I’m writing this post for all the newbies (especially military) out there who have yet to complete their first deal so they can hopefully see that getting a decent deal on their first purchase is actually achievable. I’d like to give a huge shout out to the entire BP community for opening my eyes to the possibilities of real estate investing and being there to give advice, recommend books, and answer my questions along the way. You guys are awesome and indispensable.
The deal itself is a 4plex I found as a FSBO on Craigslist, in a B to B- neighborhood. Here are the numbers:
Purchase Price: 0% down on $265k purchase price @ 3.5%. Total loan amount is $270.7k after VA funding fee.
Closing Costs: There's a great VA loan benefit where the seller can agree to pay up to 4% of the value of the home back to you in closing costs in the form of concessions â most people typically use this (if they can convince the seller) to pay down the VA funding fee. However, since I wanted to leverage to the max, instead of using this to pay off my funding fee, I chose to wrap up my funding fee in the total loan amount, and instead used the seller concessions as debt relief (the seller pays your bills for you â it doesn't get much better than that!). So I used this to pay off my car loan and a good chunk of my monthly credit card bills with the $2800 I received in concessions. I also received all $1000 of my earnest money back, $1350 in May rents, and received another $650 in fee reimbursement from my mortgage broker. Total closing table gain = $4800.
GOI: $31,290/yr (2650/mo rents - 5% vacancy + $90/mo coin-op laundry)
Operating Expenses: $11,905/yr (assuming 10% maintenance – very conservative for property condition)
Cap Rate: 7.35%
Current Cash Flow: Using conservative numbers for everything, I should see cash flow of around $364/mo or $91/door (Yes, I am living in, but I perform all analyses as if I am just another rent-paying tenant, since that is how an outside investor would analyze this property). Not bad for 0% down. For comparison, if I had put 20% down, I’d see about $156/door.
By raising rents to market, I should see my GOI increase to 33k. Further, this property is a great candidate for submetering or subdividing the water bill (all other bills are tenant paid), allowing me to further reduce my operating expenses down to $9,676/yr, with little to no increase in my vacancy. This should increase that cash flow by an additional $329/and also force appreciate the property value by about 29k. I am a little skeptical of how long I’ll be able to get away with an expense ratio of about 30% but I triple checked my numbers - I’ll update everyone in a few months to see how this plays out.
By closing on this house I eliminated my car loan of $582/mo, will be cash flowing a projected $364 per month, and paying myself an additional $265/mo to self-manage my properties. This all adds up to a $1211/mo total effective increase in personal cash flow! Yes, my car loan would have been paid off in a few months anyways, and no this isn't what it would look like to an outside investor, but this is my difference I'm seeing to my bank account just by closing this deal.
8 Lessons I learned:
1. Everything is negotiable. The seller initially was unwilling to work with me as I was using an agent to avoid the fees, but when I put a contract in front of his nose with a 2% agent commission listed (my agent’s idea, not mine), the seller signed it with only minor negotiation. People can huff and puff all they want, but it’s what happens when you put paper in front of them that matters.
2. Assume the seller is full of BS - due diligence is king. He gave me ridiculous self-reported numbers for maintenance (0.25%, really!?), vacancy (0%!), insurance, etc. Maybe that’s what he really had, but I came up with my own, more realistic and conservative numbers. Also be prepared for your seller to have incomplete information – either get comfortable with your own estimates or adjust the purchase price accordingly.
3. If you’re looking for a great deal on the MLS, you might be looking for a long time. I spent 5 months looking at everything that came onto the MLS in my area that fits my criteria and have yet to see something I'm comfortable putting an offer on.
4. Object to as much as possible in the inspection objection. This property is pretty turnkey, but I threw in a bunch of minor things into the inspection objection with the idea that the seller would negotiate me out of half of it. Turns out he accepted almost everything I asked for, saving me around $3k in immediate maintenance costs.
5. Try to close at the beginning of the month when possible. I closed May 1, so I received the entire month of May rents but was at the end of the cycle for the escrow interest calculation for the lender so I paid very little there, which is what really allowed me to walk away with so much at closing. If I would have closed on May 2, my first mortgage payment would not be due until July (vs June for May 1), which essentially is like getting an extra month of cash flow for free. Unfortunately I wasn’t able to arrange for a financially viable way to push back past May 1 – lesson learned for next time though!
6. Try to contract the seller into paying as much closing costs as possible. This one is especially important for military taking advantage of concessions - you cap the maximum amount you are eligible to receive back in debt relief at the amount you ask the seller to pay in closing costs on the contract! I didn't know this when I drafted up my contract - if I did, I could have received substantially more (up to 4% = 10.6K) back in debt relief. Fortunately I didn't have enough debt to take advantage of much more than I got, but be aware of what it means to you. Also, by extension, if you have no debt, you can't get paid cash. It has to be applied to existing debts.
7. Shop around for everything. I was originally going to work with a Mortgage Broker who promised to get me $300 of my $1000 earnest money back at closing and I’d pay nothing else – that sounded pretty good to me. But then I reached out to another Broker whom I’d heard good things about and told him what my current offer was. After about 2 days of each broker offering my progressively better deals in hopes of earning my business, I ended up settling on receiving all of my earnest money back, $2800 in debt payoff, $650 in fee reimbursement, and a slightly better interest rate. Same goes for things like insurance – 4 or 5 extra phone calls saved me close to $900/yr.
8. Read everything. Read books, read blog posts, read the forums, read everything. And listen to podcasts when you’re not reading. A little bit of knowledge goes a long way in establishing the confidence to take the first steps into becoming the master of your own financial destiny.
I’d love to field questions from beginner investors on the process or hear feedback from the more experienced investors. I don’t think I totally knocked it out of the park with this one, but I’m definitely extremely happy with the numbers for my first deal (especially for 0% down), and exited to continue onto the next one! Thanks for reading!
[Edited because formatting hates me]
wow, congrats Brendan. Thanks for the post and lessons learned.
Thanks! I will say it hasn't been 100% roses though. I was in the unfortunate situation where the property changed hands a day after a tenant moved out. The old owner did a quick walk through and gave the old tenant his security deposit back on the spot, and when I moved in after the purchase I noted a few hundred dollars worth of damage. The tenant managed to put holes in 4 doors of the unit, destroy a set of blinds, and seemingly ran off with an overhead light fixture. Fortunately, while annoying to repair, the money saved at closing made it easy to budget for immediate repairs. Somehow this all got missed in the inspection (or happened after). I suppose the lesson learned here is either coordinate with the seller for post-contract vacancies or avoid this situation altogether where possible.
Congrats and thanks for posting such a detailed explanation on how you were able to close the deal.
I had never heard of Debt Relief as part of a closing but I will try and convince a Seller to do this for me as I qualify to get a VA Mortgage.
CONGRATS! That's awesome to hear and I don't know the ins and outs of everything yet, but this gave A TON OF HELPFUL INFORMATION!!!
@Robert Blanchard Good luck with your VA purchase! If you're interested in debt relief, I would focus on getting the seller to agree to pay as much as possible in closing costs. You don't even have to ask the seller if they'll pay your debts. If you do, your seller might not be receptive to the notion that they're paying for your bills. Instead, you just have to get them to agree to pay $XXXX in closing costs - that's much easier to negotiate (and seller paid debt, for all intents and purposes, is written on the settlement as a closing cost). Then work with your mortgage broker to figure out the best way to minimize the other closing costs. The difference between the total closing costs and the amount the seller agreed to pay for you is how much you'll get in debt relief.
Example: When I contracted my place, the seller agreed to pay $2800 in closing costs. At that point, I had no idea I could even do debt relief. But after talking to and negotiating with my mortgage broker, he worked it so I would have to pay 0 in closing costs. Because of that, everything the seller agreed to pay on my behalf instead went towards my debt relief. Honestly, I'm not even 100% sure that the seller knew he was paying off my car loan even at closing.
@Lauren Lockett - Thanks! I'm glad to hear my post helped!
nice work this is exactly what many should do in high priced markets instead of buying a long way away.. with FHA 3.5 % down many can buy right were they live... live in the place a year refi then rinse repeat. and end up with 16 doors with max leverage and great long term fixed rates...
@Jay Hinrichs - It's like you read my mind! Since this deal took no skin off my back, my plan for the next year is to grab another 4-12 unit with either seller or traditional financing next Jan/Feb, then when I'm eligible to use my VA loan again in May '16, I'll refi (or not) and use my remaining ~$160k or so in eligibility to purchase another 2-4 unit to live in for 0 down. At that point I'll have exhausted my VA loan benefits, but I'll have a decent bit of cash flow and time to figure out my next pivot.
you should post on military sites so others are aware of what can be done with the VA benefits as we know you earned it !!
Totally awesome. Good job for taking action. I didnt know you could buy a 4plex with zero down VA financing.
Are you limited to purchasing just this one, or can you buy more?
@Jay Hinrichs - I do what I can, but sometimes people just hear "Free home, free income!" when they think of the VA loan and it's hard to convince them there's more nuance than that. I had a conversation with someone earlier today (military) who had bought a second SFH a few months ago and was renting out his first. He proceeded to explain to me how amazing his property was cash flowing since his mortgage was only $950 a month and rent was $1100. He then told me his property manager was taking care of everything for him for only 10%. I tried to explain to him budgeting for maintenance, and his response was "That's what security deposits are for!" Unfortunately REI just isn't for everyone...
@Jared Wilson - Thanks! You certainly can take out more than 1 VA loan at once. There are a few caveats though. First, you're limited to the max VA guarantee limit, which is determined why the cost of living in your area - this ranges from $417k (normal) to over $1M (SF Bay). You can buy as many homes as you want for 0% down up to that limit - if you go over you have to make up the difference with your down payment (or a secondary means of financing). Second, you have to live in your house for a full year after purchase before you're eligible to move or take on another VA loan. Third, VA will not lend on homes over 4 units.
Thanks for the information @Brendan Morin .
One of the conversations I consistently have with my sailors is that of finance. So many just don't get, don't want to get it, or just don't care. The entry I always use is discuss the risk of losing their security clearance due to debt trouble. The follow on conversations will always end up about the VA loan and how they can use it for make free money, at the same time you can also use your GI Bill, the compounding return of those two benefits is amazing.
This is pretty good. I'm currently working with a client as a buyer. I was able to help him get two pre approval for VA funding. The loan officer informed me when I find a property try and have the seller give funds towards closing. Ideally I don't want my client to come out of his pocket for closing fees. I'm still a little confused how you were able to get funds out. Isn't this general ledger on the HUD, and not actual funds in your hands?
@Caleb Charles , I don't 100% understand the ins and outs of what numbers were pushed around to allow me to end up so far in the positive on this. I do know it was primarily the result of both having the seller contracted into paying $XXXX in closing fees and my mortgage broker providing significant cost reduction and concessions (as a result of allowing two mortgage brokers to compete against each other). There were no actual funds given to me (you can't technically do that), at closing I was given four checks: One was my earnest money back, the other three were checks from the title company written to my banks to pay off my loans, credit cards, etc. I had to then mail them in myself to get my debt paid off.
Congratulations...wow awesome info.
Great post! I plan on using the same formula for my VA loan in a few months. I highly recommend you get your medical paperwork together and start applying for disability with the VA. If you are 10% disabled (I believe) you don't have to pay the VA funding fee. I work with a lot of retired and active duty and I'm shocked how much % disability they get for their "issues". Have you checked to see what your property is zoned as? In San Antonio it is difficult to get multiple water meters for the same property if it is not zoned as multi family. May want to check what the zoning is on your next deal.
Congrats!! I wish I would have known about this myself. I just used a VA loan to buy my first home. I purchased a duplex. I did not have a funding fee as I qualified to have that waved. And my realtor was amazing in getting me the 4% in closing costs. However the mortgage company told me that I couldn't get any money back that I didn't put in. So I was told outside of my earnest money I would have to buy my rate down or give the money back. I wish I would have known about the debt relief because I would have totally used it for that instead.
Now I know for when I use my second tier VA entitlement to upgrade to a 3/4 suite unit to use it in this manner.
@Rich Ferradino - That's good to know with the disability and funding fee, though I don't think I have anything at this point I could claim as a disability. For the zoning, I didn't expressly look into that with regards to the water, but after reading a bit on Colorado submetering legality I should be in the clear legally. Financial viability will depend on a number of variables, and I think there are a number of options here.
Great Job!!!! I love to hear story of people succeeding in real estate investment.
Good Job. I wish there were good 4 plexes in my area to invest in.
@Brendan Morin Awesome job thinking creatively and look at all of your expenses and cashflow as a whole, instead of just looking at the property by itself.
Congrats on a great deal!
Great, but I'm not following all of the numbers. It appears that insurance, taxes, and water are being left out of the analysis. I'm coming up with a monthly cash flow of around $500 p/month assuming 100% occupancy 100% of the time. Not worth it. I'm using a GRM of 60, anything above that doesn't seem worth the hassle.
@David Hoult - Insurance (2160/yr), taxes (970/yr), and water (2400/yr) were wrapped up in my total operating expenses but didn't specifically itemize them there on the first page. Vacancy assumption was 5% - for every year of occupancy per unit, if I can fill turnovers in under 18 days, I meet my vacancy threshold. And I agree with you that it's not the best deal in the world, however for my first deal the numbers worked well enough that I'm making a small bit of cash and at low risk of getting burned. Everyone has their own metrics for what is good enough to go in on - for me this was good enough to bite.
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