learn how to do the work first so you don't get taken to the cleaners by a handyman who claims it took him 4 hours to change a door lock and bills you extra for it.

 

[Magic Hat]

Sounds like a major fucking headache to me. I guess if you hire a property manager it's not as bad, but still. Then you have to worry about people paying rent on time.

IMO there are more reliable investments/sources of income.

 

[Versus]

Thought about commercial property? When we were buying our second factory, we wanted to rent out our original one. The agent told me that things like maintenance (majority of) is the tenants responsibility?

I could be _completely_ wrong.

 

[BlueYonder]

Sounds like a major fucking headache to me. I guess if you hire a property manager it's not as bad, but still. Then you have to worry about people paying rent on time.

IMO there are more reliable investments/sources of income.

My house is an estate house, and I'm looking to rent it in the near future while I figure out where I want to live. I plan to move to the opposite coast, and will hire a property manager to take care of things.

They apparently do the vetting of renters as part of the management fee or the fee they charge to tenants. When things go wrong, the renters contact them for repairs, but they charge over the normal repair fee to pad their bottom line. I would have a few people to contact for repairs yourself if that's allowed in the contract.

After the thousands I have spent fixing up, and the sweat equity that is going into this house, I worry most of all that renters wouldn't take care of it. The renters would leave a 1 month security deposit, so there is less worry about them paying up.

@Roundabout: The boiler issue is easily dealt with by having a service contract for your heating equipment that you buy yourself.

 

[AllBizNiz]

Most people I know who have rental property are filthy fucking rich. I plan on taking my online monies and investing it into rental properties as well. I plan to start with residential then move into commercial.

 

[_David_]

I have two rental properties about 200 miles from where I live. For us (me & my bro) a manager is a must. We inherited the properties, and there is no way we could take care of them when we live so far away.

That being said; it's not all bad - they're mostly paid off, and generate some good cash flow. Even with mgmt fees, it's good.

If you were just starting out with one house or duplex in your local area, you could probably do it yourself; but if you scale up, you might look at a manager.

I know in some states; it's required to have a residential manager if there are more than X number of units. I think in California it's 20 or 30 units.

 

[medicalhumor]

I have a condo and a house that are rentals. Not too bad once you have good tenants in, things usually go pretty smoothly. Getting tenants can be the pain in the ass part. Get a place that's in the same general area as you so you can be close. I have a property on each coast, and that is tough.

Most important tip: do your due diligence on your tenants. Make sure they have good credit and income!!!!!!!!!! It can be really really tough to evict a tenant if they turn out to be deadbeats that don't pay.

 

[papajohn56]

I have a condo and a house that are rentals. Not too bad once you have good tenants in, things usually go pretty smoothly. Getting tenants can be the pain in the ass part. Get a place that's in the same general area as you so you can be close. I have a property on each coast, and that is tough.

Most important tip: do your due diligence on your tenants. Make sure they have good credit and income!!!!!!!!!! It can be really really tough to evict a tenant if they turn out to be deadbeats that don't pay.

Yeah, not worth being a slum landlord. Credit checks, application fees, security deposits, and good tenants.

 

[thuxen]

Thought about commercial property? When we were buying our second factory, we wanted to rent out our original one. The agent told me that things like maintenance (majority of) is the tenants responsibility?

I could be _completely_ wrong.

Your right about commercial property. Shit is the tenants responsibility... (In Australia anyways...)

 

[soulscience]

I have a few, it's only a really big deal when you acquire them initially.

This is key (i wish i'd known when i started

Now, I only buy properties that are in good structural condition, with everything else in fairly shit condition. plumbing, electrical, bathrooms, etc. all in pretty bad shape. What I'm looking for is good structure, including level floors (no heavy sagging,) good exterior condition, decent roof.

Reason being that I can get a great deal on the property, AND be able to redo all major systems, plumbing, electrical, bathrooms, etc.. so that they are in NEW condition when I being to rent them. This cuts my maintenance down to near 0% and I rarely get calls at 3am. I have a go to plumbing company and handyman, in contract, both of whom collect some serious paychecks from me when redoing additional property, so I get extremely cheap rates (and, in many cases, free work) in between rehabs for little stuff like clogged drains, loose hinges, and such. (clogged drains are also paid for by tenants as terms of the lease.)

There are small problems with this method, such as state laws requiring extra electrical services to be installed to supply common lighting (like outdoor flood lights) when doing major reworking, which leads to tons of annoying electrical bills for $20/month and an additional upfront meter installation, but the time savings is huge. But in general, it's way easier to take care of, and is worth more than what you paid for it (including construction) almost instantly.

I own a newer building which was one of my first, (1950s era) which constantly has small problems, but it wouldn't be worth the expense to redo all the systems at once. So i'm stuck with maintenance until I sell it.

If you're on top of your game, this is a great investment vehicle. some of mine have cap rates between 20 and 30%, I don't own one that doesn't at least pay %200 of its expenses. Since my properties aren't in areas with rapidly expanding and contracting RE values, this is very constant, and slowly rising every year. I don't have management and I live pretty far from the bulk of my rentals. in the area, going rate is 5% of gross.

My advice would also be to start somewhere where median homes are below 200k, less is better. You can easily drown yourself and tie up too much money in areas with expensive homes.

Thought about commercial property? When we were buying our second factory, we wanted to rent out our original one. The agent told me that things like maintenance (majority of) is the tenants responsibility?

I could be _completely_ wrong.

This is called triple net, rare in residential property.
only accounting is an incoming check every month, tenant pays taxes, ins., upkeep, utils., etc..

 

[JonesersRX7]

With regards to multi family... and imho is the only way to go with income residential property. I would much rather have a group of tenants spreading the vacancy risk then one single tenant. Its also much easier to increase the value of MF props compared to SFR's.

To your question... Depends on size of property and gross income.

IREM : Institute of Real Estate Management is a good starting point.


If you determine you are serious about this PM me and I can give you more detailed answers to more specific questions.

 

[JonesersRX7]

Posted this on BHW a while back.. but relevant to your question.

I am posting a brief brief overview. If you are at ALL serious about doing this you should invest no less then 3-5k in your education as something that will be the most expensive thing you ever buy should be learned, studied and researched so you have a very solid understanding of what you are doing. This is a business and you need to invest and treat it as such.

Couple things to address to the old but still relevant first post/question. Currently we are in a market where the cost to build/replacement value is MUCH more costly. Lumber... Bunk Chinese dry wall... Concrete... all are still very expensive to previous prices and this causes the cost to build a new structure SKY ROCKET. Plus getting construction financing in the market will require a shit ton more skin in the game then a regular purchase.

Now... on to buying multifamily dwellings, 5 + units, apartment buildings....

The why:

I have never taken title to a SFR (single family residence) I have "owned" them contractually however. I will never own singles** too much work for too little cash flow. Why have 20-30-80 houses all over when I can have one location that is much easier to apply forced appreciation and pays me much better. You have one house, it goes vacant.. you are paying that $1000 month mortgage until you get that vacancy filled. With an apartment you have 20 units, taking in account expenses and debt service, a properly purchased building can have a 55-65% vacancy rate and still break even. Your risk it mitigated over 20 doors as opposed to 1.

It seems a lot of people are under the impression that you have to use YOUR money to buy apartments. Write this down.... OPE -- other peoples EVERYTHING! My partner and I are currently setting up a private equity fund to go take down 100+ units. You should absolutely learn how to raise money and offer a percentage of either equity, equity plus income, income or a simple flat rate of return. Learn how to write a business plan, get your financial self in line and make sure you know the difference between an accredited investor and non.

If you have money you can also learn how to do seller carry backs as most banks are requiring 70% LTV's now. You can do 20% down and then a 10% seller carry back (not all banks will do this currently) But if you build your team properly you will have a good commercial paper broker.

Team should consist of:

Multi-family broker
Real estate lawyer (with a focus on commericial)
Multi-family management company
Licensed Contractor
more.. but this is just a brief overview.

My mentor always has said not to buy more than 10-12 units your first year as you will most likely manage it yourself and there is a lot of hands on learning that takes place and any more than that you can get into trouble.

There are 4 essential ratios you must know when evaluating a deal:

1. The Capitalization Rate
2. Cash Return on Investment
3. Total Return on Investment
4. Debt Service Coverage Ratio (DCSR)

Each of these elements plays an important role in helping you to determine whether the investment you are considering is worthy of your investment capital.

The Capitalization Rate is equal to the Net Operating Income (NOI) divided by the sales price. As you can see, that ratio is really a very simple calculation used to measure the relationship between the income generated by the property and the price that it is being sold for. I want to show you why that is an important ratio to know. It's not only an important ratio to establish value it's an important ratio to show you how the property that you are looking at can be improved upon.

Example: Let's say we are looking at a 50-unit complex and through our research we found that the 50-units are being rented at $600 a month. We also found through our research that on average similar units in the area are being rented for $640 a month. We know that there is some room to bump up the rent there. Let's look at how that affects value. If we have 50-units and we times that by $40 per unit which would be the increased rent and we times that by 12 months we get $24,000. If we have a Cap Rate in the area of say 10%, $24,000 divided by the 10% Cap Rate would establish a new and improved value of $240,000. That's another reason why knowing the Cap Rate ratio is so important.

Example: We are looking at a building $600,000 and the NOI from the figures that I'm getting from the seller show that the income (NOI) is $50,000 and I know the Cap Rate in the area is 10%. I take $50,000 divide that by 10% (or .10) and I get and I get a figure of $500,000. Well if the seller is asking $600,000 for the building I know that he is asking a little bit too high. I use this ratio in my negotiating stage with the seller and it really supports the offering price that I am going to give to him.


Cash Return on Investment (Cash ROI) As Real Estate Investors we want to be concerned with the velocity of money, how fast we get our money back and what is our return on that. The Cash Return on Investment is often referred to Cash on Cash Return. It's the ratio of remaining Cash after Debt Service to Invested Capital. How we figure Cash Return on Investment is we take the remaining Cash after Debt Service and divide it by the Initial Cash Investment.

Example: If the remaining Cash after Debt Service is $10,000 and our Initial Cash Investment was $10,000, that would show us a 100% Return on Our Cash Investment. The Cash ROI is different from the NOI and the Cap Rate in that Cash ROI is calculated after Debt Service, while the Cap Rate is calculated before Debt Service. Now excluding tax implications and if you were to pay all cash for an apartment building the Cap Rate and the Cash ROI would be the same. Most Investors elect to utilize the Other Peoples Money (OPM) principle, that's something I talk about all the time which means that the Cash Return becomes a function on the return on your Invested Capital, hence the name Cash on Cash. So while the Cap Rate is an important ratio used in determining relative property value, the Cash ROI is an important ratio used to determine your Cash Rate of Return on Invested Capital.


Total Return on Investment is very similar to Cash Return on Investment with one important distinction it accounts for the portion of return, which is not cash, namely the principle reduction of your Debt Service. In other words it takes into account the portion of the loan that is reduced each year by payments that are applied to the remaining loan balance or the principle portion of the loan payment. The Total ROI is the ratio of the remaining Cash after Debt Service plus principle payments to Invested Capital.

Example: Total Return on Investment equals remaining Cash after Debt Service plus principle reduction divided by your Initial Cash Investment. So the Total ROI does exactly as its name implies. It provides a measurement of the Total Return on your Invested Capital by capturing both the Cash and Non-cash portions. The Non-cash portion is similar to making a house payment for 10, 20 or 30 years. The value is there in the form of increased equity in your house as you reduce the loan balance a little at a time over the periods of years. The gain is realized and converted to cash at the time of the sale. We are just simply figuring out what that value is with this ratio, the Total Cash Return on Investment.


Debt Service Coverage Ratio sometimes known as DSCR. The Debt Service ratio measures the relationship of the amount of Cash available to Service Debt payments, which is the Net Operating Income to the required debt payment. In other words, DSCR or Debt Service Coverage Ratio is going to equal the Net Operating Income divided by your Debt Service payment. This ratio is especially important to lenders, their primary concern is your ability to service the outstanding debt. Your ability to make the payments. This ratio will vary among lenders but generally the DSCR will range from 1 at a minimum to 1.35 at a maximum, with most of the lenders averaging at about 1.2. A number of factors are going to influence the Debt Service Coverage Ratio requirement including the age and condition of the property, the loan to value ratio and your strength as a borrower.

Example: If you have a property that drops below the 1.2 average you may be able to have that loan go through because you are a strong borrower.

 

[JonesersRX7]

Post over 10k characters... continued...

It's the lenders that rely heavily on this ratio rather than the Investor but it is equally important for you to understand its role in financing the property. When you analyze a perspective property you must be able to determine whether there is going to be adequate cash flow to service the debt. Without it you will never be able to get a loan. If the deal does not provide significant cash flow to meet the DSCR requirements of 1.20 and that includes a 20% down payment, chances are you will want to take a pass on that deal and go to the next one. One final thought, please don't make the mistake of saying I'll just put more money down to lower my monthly payments. While true that it would bring your DSCR into line, but guess what, by putting more money down you are reducing the Cash and Total ROI's. If you had some finance classes in your college days, a lot of times they talked about what the #1 objective was for most corporations in businesses. That #1 objective is to maximize shareholders wealth. In the case of investing in Multi-family units, you are the shareholder don't forget that. Now that we've talked about the fact that the DSCR is more important to bankers, it should also be figured into your analysis of properties.

The One-Minute Assessment

You can learn to quickly do an initial assessment of a perspective property in less than a minute with just 3 easy steps. The initial assessment will help you to determine if you want to proceed with a more in depth analysis. Here is how it works: sellers or Brokers use set-up sheets, which provide minimal information about a property being offered for sale such as the asking price, number of units, location, gross revenues and terms. After reviewing the set up sheet for a given property you can contact the Broker or seller directly to ask for a full offering package, which they will gladly furnish. As a rule of thumb Total Operating Expenses will average between 40 and 60%. Depending on a variety of factors you can take and split the difference and you might end up with 50% on average.
· Now take the gross income as reported on the set up sheet and multiply it by .5 or simply divide it by 2.
· The result is a reasonable estimate of Net Operating Income, which can then be divided into the asking price giving you an estimate of the Cap Rate. You now know that the Cap Rates are usually between 8 and 12% with10% being average.
· Compare your result with the 10% average, are you high or low or somewhere in the ballpark?

Again, the one-minute assessment in 3 easy steps:

1. Divide the gross income by 2, the result is an estimate of the NOI
2. Calculate the Cap Rate by dividing the NOI by the asking price
3. Determine whether the resulting Cap Rate is in line with the market

- J


** When our short sales close, I will now be taking title for 24 hours up to 30 days....

 

[schockergd]

In the US in most areas, property management is anywhere from 5% to 10% and then either 1/2 first month's rent or first month's rent to find a new tenant.

My brother and i own 2 single-family homes and a 6 unit apartment complex which we use as rentals. We currently self-manage, but hate it, we're in the process of hiring/training our own property manager so he can do all the dirty work.

High end , Low end , it's all property , methods are a bit different but they're all great investment vehicles. The median home price in my area is only about $100k , so I could spend all day locating decent homes in the 20s or 30s and use em as rentals, but unfortunately I'm a bit low on cash , so the real estate gravy train has slowed down.

 

[cucaloco]

With regards to multi family... and imho is the only way to go with income residential property. I would much rather have a group of tenants spreading the vacancy risk then one single tenant. Its also much easier to increase the value of MF props compared to SFR's.

Joneses - I understand what you are saying, but I think the logic behind this argument is not sound. I own 12 houses and a couple duplexes and condos all acquired in 2009-2010. The quality of tenant I can find who wants to rent a house is much better than someone renting an apartment. The amount of "stuff" home renters acquire is way more (they get their own big garage and a backyard) so they are less likely to move. I make my tenants pay all their own utilities and landscaping.

And the most important argument. The buyer pool for a single family home is almost everyone. Single family home purchase decisions are not made upon cash-flow, but emotions. Very few buyers buy multi-family because they like the color of the house or the size of the master bedroom.

That being said, they're two different games and both are good. Right now, at least in California the profitable game is buy a house that used to sell for $300,000 - $400,000 for $50,000 - $100,000 and let it pay for itself until it's time to sell. Once prices get to a point where they won't cash-flow, I will stop buying them.

Multi-family here is still selling around a 7 cap. You go to Orange County and it's 5 or 6 cap.