Analysis Paralysis or Calculating Risks on First (To Be) Deal?

Question

Austin Reed · Answer

@Renee Chun Renee, another avenue (perhaps I missed it in the above text) would be to purchase one of these duplex setups as an owner-occupied property. You guys move into it and start from the inside...

I'm at 16 Units consisting of duplex/triplex setup and the majority were done through buying a decent property, improving the costmetics of it and making it 'nice' and then renting the units out.

Example of a Triplex I purchased 2 years ago:

Purchased for $235K FHA loan with 3% down.

First 30 Days - Updated the Lower Unit - Cleaning / Paint / Countertops / Windows / Smart Thermostat (Rehab was around $5K. I do my own work unless it's specialized).

Listed and Rented that Unit for $1200.00

(Listed on CL; Don't be afraid to start high and lower it until you get people calling you).

That provided cash flow to continue fixing up the unit I was living in as well as the third unit.

Once it was "completed" I rented the other two units out and now the property has FCF of$1100 per month and I've moved on to another property. Free Cash Flow... after debt coverage and all expenses.

Downside is some moving more than the average person; upside is I can remain very liquid. Next step will be to refinance my holdings that are in traditional loans into a commercial product.

Andy Mirza · Answer

@Renee Chun I was in the same position as your husband for several years. I wanted real estate to be a replacement career. One time, I wanted it so bad that I took too much risk and ended up overleveraging and losing a lot of money on a flip. It took me 2 years to recover from that mistake but I ended up being in a much better position. Some people hit it big in real estate right from the get go and are tremendously successful right away. I'd venture that most are not.

First of all, I'd suggest a change in mindset. Don't be too eager to hit grandslams to make enough money to quit that W-2 job. Impatience leads to poor decision making which leads to errors that lead to losing money. Realize that it will take time to learn the business, develop knowledge, expertise, and competence. Success will come.

On a practical level and in my opinion, rentals are a great way to build wealth, not such a great way to make a living until you've accumulated enough. IMHO, your husband's best course of action would be to get involved in fix and flip if he wants a substitute job because that's exactly what it is. Rehabbing houses is work.

Instead of a rental use the money as a down payment on a flip using a HML, take your profit and put it into your next deal.

Marcus Auerbach · Answer

@Jeremiah Pedersen hate to bare bad news, but even in the midwest cheap properties are fools gold for a long term buy and hold. Any time you have a huge gap between fair market value and replacement cost, you pretty much know you are dealing with a money pit over a 30 year cycle. You can get very sophisticated with IRR calculations, but it comes down to the simple fact that the cash flow alone will not generate enough money for capex - which by the way is not a percentage of rent; the two have an inverse correlation. If you want to make it a percentage (for rough estimates) it should be tied to replacement value. You can make money with cheap properties by passing on the hot potato: buy one in good shape, rent it out for a few years and then quickly sell it to the tenant, before it needs a new roof. Or HVAC. Or kitchen. Or a new sewer lateral...

Renee Chun · Answer

@Andy Mirza Thanks for taking the time to read my post (I lost all formatting/spacing doing it from my phone so it looked horrendous when it posted). I appreciate your feedback and though he may be upset with me about it, I am going to make sure we are braking enough to thoroughly evaluate not just how great the numbers appear initially on a deal but how quickly/does it enable us to get to the next deal!

Joe Villeneuve · Answer

First, you are both right...and, you are also both wrong.  Let me try to clarify within the limits of this format.

1 - Your 1st Question isn't important, because any answer(s) you will get would/should mean nothing to you.  That's due in large part to the next point.

2 - Your 2nd Question can only be answered by you and can only be based on your ability to -      a - Analyze Markets, not properties     b - Understand How Money Works, and how it applies to REI.     c - How to Design, and Follow, your own REI Plan that takes you to your Goals.     d - That "a - c" must work in conjunction with each other, and none of them are more, or less, important than the other 2.

Jeremiah Pedersen · Answer

@Renee Chun  In regards to your dilemma about your husband wanting to quit his job. In my opinion and wisdom, Do not quit the job until your passive income is enough to replace. You gotta acknowledge there is a difference between knowing that REI can replace his W2 AND knowing how many assets it will take to get there (also how much it will cost to acquire each asset and how much time it will take to acquire 1 asset).  Im sure you already know that, but I say it because Ive been blinded myself in the past and have jumped into a new venture that didnt improve my situation, but made it worse. I'll PM you to talk about what we look for in the midwest and how I analyze them.

-Jeremiah

Marcus Auerbach · Answer

Renee - note in that Austin bought a quality property in a decent neighborhood: you can tell because of the 235k price tag in Milwaukee. You want to buy a good deal and you have to have cash flow - but the lower price segements (often perceived as lower amount = lower risk) are cheap for a reason and actually carry a lot of risk and future cost.

No new listing goes unnoticed on MLS. New investors underestimate how many seasoned investors are out there scanning the market every day with money to invest - they would buy up these cheap deals in a second if they would be any good. They don't, because they know better.

Lease options are an interesting tool and I have done a few. The issue is that most tenants will never execute the option - some say only 10% will, my personal experience is about a thrid will. The rest will forgoe thir option fee and continue to rent or move on to another one. Does not make any sense for you and me, but that's what they do.

Renee Chun · Answer

@Austin Reed that's exactly what we are hoping to do except we will probably not ever do owner-occupy in a multi-family because we have 3 crazy dogs and a baby on the way :D we are definitely looking at multi-family or if we end up doing SFH due to budget constraints - look at renting rooms vs the entire house (we  are doing that with a property and it brings in more than just renting the house as a whole).

Renee Chun · Answer

@Marcus Auerbach - that is exactly where my hesitation is for properties in Louisiana - you can't count on equity only cash flow. however, my thought was for a market like this -  try to do a lease with an option to buy for the renters down there so i can get cash flow and also get out of dodge to avoid the capex requirements that for sure would be needed if i held it too long... i feel like most of the renters there must want a way to own but must not be able to come up with the down payment because the mortgage is 4x5 less the rent they are paying! Could be naive/rookie of me to think this way but we were thinking create leverage by buying the property in cash, then pulling $ out of it to basically recycle that into another similar investment - repeat that process - lease option to own with all the renters and sell before capex is due?

Jeremiah Pedersen · Answer

@Jay Hinrichs: While there is definitely the possibility of a missed payment, in markets like Detroit, where a huge percentage of the rentals are Section 8, that is a pretty much guaranteed payment. I like guaranteed payments!

Its interesting, in some markets, the culture there is fully accepting of Section 8 and in other markets (most notably is Milwaukee) Section 8 is frowned upon.  Regardless, the rent to purchase ratio is awesome in the midwest markets!  Also know that in higher end B class neighborhoods, properties sell in the $100,000 range, which is still a great deal for Rent Ratio!

Analysis Paralysis or Calculating Risks on First (To Be) Deal?

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