First thing first

[abinvestments]

Ahh!  Ok, that makes sense.

[wallacehobbs]

Tri Country Real Estate Investors Assoc.
William Sands 610-3217-1770
Pottstown PA 19464
frakrealty@aol.com
Meets 3rd Wed of the Month

Wyoming Valley Real Estate Investors
Jim Strabu 570-288-3375
Wilke Barre PA 18703
Last Tues of the Month

Rental Property Owners Assoc of Lebanon Co
Judy Fake 7717-274-3604
211 W  Walnut St
Cleona PA 17042
4th Tues of the Month

Try these    

Okay, thanks everyone for replying so far.  I am looking forward to seeing this thread grow.  In regards to specific areas or REI, I am more interested in property rentals using a few strategies.

Buy and hold to sell within 4 to 10 years depending on the the value of the "cash cow".

Upgrading the property to increase the value of the property and neighborhood appeal.

For the first 10 years, I am looking at purchasing 1 multi-unit property every 2 to 3 years to build and stack up cash flow, and equity.

The next 10 years I am still figuring out the plan but it is safe to say for now, the first 10 years will be busy enough considering the research I have done already.

The goal is to acquire 5 strong "cash cow" properties in 10 years before I push myself outside my comfort zone.  The way the market is going up and down, I am more comfortable with long term goals than "flipping" and such.  Maybe down the road.

Regarding the accountant, every article I read about building a real estate team includes an accountant for the obvious reasons so I am comfortable with that.  It is worth a piece of mind knowing my accountant is on top of the game. 

(My accountant is also involved in real estate too.)

Now my question regarding renting and the lawyer as commented earlier,

While lawyers do cost money, it is wiser to shield my personal assets from my rental assets. 

What would I be looking for from a real estate lawyer in regards to legal issues for rental properties?

Off to search for REI clubs in the York County, PA area.  Anyone know of any?

[thelocomono]

First of all, thanks to everyone who has been commenting here.  THis is very encouraging and posistive for me.

Okay, I suppose it is appropriate to answer the goal question from Dave T since it all begins with a goal. 
 

Amused or not, it was a serious question and we still don't know the answer. 

What is it that you want to accomplish by real estate investing?  How will you know when you have accomplished what you set out to do?  What goal are you striving toward?

Good goals are objective, measurable and have a finite timeline.  Having a net worth of $5 million by the time I turn 50 is an objective, measurable goal with a specific deadline for achievement.  Just saying that you want to invest in multi-family property to increase your monthly income so you can contribute to the community is a good sound bite for a beauty pagent contestant, but, as a goal it is BS. 

Wanting to increase your monthly income is starting to sound like a goal statement, but you need to tell us more --  how much, how soon, and how much is enough?

Acquiring 5 multi-unit properties in the next ten years is not a goal statement.  It is an action plan to accomplish some goal that you have yet to tell us.  The multi-unit properties may increase your monthly income, maybe not, or, maybe not enough to meet your monthly income goal. 

Hard to tell since you have not really defined your goal for us.  Goals don't have to be long term and far reaching either.  I have a very simple one year goal, the same goal every year -- increase my net worth by 5% during the year. 

Now, what is your goal?  Is it objective, measureable, and constrained by a specific deadline to accomplish it? 

Thank you Dave for the response.  That is a fair reply.  I suppose if it were to be summed up in a single sentence, then it would be this,

To increase my rental income by 6K per year.

Is this too vague?  While it is specific in regards to dollar amount, I am not sure if I need to expand upon this in regards to acquistion of rental properties.

A second question,

What is the minimum number of units to qualify as a mulit-unit rental?

The reason I am asking this is because of the area I am looking into, York, PA where there is a lot of homes that are 2 units, and others are 3 units.  While I know there are many more that are 15-units and even 300-units, what is the minimum?

[Bluemoon06]

1 to 4 units is single family.  More than 4 is multi family

[Funder]

I like the goals that people articulate on this site; especially propertymanager and DaveT.  I think the goal of increasing rental income by 6K per year is a good thought, but I believe that a goal such as:

I want to buy 25 rental units in 5 years, each unit will have a positive cash flow of $100, and 20% in equity.  At the end of 5 years I will have a positive monthly cash flow of $2500.  I will also have at least $250,000 in equity.

That is a realistic goal, it speaks not only to the income, but also to the expense side of your financial statement.  It also addresses your net worth.  You can also stop after one year and look at the results and ask yourself:
"Self...am I moving toward my goal or not?"
This is a business that has a lot of people with personal agendas...so the real estate agent and broker want their commissions (if they‘re good, they deserve them), property managers want you to use their services, contractors want you to use their services, tenants often want improvements and services that are beyond what their rent will buy.
A lot of people will be ready to sing you a siren song about getting rich.  A lot of people will ask you to spend money that you may not need to spend.  You need to ask yourself if your plan is working.  The only way to gauge this is to look back at your goal.
You mentioned using an accountant, but a professional representation of your finances can be accomplished with a bookkeeper.  Or software like the what’s been mentioned.  You would be fortunate and smart to find a good accountant, but you will not need him or her until you own your own business, or have rental properties, and need to do your taxes.
One point that you didn’t mention, is capital reserves.  The bank wants you to have 6 months of principal interest taxes and insurance payments in cash reserves, and this is a good policy.

Good luck and have fun getting started!

[propertymanager]

1 to 4 units is single family.  More than 4 is multi family

Bluemoon was just testing to see if we were awake.

1 unit per building is single family.  Anything more than one unit is multi-family. 

For purposes of financing, 1-4 units is residential, 5 or more is commercial.

For purposes of the building code, here in Ohio 1-3 units is residential, 4 or more is commercial.

Mike

[Dave T]

Thank you Dave for the response.  That is a fair reply.  I suppose if it were to be summed up in a single sentence, then it would be this,

To increase my rental income by 6K per year.

Is this too vague?  While it is specific in regards to dollar amount, I am not sure if I need to expand upon this in regards to acquistion of rental properties.

Yeah, still too vague and there is no clear outcome.  What will increasing your rental income by $6K per year do for you?  How will that impact your bottom line?  You can buy a $1 million property and then rent it out for $6K per year.  You have accomplished what you set out to do, but the overhead cost of owning that $1 million property will soon bankrupt you.  This "goal" is more of an objective -- something you can do that will contribute to a success oriented goal.

Let's try restating the result you want to achieve.

Let's say that your GOAL is to increase your CASH FLOW by a certain amount of money by the end of the year, say $6K.  Now what will you need to do to accomplish that.  Maybe you need to get $12K more rental income than you are now receiving.   Maybe you need to reduce your overhead costs of property ownership.  Increasing your income and reducing your expenses are objectives that in some combination may result in $6K additional cash flow by the end of the year.   If you can't get all the additional cash flow you want from the property you currently own, perhaps you will also want to purchase additional property that helps you increase your rental income and cash flow.

If increasing your rental income by $12K becomes one of your objectives then define action steps that will get you there such as

(1) at each lease renewal increase the monthly rent by $50 per month,
(2) refinance current mortgage debt to reduce debt service if the interest rates are favorable,
(3) for properties with adjustable rate mortgages, contribute extra principal each month so the ARM resets to a lower loan balance when it adjusts, resulting in a lower debt service,
(4) increase tenant retention to reduce the vacancy rate.

If acquiring more property to increase your cash flow becomes one of your objectives, then you might add these action steps to your plans

(5) use 1031 exchange where appropriate to upgrade my rental property portfolio, increase my cash flow, and to increase my equity,
(6) acquire three more rental units during the year that generate a total of $300 monthly cash flow.

I hope this helps clarify the difference between your goal, objectives to accomplish that support your goal, and the specific action steps you will take to meet each objective.

Just a little more food for thought to reinforce the value of goal setting.  You might think that a very large, publicly traded company like Honda Corp. would have an elaborate goal statement.   Quite the opposite is true.  Their strategic goal for their American operation is simply

Six Hondas in every garage.

Honda will have met their goal when each garage in America houses two cars, a motorcycle, a lawn mower, and at least two power yard tools such as a weed wacker and leaf blower.  You can imagine all sorts of marketing plans and sales promotions, market penetration objectives, and corporate expansion plans that derive from that simple strategic goal statement.  [/list]

[thelocomono]

This is awesome, terrific feedback from everyone.  Before I get into the goal discussion, I wanted to comment on the accountant situation as commented on by buffinvestor.

I should clarify that I use my accountant for my tax returns and the financial statement only.  I do use MS Money to track all my income and expenses and provide my accountant with a year end summary.

Like buffinvestor, I don't care to stay on top of the tax laws either, that's why the accountants work for their paycheck.  Also as far as the financial statement goes, like Funder says,

You mentioned using an accountant, but a professional representation of your finances can be accomplished with a bookkeeper.

With that in mind, for any first time investor, when asked for their financial history, how many years of financial history or tax returns are they asked for?

Okay now, back to the fun part!!!

DaveT says

Yeah, still too vague and there is no clear outcome.  What will increasing your rental income by $6K per year do for you?  How will that impact your bottom line?  You can buy a $1 million property and then rent it out for $6K per year.  You have accomplished what you set out to do, but the overhead cost of owning that $1 million property will soon bankrupt you.  This "goal" is more of an objective -- something you can do that will contribute to a success oriented goal.

Let's try restating the result you want to achieve.

Let's say that your GOAL is to increase your CASH FLOW by a certain amount of money by the end of the year, say $6K.  Now what will you need to do to accomplish that.  Maybe you need to get $12K more rental income than you are now receiving.   Maybe you need to reduce your overhead costs of property ownership.  Increasing your income and reducing your expenses are objectives that in some combination may result in $6K additional cash flow by the end of the year.   If you can't get all the additional cash flow you want from the property you currently own, perhaps you will also want to purchase additional property that helps you increase your rental income and cash flow.

Property Manager clarified the multi-unit question which will help me with my goal.

1 unit per building is single family.  Anything more than one unit is multi-family. 

For purposes of financing, 1-4 units is residential, 5 or more is commercial.

To increase my cash flow by 6K per year through 1 multi-unit residental property purchase per year

I don't know, does that sounds kinda too long or dumbly worded?  I think we all can see where I am trying to go here.

I hope this helps clarify the difference between your goal, objectives to accomplish that support your goal, and the specific action steps you will take to meet each objective.

Dave T, it certainly does clarify the difference for me.  I hope it helps others as well.  That is why I am asking whether the goal I revised went off track or should I keep it simple and short as

To increase my cash flow by 6K per year

Thanks again everyone.  We could write a book. 

[propertymanager]

That is why I am asking whether the goal I revised went off track or should I keep it simple and short as

To increase my cash flow by 6K per year

To increase your cash flow by 6K per year is good, but you still need a time frame.  When will you accomplish your goal?  Here is how I would state this goal:

"By the end of 2008, to increase my cash flow by 6K per year".  You can see how this is a better goal because it now allows you to measure your success or failure.  If at the end of 2008, you have purchased rental(s) that will generate an additional 6K per year, then you have met your goal.  If you are not generating any additional income, you have failed.  If you are making $3k per year, then you are half way to your goal and you can re-evaluate to determine why you didn't meet your goal.

Good Luck,

Mike

[Dave T]

Why would you need a lawyer to seperate your personal assets from "rental" assets?? I am assuming by rental assets you mean business? Just deed the property into your LLC or a trust....neither of which requires an attorney.

There are some states such as my own state of SC that will not record  a deed unless it has been prepared by an attorney.

Are PMI required for purchasing investment properties with less than 20% down? 

I know they are required for personal home purchases but I can't find information as to whether this applies to investment properties?

It does not matter whether the property is your home or an investment.  As a general rule, the lender will require mortgage insurance (PMI for conventional loans, MMP for FHA loans) whenever the loan is greater than 80% of the purchase price.

You mentioned using an accountant, but a professional representation of your finances can be accomplished with a bookkeeper.

With that in mind, for any first time investor, when asked for their financial history, how many years of financial history or tax returns are they asked for?

You will be asked to complete a financial statement on a form the bank will give you, most likely a Uniform Residential Loan Application (HUD 1003).  In addition, you may be asked to provide documentation to support income such as two years prior tax returns, copies of leases for current rental property, pay stub from most recent paycheck, and whatever else the lender will require to get a complete picture of your financial strength.

To increase my cash flow by 6K per year through 1 multi-unit residental property purchase per year

I don't know, does that sounds kinda too long or dumbly worded?  I think we all can see where I am trying to go here.

If your goal is to increase your cash flow by $6K next year -- really your net disposable income -- then that is enough.   Don't let your goal statement limit yourself in how you might accomplish it.  There are several things you can do to achieve this goal.  First the active income opportunities:

• Salary increase, whether cost of living increase, promotion, or, job change
• Pay off credit cards to zero balances
• Pay off car loan faster by contributing extra toward principal each month
• Set budget and track spending to identify and eliminate wasteful spending habits
• Birddog and collect at least $500 birddog fee per property given to an investor
• Wholesale property for $2500 assignment fee, or flip for $4000 to $6000 per property.
• Sandwich lease option property for $200 monthly cash flow and $10000 minimum payoff when option is exercised.
• Start a home based internet business to generate income.
• Get a second job -- become a two income household.

In addition to these active income opportunities to increase your net disposable income, you can consider passive income opportunities such as

• Acquire "X" rental properties that generate $100 monthly cash flow each

You determine how many rental income units ("X") you need to acquire by setting a cash flow requirement per unit.  Whether you get this with one 5-plex or with several single family dwelling units is immaterial.  Your investment criteria is that each "unit" will generate whatever target cash flow you need to meet your goal.

Lastly, you will also want to include portfolio income opportunities in your action plan.  Do you have idle cash sitting in your checking account?  If so, what interest rate is it earning?  Can you find higher yielding deposit vehicles such as bank CDs to generate a little extra cash during the year.

[Dave T]

thelocomono,

You still have not really fully defined your goal for us.  Perhaps you need to replace take home pay so you can retire from your W-2 job.  Maybe you need extra income to expand your lifestyle.  Whatever your goal, may I suggest another and a plan to achieve it?

Let's say that you set a goal to have your properties generate $25K per year, tax free, for the rest of your life starting eight years from now. 

Plan to buy buy one rental property per year for each of the next seven years.  Let's say that you buy prudently in strong rental markets and only pay about $50K for each property.  Let's say you purchase in appreciating markets and see each property double in value in seven to eight years.  At the end of seven years, the property you purchased in year one will have doubled in value from $50K to $100K, and you have paid down your mortgage balance as well so your equity exceeds $50K.

In year eight, do a cash our refinance on the property purchased in year one.  Your cash out amount is $25K and should keep the LTV on the property at or below 75%.  Hopefully during the seven years of rental use, your rents have gradually increased so that you will still have a positive cash flow after the cash out refinance.

In the ninth year, repeat this process with the property purchased in year two.  And continue in succeeding years sequentially refinancing one property every seven years to take $25K per year out of your equity, tax free, and with no negative cash flows.   You can use 7/23 ARMs to support this plan, though, the rates for 30-year fixed rate loans are a little better than the ARM rates these days.

If an extra $25K tax free cash each year is not enough to support your lifestyle ($2K per month), then adapt the scenario and the number of properties to the tax free cash number you need to hit. 

If the appreciation rate is lower in your investment area, just purchase an additional property for a couple more years before starting your sequential refinance.