Landlording & Rental Properties

How I Found, Analyzed, and Bought an Ugly Purple Rental Property

Expertise: Landlording & Rental Properties, Personal Development, Real Estate News & Commentary, Real Estate Investing Basics, Business Management, Flipping Houses, Mortgages & Creative Financing, Real Estate Deal Analysis & Advice, Real Estate Wholesaling, Personal Finance, Real Estate Marketing, AskBP
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Rental Property Analyze

Yes, she’s ugly.

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She has purple windows and a dull gray paint job… but I love her anyways.

Today I want to tell you about my newest purchase, a triplex, and walk you through the step by step process I took to get this property. Although it’s easy to get small pieces of information here and there regarding the process for getting into small multifamily properties, sometimes the theory is just not enough and you want to see the real thing – the whole picture. That’s what this post is going to do – give you the exact, step by step process I took to acquire my newest investment property.

Keep in mind that every real estate deal is different. Every one has unique challenges, problems, benefits, advantages, and strengths. However, a success investor finds ways to navigate those treacherous waters and come out dry on the other side! That’s what this post is about: my ride – and I want to take you with me on it!

How to Find Multifamily Properties

Before ever taking a glance at the MLS, there are a lot of little steps that are important to take. Education, of course, is key – which is why I helped to write the Ultimate Beginner’s Guide to Real Estate Investing, and why we made it free. If you don’t have a basic understanding of what makes a good real estate investment, the rest of the game is just luck (and luck is not on your side!)

Following the education, I believe it’s extremely important to make a plan. You’ve heard me say it before: you wouldn’t embark on a road trip without a map, so why embark on a real estate investment without one? While I think an overall plan is great for your investing business (Like “I want to buy 10 units per year that provide x amount of cashflow for the next 10 years) I also think it’s smart to have a plan for the next property you want to buy. Specifically, I’m talking about having very carefully defined requirements for properties.

It would probably be silly to say “I will only buy a property that has four units, each with one bedroom, and with a new roof” because you probably won’t find that property, or you might pass up a lot of other good deals while waiting for it. However, it would be okay to say “I want to buy properties between 2 and 10 units that would provide at least $100 per month, per unit in cash flow assuming 100% financing” – which is pretty much my criteria. I’m not saying I ONLY buy properties that I can get 100% financing on… but I make that part of my requirements because it’s always my goal. If I can get $100 per month per unit with 100% financing, I know I could get even more cash flow with a down payment.

Additionally, I also know the neighborhoods I want to buy in and the neighborhoods I don’t, so I stick to that. I don’t want to buy in a war zone, so why even look there?

Having defined characteristics about a potential property enables you to “screen out” potential properties and only focus on the ones that matter to you. I like to think of it like a water filter – each layer of requirements will trap the stuff you don’t want. As a property makes it’s way through the funnel, only the one’s worth pursuing come out the other end.  The more “automated” you can make this, the better.

For example, my real estate agent knows that I'm looking for small multifamily properties in certain areas, so I had him set up "automatic alerts" so that as soon as a property that has two or more units pops up on the MLS within the areas I'm interested in – I get an email notification. In a hot market, good deals can be snatched up in just minutes, so speed is everything. My agent also knows what makes a good real estate deal, so he keeps an eye out for properties that are especially interesting and will call me about them, encouraging me to act fast.

This is the case with my most recent purchase.

The Triplex

I received a call from my agent letting me know that this triplex was going to be coming on the market, but because it was a HUD property (it was taken back in foreclosure by HUD), there was a minimum time where investors could not bid on the property. However, I knew the location was great and the price HUD listed it at was exceptional, so I watched it closely. It hit the market at $68,000 and I was sure a homeowner would snatch it up, because of the unique characteristics of the home, which we'll get to in a moment.

The property had three units, but not evenly split. I believe originally it was just a huge house with a basement and a garage. At some point in the past fifty years, someone added a basement apartment and another apartment above the garage. Let me give you a brief description of the property:

Layout:

  • The main house had 4 bedrooms and 3 bathrooms, including a totally remodeled (though slightly outdated) master bathroom complete with Jacuzzi tub, natural gas furnace, hardwood floors, and probably remodeled in the early 1990s.  Potential rent: $800-1000 per month (we’ll talk more about this in a few minutes.) Total square feet: about 2,000.
  • The basement apartment has one bedroom, one bathroom, tile floors, and newer kitchen cabinets. Total square feet: about 600
  • The garage apartment has one bedroom, one bath, and laminate flooring.

Condition:

The basement apartment and the garage apartment were virtually rent-ready, needing only a small amount of cleaning.  The main house, however, had a roof leak near the chimney that ruined an area in the upstairs bedroom about 15′ x 8′.  Although the roof was actually new within the past five years, it looks like whoever installed the flashing around the chimney did so incorrectly.

Furthermore, as you can see in the photos, the paint is atrocious. Purple windows… I don’t know what they were thinking.

My total estimates for repairs are about $5,000, most to fix the chimney leak, fix the drywall, paint the windows, and clean.  This might be a little light, and I’m prepared to spend up to $10,000 if needed, but $5,000 will get it rented now.

Rent Potential:

The Main House: $800-$1000 per month. Yes, this is a wide range, but honestly I’m not entirely sure. Typical 4 bedroom, 3 bath homes might rent for $1000 around here, but the outside of the home is REALLY ugly (and I can’t paint until the rain stops next spring) and because it’s a multifamily property, I may have a little more difficulty renting this. So I’m estimating $895 for rent for now, though I’m willing to drop the price quickly if needed.

The garage apartment and basement apartment should both rent for around $500 per month, so I’ll advertise them at $495.

Total potential income: $1885.00

Additionally, there is a one car garage on the property. I may be able to rent this garage out to one of the tenants for an extra $40 a month – which would make my income a bit higher, but I won’t assume that yet.

collage

How I Lost the Property… but Still Got It Under Contract

As I mentioned earlier, this was a HUD house that restricted investors from offering on the property for the first two weeks. With the large, main house and additional income units, I was sure this home would sell before I ever got a chance to offer and I was right… the home was quickly snatched up by a homeowner. Good for them… but sad for me.

However… two weeks later, I got another call from my agent. He just heard that the buyer was going to be backing out of the deal and the property would be coming back on the market the following morning, still at $68,000, and the bidding would be open for investors. He also knew several other investors that were going to be offering on the property, and I knew this would go quick. For the first time in my entire investing career I decided to do something I had never done before:

I offered above asking price.

The next morning my agent submitted my offer for $70,000 and we waited. By the end of the day, we received word: we had won the contract and the property was ours.

How to Analyze this Triplex

There are a lot of ways to analyze a potential rental property, and we’ll look at most of them here, so you can see the different methods. I’ll also share a video below on how I used the new Rental Property Calculator to analyze this property.

The 2% Rule

The first rule a lot of folks like to look at is the 2% rule. This “rule of thumb” is a quick way to look at a property’s price in relation to the monthly rent to see how awesome the deal is. I mentioned earlier the idea of a filter – and the 2% rule is a very early filter to see how good a property might be.

The 2% rule (of thumb) states that a properties total monthly rent should be 2% of the purchase price (including repairs and closing costs.) In other words, a property for $100,000 should rent for $2,000 per month.  In this case, with a purchase price of $70,000 and roughly $10,000 added for closing costs and repairs, the property should rent for $1600 per month. As I mentioned earlier, the potential rent was $1885, which is 2.35% of the purchase price.

In most areas of the country, the 2% rule is impossible to find, and most of the properties I own don’t meet this rule, but this property actually surpasses this requirement. So should you use the 2% rule?

That’s hard to say. Would this property have been a good deal at 1%? 1.5%?  Or even more importantly – what makes a good deal?

This is why the 2% rule is nice to look at, to quickly look at potential cash flow, but it is only a rule of thumb. I like to think of the 2% rule as a sort of “certificate of approval” – if it meets it, great! It doesn’t mean it’s not a good deal if it doesn’t, but it is definitely awesome if it does.

The 50% Rule

The next rule of thumb we talk about often on BiggerPockets is the 50% rule, which is used to quickly analyze potential cash flow. This rule basically states that half of your income is going to be spent on non-mortgage expenses each month, so whatever you have left (called the Net Operating Income) will go toward the mortgage payment and cash flow. If you want to learn much more about the 50% rule, check out this post and video.

Again, the potential income on this property was $1885 per month.  The 50% rule (of thumb) tells us that half of that will go out in expenses, which included everything except the mortgage payment. So…

$1885 x 50% = $942.50.

So how much will the mortgage be?

My initial assumption was a 25% down payment, meaning a total loan amount of $52,500. (because $70,000 x .75= $52,500). Using a quick online mortgage calculator, I determined that a $52,500 loan, at 5.5% for 30 years would be $298.08 per month.

Therefore,

$942.50 – $298.08 = $644.42 in monthly cash flow, or an average of $214.81 per month per unit.

If you want to take this one step further, let’s look at the cash on cash return on investment, considering the 50% rule. With  25% down payment, we know we put in $17,500 for the down payment. I’ll also add $5,000 for closing costs and another $5,000 for repairs, bringing my total investment to $27,500 for this property.

$644.42 per month in cash flow X 12 = $7,733.04 per year.

To determine cash on cash return on investment, simply calculate: $7,733.04 / $27,500 = 28.12%

Therefore, according to the 50% rule, I could expect to earn $644.42 per month in cash flow which equates to a 28.12% cash on cash return on investment. Doesn’t seem to terrible to me – but what do the REAL numbers say?

The Actual-Number Analysis

Rules of thumb are good for quickly analyzing the potential, and for helping you avoid underestimating expenses… but it’s also important to run the real numbers and see what you’ll actually be looking at. This section is going to do just that. However, for this analysis I’m going to save a ton of time and use the new BiggerPockets Rental Property Calculator to run the numbers. The following video will walk you through my step by step analysis of this property, and below that I’ll show you the PDF report that was generated.

So for those too lazy to watch the video 😉 let me give you a quick breakdown of how the numbers look:

Total Monthly Income: $1885
Total Monthly Expenses: $1434.58
Total Monthly Cash Flow: $450.42

Total Cash Needed: $27,500
Cash on Cash Return on Investment: 19.65%

Analyze 1

Analyze 2

How I Paid For the Ugly Purple Rental Property

Easy, I whipped out my wallet, pulled out $70k in hundred dolla’ bills, and slapped it down on the counter.

Er…

Okay, that’s not how it went down. So let me tell you the story behind this deal.

As most people here on BiggerPockets know, I’m a big fan of using partners, for a variety of reasons – but mostly because I’m not rich. I know – shocker! However, when I use partners, I’m able to share the load and sometimes get into a deal for no money down. This triplex wasn’t quite “no money down” but in the end, I hope it to be close.

I reached out to a local couple of folks I know who had bought their first rental property a few years ago and have been very excited about doing more when the home came on the market the first time. I simply mentioned that I was working on getting a new property and wanted to know if they were interested in partnering on it. They jumped at it, and we began to take steps toward acquiring the property.

We decided to split everything right down the middle – down payment, closing costs, everything. As the video showed, we would need about $27,500 total out of pocket to make this deal happen, which means just a bit less than $14,000 each. Had I wanted to bypass this, I could have used a private lender for a year, refinanced the entire thing into a fixes rate loan, and done the whole deal with no money (Like I'm doing in this story), but I’m just a bit concerned about interest rates rising so I thought I’d lock it in right now, and I still may refinance and pull my cash out in the near future, depending on how things look six months from now.

We approached a local bank that does Portfolio loans (because I'm over the limit on the number of mortgages I can have through Fannie Mae/Freddie Mac) and obtained a loan through them. The loan is a thirty year loan, but fixed for 5 years at 5.5%, and variable after that. Although I'm highly against variable-rate mortgages (It's one of my "6 Dumbest Mistakes You Can Make as a Buy and Hold Investor“) the rising rate was guaranteed to never rise more than 2% per year for a maximum of 11%. Worst case scenario, if the rate jacked up to 11% in 5 years… my payment will only rise by $200 per month… something I could live with.

My Plan Going Forward:

As I mentioned earlier, I plan on getting an average of $450 per month in passive cash flow. However, although I accounted for property management in the numbers, I will be managing myself – so I will actually be receiving an extra $226 per month, for a total monthly cash flow of $676.00 per month. Additionally, I hope to pass on a “Water/Sewer/Garbage” surcharge to the tenant in the large 4 bedroom house for approximately $75 per month. This will bring the total cash flow to approximately $750.00 a month after accounting for all of the possible expenses.

With the partners I am working on this project with, we have decided to pay this property off as fast as possible with the cash flow we get. Using an online early payoff calculator from Dave Ramsey, I can see that by paying this $750 per month toward the mortgage, I will be able to pay off this entire property in just 4 years, 10 months.

Early Rental Property Payoff

Yep, under 5 years and I’ll own this property, free and clear. 

Although there are a lot of reasons why mathematically this might not make the most sense, it makes the most sense in this scenario because of the goals my partners have for their retirement. Additionally, because my loan is only fixed for 5 years, I'll hopefully have the entire property paid off before the variable factor kicks in.

So I closed on this property yesterday. I’ve got contractors fixing the minor issues in the next several days, and will hopefully have this property fully rented by January 1st, 2014 – when my first mortgage payment is due.

On to the next!

Alright, I’m done rambling now.  What are your thoughts or questions? I hope you don’t make me write 3,000 words without even leaving me a comment below!

Oh, and if you wanted to give our BiggerPockets Rental Property Calculator a run for its money, click here.

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather, and How to Invest in Real Estate, which he wrote alongside Joshua Dorkin. A life-long adventurer, Brandon (along with Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.

    AL Rivard
    Replied almost 6 years ago
    Wow that is great. I am currently just getting started in R/E and have been sponging all I can get since this summer. That is a great article. I must admit being an old school thinker and worked my a.. off being debt free. But now I realize the power of ”good” debt. I am currently looking into a joint venture. Since I don’t have the expertise yet and ”power team” I figured I’d team up with people whom I have been researching and also met. Do you think a joint venture is a good start for a newbie? Reply Report comment
    AL Rivard
    Replied almost 6 years ago
    Wow that is great. I am currently just getting started in R/E and have been sponging all I can get since this summer. That is a great article. I must admit being an old school thinker and worked my a.. off being debt free. But now I realize the power of ”good” debt. I am currently looking into a joint venture. Since I don’t have the expertise yet and ”power team” I figured I’d team up with people whom I have been researching and also met. Do you think a joint venture is a good start for a newbie?
    Brandon Turner
    Replied almost 6 years ago
    Hey Al, thanks! You know, the idea of being debt free isn’t that bad at all, so don’t automatically discount it! But yeah, there is definitely power in leverage and if you are smart about it, it can give you some great returns! As for JVing on an investment, I think it’s great BUT it’s easy to be taken advantage of. So find someone trustworthy and make sure the deal is solid. Best of luck!
    Mary B
    Replied almost 6 years ago
    Super blog Brandon! Love the way you included the links to refers. Many blessing on this deal and others to come. Happy Holidays to you and yours also. Kudos, Mary
    Brandon Turner
    Replied almost 6 years ago
    Thanks Mary! Likewise!
    Graham Mink
    Replied almost 6 years ago
    Great post! Next deal I analyze I will definitely be using the new BPOC!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Graham! Good luck!
    Roy N.
    Replied almost 6 years ago
    Brandon: Variable rate mortgages are not evil … some of us actually like them. In fact, it’s all we use. Here there is 1.5-2% difference in the rate between a 5yr-term variable rate (2.6 – 2.9%) and fixed rate (4 – 5.34%) … rates would have to jump considerable before you would be better off taking the fixed rate.
    Brandon Turner
    Replied almost 6 years ago
    Hey Roy, I agree they aren’t necessarily evil, but they are dangerous because it puts the control of your financial success more-outside our own control than we’d like. If rates jumped to 12% and a $200 cash flow deal drops to a negative $200 cash flow deal… it’s not so good. Sure, right now variable are fine… but everyone is a genius in a Bull market, right?
    Roy N.
    Replied almost 6 years ago
    Brandon: Many of the fixed term variable mortgage offerings in Canada have a right of conversion into a fixed rate product with a term of at least the length of the remaining term of the variable mortgage. Even without a right of conversion, all variable mortgages can be broken with either no penalty (open mortgage) or 3-months interest (fixed term), so if interest rates did start to rise significantly you can always refinance. In our context, where mortgage terms are typically 1-5 years and never longer than 10, there is very little reason (mathematically speaking) to go with a fixed rate mortgage. In the U.S.A. context, a 15 or 30 year term makes sense if you are certain interest rates are headed for a prolonged ascent (e.g. 1979), but in a flat or declining rate space, locking in long term should not be preferred. I would also counter the relinquishing control of your financial success by using a variable rate product by saying you can plan for this when you model your property at acquisition time …. but a full discussion is fodder for another time 🙂 Finally, I would like to say: that wall paper is far worse than the purple trim on the exterior 😀
    Roy N.
    Replied almost 6 years ago
    Brandon: Variable rate mortgages are not evil … some of us actually like them. In fact, it’s all we use. Here there is 1.5-2% difference in the rate between a 5yr-term variable rate (2.6 – 2.9%) and fixed rate (4 – 5.34%) … rates would have to jump considerable before you would be better off taking the fixed rate. Reply Report comment
    Yvette
    Replied almost 6 years ago
    Excellent deal! I love the thorough breakdown of the entire deal!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Yvette! I’m glad you enjoyed it 🙂
    Bobby
    Replied almost 6 years ago
    Brandon, For your investors and yourself, did you put the home into an LLC? So in 5 years the LLC would own it? How are you finding the lending climate for an LLC owned property?
    Brandon Turner
    Replied almost 6 years ago
    Hey Bobby, I bought it without and LLC (so I could get a residential loan) and will be transferring into an LLC. Yeah, I can’t get a good loan with an LLC 🙂 My local lender is okay with me transferring into an LLC after the purchase.
    Victor
    Replied almost 6 years ago
    Brandon, Your article is phenomenal!!! Great info. I have a question? Do you have to ask your lender permission to transfer the property purchase under your legal name into an LLC?
    Brandon Turner
    Replied almost 6 years ago
    Hey Victor, I don’t think it’s a bad idea, though I am taking a bit of a risk by not getting it in writing. They verbally have said they don’t care, but that could change, which is another reason I like using partners with good income/credit. We wouldn’t have a problem, hopefully, refinancing if we ever absolutely had to.
    Brandon Turner
    Replied almost 6 years ago
    Hey Victor, I don’t think it’s a bad idea, though I am taking a bit of a risk by not getting it in writing. They verbally have said they don’t care, but that could change, which is another reason I like using partners with good income/credit. We wouldn’t have a problem, hopefully, refinancing if we ever absolutely had to.
    Newport Group
    Replied almost 6 years ago
    Brandon: I have always bought it under my name with the understanding that this is an investment property that will be quit claimed into an LLC. However, I have to pay a half point higher in rate. Are you getting that half point higher rate?
    Kyle Hipp
    Replied almost 6 years ago
    Great post brandon. I love the detail. I have two questions.. 1. When you do the property management when you have a partner do you collect a fee or payment for that? It seems as if you do it for free and share that with the partner. 2. Maybe more of a comment as it sounds completed already but why did you choose to ammortize over 30 years with the intention to pay off early. I have not looked at rates in a couple weeks but just closed a commercial loan just over a month ago and recieved a 5% rate on a 15 year ammortization. It doesn’t change the world but it does save you 1extra payment to a payoff in 4 years 9 months and about $800. Also this comes at a unique time. A block and a half down from my house a triplex just came on the market. Huge 2800 sq ft house for $63,000. Might need more work though, no garage, stone foundation, and asbestos siding. It is also a foreclosure but not a HUD. An old acquaintance of mine actually lived there and I know there is plenty of deferred maintenance. Nothing I havn’t dealt with before but it might be pushing our pace a little bit.
    Brandon Turner
    Replied almost 6 years ago
    Hey Kyle, Thanks for reading! 1.) Normally, when I do deals like this, the fact that I do the management is okay because usually I don’t put in any money (usually my partner covers 100% of the down payment) but on this one, it’s a little different. I didn’t mentioned this in the post, but the partner that I’m using is actually my office manager, who I pay to look after my properties anyways. So for this project, she’ll be actually doing most of the managing work. Had it not been like that, yes – I would take a management fee. 2.) Great question – only because my portfolio lender only let me do that. I don’t know why – and I might refinance in the coming months to do just that. You are right, if I could cut the interest, it might be worth it, especially if I can get all our capital back out to do another project. Let me know what you end up doing with that potential triplex of yours!
    Christopher
    Replied almost 6 years ago
    Hello I have a quick question. How exactly did your partner on the deal make money on the investment?
    Brandon Turner
    Replied almost 6 years ago
    Hey Christopher, My partners have 50% in the deal. 50% of the down payment, 50% of the repairs, and then 50% of the cash flow and 50% of the appreciation and future profit. So they’ll get the same profit I do. Thanks!
    Shaun
    Replied almost 6 years ago
    Is the loan in all of your names or just yours? If the cash contributions are the same and they are not on the loan I think you should have gotten a little bit bigger piece of the pie for taking that added risk.
    Jon Klaus
    Replied almost 6 years ago
    Lots of character in your triplex, Brandon. I’m surprised it didn’t sell in he owner occupant only period. When you ultimately sell maybe it will go to an OO. A 4/3, with a couple of mother-in-law suites “might” go for a premium to the right buyer. In the mean time, it’s cash flow city. Good job, and great write up!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Jon, yeah tons of character. I’m gonna try to take a video tour of it sometime soon, cause it sure is a cool place. I wish I could drop 100k into making it amazing, but it wouldn’t get any more rent, so I won’t. 🙂 And yeah, I’m also surprised it didn’t go OO. Someone could have had an amazing house. At least now I can get it rented and keep the option for selling open! Thanks Jon!
    Abdul
    Replied almost 6 years ago
    Great post Brandon. I am a newbie as well and it’s good to see the full break down of the property, including the pictures. It’s been tough to imagine a multi-family in that condition, in that price range!!! This helps support the fact that with some patience and analysis, the deals are really out there, in the right market.
    Brandon Turner
    Replied almost 6 years ago
    Hey Abdul, Yeah I admit my area is a little unique, but these areas exist all over the country – you just gotta get outside the major cities! Thanks for reading!
    Troy
    Replied almost 6 years ago
    Aren’t most of the houses in Aberdeen white with purple trim? It’s like a thing out there in the hills. 3,000 words and making a video! Great break down of the analysis!
    Brandon Turner
    Replied almost 6 years ago
    Haha Troy – this definitely isn’t the only one, but it might be the biggest! 🙂 Thanks for reading!
    Lisa
    Replied almost 6 years ago
    Excellent case for partnering. Such a good deal 🙂 Thank you for going into details about partnering. This is one area where someone always mention you should do it, but no details. Thanks for that!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Lisa! Thanks for reading 🙂
    Dean
    Replied almost 6 years ago
    Hi Brandon Great post. I just hit my 10 Fannie Mae loans and thought that I was stuck. Your post opens my eyes to potentially going above the 10 loans. How do you go about finding a portfolio lender? Thanks, Dean
    Brandon Turner
    Replied almost 6 years ago
    Hey Dean, Thanks! As for finding portfolio lenders, the best way is simply to start calling! Stay away from the national banks, and start calling all the small local community banks. You’ll find one pretty quick. Check out the 6th episode of the BP Podcast for a great story on how Arthur Garcia found his!
    Sharon Tzib
    Replied almost 6 years ago
    Would love to see an after picture when it’s no longer purple, lol! Excellent post, as always, Brandon. Very helpful to see a start to finish analysis of a multi purchase. Thanks!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Sharon, and yeah – I’ll post pics!
    Steve Johnson
    Replied almost 6 years ago
    You did it again! You’ve got a great video that is laid out very well and explains how the calculator works. I greatly appreciate the added factors such as rent multiplier Better yet, I picked up a great strategy for how to deal with those ARMs. I hadn’t considered that you could just pay off the whole thing in less time than it takes for the new rates to kick in. I heard of an investor with ARMs on a number of his properties and I was baffled as to how and why he felt comfortable doing it that way. But, if he’s run the numbers similar to you I completely understand how that makes sense. Thanks again for a helpful article.
    Brandon Turner
    Replied almost 6 years ago
    Thanks Steve! Yeah, trying to pay off the loan before the ARM is something I’ve never done, but really like the idea of so I’m gonna try on this one. Also, it’s nice that most ARMs today have a cap, so just run your numbers with the cap, and if it works, great!
    Rose
    Replied almost 6 years ago
    Excellent presentation of info! I do hope you update us on how the rental of the main house goes. We had a duplex years ago that was a 4 bed 2 bath home with a converted garage that was 2 beds and 1 bath. Both were very nice and the garage unit always rented quickly. The main home was always difficult to rent as mostly families called on it and it had a connected laundry area that families didn’t like. Families also didn’t like the idea of sharing the backyard their kids would be playing in.
    Brandon Turner
    Replied almost 6 years ago
    Hey Rose, yeah that’s definitely my biggest concern here. Luckily, the main home really does feel like a house, in that there is a separate entrance, separate laundry, and separate back yard. We shall see!
    Daren
    Replied almost 6 years ago
    Brandon, Good work to walk thru your deal with people here. Would you walk us thru the loan process specifically in your next post (after you max out the traditional loan)? and did DCR play any part of your local bank portfolio loan process?
    Brandon Turner
    Replied almost 6 years ago
    Hey Daren, yeah sounds like a great post, I’ll definitely try to do that. This loan went pretty easily, but there were a few hiccups along the way. And no, because it was a residential loan, I don’t think they ever even asked about the Debt Coverage Ratio, though it was incredible on this. I think if I had gone with a commercial loan they would have been a lot more interested!
    Daren
    Replied almost 6 years ago
    First of all, I was quite puzzled by an early reply from Dean, I thought the max number for Fannie and Feddie is 4 Residential loans instead of 10. They check up your income/debt ratio, as it for now it must be under 43%. And then everything after the 4 loans would go like commercial loan, because the local bank is gonna buy your loan and keep in it’s book, usually they would ask about DCR, maybe it differs in different markets. I do think mass audience here would like to know your process with the bank, and get the bank aside with them. Thanks for your quick reply. You are always champion.
    Bruce Driscoll
    Replied almost 6 years ago
    This is probably the best information on purchasing a property I have read. Great detail and insight. I haven’t paid much attention to the emails I have been receiving since joining, but I will now Thanks
    Brandon Turner
    Replied almost 6 years ago
    Hey Bruce, thanks so much! If you liked this, I went into even more detail on this one: https://www.biggerpockets.com/renewsblog/2013/04/09/how-to-buy-a-small-multifamily-property/ Thanks for reading!
    Brian
    Replied almost 6 years ago
    1st thing I saw was <4x Gross rent multiple and it's habitable and not in a warzone….i'm in the wrong market. I've never saw a GRM that low unless it was a teardown.
    Brandon Turner
    Replied almost 6 years ago
    Agreed Brian, this isn’t a “normal” deal around here, but it’s also not unheard of. I hear people on the forums talk about these deals in areas all around the country. It would be fun to put a list together of all the markets in the US where things like this are possible. I’ll have to work on that!
    Diana
    Replied almost 6 years ago
    That was great Brandon. I really understood what you were talking about and applied it toward an analysis of a property I am looking at and it give’s me good numbers, now I think I might make that offer that I have been so much hesitating to make. Because it has to be a win win purchase. Thank you for the article. Now you should consider righting one on how to put an offer together so I could understand how it fits in with the analysis and the lowest possible offer price to make on a property.
    Brandon Turner
    Replied almost 6 years ago
    Nice Diana! Hopefully you can get that property of yours. Good luck with it! And yeah, I probably should write an article on that, huh!? Thanks for the idea! I like it! I’ll try to do one soon 🙂
    Edwin
    Replied almost 6 years ago
    Brandon, you mentioned reaching to couple folks as partners, so if they each agreed to invest with you, that would be three people total. $27500 /3= $9166 each partner invests, not just under the $14,000 you mentioned. were there ultimately only 2 partners, or 3?
    Brandon Turner
    Replied almost 6 years ago
    Hey Edwin, Oh yeah, I never made that very clear. The other people are a married couple, so it’s them (as half) and myself/wife (as half.) Hope that helps!
    Edwin
    Replied almost 6 years ago
    thanks, Brandon,that makes more sense now.Regardless of the # of people involved it’s still in essence just two partnership halves.
    True
    Replied almost 6 years ago
    Hi Brandon, for a newbie from New Jersey this is by far one of the best articles I’ve read from BP, I planning getting the Pro membership in January when I start my REI company. The best part was the education I recieved from your detailed breakdown and software links you provided. Thanks a bunch! True
    Brandon Turner
    Replied almost 6 years ago
    Thanks so much! And definitely go pro- though FYI – prices on Pro memberships double after today – so lock in a low price by just going “monthly” now, and you’ll be safe before prices go up on NEW accounts. Quick tip! 🙂
    Rose
    Replied almost 6 years ago
    Brandon, This article is so timely for me. I’ve been studying REI for a few months now and have the “rules” & spreadsheets & info, but didn’t have the process in a lineal form so this is just what I needed as I’m currently looking at a duplex and writing my business plan. Thanks for putting the puzzle together in an understandable post. Now I just have to figure out how the spreadsheets work.
    Rose
    Replied almost 6 years ago
    BTW, I don’t think it’s ugly at all. A new coat of paint maybe… But then I live in the land of cookie-cutter homes & condos so something with architectural interest is always refreshing to me.
    Brandon Turner
    Replied almost 6 years ago
    Thanks so much for reading, Rose! I know I really love to see step by step, big picture stuff sometimes, so I’m glad I could help! And thanks, yeah… awesome house, just ugly purple windows!
    Rose
    Replied almost 6 years ago
    Ah, but the purple is part of the charm.
    Rose
    Replied almost 6 years ago
    Ah, but the purple is part of the charm.
    Rose
    Replied almost 6 years ago
    Ah, but the purple is part of the charm.
    Adrian
    Replied almost 6 years ago
    Thanks Brandon, great end to end description of a great deal.
    Brandon Turner
    Replied almost 6 years ago
    Thanks Adrian!
    Aaron
    Replied almost 6 years ago
    I like purple. Great post.
    Brandon Turner
    Replied almost 6 years ago
    Haha I like purple too when it cash flows 🙂
    Keith
    Replied almost 6 years ago
    I would be painting it green, based on these numbers, Brandon!
    ian
    Replied almost 6 years ago
    Quite entrepreneurial in your approach to this deal — seeing not only the obvious but the potential. Very creative and replete with educated faith. Simple yet sophisticated and thinking outside of the box. I appreciate your unselfish sharing Brandon and the explanatory detail of your demonstration. I am inspired and motivated by it. I am naturally confident in my approach to things; however, my confidence is boosted by your deal strategy. Keep up the good work. Life is splendid; keeps getting better too.
    Brandon Turner
    Replied almost 6 years ago
    Thanks Ian!
    Kendra Gaines
    Replied almost 6 years ago
    Ok…what I’m confused about here is the partnership. Of your $750 cashflow what are they getting? It seems like no one talks about this…if you’re splitting it down the middle, then it’s only $375 for you right? And what is the benefit of a private lender if there seems to be no interest? I’m very confused!
    Brandon Turner
    Replied almost 6 years ago
    Hey Kendra, There are different kinds of partners. This partnership is an “equity” partnership, in which they get 50% of the property. So if we paid it off, and sold if for $100,000 – then we would each get to keep $50,000. So yes, we should be getting about $750 in cash flow, so $375 each. Normally, yes – we would each keep that money to go buy TVs, cars, whatever 🙂 However, instead, we are going to take that money and pay of the mortgage faster, hopefully in 5 years. So 5 years from now, we’ll both own 50% of the property. At this point, we’ll get to split 50% of the cash flow from that point forward, and if we sell it, get to keep 50% of the profits from the sale. Does that help?
    Brandon Turner
    Replied almost 6 years ago
    Hey Kendra, There are different kinds of partners. This partnership is an “equity” partnership, in which they get 50% of the property. So if we paid it off, and sold if for $100,000 – then we would each get to keep $50,000. So yes, we should be getting about $750 in cash flow, so $375 each. Normally, yes – we would each keep that money to go buy TVs, cars, whatever 🙂 However, instead, we are going to take that money and pay of the mortgage faster, hopefully in 5 years. So 5 years from now, we’ll both own 50% of the property. At this point, we’ll get to split 50% of the cash flow from that point forward, and if we sell it, get to keep 50% of the profits from the sale. Does that help?
    Billy
    Replied almost 6 years ago
    I have a question, you mention that you MAY be able to rent the garage to one of the tenants for $40 per month. Is this common on multi unit properties? If no one rents it, would you be able to store your stuff there?
    Brandon Turner
    Replied almost 6 years ago
    Hey Billy, Everything is up for negotiation, but yes – on multifamily, this is pretty typical to charge for storage. I might offer it as a “bonus” or something, or just give it to the tenants in the big house if I have any trouble. I dunno 🙂 But yes, I could just use it for my own stuff – I did that once before and worked okay, but it got broke into a few times – and I think it was the tenants who lived there. So I emptied it.
    Michael Sadler
    Replied almost 6 years ago
    I really like automating things, too! How common is 100% financing in most US cities? Thanks for sharing the 2% rule of thumb, where the gross rent should be 2% of the purchase price. I never knew that! Thanks for sharing the 50% rule, too! It is really helpful when you don’t know the cost of heating, tax, and insurance. I am glad that I watched the video so that I could hear about your Buy’n Hold Calculator. It looks like a great report generator that can be shared with investors. I also like to source deals, so that I can use other people’s money. I keep seeing cash-on-cash return online. Are you familiar with cap-rate? Thanks for sharing your real life experience buying a new asset! Reply Report comment
    Michael Sadler
    Replied almost 6 years ago
    I really like automating things, too! How common is 100% financing in most US cities? Thanks for sharing the 2% rule of thumb, where the gross rent should be 2% of the purchase price. I never knew that! Thanks for sharing the 50% rule, too! It is really helpful when you don’t know the cost of heating, tax, and insurance. I am glad that I watched the video so that I could hear about your Buy’n Hold Calculator. It looks like a great report generator that can be shared with investors. I also like to source deals, so that I can use other people’s money. I keep seeing cash-on-cash return online. Are you familiar with cap-rate? Thanks for sharing your real life experience buying a new asset!
    Brandon Turner
    Replied almost 6 years ago
    Hey MIchael, thanks for the comment! 100% financing – tough but doable in any market. It’s not so much “no money down” as it is “no money of yours down.” As for 2% rule – yeah, it’s tough to find properties that fit this, but when you do – you have a strong suspicion it’s going to be a good cash flow deal. And yeah, the 50% rule is nice also. Thanks Michael! Reply Report comment
    Brandon Turner
    Replied almost 6 years ago
    Hey MIchael, thanks for the comment! 100% financing – tough but doable in any market. It’s not so much “no money down” as it is “no money of yours down.” As for 2% rule – yeah, it’s tough to find properties that fit this, but when you do – you have a strong suspicion it’s going to be a good cash flow deal. And yeah, the 50% rule is nice also. Thanks Michael!
    Jimmy
    Replied almost 6 years ago
    Dude! I swear I’m going to come and visit you in 2014. The deals you get are awesome! Congrats! Next time my wife complains our triplex is ugly – I’m going to show her this picture! Hope you are doing well!
    Stanly Hernandez
    Replied almost 6 years ago
    This is simply amazing and well done! Hope it works here in SoCal!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Stanly! It should work – but you may need to add a few zeros onto the numbers 😉
    Newport Group
    Replied almost 6 years ago
    Brandon: Where did you get the background music for your video. I am looking for the rights to use something similar for cheap. Thanks
    Brandon Turner
    Replied almost 6 years ago
    Hello, The music came from this guy: http://www.youtube.com/watch?v=5v7HBBMJc7o – though YouTube now offers free background music as well – https://www.youtube.com/audiolibrary?feature=blog And I use “Screenflow” to make the videos !
    Newport Group
    Replied almost 6 years ago
    Also, what program are you using to show the computer screen and picture in picture? Thanks,
    Brandon Turner
    Replied almost 6 years ago
    Hello, The music came from this guy: http://www.youtube.com/watch?v=5v7HBBMJc7o – though YouTube now offers free background music as well – https://www.youtube.com/audiolibrary?feature=blog And I use “Screenflow” to make the videos !
    Amy
    Replied almost 6 years ago
    Great post, thank you Brandon! I have always enjoyed you links to references too, however, I get really distracted when reading and have to remember to go back and read them all, because I think, yeah, that sounds interesting too! Keep up the excellent work!
    Brandon Turner
    Replied almost 6 years ago
    Thanks Amy! Yeah, I know exactly what you mean. When I’m reading a long blog post, by the time I finish I have like 15 tabs open with other links and content. 🙂
    Gerald Harris
    Replied almost 6 years ago
    Great Article! I am just beginning to understand Multi-Unit Properties. I actually didn’t know about the 2% rule. Here in North Carolina that is easy to achieve. Where I use to live in Southern California It is difficult to find that unless i acquire a property with a large unit count. SFH’s in alot of the areas in California would not qualify for this 2% rule. Where I use to live the average price of a single family house was 300k. The rents in the area go for about 1700 to 1900 per mo. No cash flow. Having Moved across the country I see this 2% rule is so much easier to achieve.
    Brandon Turner
    Replied almost 6 years ago
    Hey Gerald, thanks for the comment!
    Daniel Walker
    Replied almost 6 years ago
    Brandon, Just wanted to check if you had an update on the ugly purple. Did you get this rented out? Thanks!
    Brandon Turner
    Replied almost 6 years ago
    Hey Daniel, 2 out of 3 are rented. I’m planning to write an update on this one as soon as the third gets rented. I had a bunch of unexpected plumbing issues to deal with!
    Daniel Walker
    Replied almost 6 years ago
    Brandon, Just wanted to check if you had an update on the ugly purple. Did you get this rented out? Thanks! Reply Report comment
    Daniel Walker
    Replied almost 6 years ago
    Brandon, Just wanted to check if you had an update on the ugly purple. Did you get this rented out? Thanks!
    Roberto Reyna
    Replied over 5 years ago
    Brandon, is this the “Waldo” property spoken about in a podcast with Ben ?
    Brandon Turner
    Replied over 5 years ago
    Yep! It is the very same one!
    Ed
    Replied over 5 years ago
    I’m waiting to hear about the plumbing issues and how you dealt with them.
    Brandon Turner
    Replied over 5 years ago
    Here’s the problem: Someone in the past flushed huge rocks down the toilet. So, after several plumbers, I got one to stick a camera down the line and we discovered them. We then pushed the rocks all the way through to the street. So no more rocks, no more problems with plumbing! 🙂 I also re-did some of the old water supply lines with Pex, because Pex is amazing!
    Brandon Turner
    Replied over 5 years ago
    Here’s the problem: Someone in the past flushed huge rocks down the toilet. So, after several plumbers, I got one to stick a camera down the line and we discovered them. We then pushed the rocks all the way through to the street. So no more rocks, no more problems with plumbing! 🙂 I also re-did some of the old water supply lines with Pex, because Pex is amazing!
    Brandon Turner
    Replied over 5 years ago
    Here’s the problem: Someone in the past flushed huge rocks down the toilet. So, after several plumbers, I got one to stick a camera down the line and we discovered them. We then pushed the rocks all the way through to the street. So no more rocks, no more problems with plumbing! 🙂 I also re-did some of the old water supply lines with Pex, because Pex is amazing!
    Katie Rogers from Santa Barbara, California
    Replied over 4 years ago
    “I was sure a homeowner would snatch it up.” People who are simply trying to buy a family home are sick to death of this attitude from investors. Actually, this is exactly how I became an investor. In the process of the total frustration of trying to compete with investors and hedge funds just to buy a personal HOME, I learned that I needed to think the way investors think and run the numbers the way investors run the numbers. Buyer’s agents are useless. They will not do the homework, and they do not seem to know how to negotiate on their buyer’s behalf even though that is supposed to be their fiduciary duty. One investor I knew very well had 39 houses (probably a lot more now). When he was looking at the 40th house, I said, “Can I have that one? Please. pretty please?” No dice.
    Alex Chin from Seattle, Washington
    Replied about 4 years ago
    I was browsing the MLS ealiar tonight and happened to run across this gem and it immediately made me think of Brandon’s ugly purple tri-plex…only I think this one has the “ugly” factor beat by a few miles. Have a gander! https://www.redfin.com/WA/Everett/2501-California-St-98201/home/2686253
    Michael Finkle
    Replied 5 months ago
    Hi Brandon, I just listened to the podcast that discussed this episode and this is just about 5 years ago…I’m curious, how did your plan work out on this property? Thanks! Mike
    Derik Lewis
    Replied 3 months ago
    I would love to hear the 2019 update on the ugly purple rental!!