I want to start my real estate portfolio. I want to start with a house hack But can't find a duplex. I found a fourplex that is 419k but its been in the market for a long time. I did the number for 400k and this is what I got.
Price:400k
Taxes 2019- $7631
Rents for 3 of the units-currently 800 but raising it to 900 = 2700
Down payment 3%
Home insurance- 828 annually (used the number the calculator gave me)
Repair and maintenance- 10%
Vacancy- 5%
Mortgage Insurance- 350 per month? I used what the calculator came up with not sure its accurate
All in all I should be paying around 500 out of pocket till that PMI comes off. Is this a decent deal? I know It doesn't make the 1% rule but I hear those are hard to come by now and my area is very hot overall to find anything ATM. Am I missing something? My hope is to stay in the apartment for 1-2 years and than try to another duplex or fourplex to do it again. I am currently driving 2.5 hours a day to get to work and it's getting to the point where I get a single family home or rent an apartment. I am barely paying any rent there but the drive totally sucks and the savings are going out the window when I think of gas and the time wasted.
$891 for insurance on a $400K property? Mmmm....that sounds very LOW. I live in a lower cost of living area, and my $250K personal residence is $1200, and we keep a high deductible, have no claims, and we have one of the lowest cost providers in the nation (USAA, for military). Call 3-4 agencies and get some real quotes. You have to remember too that you'll want increased liability insurance. This is a business asset, not just your personal home. I recommend at least having $1 million in liability.
I do not see any figures for Capital Expense repairs. Big ticket items like roof, hvac, water heaters, flooring, etc. Figure 5% per month of gross potential rents (GPR).
I also don't see any numbers for Professional Management. I realize you intend to self-manage, but it should still be factored in as a cost that you pay to yourself because again we are evaluating this property as a business decision, not a personal decision. Otherwise, you've just bought yourself an unpaid volunteer job. figure 10% per month of GPR.
Who is mowing the yard and shoveling the snow? I don't know where your duplex is located, but figure $100 / month minimum for the lawn, 7 months of the year, and if you have snow figure 3-4 plows per years at $50 per event.
10% maintenance? That might work if the place is fairly flawless at the moment and you plan to donate your labor unpaid. But again...this is a business decision and the cost should be included even if you are paying yourself. We don't "invest" in real estate when we work for free.
So what we see here is there are many costs which haven't been accounted for, and at least one cost that may be account for but is too low. A general rule of thumb for a well-maintained property is figure 30% of GPR just for operating expenses, and that doesn't include any mortgage or PMI. If the property is older or requiring more maintenance, figure 40-45%.
My guess is you will cash flow significantly more negative than $500 per month. Re-run your numbers and see where you are.
Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
5y
The metrics that you put in are definitely a good option for you to get your toes wet in investing. Your PMI should not be that high and wouldnt be anymore than 150+/- because it's a single family. I would not use the 1% rule in this scenario because it's a single family rental. Assuming your bedroom rental rates are accurate I would feel confident about making an offer on this property.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
@Lien Vuong I apologize if I confused you but this is a actually a fourplex. I would be living in one of the 4 units. If I don't go with this than I would have to go with a single family house or rent.
@Joe Villeneuve So even if I would be living for cheaper it doesn't make sense? What could be done to fix the deal? I planned on offering lower than 400K but what would make the deal make sense?
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
@Russell Brazil Yes and No, I have an apartment where the rent is 625 but Am renting a room for $300 and my girlfriend pays me $250. I pay the rent and bills. What's killing me right now is the 2.5 hour drive and the gas. That should take me above 500.
$891 for insurance on a $400K property? Mmmm....that sounds very LOW. I live in a lower cost of living area, and my $250K personal residence is $1200, and we keep a high deductible, have no claims, and we have one of the lowest cost providers in the nation (USAA, for military). Call 3-4 agencies and get some real quotes. You have to remember too that you'll want increased liability insurance. This is a business asset, not just your personal home. I recommend at least having $1 million in liability.
I do not see any figures for Capital Expense repairs. Big ticket items like roof, hvac, water heaters, flooring, etc. Figure 5% per month of gross potential rents (GPR).
I also don't see any numbers for Professional Management. I realize you intend to self-manage, but it should still be factored in as a cost that you pay to yourself because again we are evaluating this property as a business decision, not a personal decision. Otherwise, you've just bought yourself an unpaid volunteer job. figure 10% per month of GPR.
Who is mowing the yard and shoveling the snow? I don't know where your duplex is located, but figure $100 / month minimum for the lawn, 7 months of the year, and if you have snow figure 3-4 plows per years at $50 per event.
10% maintenance? That might work if the place is fairly flawless at the moment and you plan to donate your labor unpaid. But again...this is a business decision and the cost should be included even if you are paying yourself. We don't "invest" in real estate when we work for free.
So what we see here is there are many costs which haven't been accounted for, and at least one cost that may be account for but is too low. A general rule of thumb for a well-maintained property is figure 30% of GPR just for operating expenses, and that doesn't include any mortgage or PMI. If the property is older or requiring more maintenance, figure 40-45%.
My guess is you will cash flow significantly more negative than $500 per month. Re-run your numbers and see where you are.
@Lien Vuong I apologize if I confused you but this is a actually a fourplex. I would be living in one of the 4 units. If I don't go with this than I would have to go with a single family house or rent.
@Joe Villeneuve So even if I would be living for cheaper it doesn't make sense? What could be done to fix the deal? I planned on offering lower than 400K but what would make the deal make sense?
I wouldn't even attempt to suggest anything without actual numbers. You have too many numbers that are computed for you. Find out the actual numbers first.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
@Erik W. Thank you so much! That's exactly what I needed to hear and even if its not a property that works. This will help me when analyzing other properties as well. I will find all those things out and go from there. I will also look into USAA since I am military as well. Thank you again!!
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
On top of that, if there is only 1 month ov vacancy per unit per year, the 15% (RMV) holdback only covers half of the expenses for that month, so that makes the payback even longer,...and
If he's living in one of the units, he's only getting $2700/month...not $3600/month...and, he would also have to pay for the cost of a different place to live. We're looking at around a 7 year payback. During that 7 year period, I assume at least one CAPEX surprise will hit, so...
...the more I look at this "deal" property, the worse it gets.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
On top of that, if there is only 1 month ov vacancy per unit per year, the 15% (RMV) holdback only covers half of the expenses for that month, so that makes the payback even longer,...and
If he's living in one of the units, he's only getting $2700/month...not $3600/month...and, he would also have to pay for the cost of a different place to live. We're looking at around a 7 year payback. During that 7 year period, I assume at least one CAPEX surprise will hit, so...
...the more I look at this "deal" property, the worse it gets.
The buyers situation is completely independent of the valuation of the asset. Is Disney stock perform any different for buyer X or Y. No, we examine Disney stock on its own merits. Real estate isnt any different. The analysis of the asset should be completely independent of who is buying the asset and how they are buying it.
I dont know the particular of his market, but in my market a $400k property would get me $2,000 a month in rent, and that will equate in our market to a 23% IRR over a 5 plus year period.
Im assuming the property should hit at least a 15% IRR here if he has stagnant appreciation and or rent growth based off just the yield of the asset.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
On top of that, if there is only 1 month ov vacancy per unit per year, the 15% (RMV) holdback only covers half of the expenses for that month, so that makes the payback even longer,...and
If he's living in one of the units, he's only getting $2700/month...not $3600/month...and, he would also have to pay for the cost of a different place to live. We're looking at around a 7 year payback. During that 7 year period, I assume at least one CAPEX surprise will hit, so...
...the more I look at this "deal" property, the worse it gets.
The buyers situation is completely independent of the valuation of the asset. Is Disney stock perform any different for buyer X or Y. No, we examine Disney stock on its own merits. Real estate isnt any different. The analysis of the asset should be completely independent of who is buying the asset and how they are buying it.
I dont know the particular of his market, but in my market a $400k property would get me $2,000 a month in rent, and that will equate in our market to a 23% IRR over a 5 plus year period.
Im assuming the property should hit at least a 15% IRR here if he has stagnant appreciation and or rent growth based off just the yield of the asset.
I disagree. I firmly believe the valuation of the REI is very specific to the REI, and even if it wasn't, this is still a bad deal.
Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
5y
First, I agree this is pobably not a good deal. I figured my analysis makes that abundantly clear. That said...
It is incorrect to say that in a 25% down ($100,000) that there is a 4 year break even. If a Buyer gives $100,000 for the down payment, he loses nothing: he simply transforms his equity from liquid it illiquid. Once 4 years have elapsed and he has $100,000 cash in the bank (using the assumed $24,000 positive cash flow per year example and rounding up for rent increases), he will have BOTH the $100,000 liquid cash and should have at least the $100,000 in equity, assuming the market doesn't crash, which it could. But....if things stay level or go up, he will have gained amortization equity--though not much if on a 30 year note--and also possibly appreciation equity.
Worst case scenario if he gets only enough amortization and appreciation to cover sale expenses at the end of 4 years, and he only gets back his down payment (the full $100,000), then he has that in addition to his $100K of positive cash flow, making it a 100% return over 4 years. Ergo, not break even.
The correct analysis is his liquid capital recovery period is 4 years.
Even with all that, still probably not a good deal. Mediocre at best assuming all goes well, and I agree usually it does not.
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
On top of that, if there is only 1 month ov vacancy per unit per year, the 15% (RMV) holdback only covers half of the expenses for that month, so that makes the payback even longer,...and
If he's living in one of the units, he's only getting $2700/month...not $3600/month...and, he would also have to pay for the cost of a different place to live. We're looking at around a 7 year payback. During that 7 year period, I assume at least one CAPEX surprise will hit, so...
...the more I look at this "deal" property, the worse it gets.
The buyers situation is completely independent of the valuation of the asset. Is Disney stock perform any different for buyer X or Y. No, we examine Disney stock on its own merits. Real estate isnt any different. The analysis of the asset should be completely independent of who is buying the asset and how they are buying it.
I dont know the particular of his market, but in my market a $400k property would get me $2,000 a month in rent, and that will equate in our market to a 23% IRR over a 5 plus year period.
Im assuming the property should hit at least a 15% IRR here if he has stagnant appreciation and or rent growth based off just the yield of the asset.
I disagree. I firmly believe the valuation of the REI is very specific to the REI, and even if it wasn't, this is still a bad deal.
So what Cash on cash return or IRR do you feel then would be good?
It's a terrible deal...on so many fronts...not the least of which is the negative cash flow....and paying a higher DP isn't the answer to that. All that would be doing is paying for all that negative CF upfront.
You think $3600 a month in rent on a $400k asset is a terrible deal? Whats a good deal?
Rent means nothing. You don't keep all the rent, so who cares what the rent is. What matters is the cash flow, which is negative.
The asset isn't the PV...it's the equity, which is non-existent.
So, what I see is a property that costs $400k plus interest, that the rent doesn't cover expenses, and there's no equity, so...yes...this is a terrible deal.
...and,...
With only a 3% DP, it will take forever to get enough equity to get rid of the mortgage insurance, which really doesn't matter anyway since that only reduces the negative CF from $500/m to $150/m.
It would have free cash flow of almost $2k per month if purchased with a standard 25% down loan lol.
That's not the deal he proposed. Even if it was, it's borderline. HE would be paying $100k in cash (DP) and only getting less than $24k/year back in CF. That means it will take him (all going perfect,...not likely), over 4 years to break even and start making a profit.
On top of that, if there is only 1 month ov vacancy per unit per year, the 15% (RMV) holdback only covers half of the expenses for that month, so that makes the payback even longer,...and
If he's living in one of the units, he's only getting $2700/month...not $3600/month...and, he would also have to pay for the cost of a different place to live. We're looking at around a 7 year payback. During that 7 year period, I assume at least one CAPEX surprise will hit, so...
...the more I look at this "deal" property, the worse it gets.
The buyers situation is completely independent of the valuation of the asset. Is Disney stock perform any different for buyer X or Y. No, we examine Disney stock on its own merits. Real estate isnt any different. The analysis of the asset should be completely independent of who is buying the asset and how they are buying it.
I dont know the particular of his market, but in my market a $400k property would get me $2,000 a month in rent, and that will equate in our market to a 23% IRR over a 5 plus year period.
Im assuming the property should hit at least a 15% IRR here if he has stagnant appreciation and or rent growth based off just the yield of the asset.
I disagree. I firmly believe the valuation of the REI is very specific to the REI, and even if it wasn't, this is still a bad deal.
So what Cash on cash return or IRR do you feel then would be good?
It's not a specific percentage I look for. Each deal is a part of a string of deals with exponential growth. They are all connected. this means each deal's needed exit (cash's exit, not percentage) is based on the needed cash for the next entrance(s), so each return is dictated by what the timeline in the plan tells me it needs to be.
Understand that in my system, I focus on the continuous movement forward of my cash...and I consider equity dormant cash, resting temporarily in a property, waiting to grow in the next deal(s). This means each property is part of a system, and not stand alone, so whatever the percentage return the property ends up being, it is determined after the deal is completed.
However, no deal is executed that doesn't have high cash flow and/equity built in. I've always laughed at the posts here where a question is posed to the effect there has to be a choice between cash flow or equity. To my mind, you have to have both, or the one you are missing just brings down the one you think you have.
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Joe Villeneuve
Can you give us an example of the exponential growth you describe. I read your posts often and look to see further into your insight.
By exponential do you mean you roll 15% growth this year into a 10% deal next year and compounding thin that manner where your investment funds are always being pulled out of a deal once profit is reached to advance to another deal?
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Gerardo Hernandez
I agree with most others this doesn't look like a great deal at 400k. I would suggest visiting the property. Doing the best inspection you can and assess the costs that would be needed immediately realize most properties need some amount of work in the near future. I don't have an issue with 3.5% fha. but you said you are military. I would look into a VA loan making your cash available for those needed repairs and reserves. After reading many posts and talking to other investors the people who get hurt in investing are the ones with no reserves and who try and fudge math to make it work.
All that said. With a 0% VA loan and if your place has 2bd you could consider renting one out and get closer to it being a deal. Maybe you do the math and find a price that works maybe 380 or 370. If that meets your needs including all the expenses previously mentioned then make the offer that would work for you at the price. If they say no. You didn't lose anything.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
5y
I think your costs are too low.
But I like the daal.
Toss out an offer of $375k and go from there.
Don’t listen to “it’s a bad deal”. You could say that about every deal and 10 years from now you’ll be like 90% of the people on this site: looking. Talking. Reading. Posting. But never taking that first step to grow a portfolio
is it the best deal ever? No. But I’m a strong believer in getting a first deal under your belt.
My first deal was about this size. $440k for an 8 unit with about $4,400/month in rents in a hip and trendy area of houston. I had no clue what i was doing. It wasn’t the best deal ever and had I posted it to BP I’d have 50 people talking me out of it.
But that was the first step in my journey. I didn’t know what the word “rent roll” meant. Id never read a lease. If not for that property I wouldn’t have the portfolio I have today. And hell, I just put a property under contract where my earnest money was more than that 1st properties purchase price.
Can you give us an example of the exponential growth you describe. I read your posts often and look to see further into your insight.
By exponential do you mean you roll 15% growth this year into a 10% deal next year and compounding thin that manner where your investment funds are always being pulled out of a deal once profit is reached to advance to another deal?
Yes,....except eliminate the percentages you just mentioned.
Exponential growth involves the following formula: a to the x'th power, where a is your starting "seed money", and "X" is the factor you are increasing by.
OK, I can hear the head scratching from the non-math majors and Engineers. Here's what I'm saying:
1 - Treat your equity as cash that is dead. It has value, but no use in its current form. The have use, it must be converted to a liquid. 2 - Think of your assets being the equity and cash flow in these properties...not the property itself. The property is nothing more than the temporary resting place for your assets, until the time is right for them to move to the next properties. 3 - The time is right to move, when the equity (and accumulated/saved CF if you want to use it this way instead of as income) is large enough to be of more use moving forward. This number is determined by the plan...not an arbitrary number that is applied to every deal, thus this number is different for every property because the criteria for the next step (property) in your plan is different. 4 - If you started with the number 10, an example of exponential growth vs linear growth is as follows:
Linear: Increasing your number by the same number (addition) for each step...i.e...10, 20, 30, 40, ... Exponential (Compounding): Increasing your number by the same factor (exponent) for each step...i.e...10, 20, 40, 80, 160,...
Question: Which method will get you to 100 times the original number (=1000) the fastest, and in each case, how many steps would it take?
Holding onto the property, jailing your asset (cash/equity), and increasing your returns by 10% (pick a number you think is realistic), is a linear return...and losing you money with each step. Freeing your equity from jail, at the appropriate time (pick a number based on a plan, which is based criteria for the next step in that plan), and reinvesting it takes advantage of the full value of that cash...in liquid form.
Example: Start with $20k, and use it as a DP on a property at 20% the PV. Your options are to leave this cash/equity alone in the same property until that property reaches 100% equity (paid off), or moving it (let's use "x2" as our factor to move) when it reaches our "magic number". By moving it I mean sell the property. Assumption: Each step/year has an appreciation of $20k/year. Note: FV/PV is the ratio of the face value of your equity to the actual Property Value
Don’t listen to “it’s a bad deal”. You could say that about every deal and 10 years from now you’ll be like 90% of the people on this site: looking. Talking. Reading. Posting. But never taking that first step to grow a portfolio
is it the best deal ever? No. But I’m a strong believer in getting a first deal under your belt.
My first deal was about this size. $440k for an 8 unit with about $4,400/month in rents in a hip and trendy area of houston. I had no clue what i was doing. It wasn’t the best deal ever and had I posted it to BP I’d have 50 people talking me out of it.
But that was the first step in my journey. I didn’t know what the word “rent roll” meant. Id never read a lease. If not for that property I wouldn’t have the portfolio I have today. And hell, I just put a property under contract where my earnest money was more than that 1st properties purchase price.
It's a bad deal. First deal, last deal, or in the middle...it's still a bad deal...and no, it's not a good idea to lose money in order to get a deal under your belt. Why in the world would you think that's a good idea? To intentionally lose money.
Why not lose money on your first couple of deals? Wouldn't that make even more sense?
$4400 in rent means nothing. What was the CF after expenses? If the higher the rent made the deal better, then why not buy a property that was worth $5M at $50k in rent...and lose $20k in CF each month? Oh wait, the focus should be on the rent...not the CF.
