Multi Unit Investment Question?

[Anonymous]

4plex and Bugs thank you for the great information. You guys have the experience I don’t and I apprecite the responses. I look at some of these multi-units in california and can not figure why they are even on the market. They make no finacial sense for the price they are asking with the rents they are collecting. Unless you buy the bldg for cash but even at that rate you are better off without the risk and leaving your money in a MMF. I have had a hard time understanding why you would buy the property unless you thought it would apprectiate better than 5% per year. Maybe some can explain that to me.

My thought on multi-units was cash flow + greater than what you could get in a MMF maybe 7-10% and not even count on appreciation just only go for the cash flow.

4plex could you go over some of the pitfalls in more detail with investing out of state?

Thanks again!

[sdcellar]

traderdad– I’m reluctant to post this, but the reason one invests in real estate is because of the leverage potential of investing an amount of money that is less than the value of the property itself. In other words, gains are a percentage of the value of the property, not the amount of your investment. Only when you buy outright, are the gains the same.

Levers work both ways though and the effect in the other direction can be fairly devastating. In this way, real estate is different from “simple” investments like money market funds in that you can easily lose money beyond your original investment.

[surveyor]

out-of-state out-of-mind

The reason why my group invests in out of state properties is so that we are not dependent on our local area’s real estate market whims. Yes, it totally sucks to be in the San Diego real estate market right now. However, other locations are not on the same cycle and are in fact poised to move up. If you limit yourself to being a “local” real estate investor, then you are much more vulnerable to the market ups and downs, much like being too heavily invested in tech stocks in the stock market. By being out of state, out of town, you can diversify.

Yes, certainly there are a lot of hassles dealing with people out of state. My property manager in South Carolina has not aggressively rented out my last remaining unit for the past few months. I’ve been talking to them about it but ultimately it comes down to being able to choose good people.

sdcellar is totally right that real estate lets you leverage. However, if you are able to keep the property for a long time, using leverage, appreciation, cash flow, and depreciation, you can get 25% to 30% return from real estate.

==update: just called my property manager in SC and they just got it rented. so, my bugging them has had results.

[Anonymous]

4plex, thanks for sharing the overview of your investments over time. It’s great to hear an experienced hand clearly lay out what he did and why, and to hear his outlook. What you stated makes perfect sense to me.

[4plexowner]

Out-of-state ownership:

Obviously, if you are going to own property outside of your local area you will need someone to manage it for you. Are you going to pick someone out of the yellow pages? Hope your realtor can refer you to someone?

When you hire a management company you will provide them with your contact information – an address and phone number that will clearly show them that you are an out-of-the-area owner.

Who do you think the management company is going to give highest priority to: the out-of-the-area owner or the local owner? Which of these owners is more likely to show up in the doorway of the management company and complain? Which of these owners is more likely to drive by their property and see how it is being maintained and managed?

What can you say to the management company when your property vacates and then sits empty for 2 or 3 months? How do you know that they cleaned the unit and put it back on the market in a timely manner?

What can you say to the management company when your property vacates and, according to them, needs $2500 worth of repairs? Are you going to inspect the property and see what they are talking about? (All you can say is, “OK, make the repairs and I’ll send you a check” and hope they aren’t screwing you over.)

If you finally get fed up with the management company what are you going to do? Fly there and fire them? Who will you replace them with? Back to the yellow pages?

Bottom line, IMO, is that you are setting yourself up for problems by being an out-of-the-area owner. You might get lucky and never have any problems – or you might be unlucky and end up losing your ass on a property that you shouldn’t have bought in the first place.

(If you have family or friends in the city where your property is located they might be able to keep an eye on things for you.)

My experience: I turned one of my properties over to a management company not long after purchasing it – they had a maintenance crew on staff so I asked them to do some of the work that was needed – one job was to sand/paint a wrought-iron railing – I happened to be in the area one day so I drove by the property and found two people spray painting my railing with cans of Krylon spray paint – they hadn’t put down any paper or taped anything – I stopped the ‘painters’ from continuing and told the management company not to do anymore of the work I had asked for (I had to pay to have the overspray buffed out of my tenants’ cars) – not long after that incident I had a unit vacate and it needed new linoleum in the kitchen – I picked the flooring and let the management company schedule the install – after the work was done I went to the unit and found that there was a seam in the linoleum about six inches away from the sink (ie, highest wear point in the kitchen and a wet point besides) – how long do you think it would have been before that seam looked like shit and was allowing water to get below the flooring? – the management company insisted that there was nothing wrong with the install (I made them redo the entire floor and put the seam in a more sensible location) – at this point the management company let me out of my contract (they could have refused) and I took over management – if I had been an out-of-area owner, I might have been sued by my tenants because of paint on their cars and I would have been replacing the linoleum in that kitchen much sooner than necessary

[surveyor]

management companies

In my real estate group, good property management companies are very difficult to find and the ones I have employed are ones that I asked my group to refer or were referred by my real estate agents. And from there I interviewed at least three. Not a perfect system, I admit, but at least better than a google search or a search in the yellow pages. For my position, I do have a backup property manager if I decide the one I have is not working out for me. I do have a better position than most, because I have a network of investors that I talk to and we refer a lot of people to each other (mortgage brokers, real estate agents, property managers, attorneys). I would say without this real estate group, I probably would be running into the same problems you’ve been experiencing.

(which is why I have yet to invest in North Carolina, because I have heard that the property managers there are all pretty bad).

I have two property managers, one in Denver, one in South Carolina. The South Carolina one had one unit left vacant for a few months, but I cut them slack because it was the Christmas holidays and there weren’t a lot of people running around trying to get an apartment at the time. The one in Denver, the 30 year old boiler went out on me a WEEK after I bought the property, and replacing it cost $8000. SUCKED. But I had them send me a picture of it, send me the work order and exact scope of what was replaced (as well as talk to the company and checked out the company who replaced the boiler). Every year, one requirement I have for the property manager is to go around and take pictures of the property so that I know what’s going on.

So… it helps to have a network, it helps to have others in the same boat as you, but at the end of it, there are a lot of hassles and risks when you do any investment, stock market or real estate. I do property management myself for my two San Diego properties. My tenants are sometimes late for their payments, they ask me to come by because they can’t light the pilot light, and during Christmas, I had to fix up one property because the tenant left, stiffed me for two months rent, and then left the place in a terrible condition that I had to fix up. I mean, I already have a day job. Pretty much ruined my Christmas. So whether out-of-state or in-state, stuff happens.

But at the end of it, I still do it because it will provide me the best way to use money and there are too many advantages to it otherwise. By at least going to out-of-state, I can diversify out of the “bubble”, continue to make more money.

Bottom line, IMO, is that you are setting yourself up for problems by being an out-of-the-area owner. You might get lucky and never have any problems – or you might be unlucky and end up losing your ass on a property that you shouldn’t have bought in the first place.

No risk, no reward.

So certainly take a look at 4plex’s stories and examine it. If what he goes through seems like too much work, it seems like it’s just too much trouble, by all means, do not invest in real estate out of state. It’s not a get-rich-quick thing at all. It’s a lot of work and a lot of hassle.

But like everything in life, if you prepare yourself, do your homework, work hard, America will reward you for it.

[Anonymous]

No doubt about it 4plex there are some awful property management companies out there….I have see them first hand, when I searched out a place to rent I ran into several PM companies that were just worthless. Funny thing was I actually ended up renting a house from one of the bad ones, and they could not even fix a running toilet. So I convinced the owner of the house I was renting, to droping them and just letting me take care of things around the house for a little money off the rent. Obviuosly bigger problems I deffered to the owner and she would just hire someone to fix them.

Investing/trading in the stock market for many years the one thing I always looked at first in a company was the management , I have seen companies with great products and bad management go completely broke. On the flip side I have seen companies with a great mangement team and an average product be great investments. Surveyors last comment put the 2 together for me. If you are looking local or out of state its clear to me the most important part of this investment is going to be the property management company. So that will be my new direction…trying to find the right PM company first, then search out a property in that area. Building a network of like minded people is key. Surveyor how much trust do you put in RE broker referrals would you say that could be a good start for finding one?

[surveyor]

RE broker referrals

The network I’m with is fairly selective about the real estate agents we deal with. They have to have taken the classes we took and they are usually investors themselves. In some cases, they are commercial real estate agents.

Because of that qualification, I do have a certain degree of confidence in whom they refer. The real estate agents and the investors in the area are probably the best people to talk to in seeing if the property management is any good.

However, I still took the extra step (and this was certainly recommended by my group) in interviewing the property management companies, taking a look at their contracts, and then talking to other members to see their opinion of them. I even talked to the people who were actually renting the place they were managing.

Sometimes, in certain locations, there will be only one property management company in town and you’re kind of forced to live with them. Those are typically areas I’ve avoided.

The order I’ve gone is researching which area of the country I should invest, deciding which one, and then making the contacts, doing the research, and seeing what team I can put together in the area. That involves interviewing the team members, taking a look at their qualifications, and then checking their reputation with other investors. You also have to ask them what criteria do they use when they select tenants, what is their procedure for repairs and maintenance, etc.

There are a lot of aspects of out-of-state RE investing that will really stretch your abilities. Managing from a distance, writing a $8,000 check which you know you have to do because the hot water went out in the middle of winter (and it was a good thing I did it too because it was right before Denver went through three weeks of blizzards), talking to them every month or so to make sure everything is ok, etc.

It’s hard because we of course can probably do a better job ourselves, but success in real estate is not doing everything yourself, but creating a team that will make you money so that you don’t have to work as hard. If your property management is running smoothly, you have more time to look for other properties and other opportunities (and then the whole cycle repeats).

When I get home, I will post you the recommended questions that my group asks of property managers.

[surveyor]

1. How long have you been managing property in this area?
2. What are the vacancy rate fluctuations in a ten year cycle?
3. What are the typical drops in rent when the market softens up?
4. Are you willing to provide monthly statements for the property to include all income sources, itemized expenses and receipts for repairs?
5. Are you willing to send digital pictures of the condition of property you are managing every 6 months to include interior and exterior of the building?
6. Do you have any tenants and clients I can talk to as references?
7. What is your criteria for good tenant applicants?
8. What charges do you have for evictions?
9. Do you have a lawyer on retainer to help you with evictions?

Those are just a few basic questions to ask.

If you are serious enough about investing in real estate, out of state or no, I recommend taking the real estate work shop class that lisa vander gives. She does a good job of helping real estate newbies go into real estate and shows you how real estate actually makes money. She actually does anticipate down markets and tells you what to do during those markets. She also has the network that you can access (without charge) and can help you get in touch with people who can find you properties. Anyways, I highly recommend her. If I had taken her classes earlier, I would’ve have made as many boneheaded mistakes as I have made. You can go to http://www.pacblueinvestments.com and see what they can offer you.

Good luck.

[Anonymous]

Surveyor,

Thank for all that info. I looked into what pacific blue offers. I think REP workshop would probably work best for me.

Thanks again.

[surveyor]

Discounts

Lisa has a radio show on Cash 1700 AM on Thursdays at 8:00a.m. to 9:00a.m. It’s good listening, but no substitute for her classes.

If you call Pac Blue and sign up for their workshop on a Thursday and say that you heard her on Cash 1700, they will give you a discount on the class cost.

Interestingly enough one call today was a orange county real estate agent who deplored the lack of good property managers in other locations.

Good luck.

[Author]

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