Rental Property Investor · Boulder, CO · Member since 2019 · 144 posts · 72 votes
I get that BP is selling the sizzle a bit. I have been studying and studying. But no matter what, I simply cannot make the numbers work.
I am in a still-affordable-yet-booming metropolitan market in the southeast. The humidity is crippling. Within 50 miles, there are no homes for 100k (there are vacant lots for 99k). Homes at 150k are tear downs, or would require I would imagine, at least 30k in rehab.
There are no homes that simply require a lick of paint for under 200k. Probably 250k.
Banks I am talking to require 25% down. Let's say I get a house for 140k. 25% down is 35k. 30k rehab, that's 65k in.
A 105k loan @3.6% for 30 yr is 477/mo. I am roughly doubling that to account for all other expenditures. Estimating rents around 1200, this leaves about 250 left over. 2400/yr / 65k in = 4.5% ROI. Pathetic.
When I look in smaller markets, there are some potential homes at the right price, but the rents are around 750/mo, so that disqualifies those deals again.
What am I not getting here? This is what it's like with no mentor, just fishing around in the dark.
The way Bigger Pockets explains it, any house over 100-150k simply doesn't work. In a market with homes at 2-300K, how does any of this work?
I know how to describe this feeling now. It's like when a med student gets out of med school and is in his/her first year residency. Doesn't know what the f is going on, feels completely lost, they know nothing. After years of school. Hilarious.
what about Memphis? from google maps its a manageable 3 hour drive away from Nashville. If i was in driving distance to Memphis that would definitely would have be my first option. Ive calculated some pretty impressive ROI %s on some properties there but they were in D/F neighborhoods.
Really? You think 3 hours is manageable in terms of tenant needs, spontaneous service calls, etc. I am looking about an hour around Nashville. I was thinking it's best to be closer, 3 hours seem like "long distance" investing. I was expecting to have a first deal relatively close so I can monitor the property if things need maintenance. Who the heck knows. There are more opportunities in a wider area of course.
Yes, ofcourse 3 hours away would be too far for that... I assumed you would be hiring a property manager. Im saying its a manageable drive for that occasional need for you to physically be at the property, such as viewing it and getting a feel of the neighborhood before buying or performing/coordinating some pre-planned work to get it rental ready.
@Christopher Davis Thank you! I am feeling the commodore. My first investment property out of state. After reading Long Distance Investment by David Green, I had gain some courage. But I started looking at 2% rule property. It's like I didn't hear all the warning signs for newbies to stay away from 2% rule properties. But It's all I can afford cash and the area is up and coming with a tenant. I am so torn! the 2% rule scared the crap out of me after running the numbers.
what about Memphis? from google maps its a manageable 3 hour drive away from Nashville. If i was in driving distance to Memphis that would definitely would have be my first option. Ive calculated some pretty impressive ROI %s on some properties there but they were in D/F neighborhoods.
Really? You think 3 hours is manageable in terms of tenant needs, spontaneous service calls, etc. I am looking about an hour around Nashville. I was thinking it's best to be closer, 3 hours seem like "long distance" investing. I was expecting to have a first deal relatively close so I can monitor the property if things need maintenance. Who the heck knows. There are more opportunities in a wider area of course.
Yes, ofcourse 3 hours away would be too far for that... I assumed you would be hiring a property manager. Im saying its a manageable drive for that occasional need for you to physically be at the property, such as viewing it and getting a feel of the neighborhood before buying or performing/coordinating some pre-planned work to get it rental ready.
Gotcha. I figured I would manage at least for a few months just to see how terrible that is. Another learning experience. I agree 3 hours is ok as an occasional drive, checking the area out, a weekend, etc. Thanks much.
75 LTV on purchase means loan for 75% of purchase price. Houses over $150k probably don't work very well and neither do 2 units. Look for 3 and 4 units. Forget the 1% rule that's more for really cheap houses and just run all the numbers.
BP calculator may be of help. You can plug in your local taxes your personal down payment, etc. See what works. I'd focus on 3 and 4 units those are typically the best.
@Christopher Davis I'm not analyzing for rentals, but I feel your pain. I'm new to investing and it took me a year to find my first flip on the mls. All the numbers I ran left little to no margin. I believe many realtors run the numbers also and have the clients price just where someone might think they can make money. I analyzed about 100 potentials and offered on about 24 before one hit.
I see that you're in the Nashville market. I suggest you check out Clarksville TN/Hopkinsville KY and similar smaller metros within a 2-hr radius. You should easily be able to snag some 1% deals. I advise looking at properties that need significant rehab because that's your opportunity to build in cash flow and force equity.
@Christopher Davis why would you drive 3 hours for a random “service call”!? That’s what a property manager does! Sounds like you are putting the cart before the horse bud!
@Christopher Davis what specific market are you looking in? It's ok to say, it's not as if someone is going to steal your deals! :D
I kid somewhat, but honest question. I was raised in the deep SE US so am aware of both the humidity and home prices. Let me walk you through my first deal that I find locally up here in WV, on the MLS, and you (or anyone else for that matter) can tell me if it is bad from your perspective. It worked for me but if be curious for thoughts:
Type: duplex
Purchase Price: $97500
Down Payment: 25%, $24375
Source of Down Payment: 401k loan, 5 years @ 5.5%
Rehab: ~$8,000 out of pocket
Monthly PITI: $680
Rents: unit 1, $800; unit 2, $900
Monthly "Cash Flow": $1,020
The 401k loan hits my paycheck before I see it and I adjusted easily; it's around $300 a pay period I think. Plus that payment and interest goes back into my 401k in its entirety.
@Christopher Davis SFH don't always work the best. Try to find a 2-4 unit. You can get $2000-$4000 a month which makes a huge difference. You will pay more for it obviously but has better cash flow. I am looking at duplexes myself.
what about Memphis? from google maps its a manageable 3 hour drive away from Nashville. If i was in driving distance to Memphis that would definitely would have be my first option. Ive calculated some pretty impressive ROI %s on some properties there but they were in D/F neighborhoods.
D/f areas seldom hit their ROI projection except for those with a lot of experience with that class of RE. Most investors will achieve higher actual ROI on class B/C RE.
@Christopher Davis what specific market are you looking in? It's ok to say, it's not as if someone is going to steal your deals! :D
I kid somewhat, but honest question. I was raised in the deep SE US so am aware of both the humidity and home prices. Let me walk you through my first deal that I find locally up here in WV, on the MLS, and you (or anyone else for that matter) can tell me if it is bad from your perspective. It worked for me but if be curious for thoughts:
Type: duplex
Purchase Price: $97500
Down Payment: 25%, $24375
Source of Down Payment: 401k loan, 5 years @ 5.5%
Rehab: ~$8,000 out of pocket
Monthly PITI: $680
Rents: unit 1, $800; unit 2, $900
Monthly "Cash Flow": $1,020
The 401k loan hits my paycheck before I see it and I adjusted easily; it's around $300 a pay period I think. Plus that payment and interest goes back into my 401k in its entirety.
50% rule puts expected cash flow at $170/month. Cap expenses will eventually consume much of your current projection of cash flow. Add in maintenance, vacancy, PM, and miscellaneous and you get down to ~$170. At least it projects positive cash flow. The cash flow projects 8.3%. Then add the equity pay down and 4 times the appreciation (the multiplication is due to the leverage). It appears to be a fine investment.
Now same numbers with a value add that provides BRRRR opportunity. Ideally any dollar spent on rehab provides at least 2 to 1 return (we always achieve this). The refinance ideally lets you recapture all of your investment (we have never achieved this) but for this example we will say after the refinance you are in for 10% of original purchase but the rent has gone up in proportion to the value (so your equity is significantly increased with less money invested and the cash flow is virtually the same). Now the cash flow is returning 20.9% and the property still has equity pay down and market appreciation (now using a factor of 10 instead of the factor of 4) with a great chance of 1st year return of over 30%.
There are a lot of ways that a property can be a good investment (provide good ROI).
I'm considering long term extended stays on AirBnB and marketing one side of my 3/3 unit duplex to business travelers as test run. Less turnover. They'll stay 30 days or more. It is located near the state capital so I can market it at more affordable rates than the competition. You can also focus efforts on properties near hospitals for traveling nurses. Check out Al Williamson and his strategy on extended stay AirBnB. He was one of business types AirBnB appealed to when the company first started. He realized how much more profits that could bring versus traditional leasing. He helps coach landlords in how to go from traditional landlording around $1200 a month to upwards of $2000 a month depending on your market demand and location. You have to furnish it appropriately. He has tricks for doing affordably. This way if you assess your local market correctly and the demand for extended stays then the mortgage and expenses on that perfectly situated home become less stressful.
@Christopher Davis what specific market are you looking in? It's ok to say, it's not as if someone is going to steal your deals! :D
I kid somewhat, but honest question. I was raised in the deep SE US so am aware of both the humidity and home prices. Let me walk you through my first deal that I find locally up here in WV, on the MLS, and you (or anyone else for that matter) can tell me if it is bad from your perspective. It worked for me but if be curious for thoughts:
Type: duplex
Purchase Price: $97500
Down Payment: 25%, $24375
Source of Down Payment: 401k loan, 5 years @ 5.5%
Rehab: ~$8,000 out of pocket
Monthly PITI: $680
Rents: unit 1, $800; unit 2, $900
Monthly "Cash Flow": $1,020
The 401k loan hits my paycheck before I see it and I adjusted easily; it's around $300 a pay period I think. Plus that payment and interest goes back into my 401k in its entirety.
Nathan I think you have a great deal right there. It falls pretty close to the 2% rule (1700/97500 = 1.75%). The 401K loan is awesome - as long as the 5.5% goes back to you. I have a 401K loan at 6% and all that interest goes back to my account, so I assume you get the same deal. I don't know what PITI is though. Okay just figured that out. Principle, interest, tax, insurance, duh me.
At any rate, $100K for a cash flowing duplex. I would jump all over it, based on those numbers.
You’re 100% right, the market is pretty terrible in my neck of the woods and would imagine it’s the same almost every where else. If I knew what I knew now during the years post recession I’d be sitting on a few properties.
But you know who benefits in any market more than anyone? They risk nothing and bring in that cash time after time? Realtors, they just sell us on the dream of having a cash flowing property while they collect the commission.
Reminds me of the scene with Matthew McConaughey and Leonardo DiCaprio in the wolf of Wall Street. They’re at the restaurant and Matthew tells him “who cares what the market does, your client thinks their rich but we are the ones taking home that cold hard commission!”
Hopefully market will turn for the better and this BP dream will come to fruition
That’s how it is in Cleveland. If we’re getting a deal on the mls it’s the first day in the market. All cash. Quick Close. The motivates seller says yes or counters.
@Christopher Davis i feel your pain! As a former RE agent I know how to find comps and I have yet to find anything in my market (Houston) where the numbers work. Of course MLS houses are going to be tough because they are basically already priced at "retail" and every deal I have seen by wholesalers are way off on their ARV and rehab costs. So that leaves finding the distressed sellers and "good deals" on your own....and who has time for that?
I am even willing to find a “decent deal” on something that has already been rehabbed and rent and hope for appreciation later but even that is hard to make the numbers work even with being willing to accept low cash flow.
I think at this point it is going to take a lot of patience to wait for the good deals to come and being ready to pounce when they do.
I have talked to an investing group here that does more “turn key” investing where they have the teams in place to find the deals, have the lenders, the contractors and the property management in place. It’s more “passive investing” for busy people with full time jobs and clearly all that cuts into your profits. So it’s a trade off of doing all the hunting on your own or leveraging people to do the grunt work for you. My next step with them is to sit down and go through one of their deals to see how the numbers play out.
But yeah, no <100k deals around Houston either. Good luck to you!
@Christopher Davis also happy to help you go over numbers. I’m in Houston so not a competitor but happy to help if I can. As I always say “it takes a village!” 🤪
@Christopher Davis I’m in Texas, and it’s similar here. The only way the numbers work for me is to put more down... up to 50% in some cases. It’s not what the “experts” tell you to do, but if it’s a long term investment and I can still get the property at least 50% off using OPM... I’m good with that.
@Christopher Davis Just remember, if it was easy everyone would be doing it and the returns would be meh. You’ve got to want it, bad. The people who want it the most and who are obsessed with real estate, are the ones who crush it. Nothing will get it in their way.