Buy and Hold Questions from a New Investor

14 Replies

Hello everyone,

   I’m a 22 year old Floridian, stationed in the Midwest and I have just over $26,000 saved with a 731 FICO. 

    My strategy is to buy and hold affordable properties while I am still living in the Midwest over the next couple of years. The property is very affordable in comparison to back home and I want to use this to my advantage.

     I have recently analyzed a fourplex in a nearby city priced at $125,000 (I believe I can negotiate it down to the $95,000-$100,000 range). This is a B- property with a new roof and has a combined market rent of $2,680.   I would like input as to what others would do in my situation.

     

     My questions:

Is it more advantageous to utilize a smaller more local lender as a way to build a reputation as a new investor?

Would it behoove me to put down a larger down payment for more cash flow, or, should I use some of my cash to invest another 5% into another property?

Thank you for your input,

    Dominic

What are the rest of the numbers?  The ones with $$$ in front?  Rent means nothing without knowing the exact monthly costs...and never put down a larger down payment to get what you think is bigger cash flow.  All you're doing is buying cash flow.  That makes now sense.  Use the least amount of Cash as you can...as long as it still cash flow positive, at the minimum required cash flow for you.

The Figures:

*Based on a $95,000 purchase price.*

Monthly Income: $2,680

Monthly Expenses: $1,140

Monthly Cashflow: $1,539.46

Pro Forma Cap: 20.72%

NOI: $23,833

Total Cash Needed: $4,750

Cash on Cash ROI: 388.92%

Purchase Cap Rate: 25.09%

Total Operating Expenses: $693.92

Mortgage Expenses: $446.62

Vacancy (5%): $134

CapEx (10%): $268

Repairs (10%): $268

Property Taxes: $23.92

P&I: $446.62

I know the current rent needs to be verified with what the tenants are paying but it is fully occupied. Even if I can't get this property at a lower value as calculated, it is still an appealing deal.

I think part of your dilemma @Dominic D. is that you are looking to potentially keep 5% to use to acquire another property. Do you have a lender that will lend you 95% of the acquisition for another property? Usually on an investment property, lenders will want 20-25% down. If you aren't going to have that, you can keep the 5% and save up until you get to 20% or put that into this deal to increase your cash flow. Run your numbers with both scenarios and then you can make the best decision. 

Here are the numbers that matter:

Buy                95,000
DP (20%)       19,000

Rent  M/Y      2680/ 32,160
PITI M/Y 471/ 5652
CF     M/Y       2209/ 26,508

End of YR#       +  7508

CoCR                   353%

This means you would be making Realizing) a profit of about mid way through the 9th month...when you'v recovered all of the cash you put into the deal.

Great breakdown by @Joe Villeneuve above. Another thing to keep in mind; cash flow in the midwest is great. Appreciation? Not so much. Without appreciation, it's nearly impossible to scale. I don't know what your long term goals are, but you might reconsider the market you invest in if you plan to make a serious run at this. If you buy this place for $95k and keep it for 10 years, you'll have good cash flow, but you'll never be able to leverage it, and I'd be shocked if you can sell it in 10 years for more than the an increase at the rate of inflation. There are markets out there where you'll realize less cash flow, but your property appreciates at 5-8% a year. If you buy at $100k property that appreciates like that, you'll be way better off in 10 years than you could do with cash flow in the midwest. Then you can borrow against your equity and keep rolling from property to property. 

Originally posted by @Corby Goade :

Great breakdown by @Joe Villeneuve above. Another thing to keep in mind; cash flow in the midwest is great. Appreciation? Not so much. Without appreciation, it's nearly impossible to scale. I don't know what your long term goals are, but you might reconsider the market you invest in if you plan to make a serious run at this. If you buy this place for $95k and keep it for 10 years, you'll have good cash flow, but you'll never be able to leverage it, and I'd be shocked if you can sell it in 10 years for more than the an increase at the rate of inflation. There are markets out there where you'll realize less cash flow, but your property appreciates at 5-8% a year. If you buy at $100k property that appreciates like that, you'll be way better off in 10 years than you could do with cash flow in the midwest. Then you can borrow against your equity and keep rolling from property to property. 

 Midwest appreciates just fine

These numbers seem a bit too good. Most decent small multifamily that cash flows like that will be gone overnight. Is this d/f class? nightmare tenants? Tons of deferred maintenance? All these are potential reasons people will sell an occupied building with an apparent cap rate around 25%. With 5% down, you could easily start out underwater then sink to the bottom once reality sets in.. Better inspect carefully and background check the tenants.

@Dominic D. If you can provide more info on the numbers, it may help others to give their input. Regarding using a local lender, it will help for future deals if you plan to continue to buy in the area. As for putting down a larger down payment for more cash flow, you'll have to look at all the numbers (i.e. income, expenses, debt service, etc.) before you can make a decision. Good luck! 

Originally posted by @Gordon Starr :

These numbers seem a bit too good. Most decent small multifamily that cash flows like that will be gone overnight. Is this d/f class? nightmare tenants? Tons of deferred maintenance? All these are potential reasons people will sell an occupied building with an apparent cap rate around 25%. With 5% down, you could easily start out underwater then sink to the bottom once reality sets in.. Better inspect carefully and background check the tenants.

 I thought that was the idea...to find properties that are "a bit too good".