Where to buy first property( Nevada or Texas)
Los Angeles, CA · Member since 2020 · 10 posts · 2 votes
Where to buy first property( Nevada or Texas)
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Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
6yAngeli,
Tenant non-payment is definitely an issue because the eviction moratorium is in place until Jan 31, 2021. So a few things are important when pursuing a property now:
Firslty, you want to get the last six month's payment history for the property, and then you want to verify it with bank documents. If the tenants have been paying this entire time, they're unlikely to suddenly stop because there's a new owner. Tenant who have continued to pay rent have maintained they jobs or care too much about their credit to take advantage of the situation or both.
Secondly, you want to go into the deal with additional reserves. If you househacked this property and moved into the lowest-rent unit, you'd be collecting about $6000/month from the other units. You might want to have 6 months, or $36K, in reserves to cover any unpaid rent that might occur. If all tenants have been paying rent, you might only need 3-4 months reserves. Having reserves insulates you against the risk of non-payment.
I've made a spreadsheet that I called "The Househacker Calculator." Enter the basic info, and the spreadsheet auto-populates the rest with a pro forma and a longterm projection. Here's what the results for this property look like:
Given the price and current rents, I think this is a really good candidate for a househack!
Best,
Jon
29 Replies
- Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes6y
- Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes6y
- 6yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
- Real Estate Agent · Las Vegas, NV · Member since 2016 · 32 posts · 31 votes6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Real Estate Agent · Las Vegas, NV · Member since 2016 · 32 posts · 31 votes6y
- Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes6y
Angeli,
Tenant non-payment is definitely an issue because the eviction moratorium is in place until Jan 31, 2021. So a few things are important when pursuing a property now:
Firslty, you want to get the last six month's payment history for the property, and then you want to verify it with bank documents. If the tenants have been paying this entire time, they're unlikely to suddenly stop because there's a new owner. Tenant who have continued to pay rent have maintained they jobs or care too much about their credit to take advantage of the situation or both.
Secondly, you want to go into the deal with additional reserves. If you househacked this property and moved into the lowest-rent unit, you'd be collecting about $6000/month from the other units. You might want to have 6 months, or $36K, in reserves to cover any unpaid rent that might occur. If all tenants have been paying rent, you might only need 3-4 months reserves. Having reserves insulates you against the risk of non-payment.
I've made a spreadsheet that I called "The Househacker Calculator." Enter the basic info, and the spreadsheet auto-populates the rest with a pro forma and a longterm projection. Here's what the results for this property look like:
Given the price and current rents, I think this is a really good candidate for a househack!
Best,
Jon
- 6yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
- Member since 2019 · 144 posts · 93 votes6y
- Specialist · DETROIT · Member since 2019 · 116 posts · 243 votes6y
- Member since 2020 · 5 posts · 1 vote6y
- Los Angeles, CA · Member since 2020 · 10 posts · 2 votes6y
- Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes6y
Corey,
Happy to answer your questions!
First, insurance:
Insurance is toughest to estimate because it's such a case-by-case cost. When I'm deeper into underwriting, I actually run a quote through my provider, who has a website that allows clients to run their own quotes. It takes about 15 minutes, but it generates the actual number.
Insurance is based on rebuild cost. This is a 2-story, 2690-sq-ft building with, I imagine, somewhat outdated and average finishes. I'd guesstimate the rebuild cost at $800K or $900K. I own a 2-story, 3200-sq-ft duplex with a rebuild cost of $1.1M, and my insurance bill on it is $2345/year. I have all of my buildings and cars insured by the same company, so that bundling provides some discounts, but you'll enjoy similar discounts even if you only have 1 building and 1 car. Anyway, I'm paying $195/month for my building; I'm sure this building will cost less than $250/month.
Earthquake insurance isn't included in this calculator because it isn't required. Standard insurance is; you won't get a loan without buying it. Earthquake insurance is up to you. That said, the earthquake insurance on my aforementioned duplex is $3329/year. It would probably be about $3000/year for this property, so you'd need to add $250/month to the expenses if you want to account for earthquake insurance.
Fourplexes, triplexes, duplexes, and single-family homes are all residential property, so they're all insured similarly. You don't have master and individual policies. You buy a standard policy for the building, and it protects against fire and the other standard risks.
Where are you getting 10% as the going rate for property management? Just to give a few quotes: Real Property Management charges 6%; Los Angeles Property Management Group charges 6% for 9 or fewer units, 5% for 10-99 units, and 4% for 100+ units; TGN Property Management charges 4%; and Action Management charges 6%. If I bought this fourplex, I'd utilize a service like www.hemlane.com, which charges a very low fee to act as your call center. Hemlane would charge $148/month to take all the tenant calls, collect rent, and otherwise operate as your slimmed-down property management service.
There are no HOA fees when you own a multifamily property. HOA stands for "home owners association." When multiple individuals own homes that are connected or share services and spaces (ie, condos, townhomes, and developments that share amenities), an association needs to be formed to manage the shared resources. This association is called the HOA, and the HOA dues pay for the maintenance of the shared resources. If you buy a fourplex, you are the only owner. There is no HOA because there is only one owner.
Corey, clearing up these misconceptions will definitely help you more accurately calculate the cashflow on a property.
$300K is a lot of money, no question. LA is an expensive market to enter.
$40-60K per unit for reno is a good rough estimate. Here's what you're not considering: when you buy a building, it'll come with tenants (most of the time). Unless you're moving into a unit, you can't just evict those tenants and renovate their units. Therefore, it's important to find a property that cashflows, even if just a tiny bit, with the current tenants.
So two years down the road, a tenant moves out, and now you have to do your $50K renovation to get the unit up to market standards. This means you can now charge market rent! If a unit needs a $50K facelift to get to market rent, that means it was mostly likely renting for well under market rent to begin with. In the above example, the most expensive unit was renting for $2088 when it should be at $2925. That's an $837 difference! Annually, that's $10,044. If I asked you to make a $50K investment that would pay you back $10,044/year, would you do it? Of course you would! That's a 20% cash-on-cash.
But Corey, there's more! LA has notoriously low cap rates. I'm not 100% certain, but I'd guest the prevailing cap rate for the above property is below 5%. Let's say it's a 5% cap rate. $10,000 of additional NOI at a 5% cap rate increases the value of the building by $200,000. So not only are you getting a 20% cash-on-cash on your reno cost, but you've created $200K of equity. It's gobsmacking, and it's why LA is such an amazing market.
Do these concepts make sense to you? If not, I'm happy to discuss further.
Best,
Jon
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
- 5yEric FernwoodBusiness MemberRealtor · Las Vegas, NV · Member since 2014 · 999 posts · 1k+ votes
Hello Angeli,
The Texas and Nevada markets are very different. In an article I wrote a few years ago, I compared a Las Vegas and an Austin property. The comparison may help you to decide.
Below are the assumptions for both properties.
- 20% down
- 4.5% rate
- 30-year term
- 3% closing cost
- 8% property management
- 0% state income tax. Neither Texas nor Nevada have a personal state income tax.
Calculations for the Austin property:
- ROI = (1700 x 12 - 1024 x 12 - 1700 x 12 x 8% - 1625 - 6022 - 41 x 12) / (3% x 252500 + 20% x 252500) = -2.9%
- Cash Flow = (1700 x 12 - 1024 x 12 - 1700 x 12 x 8% - 1625 - 6022 - 41 x 12) = -1659/Yr. or -139/Mo.
Calculations for the Las Vegas property:
- ROI = (1490 x 12 - 1033 x 12 - 1490 x 12 x 8% - 450 - 1151- 41 x 12) / (3% x 255000 + 20% x 255000) = 3.3%
- Cash Flow = (1490 x 12 - 1033 x 12 - 1490 x 12 x 8% - 450 - 1511- 41 x 12) = 1,906/Yr. or $163/Mo.
Include all major costs when comparing properties
As you can see, the high cost of insurance and property taxes in Austin had a huge impact on profitability. This is why including all major costs is important. If you do not, the numbers generated can be way off reality.
Below are the formulas we use for comparing properties:
Below is an explanation of the variables:
- Income: The monthly rent x 12.
- Debt Service: 12 x the monthly mortgage payment (principal and interest).
- Management Fee: Management fee percentage x annual rent.
- Insurance: Estimated annual landlord insurance.
- RETax: Annual property tax.
- Periodic Fees: The sum of all periodic fees. For example, the HOA dues.
- State Tax: Nevada has no state income tax so this is always zero. If you are comparing a property in Nevada to one in another state, use the appropriate tax rate for that state.
- Down Payment: For a financed purchase we use the down percent x the purchase price. For cash purchases, it is the total purchase price.
- Closing Costs: We use 3% x purchase price for financed properties and $2000 for cash purchases.
What about formulas like the rent/price ratio? See the calculation below.
- Austin: 1700 12 / 252500 = 8.1%
- Las Vegas: 1490 x 12 / 255000 = 7.0%
As you can see, the result is invalid. The Austin property has a much lower rate of return than the Las Vegas property. The rent/price ratio is simply wrong because it does not include all the costs.
Another consideration is a local investment team.
If you needed surgery, you would not start medical school. Also, not just any doctor will do. You want a surgeon that specializes in the kind of surgery you need, not a general practitioner. The same is true with real estate investing. You want to work with an investment team that already has the skills and contacts. Good investment teams are hard to find. The place to start is with an investment Realtor. Know that even in a large metro area, there is likely only one or at most two investment Realtors. While finding an investment Realtor may take time, the cost, risk, and time savings will be worth it. See the image below for the range of skills you need to be successful.
Whether you decide on Texas or Nevada, find a local investment team. A good investment team will save you time, money, and risk.
...Eric
FERNWOOD Team, KW VIP Realty520 Reviews
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