Am I absolutely crazy here? (hint: probably.)

Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes

@Rick Petersen starting out, many investors make the mistake of not vetting the numbers properly and not understanding the CLASS of what they are buyng.

A common mistake we see is an investor applying Class A assumptions to Class C properties.

Example: maintenance, vacancy and nonperformance assumptions should all be higher for Class C than for Class B than for Class A.

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7 Reply

Steven Foster Wilson

Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes

4y

Quote from @Rick Petersen:

Okay, first of all, went through the free recorded session provided when you sign up, and it said you needed a plan to start with. Before I share what I'm looking at property-wise, I thought I would share my plan... I'm so new, I'm still working on figuring out if properties and strategies fit my plan.

I want to not have to work high-income roles just to meet my family's spending expectations (working on fixing the expenses side of the equation too...)

Because...

I want more time with my family

I want to be able to do leisure activities

I want to not be so stressed all the time

I want to be wealthy

Because...

I want to be able to set up <special needs child> to be cared for well in the long term

I want to travel

I want to live where I want when I want

I want to set my kids up, teach them and teach them to teach their kids

I hope to do this by setting up cash-flowing properties in the MidWest (Ohio, Michigan, Indiana, Kentucky, Missouri and Tennessee primarily). I am interested in either the BRRRR or just standard SF/MF rental strategies, understanding MF will cash flow better.

With that back-drop, I find an opportunity but it is a _big_ purchase and would be my very first. It includes many MF properties in a bundle. It looks to me, using the tax, insurance and current rent amounts provided, with 5% each cap expense savings, repair and vacancy planned in and 10% to a management company, that it would cashflow immediately. Small amount per unit, but at 40+ units, the cash flow would be around $2.7k/month. CoC looks to be low, 4.84% (predicted to hit 10.85% by year 10) and cap rate at 5.90%.

Now, I know the cash flow is super-low per unit, but if it's rare to find something that cash flows immediately, if it's diversified across a good number of properties and if we could be in for inflation and potential rent rate increases, does this sound like a good deal? Would this be something that would be a good deal for someone with a lot of experience/big portfolio, or do the numbers on this just scream that it's an over-all bad deal?

Finally, if it sounds like an good deal (BP says the first one doesn't have to be a home run, you just gotta get on base), and know that I am local to all the properties so there's that at least, then... I'd love help working through what all would be needed in order to secure financing (not sure if that cash flow is enough to make it so that an investor would be 100% willing to dive in). What would next steps be?

Are you partnering on this? https://www.calculator.net/ren... I like to use this calculator when running numbers. Where is this property bundle located in, A class, B class, C class? A lot of my properties do cashflow to start. I feel I would have to know more details before I answered. I am happy to chat if you would like.

1 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Drew Sygit:

@Rick Petersen starting out, many investors make the mistake of not vetting the numbers properly and not understanding the CLASS of what they are buyng.

A common mistake we see is an investor applying Class A assumptions to Class C properties.

Example: maintenance, vacancy and nonperformance assumptions should all be higher for Class C than for Class B than for Class A.

That makes a ton of sense! I think that makes perfect sense and I should have thought of that. I did not expect that this would be the sort of thing I would actually move on this early in my process, but I wanted to share a bit about the opportunity to find exactly that type of information. I thought about it last night and came up with a few other concerns that did not hit me right at first:

* The properties are spread over a 7 or 8 town area, so finding a single management company that would want to span that much area would probably be a struggle

* Just trying to be brutally honest with myself; if the cash needed was ~$450k up front (most of which I would need someone else to provide), I was planning to use a property manager... what exactly am I bringing to the table? I need to start smaller and a bit more within my means until I have at least some experience.

I really need to look more into what constitutes Class A/B/C as that wasn't even part of my criteria.

2 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Steven Foster Wilson:

Quote from @Rick Petersen:

Okay, first of all, went through the free recorded session provided when you sign up, and it said you needed a plan to start with. Before I share what I'm looking at property-wise, I thought I would share my plan... I'm so new, I'm still working on figuring out if properties and strategies fit my plan.

I want to not have to work high-income roles just to meet my family's spending expectations (working on fixing the expenses side of the equation too...)

Because...

I want more time with my family

I want to be able to do leisure activities

I want to not be so stressed all the time

I want to be wealthy

Because...

I want to be able to set up <special needs child> to be cared for well in the long term

I want to travel

I want to live where I want when I want

I want to set my kids up, teach them and teach them to teach their kids

I hope to do this by setting up cash-flowing properties in the MidWest (Ohio, Michigan, Indiana, Kentucky, Missouri and Tennessee primarily). I am interested in either the BRRRR or just standard SF/MF rental strategies, understanding MF will cash flow better.

With that back-drop, I find an opportunity but it is a _big_ purchase and would be my very first. It includes many MF properties in a bundle. It looks to me, using the tax, insurance and current rent amounts provided, with 5% each cap expense savings, repair and vacancy planned in and 10% to a management company, that it would cashflow immediately. Small amount per unit, but at 40+ units, the cash flow would be around $2.7k/month. CoC looks to be low, 4.84% (predicted to hit 10.85% by year 10) and cap rate at 5.90%.

Now, I know the cash flow is super-low per unit, but if it's rare to find something that cash flows immediately, if it's diversified across a good number of properties and if we could be in for inflation and potential rent rate increases, does this sound like a good deal? Would this be something that would be a good deal for someone with a lot of experience/big portfolio, or do the numbers on this just scream that it's an over-all bad deal?

Finally, if it sounds like an good deal (BP says the first one doesn't have to be a home run, you just gotta get on base), and know that I am local to all the properties so there's that at least, then... I'd love help working through what all would be needed in order to secure financing (not sure if that cash flow is enough to make it so that an investor would be 100% willing to dive in). What would next steps be?

Are you partnering on this? https://www.calculator.net/ren... I like to use this calculator when running numbers. Where is this property bundle located in, A class, B class, C class? A lot of my properties do cashflow to start. I feel I would have to know more details before I answered. I am happy to chat if you would like.

Steven (my nephew's name is Stephen Wilson, so I noticed your posts elsewhere), I would be glad to chat. Doing a quick glance at the class definitions, my gut is that of 11 properties, at least 10 of them would be class C, potentially one would get to the Class B level. They are in the Fort Wayne, IN area but most are in the more rural surrounding areas to the north.

I'll send you a direct message just to discuss a bit further if you don't mind; work will take me often to Columbus this year and last time there I fell in love with the German area, so I'd be glad to talk a bit about what that market looks like as well!

2 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

4y

How much are you going to have to spend to buy 40+ units and get a $2.7K/month return? That is a LOT of units and not a lot of return. If you have that much money to buy 40+ units, why not simply buy a few houses with good rent outright and make the same amount of cash flow (because your houses will be paid off)?

Then there is also the question of the quality of the tenant. I'd rather buy a few good properties in solid areas than lots of cheap places where I won't have great tenants and will have higher turnover, more problems and higher costs.

9 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

Quote from @Theresa Harris:

How much are you going to have to spend to buy 40+ units and get a $2.7K/month return? That is a LOT of units and not a lot of return. If you have that much money to buy 40+ units, why not simply buy a few houses with good rent outright and make the same amount of cash flow (because your houses will be paid off)?

Then there is also the question of the quality of the tenant. I'd rather buy a few good properties in solid areas than lots of cheap places where I won't have great tenants and will have higher turnover, more problems and higher costs.

This^^^ .....I would much rather have fewer units (doors) that had a better cash flow. You are going to deal with all the problems and issues associated with rentals that are probably C or D?

No thanks, I wouldn't do this for double that return......

2 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Theresa Harris:

How much are you going to have to spend to buy 40+ units and get a $2.7K/month return? That is a LOT of units and not a lot of return. If you have that much money to buy 40+ units, why not simply buy a few houses with good rent outright and make the same amount of cash flow (because your houses will be paid off)?

Then there is also the question of the quality of the tenant. I'd rather buy a few good properties in solid areas than lots of cheap places where I won't have great tenants and will have higher turnover, more problems and higher costs.

Thank you! That makes a lot of sense!

1 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Bruce Woodruff:

Quote from @Theresa Harris:

How much are you going to have to spend to buy 40+ units and get a $2.7K/month return? That is a LOT of units and not a lot of return. If you have that much money to buy 40+ units, why not simply buy a few houses with good rent outright and make the same amount of cash flow (because your houses will be paid off)?

Then there is also the question of the quality of the tenant. I'd rather buy a few good properties in solid areas than lots of cheap places where I won't have great tenants and will have higher turnover, more problems and higher costs.

This^^^ .....I would much rather have fewer units (doors) that had a better cash flow. You are going to deal with all the problems and issues associated with rentals that are probably C or D?

No thanks, I wouldn't do this for double that return......

Thank you, Bruce! You all have helped me hone in better on the types of deals I should be looking for.

2 Reply

Austin Johnson

Investor · Jefferson City, MO · Member since 2020 · 192 posts · 178 votes

4y

"CoC looks to be low, 4.84% (predicted to hit 10.85% by year 10)"

if you're paying all cash for these deals or funding yourself, that's decent. if you're raising private capital that's miserable.

"if it's diversified across a good number of properties"
this is why I wouldn't do it. if I'm buying MF units, I want them close for easier PM and under the fewest number of roofs.

"I'd love help working through what all would be needed in order to secure financing (not sure if that cash flow is enough to make it so that an investor would be 100% willing to dive in)."

what's the purchase price and the Gross Scheduled Rent? (total rental income if units were 100% occupied) is the DSCR 1.25 or higher? additionally, do you have anyone on your team with experience in MF who has closed on something this size before? banks TYPICALLY don't lend for big projects to brand new folks. you need someone called a KP on your team (Key Principle) to cover the experience, net worth and liquidity requirements of a bank. this protects both you and the bank.

2 Reply

Remington LymanBusiness Member

Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes

4y

Quote from @Rick Petersen:

Okay, first of all, went through the free recorded session provided when you sign up, and it said you needed a plan to start with. Before I share what I'm looking at property-wise, I thought I would share my plan... I'm so new, I'm still working on figuring out if properties and strategies fit my plan.

I want to not have to work high-income roles just to meet my family's spending expectations (working on fixing the expenses side of the equation too...)

Because...

I want more time with my family

I want to be able to do leisure activities

I want to not be so stressed all the time

I want to be wealthy

Because...

I want to be able to set up <special needs child> to be cared for well in the long term

I want to travel

I want to live where I want when I want

I want to set my kids up, teach them and teach them to teach their kids

I hope to do this by setting up cash-flowing properties in the MidWest (Ohio, Michigan, Indiana, Kentucky, Missouri and Tennessee primarily). I am interested in either the BRRRR or just standard SF/MF rental strategies, understanding MF will cash flow better.

With that back-drop, I find an opportunity but it is a _big_ purchase and would be my very first. It includes many MF properties in a bundle. It looks to me, using the tax, insurance and current rent amounts provided, with 5% each cap expense savings, repair and vacancy planned in and 10% to a management company, that it would cashflow immediately. Small amount per unit, but at 40+ units, the cash flow would be around $2.7k/month. CoC looks to be low, 4.84% (predicted to hit 10.85% by year 10) and cap rate at 5.90%.

Now, I know the cash flow is super-low per unit, but if it's rare to find something that cash flows immediately, if it's diversified across a good number of properties and if we could be in for inflation and potential rent rate increases, does this sound like a good deal? Would this be something that would be a good deal for someone with a lot of experience/big portfolio, or do the numbers on this just scream that it's an over-all bad deal?

Finally, if it sounds like an good deal (BP says the first one doesn't have to be a home run, you just gotta get on base), and know that I am local to all the properties so there's that at least, then... I'd love help working through what all would be needed in order to secure financing (not sure if that cash flow is enough to make it so that an investor would be 100% willing to dive in). What would next steps be?

That is exactly what I did here in Columbus, Ohio!

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Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Austin, that is helpful. This would not be all cash or self-funded; I would be able to pay a portion of the downpayment/closing but it would largely require additional capital... late at night when I posted the original, I wasn't thinking entirely clearly on the numbers but I've been assisted in seeing that there were many gaps in the idea.

I have not gone beyond just seeing it on the MLS (realtor.com) and running some of the provided numbers through the BP calculators. The seller will provide more documentation upon contact and proof of funds, so I don't have the details exactly. What was provided was $2.1mil purchase price, $212k/annually gross rent.

And finally, my team is me and I own my own primary residence, but other than a brief 1 year period where I owned my former home and rented it out while living out of state during a move, I have no experience with any of this. I suspected that the only way this would have been a deal I could be involved in would be if the numbers were a smash hit and someone with experience and cash was willing to jump into it with me... but that's why I posted earlier that I realized in that scenario I'm bringing nothing to the table and so I realized that this particular deal would not be something for me to get involved in.

1 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

If you're really a newbie like you say, definitely start off small where you know you can make some $$. But a SFR and see if you can find one that will work as a STR....?

You're doing this To. Make. Money. not for fun or an experiment

1 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Bruce Woodruff:

If you're really a newbie like you say, definitely start off small where you know you can make some $$. But a SFR and see if you can find one that will work as a STR....?

You're doing this To. Make. Money. not for fun or an experiment

I am indeed as new as new can be. Also, I'll be honest, STR is something I've not looked into at all yet; I have been very much focused on LTR. I need to do some reading on STR because my understanding is those would normally be in destination cities/areas and I'm not sure many people are headed to Fort Wayne for Spring Break... I probably am misunderstanding/misrepresenting the STR strategy out of ignorance though and I will work on fixing that with some research.

0 Reply

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

4y

@Rick Petersen

where are you located?

Start with:

-One property

-In an area you can drive to

0 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Auburn, Indiana, 30m north of Fort Wayne, IN. By "can drive to" I assume you mean quickly/often? I do travel to Chicago, Cincy, Columbus and Indy for work often, each of those is 2-3 hr drive, so I assume I shouldn't be looking quite that far away even if those may be 'better' areas.

1 Reply

Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

4y

@Rick Petersen correct - not necessarily a place you're in every week, but a place you can drive to. And, not to be able to manage your property - hire property management - but to get started - to go to REIA meetings, to see properties, to set up your Core 4.

Sounds like you're in a great area to do that - lots of markets within a drive.

2 Reply

Nathan GesnerBusiness Member

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Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

4y

I'm not going to add to the noise because you've already got some good advice. I do want to congratulate you for not being afraid to ask for help. There are a lot of experienced users to help you through this. Keep plugging away!

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4 Reply

JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes

4y

The numbers scream all around bad deal. Less than $100 per door is someone looking for a sucker to take a bunch of non-performing C/D properties off their hands while the market is hot. My prediction, just based on the few numbers provided, is that you wouldn't even find private equity to help you fund this purchase.

Start with 1. You can grow exponentially if you want but start somewhere. Starting with 40 C/D class apartments spread out over 7 cities is a good way to go bankrupt. Making money in that arena is possible but takes a lot more work, time and money than you likely understand - not least because no property managers want to deal with that kind of housing.

Lastly, the "Why" of "Why do I want to be wealthy" is hardly of any importance. What's more important is the "How" - as in "How hard am I willing to work to make this happen?" "How much time, money and energy am I willing to invest to get something like this going?" "How much sacrifice am I, and my family, willing to make in order to achieve these goals?"

Everyone wants to be wealthy. The reason why doesn't really matter. I've seen people work their asses off for what I consider shallow "Whys" because it was so important that they were willing to answer every "How". I've seen people with really important, noble or grand "Whys" do nothing whatsoever to reach those goals because they were unwilling to commit to the "Hows".

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1 Reply

Leo R.

Investor · Member since 2021 · 591 posts · 695 votes

4y

@Rick Petersen the thing that jumps out to me about your post is not the numbers, but the fact that you said you're new, and this deal is multiple MFs with 40+ units over multiple towns...that's certainly jumping in at the deep end.

I'm not saying that it can't be done, but I am saying that a portfolio like that is a challenge to buy and manage even for a person with extensive experience buying and managing MFs...

I don't believe you mentioned anything about property management (so for all I know, perhaps you have extensive experience with PM), but to buy and successfully manage a portfolio the size of what you're describing, you'll need a small army of professionals (i.e.; agent, broker, property managers, carpenters, roofers, electricians, plumbers, groundskeepers, and a CPA proficient in MF real estate...and those are just the folks I can think of off the top of my head!). Do you have that team in-place?

As for your actual question, 40+ units is a LOT of work for $2,700 / month cashflow (as @Bruce Woodruff mentioned)...you said that your goal is more free time for your family, etc. --if that's your goal, I'd say that this deal will move you in the opposite direction of that goal. Even if these are A class properties with competent personnel, 40+ units in multiple towns will take a lot of your time...which could be fine, if you're netting significant money per month, but this deal doesn't provide that....

In terms of the numbers, I'd say that $2,700/month cashflow is waaayyyy too thin of a margin for a portfolio this size--I personally wouldn't feel comfortable with that much risk, that much work, and that little cashflow. For perspective, one of my friends has a modest portfolio of 3 single family homes and 1 duplex, and he nets approximately $4k/month--that is a much more reasonable risk/work/cashflow ratio.

Also, you mentioned future appreciation and rent increases...if your plan hinges on future appreciation or future rent increases, you're not investing, you're speculating. Sure, there's good reason to believe that we'll see appreciation, but there are also well-evidenced arguments that we won't see appreciation (or that we may even see a downturn). At the end of the day, nobody knows what will occur in the future, and because nobody knows, your financial models need to be able to withstand worst-case scenarios (for instance, market downturns, significant vacancy, huge capex, significant wage increases for personnel, tenant lawsuits, etc.)...and $2,700/month cashflow isn't close to being enough to offset the work and the risk of 40+ units...

Sorry to be the bearer of bad news, but the good news is: there are always other deals to be found, and there are always other opportunities for success in RE (if you put in the work).

Good luck out there!

3 Reply

Bryan F.

Member since 2020 · 38 posts · 22 votes

4y

I know the package you are looking at. This is a terrible deal that will be cash flow negative after capex. Finding decent management won't be an issue. The current PM does a good job. Vacancy will be a bit higher in a couple of these towns (Butler specifically). These are all 100 plus year old properties that require higher capex estimates (I know from experience). You can find better deals for individual properties in more desirable areas on the MLS. If you're interested in the area, I'd start there. Review the listings/recent sales on multi-families and you can pretty easily spot the agents that specialize in investment properties in the area.

3 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

4y

dude just invest in syndication or Real estate funds if you don't have single experience. From the way you describe your dream, it seems you're not ready. Cash-flowing property can only pay you small bills but not a huge total return to make you wealthy, especially from an investment in a rural place in Indiana.

2 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

You are all awesome and I sincerely appreciate the guidance and correction, even the "what on earth are you thinking?!?" type responses help validate what I was thinking. The reality is that I keep looking in this area (Fort Wayne specifically) and with quick back of the napkin math, literally everything fails to cashflow using the same #'s and %'s I provided in the OP. So when I found something that looked like it could cash flow and it happened to be a lot of doors, I got excited. Where I am today I know full well that I need to find a SF or small MF and start there; finding so few that would cash flow from the start is discouraging but makes perfect sense: if it were easy/automatic, literally everyone would do it.

May end up needing to be a separate post, but in light of everything I'm finding, at least if I'm trying to stay very local to me, it looks like there are a lot of C/D type properties that I could buy, if they have the square footage, I could invest in adding a room, doing some minor rehab, then likely be able to rent it in such a way that it cash flows. Other than the 1-2br/1ba class C's in the rougher parts of town, there are then the nicer SF homes that have already been fixed up/staged and they look super nice but are carrying a hefty price tag where cash flowing is unlikely and there's not much value to add.

If I were to say I could bring ~$50k cash in the next 3 months to a deal, starting with the assumption that it's preferable to have my first deal fairly local and I live in Auburn, IN... Is that enough to get started well? I am very aware that I need to build my team of 4, but it feels like I should know what city first (again, options within 3 hours would be: Fort Wayne - if super-local is best to start, Chicago, Indianapolis, Cincy, Columbus, Detroit, Frankenmuth -- maybe good for STR?). I love what I saw when I visited Columbus, but to be real with everyone... the hype has me worried; in the stock market I believe in buying always but more aggressively when there is fear and I tap the breaks when there's such rampant optimism.

@Carlos Ptriawan - I appreciate the guidance and you are correct that I do not have any experience yet; as such I am certain that the property in question was outside of my means, which I've been assisted in realizing. That said, I do have other very passive investments as you outline and that is great advice as well. I am hoping to acquire a few properties directly as well both as an opportunity to learn and in hopes of growing it into something more... gotta get started somewhere!

@Bryan F. - Very interested in discussing what you know about the property if you'd be open to connecting more privately. If nothing else, I would love to hear about and meet the current property manager if they do a good job as I cannot imagine that I'll never buy any property in my hometown.

0 Reply

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

4y

@Rick Petersen you are not crazy... but please don't go buy a portfolio of properties in a different state using other people's money that will be "professionally" managed. You are setting yourself up for disaster.

Others on here have said it well. C class can be great, but the money is made through excellent operations. I operate in the Chicago area, and I ended up building a vertically integrated company for this reason. Management is too important to the returns, and also to quality control for the tenants.

I would focus on a deal you can do yourself for the first one, and if possible, I would stay local.

2 Reply

Bruce WoodruffPro Member

Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes

4y

@Rick Petersen Is this $50k you are bringing to the deal your money? Or is it someone else's? If you have to pay that back along with the rest of the expenses, you are going to have trouble finding a cash-flowing deal.....

0 Reply

Rick Petersen

OP

Member since 2022 · 16 posts · 15 votes

4y

Quote from @Bruce Woodruff:

@Rick Petersen Is this $50k you are bringing to the deal your money? Or is it someone else's? If you have to pay that back along with the rest of the expenses, you are going to have trouble finding a cash-flowing deal.....

That would be my liquid cash on hand.

0 Reply

Am I absolutely crazy here? (hint: probably.)

Am I absolutely crazy here? (hint: probably.)

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