Questions On My 1st Inv Property???
Hi Everyone,
Im a little nerve wracked and excited at the same time since Im about to close on my first investment property late next month. It is a 2-unit multi-family home. I am buying this with no money down, just $1k in earnest money and getting my closing costs rolled into this 80/20 loan. Im buying for $142k, with taxes it comes to about $145k. This is a 5 yr arm at 7.65% for 80% of purchase price and 11.3% for the remaining 20% of purchase price, I believe this is an excellent deal since it is all tax deductible and I pay nothing out of pocket. The monthly payment will be $1387/mo, rents on the house is $900 and $750, so Im grossing almost $300/mo profit. Im converting the utilities to where the tenants will pay for them, all they pay now is electric.
In your opinion do you think this is a great deal for a first timer? What steps should I take next since tenants are on a month to month basis and dont seem they want to go anywhere soon. Should I make them sign leases, raise the rents, change locks on doors so I have keys???
Also if this goes smoothly I will want to do this again and again, should I buy another multi-unit home (4 or 6 unit next time)? Are foreclosures better to get into? Are there questions that Im not asking in which I should be asking? So many questions and concerns I think my head is going to explode. Any advice or proper steps are much appreciated for this distraught soul.
Thanks
you should really slow down and relax.
before you rush into anything else, you really need to get a goo dhandle on what you are doing at your duplex. Don't even think about rushing in and changing locks, sign leases, etc.
The first step you should take is draft a nice letter to each tenant advising them that you are the new owner and instructions on rent payment.
Next in the letter, let them know that you'd like to sit down with them to go over some thoughts on this property fitting into your system. They wil lmost likely have a few things they would like changed, and you are thinking about a lease, utility changes, etc. get all of this out in the open in a friendly environment.
In less than 4 unit properties, I have never had an existing tenant stay longer than 6 months after i took ownership; and I am eternally grateful that I didn;t rush any of these people into long leases as I am glad they are all gone. You are inheriting someone else's tenants - they may be a good fit for you and maybe not ----> find out BEFORE you signa a lease.
Again, relax, and take it easy, it will likely take you a few years before you can profitably sell this property, so dont't go rushing into anything. take your time and do it right.
I agree with feltman. Take it easy its like your first date with someone, take some time to get to know the tenant before you sign any leases You wouldnt marry someone as soon as you meet them now would you? You might be looked at as being a new landlord and are going to raise the rents right away. Find time to sit down with them and talk to them.
I do this every time I buy a place with exsisting tenants. Most ask me right away if they have to move out or how much is the rent going up. I always tell them for now nothing is changing.
What works for me not might work for others....
Ok, guess the first thing I need to do is take a chill pill and just relax and take everything in stride, guess Im getting ahead of myself. I just want everything to go smoothly. That is good advice about getting to know the tenants, I thought about sitting down and talking with them after I close next month. So I shouldnt make them sign long leases then??? Maybe just a 6/mo lease and go from there? One has been living there for 5 yrs and the other for 1.5 yrs. I will tell them my master plan and hopefully we will come to an agreement and everything will be ok. Should I get a PO Box so they could send the rent money there??? Thanks for your input, it is much appreciated.
Concur with the above, but I think a heathly dose of reality is needed. I call in "managing expectations". I might conside using a seasoned PM - if you have one you trust. Tenants can be a bit tricky sometimes, now that also depends on the type of property - low income vs middle working class. Either way I would tale in one step at a time...gvive each unit a few months to settle out. You won't now all the problems until you own them a while. So expect problems, do you reasearch, be prepared and stay focus - it will be worth it in the long run.
If you have tenants with 60 months and 18 months rental history on a month-to-month basis, why do you feel the need for annual leases?
I once had an annual lease with a new tenant, but at the end of the lease I allowed the tenant to go month to month. The tenant always expected a rent increase on the annual anniversary of his lease expiration, but I continued with the month to month arrangement anyway. For the next four years, the tenant made all minor repairs on his own and out of his own pocket. My tenant had developed some sense of participatory ownership. For his willingness to make minor repairs at his own expense, I never raised the rent in those four years. He decided to buy the property from me when I told him I was going to put it up for sale.
By the way, he qualified for an 80/20 loan and only paid closing costs out of pocket. In a separate side deal, I agreed to reimburse the tenant $3500 after closing toward the cost of a new roof. I wrote him a check two weeks after closing, though I don't know if he ever put on a new roof.
Congrats!
One thing I couldn't tell from your post is whether or not the $1387 included taxes and insurance?
Another thing to remember is that sometimes a lease works against the owner. If things get bad, a tenant can break the lease and leave in the middle of the night and your left hanging. That same lease keeps you from being able to get rid of the tenant if you want to.
Just a couple of things to think about.
Good Luck!
Di
Hello PA1,
Congrads. on your 1st investment unit.
The 1st house I bought was a three unit that I never lived in. Here's a few things I have learned.
The tenants expect you to come in and rock their world, you need to assure them that this is their home, but it's your house and that you expect them to treat it like it was theirs.
Unless you like to run over and change lightbulbs, I always had them fix minor things"if capable" without damaging your property and send reciepts in with there rent. example; light switch sink gasket or such. I always did a month to month with a new lease signed every year. This lease is from 1/1/04 to 1/1/05 on a month to month basis. That is in your best interest if you need to get rid of problem tenants. expect to get calls in the 1st few months to see how much you will kiss their a--
I used waterbed,pet and any other addendum that can damage a property with extra deposit. And always charged $200 more for deposit than rent because they think they pay on the 1st decide to move without telling you, don't see a payment and move because they paid the last months rent. Damage deposit is just that, you have to bring in a dumster or paint crayon wall thats what the deposit is for.
This is getting to long, If you need a copy of a good lease or addendums PM me I will send you some.
Good luck,
Marv
Thank you for your responses Hoober, Newkidintown, Regal, and Marv_wi. I appreciate all your responses. To answer your questions: The $1387 does include taxes and everything else. I felt leases were necessary to make the tenant feel at ease so they will have a locked monthly rate, maybe my line of thinking is incorrect and I should just go month to month. You guys brought up very good points if I have them sign a lease and they dont pay, it will be hard to kick them out since they signed a lease.
I had an inspection done on this investment property this morning and the inspector gave me nothing but bad news since the house was built in the early 1900's. The roof needed fixed, the chimney was cracked, water piping is leaking, electrical wiring needs to be redone, floors bow and dip drastically, signs of mildew in all bathrooms. The inspector says there is probably about $10k - $20k worth of work that needs done, this is money I dont have to put in the property. I doubt the seller will fix all the major items nor will he deduct anything from the final agreed upon price, but I wont know until we speak to him on Monday. In your opinion is it better to walk away from this 2-unit and look for something else or worth trying to fix it up? I just dont have th necessary funds to fix this property up.
MARV-WI, any leases or adendums you have would be much appreciated by me if you could possibly send them to me, what is the best way? Thank you everyone for you input, I just dont know what to do at this point.
Thanks
You also need to check with the county building inspectors. Ask if they will issue a certificate of occupancy for this building in its current condition when you become the new owner. If they say no, then you have no choice but to walk away.
If you can get a certificate of occupancy, you could lower your purchase price to compensate for the cost of the repairs to bring the property up to grade. Then prioritize the needed repairs over the next year or so paying as you go with your cash flow.
As your tenants notice the repairs underway, they may wonder whether you are planning to raise the rent. You can reassure them that you won't raise the rent immediately and even offer a new annual lease to lock in their current rent for the next 12 months.
I don't use leases, if they don't want to live there any longer I sure don't want to force them to stay, rentors do enough damage without being angry.
I use a month to month with a price lock for 12 months then no greater than a 5% increase, if they stay less than 6 months the deposit is forfiet. Better than a lease from there side, set price but not forced to stay, better from my side too, I just keep the money I already have in my possession, no messing around taking people to court etc. I'm probably going to drop the 5% maximum increase part for the time being due to local conditions that should boost rents dramatically. As a rule though I like that clause, if they have been there a year and been a good tenant I'm not going to abuse them with price hikes.
I've never bought with tenants in place, but sounds like good advice being given. Be sure you get the rentors deposit money from the prior owner.
As to if it's a deal worth doing, only you can really say what works for you. Personally i would want a better cash flow on my first deal, but then I can find better cash flow where I am. Don't go spending that extra cash every month, it's not yours, it's the properties and the property is going to want that money back at some point, IE vacancies and repairs.
Quote:Mr. Alan Greenspan has stated repeatedly that the Federal Reserve intends to push up short term interest rates, which will raise your rates on the 5 year ARM. Based on your rate now you will likely end up at about 10% instead of 7.85% in just 12 to 18 months. Will the property cash flow at a higher interest rateMantis,
Doesn't a 5-year ARM keep the mortgage interest rate constant for the first five years of the loan?
Also, I am concerned about your financing. I don't know your situation but 7.85% for a 5 year ARM is quite poor for good credit. Please also remember that Mr. Alan Greenspan has stated repeatedly that the Federal Reserve intends to push up short term interest rates, which will raise your rates on the 5 year ARM. Based on your rate now you will likely end up at about 10% instead of 7.85% in just 12 to 18 months. Will the property cash flow at a higher interest rate? It doesn't sound like it (did you plan for a 5% to 15% vacancy rate in case a tenant moves out and you have to re-rent). Also, 11.3% for a second is rather high, I've been offering 6%, and getting counter offers at 6.5% to 7%, for 40K to 100K seconds payable over 5 to 12 years.
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wow thanks for those numbers
i was just offered an 80% ltv first at 8.3% for 30yrs. no points and a second for 15% at 12.3 +two points for 15yr
ouch i think you may have saved me a bunch of money
kevin
Thank you for your input Newkidintown, Mykle, and Mantis, it is much appreciated. You brough up some very good points Mantis. It might be better to go with a 15 or 30 yr fixed instead of my current 80/20 loan which does seem high, but I guess that is because of my no money down situation. Closing costs are even rolled into this loan amount, Im only paying $1000 in earnest money.
Im thinking I just might have to walk away from this deal because I have no start up money to make any large repairs (i.e., roof, chimney - cracked, flooring, etc.) I dont know if it is better to purchase a 4-6 flat as a first purchase or a 2-unit, but my inspector said it is best to purchase an all brick home instead of one made of vinyl siding. So this is something else for me to consider when looking for a rental property. There are so many things to consider when making this first purchase. I guess from your peoples feedback making $250 - $300 net profit a month is not much of a profit. Does making $400-$500/mo profit sound like a much better deal than my present one? Thank you again everyone for all of your feedback, if anyone else has any other ideas or input on what I should be doing or doing differently, please let me know. Have a great Monday everyone!!! 8-)
Welcome to REI, Proactive.
As for your deal, don't be so quick to walk away. Figure out what purchase prices works with your numbers, repair estimates, etc., and make an offer accordingly. Sure, maybe the owner rejects it, but so what. Let him know the offer stands and he's welcome to call you if he changes his mind. Then check back with him in a month if the house is still for sale and remind him you're still interested at your original offer price. Who knows? If the house sits for a month, or two, or three, your offer may begin to look pretty good to the seller.
My point is never give up on a property once you've established your working offer until it gets sold.
Oh, and by the way, some of the financial and economic "insight" provided by Mantis is flawed.
A 5 yr ARM is a fixed product for the term of 5 years, then it becomes and adjustable product going forward.
Take care.
[addsig]
Thank you very much monkfish for you output. I figured as much that on a 5yr arm that it is fixed for 5 yrs than can increase or drop afterwards. My problem with this property is that the inspector found allot of work which must be addressed, foundation is cracked and steps are bowing outwards, chimney is cracked and needs to be fixed because of the gases, water leaks, piping is not in ordinance, etc. I just dont have the money at the present time to put into it, it will take at least 6 months before Im able to fix anything major. So im thinking walking away and finding another would be best since I will have to put at least $10k into it right away. Thanks again for your help.
Thank you very much monkfish for you output. I figured as much that on a 5yr arm that it is fixed for 5 yrs than can increase or drop afterwards. My problem with this property is that the inspector found allot of work which must be addressed, foundation is cracked and steps are bowing outwards, chimney is cracked and needs to be fixed because of the gases, water leaks, piping is not in ordinance, etc. I just dont have the money at the present time to put into it, it will take at least 6 months before Im able to fix anything major. So im thinking walking away and finding another would be best since I will have to put at least $10k into it right away. Thanks again for your help.[ Edited by Proactive1 on Date 08/02/2004 ]
Thanks Newkidintown,
I appreciate your comments. Im going back and forth with my lawyer to their lawyer on what I would like done to the 2 flat in order for me to purchase it. Im asking for all the repairs to be fixed but I know that is unlikely, so I am waiting on what they come back with. You did bring up a good point on asking for at least a $15k credit on the purchase price and that it would be a good investment in the future, I guess netting $300/mo is not that bad as a first investment property. What is your opinion on a brick building compared to a vinyl siding property? Also what would yield the best return in years to come: a 2-unit or a 4-unit multi family home? Thanks again for your comments, they are always welcome.
Hello everyone,
I'm a private consultant, and licensed state inspector with Illinois. I must agree with the remarks of other in this forum in regards to your high interest rates on that 5 year Arm. Currently, I have financed a property on a 5 yr ARM interest only with 5.5 on the 1st loan and 6.9 on the second. This is okay. I might've found something better. I really shopped it out with about 10 lenders and that was the best I can do for now. So far I'm verry happy.. My advise is take your time with the financing. As for Inspection advise, listen to you inspector they know what they are talking about.
We inspect and see Real Estate everyday. I do agree that this particular building may increase your liabilities since you stated it had so many damages. Find one that is in better shape, especially if its your 1st one. THIS IS SO IMPORTANT! Take your time and do your homeworks. This can take a while. [
Thanks for your comments RickGuzman. Regarding your comments on the 80/20 loan, mine is an investment property loan with no money out of pocket, even the closing costs are in this loan, that is why it is a little higher. Is yours considered an investment property loan? You are probably right, I should walk away since the seller is not willing to do allot as far as fixing or give me a decent credit. This is my first investment property and Im trying my best to find a property that will net me at least $500/mo after everything has been paid for. At least this time around I know what to look for when I go look at a potential property, I just threw away $500 on an inspection on this property, but it is a lesson learned.