Investment/Rental Properties - Megathread

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Kedwyn

Silver Squire
3,915
80
I've been doing this for a long time and I'll tell you now that you either embrace the low end units or you avoid them like the plague. I personally avoid them. I have no interest in being a slum lord or dealing with the shit that comes with it. The benefits of low end tend to be steady payment (section 8), the tenants tend to stay a long time (low turn over, here there aren't many options for them) but at the cost of your property going to shit and your difficult tenants can be huge problems.

Location is key just like anything in real estate. If you have rentals in the nice area, you command nice rents and you get nice tenants. Turn over in desirable areas is generally NOT a problem. In fact, if you are smart with your lease times you can virtually guarantee a list of people begging for your place. Especially if you take care of it.

Hard floors, nice kitchen, granite and molding / wainscoting are all relatively cheap things you can add that will place your unit over and above everything else. People tend to be cheap with their rentals. I have people fighting for mine and never have to replace carpet or other wear items because everything I have is quality. Tenants love to feel like they are in a home, so open concept and upgraded. You can command more rent and you'll have people throwing money at you when your unit comes up.

If you can get setup near a level 1 trauma center and hook up with an agency service that is some great money and tenants. They tend to always have staff coming in and out of the area. These units must be furnished.

I love colleges and University areas. Grad students make the best tenants.

Older folks, widows and recently divorced woman also make excellent tenants. Woman tend to not bring their shit home with them as much as men. So even if they are a rebound bar whore they tend to sleep out more than sleep in. They also tend to not be as loud or rowdy in the younger brackets. You can get a pig in any group, that has been my experience.

Single family units can work, I prefer multi unit buildings. Duplex or bigger in general. Condos in a well managed HOA can also work very well especially if they are established, have an excellent reserve fund, large community (low HOAs) and cover the exterior maintenance. Commercial property can be very profitable and can also be a nightmare. Every property is it's own beast with it's own set of numbers to crunch.

There tend to be two types of investors:

1. People that leverage themselves out the ass.

2. People that have cash, invest it and tend to buy and hold

You'll occasionally see a smart one using leverage to buy something and paying it off. Then repeating. That is rare though. Generally you see people going balls deep and getting a property, then within a year or two trying to get 3 more. I'm sure some people can make it work, but it is dangerous and most of the people I've watched try it are doing something else now.

Generally speaking, if you get good units in a good area you want to hold them. Flipping is an entirely different business and I find that people that engage in that type of business generally have a fair bit of debt, are looking to upgrade and see the marginal gain they made on the flip as worth more than the rents they are getting. This is generally because their ROI is shit since they are paying the bank a ton of money in interest and principal.

Also, many people tend to flip because they are piss poor at doing this and can't make the numbers work when the homes starts needing new roof, AC, water heaters, appliances etc. Again, generally people are leveraged up to their eye balls looking to take on as many properties as they can and adding new ones ASAP. I find this to be a recipe for disaster.

Owning free and clear real estate is an amazing investment. You get a great ROI which rivals aggressive growth stocks, you have excellent asset preservation and if you buy in an in demand area you will see appreciation. You can't get anything like that anywhere else. The real players in this buy and hold their investments. Leverage is fine but a free and clear property is worth 3x+ a leveraged one. No reason to be greedy, if the cash flow is really that good that you can add 2 more you can pay the first one off fast enough that you can wait on the others and be in much better position financially.
 

Picasso3

Silver Baronet of the Realm
11,333
5,322
Came close to setting up autopay to roll the $600/mo I clear on mine into principal and having it paid off in 7 years. Then i figured i'm paying 2.625% and I could use that money to fix it up (with my labor) or get another place, so i didn't.

I probably spend most of it on cigars, shoes, and eating out though. Poor people gonna be poor.

Great post, Ked.
 

Blazin

Creative Title
<Nazi Janitors>
7,030
36,427
Still not a fan of residential over commercial/industrial, unless you simply don't have the capital to do anything else.

I rent a warehouse to a large national bakery, property cost me $208k and have a triple net lease for $33.6k/yr.

Have another Class A office that I rent to a Dr's practice that I paid $180k for and rent out for $38,787/yr after taxes, condo fee and insurance nets me just over $28,000/yr. and another office that I rent to an office supply company for $16,800/yr that only cost me $70k.

I believe my current cap rate on portfolio is 12-13%

It would take an awful lot of housing rentals to generate that level of income and about 50x the headache. I don't hear a peep from them they send me checks without issue every month. I find there is less buyer competition in commercial, I have low balled the fuck out of every offer. I have bid on far more properties then I own but when you win a good one it pays off in spades. I worked for 15 years running my own industrial contracting business which certainly helps with my confidence when buying these type of properties but I was also a licensed real estate agent and still quite familiar with residential and I just don't see that it pays in the long run. A home needs a lot more maintenance then a concrete tilt up or steel frame warehouse.

If you have to start in residential that's fine but after a few properties I'd take my cash and buy a decent industrial property and start signing 7+yr leases.
 

Picasso3

Silver Baronet of the Realm
11,333
5,322
^ There's an old warehouse here i've been pining to buy for a while but yeah, it takes a fuck ton more cash to get in the game and some commercial properties I see go vacant and stay like that for years. Getting a major client and kicking back seems like the dream though.
 

Blazin

Creative Title
<Nazi Janitors>
7,030
36,427
On the east coast there are a lot of old warehouse buildings that are often within city boundaries that are awful for truck traffic (I would avoid these). I focus on proximity to an interstate stay under 10,000 sq ft and if you have enough dock doors consider partitioning the space up. Ceiling height is another biggie 13' (30 is best with nice premium to value) would be bare minimum, stacked pallet height is a large part of how the tenant will be able to make the property financially viable. Commercial has the big boys and the 1 million square feet warehouses sitting right off the interchanges, you can't compete with them you have to try to fill a less served niche on the smaller end. Dock doors and 5,000 sq ft can be rare but there are smaller supply companies and contractors who need that type space.

Leverage must be kept low so vacancy periods don't sink you. I keep a line of credit against my whole portfolio as an emergency back up but I carry no debt on my properties.
 

Cad

scientia potentia est
<Bronze Donator>
25,633
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Great info in the last few posts, thanks guys. I'm digesting and considering. Not doing anything spur of the moment. The commercial idea is intriguing.
 

Kedwyn

Silver Squire
3,915
80
When commercial is full, commercial is amazing. When it goes empty, commercial is shit. If you can buy property with a great / stable anchor or have a long term tenants that are stable it's great money with little issues.

Starting with a new businesses at a new location or a location with high turn over can be difficult. Mom and pop shops opening and closing looking for rent subsidies as you weigh the "should I keep them at half rent for 6 months and hope it improves or boot them and hope I can fill their spot and the others that are empty" can really weigh on you and your returns if you get caught in a cycle like that.

Desirable areas with good traffic and low vacancy are money in the bank. This area here has strip malls every 5k feet and many of them have a fair percentage of sq/ft vacant. Not so good. As i said earlier, every property and every location is a different beast. What is good in my area might suck for you and vice versa.

The key to success is being realistic with your budgets, expectations and not being over leveraged. Know your market.
 

Borzak

Bronze Baron of the Realm
25,704
33,512
I know a few people who are in the rental game. 5% of the time they are telling you how much money they are making, the other 95% of the time they are telling you about how big of a pain in the ass it is.
 

Khane

Got something right about marriage
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The Marriage thread just reminded me of something I am seriously considering as my next venture in Real Estate. Wedding/Event hall.

I live in CT and quite literally all I need to do is buy a beat up old barn in an allergy ridden field, put a rope swing on a tree and a random trellised bridge somewhere on the property and I can charge a premium.

I can even make people bring their own tables/chairs and decorations. None of that shit is provided. Just pay me $4500 to rent it for the day. Oh and there's no HVAC system either. I'm not kidding when I say a large majority of weddings I've been to in this state are exactly that.
 

AladainAF

Best Rabbit
<Gold Donor>
12,932
31,052
Hard floors, nice kitchen, granite and molding / wainscoting are all relatively cheap things you can add that will place your unit over and above everything else. People tend to be cheap with their rentals. I have people fighting for mine and never have to replace carpet or other wear items because everything I have is quality. Tenants love to feel like they are in a home, so open concept and upgraded. You can command more rent and you'll have people throwing money at you when your unit comes up.
Overall, a great post, Kedwyn, but this above is probably one of the most important things, and most overlooked things ever. Most people get a rental and go cheapy on EVERYTHING. Even my property manager, who does a fantastic job for me, initially advised me on getting houses ready and just to get crap, basically, because renters don't care. This is true, they don't care. However, when you have a nice house in a decent area of town and a renter walks into a kitchen with nice tile backsplashes, granite countertops, stainless steel appliances, and either really nice vinyl or nice tiled floors.. very soft, plush carpet, and really nice light fixtures (as opposed to the $5 home depot light fixtures) they will not only appreciate it more and want to fight for your rental, but you can EASILY make it back in higher rents and they overall tend to treat it much nicer because they do appreciate it. Protip: Silver/Brushed Nickel door handles on everything! FUCK GOLD. Silver on everything. That alone = $$$$. We have four rental houses across the Austin area, and all four are furnished far better than any of the normal houses in the area, I guarantee, and I've never had a single tenant break or destroy anything other than one unrelated incident... we furnish all our lighting fixtures in our houses with premium LED lights (great selling point for a rental), and we had one tenant steal them when they left, which was fine, they just didn't get their security depo back and we overpriced them on the lights heh. You can also get a higher security deposit up front when you have a really nice house, we generally ask for 1.5x rent + 1 month rent up front (which we use for their last months rent upon lease termination).

Single family units can work, I prefer multi unit buildings. Duplex or bigger in general. Condos in a well managed HOA can also work very well especially if they are established, have an excellent reserve fund, large community (low HOAs) and cover the exterior maintenance. Commercial property can be very profitable and can also be a nightmare. Every property is it's own beast with it's own set of numbers to crunch.
We have all single family units for our investments, though I want to get some multi-units but those never ever go on sale here, it seems. Austin doesn't have very many duplexes anyway. We also are getting into commercial property full steam, but still looking for something to come up on the radar.

You'll occasionally see a smart one using leverage to buy something and paying it off. Then repeating. That is rare though. Generally you see people going balls deep and getting a property, then within a year or two trying to get 3 more. I'm sure some people can make it work, but it is dangerous and most of the people I've watched try it are doing something else now.
This is me, but it's mainly because location. The occupancy rate in the Austin area is very high. I've always had a new tenant lease signed within 1 week of a house going up for rent. We put 25% down on all our properties, and have 15 year notes on 3 of the 4 (4th paid off). Even with 15 year notes, and 25% down the cash flow is huge. Mortgage payments are $700, $615, and $540. The rents are $1,650, $1,600, and $1,525 respectively. Every house is 50% LTV or less at this point, and the paid off house is the premium of the bunch. So we are carrying around some debt (Total about 200k worth) but its nothing we can't manage by any measure, and the sale of our paid off house would sell for more than our debt anyway.

Generally speaking, if you get good units in a good area you want to hold them. Flipping is an entirely different business and I find that people that engage in that type of business generally have a fair bit of debt, are looking to upgrade and see the marginal gain they made on the flip as worth more than the rents they are getting. This is generally because their ROI is shit since they are paying the bank a ton of money in interest and principal.
I'm with you on flipping. I don't see how people make money on it unless maybe they get a great deal on the monthly auction at the courthouse steps heh. It's also funny so many people suck at it. When I'm looking for a new investment property, it's so easy to find which homes people are trying to flip. It's embarrassing.

Owning free and clear real estate is an amazing investment. You get a great ROI which rivals aggressive growth stocks, you have excellent asset preservation and if you buy in an in demand area you will see appreciation. You can't get anything like that anywhere else. The real players in this buy and hold their investments. Leverage is fine but a free and clear property is worth 3x+ a leveraged one. No reason to be greedy, if the cash flow is really that good that you can add 2 more you can pay the first one off fast enough that you can wait on the others and be in much better position financially.
YES!!!! This is mainly why we did 15 year notes. And again, you make excellent points that mirrored what we did ... we wanted to buy in solid, good areas with great growth potential and great outlooks, and amazing appreciation outlooks. We didn't buy our property for short-term rent and flips, or anything. It was a very strategic thing deciding where to buy to not just maximize your rent and get good tenants, but also for the longer term outlook.

Fantastic post, Kedwyn!

I know a few people who are in the rental game. 5% of the time they are telling you how much money they are making, the other 95% of the time they are telling you about how big of a pain in the ass it is.
Get a good property manager. I pay mine $70 flat a month per rental (~4-5% based on current rents which is a stellar rate for property management), and 80% of first month rent in a new lease (that's a hit, but he takes care of all the listing, staging, pictures, etc so it's understandable).

I don't have to deal with shit.
 

AladainAF

Best Rabbit
<Gold Donor>
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Great info in the last few posts, thanks guys. I'm digesting and considering. Not doing anything spur of the moment. The commercial idea is intriguing.
Cad, Mr. Lawyer - when you do rentals or real estate set up a Texas Series LLC to protect each property in it's own bubble. That's what we do.

The Texas Series LLC - A Great Tool For Investors | Dallas Business Lawyer | Vela Wood

Vela|Wood_sl said:
The Texas Series LLC is rapidly becoming a preferred vehicle for real estate investors, and series LLCs make a lot of sense for several classes of investors. The beauty of series LLCs is that they allow the individual forming them to create several distinct entities and receive all of the benefits of multiple Limited Liability Companies, with only one filing.
The 81st legislature codified series LLCs in 2009 by adding Subchapter M, Sections 101.601 - 101.621 to the Texas Business Organizations Code. In essence, a Texas Series LLC is a type of limited liability company that provides liability protection and tax advantages across a series of LLCs, each which is protected from the liabilities arising from the other LLCs within the same series. This is analogous to a big corporation with several subsidiary entities underneath it, but with the ease and flexibility of a limited liability company. Each LLC within the series can have its own name, organizational structure, and assets legally separate from the others. All under one filing.
 

Khane

Got something right about marriage
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14,142
Man, Texas really loves to protect the wealthy. I should move there... ya know, since I'm a real estate magnate.
 

Khane

Got something right about marriage
20,449
14,142
Overall, a great post, Kedwyn, but this above is probably one of the most important things, and most overlooked things ever. Most people get a rental and go cheapy on EVERYTHING. Even my property manager, who does a fantastic job for me, initially advised me on getting houses ready and just to get crap, basically, because renters don't care. This is true, they don't care. However, when you have a nice house in a decent area of town and a renter walks into a kitchen with nice tile backsplashes, granite countertops, stainless steel appliances, and either really nice vinyl or nice tiled floors.. very soft, plush carpet, and really nice light fixtures (as opposed to the $5 home depot light fixtures) they will not only appreciate it more and want to fight for your rental, but you can EASILY make it back in higher rents and they overall tend to treat it much nicer because they do appreciate it. Protip: Silver/Brushed Nickel door handles on everything! FUCK GOLD. Silver on everything. That alone = $$$$. We have four rental houses across the Austin area, and all four are furnished far better than any of the normal houses in the area, I guarantee, and I've never had a single tenant break or destroy anything other than one unrelated incident... we furnish all our lighting fixtures in our houses with premium LED lights (great selling point for a rental), and we had one tenant steal them when they left, which was fine, they just didn't get their security depo back and we overpriced them on the lights heh. You can also get a higher security deposit up front when you have a really nice house, we generally ask for 1.5x rent + 1 month rent up front (which we use for their last months rent upon lease termination).
A lot of this is true but the fact that nothing has broken in any of your rentals speaks a little bit to where the property is and how appealing the inside is (attracting better tenants for the most part), and a little bit to luck.

My rental was (key word here) on the higher end of the spectrum and I am able to charge a bit more for it as a result. But my tenant has destroyed the place. If he ever moves out I will need to redo a lot of the apartment. Every single appliance has been broken, he cleans the place only when I tell him I am going to do a walkthrough because I can smell the stink from the hallway when I walk up to my apartment, his garage door is completely busted, the list goes on. The bathroom was entirely new when he moved in, new tub and shower + fixtures, new vanity with granite countertops, new tile floor, new everything, and he's broken the sink and toilet and let mold and mildew build up in the shower.

My property is set back off the road, has a detached 2 car garage, a ton of storage space in the basement, has all appliances included (and washer dryer), is on a fairly private 1.7 acre lot, has a big walk out deck for the first floor apartment and that apartment is also a fairly up to date 3 bedroom, 1500 sq ft unit. Some people are just lazy and have always lived in filth. It's just normal to them.

But he pays on time every month, is probably never going to move out, and would be a pain in the ass to evict because he has small children. So it is what it is.
 

Khane

Got something right about marriage
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Non-wealthy people get sued into oblivion every single day. This isn't a wealthy thing.
A non wealthy person would have no need for that series LLC. That's what I was getting at. That's the kind of thing that really would only ever protect the wealthy.
 

AladainAF

Best Rabbit
<Gold Donor>
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A non wealthy person would have no need for that series LLC. That's what I was getting at. That's the kind of thing that really would only ever protect the wealthy.
Why so? It's no different than simply opening multiple LLCs which is IMO something you should do if you have multiple properties and are in a state that doesn't have a series style LLC. It's more of a convenience factor than anything else, in that it can be done in one filing.

I suppose you can correlate having "multiple properties" with being "wealthy" but I wouldn't go that far.
 

Picasso3

Silver Baronet of the Realm
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We moved of out of our old houses and rented them and still have the same mortgages on them. I think an llc setup would be impossible, correct?
 

AladainAF

Best Rabbit
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We moved of out of our old houses and rented them and still have the same mortgages on them. I think an llc setup would be impossible, correct?
Nope, all our mortgages are still in our personal names. We just pay them with the LLC. We did transfer title of the homes to the LLC and submitted it to the county clerks office, so the LLC *officially* owns the properties. It is very important that all documentation, and as much as possible be in the LLCs name in this case (eg: insurance should also be in the LLCs name and not personal name).

But the mortgages are still in our personal names. In fact, I do think it's impossible for an LLC to actually get a mortgage. That, no, you can't change.
 

Cad

scientia potentia est
<Bronze Donator>
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But the mortgages are still in our personal names. In fact, I do think it's impossible for an LLC to actually get a mortgage. That, no, you can't change.
It's not impossible for an LLC to get a loan but the LLC would need to have assets/income that it could use as collateral and credit for the bank to price as risk. What you're doing is making yourself personally responsible for the LLC's debt, which is fine.

FYI the "mortgage" is the security instrument the lender can use to foreclose on the property, the "note" is the actual debt instrument. So the LLC would get a loan/sign a note while the lender would get a mortgage to secure the property.
 

AladainAF

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It's not impossible for an LLC to get a loan but the LLC would need to have assets/income that it could use as collateral and credit for the bank to price as risk. What you're doing is making yourself personally responsible for the LLC's debt, which is fine.

FYI the "mortgage" is the security instrument the lender can use to foreclose on the property, the "note" is the actual debt instrument. So the LLC would get a loan/sign a note while the lender would get a mortgage to secure the property.
Understood, thanks for that. I haven't been able to find a bank anywhere that will loan me money under the LLC, despite having over 400k in home equity assets, including a paid off home. It seems odd, but just no luck. Maybe I'm seeing the wrong bankers.