Graham, WA · Member since 2017 · 33 posts · 10 votes
Hello, I am looking at one of the last options in my price range of a duplex in Auburn, WA. List price is 235,000. But rents are only 1390 a month. We are shooting for offering 215 and counting on raising rents to at least 1490 (one renter is M2M, other is term so I can't until term is up.)
Expenses
Prop tax 3171 annual
Insurance 400
Maintenance 10%
Vacancy 5%
Loan payment 871/mo
I'm getting nervous because by some calculations I will have a small positive cash flow of 20 to 100 but if I add anything else like utilities cost or if repairs are more than 10%, I end up in the red monthly.
This will be my first rental, but I will be doing the property managing too. Mainly because I could not afford a property manager with such a razor thin profit margin but also because I stay home with my 1 year old and want to help with income in some way.
Our real estate agent has brought up the point that we will be gaining equity. Also that we may be priced out of the market soon. Which looks very possible.
Any advice appreciated.
I'm trying to schedule with a financial advisor at my bank now
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
9y
Typically for a fiduciary you can pay by the hour, where the other "financial advisers" make their money through the commissions on the products they sell people. Some are of course employed by financial institutions in good faith but unless they are a CFP (Certified Financial Planner) or fiduciary there is no guarantee.
Investor · Moscow, ID · Member since 2017 · 107 posts · 76 votes
9y
@Jayme Jahns I'd really have to know more to give more advice, and honestly there are more experienced people than myself who can probably help you more. But I will try to take a stab with some general advice.
How large of a HELOC were you approved for? If it is large enough you could buy a rundown property outright, fix it up, rent it, then refiance to get your money out. This is called the BRRR method on here and many people have been very successful with it.
You could also try a Cash out refinance of your home instead of a HELOC. On paper it shares some of the same risks of a HELOC, but I believe it would be easier to get traditional financing this way. There are a few mortgage brokers on this website who might be of better use. But thats how I understand it.
Cards on the table I think the way to go starting out would be to save up for a down payment and keep a HELOC for emergencies.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
Just have an honest conversation with yourself to understand what you want. But instead of I want a investment property before I get priced out of the local market make it something objective.
I want house or duplex under 150k that will rent for 1500 or more per month. I will (refi, heloc for down payment, save) x amount for this property....
The more you build this, the more clear it gets and the better understanding you have of the process and more important if your goal can work. If it doesn't you understand what can change to make it work.
I like Travis's advice. Taking it a step further, what price would put you in the black? 200K?, 180K?
Great advice. If you like the property but not the price you can always offer less. If nobody likes the deal the seller will have to lower the price eventually. The worst thing they could say is no.
Real Estate Entrepreneur · Gibsonton, FL · Member since 2017 · 17 posts · 11 votes
9y
Why buy a property that wouldn't cash flow? Don't force it, the math works or it doesn't. If you have one major cap ex happen you are hurting financially in this property for years to
Come. I always work the numbers worst case scenario, and I always want to see worst year and trailing 12, of it doesn't work (cash flow 400+ after debt service and all expenses) I don't buy it, or offer a price where it will work. Numbers never lie, if you stay true to a system that will cash flow for you at a min you are protection yourself and your money.
Buying a cash flowing property is buying an income for yourself for a certain amount invested. If it doesn't pay me monthly I don't buy it.
Rental Property Investor · SF Bay Area, CA · Member since 2015 · 206 posts · 156 votes
9y
@Travis Dawson - I agree with you that one must be careful about using a HELOC as a downpayment, as it essentially creates a second loan aside from the mortgage. HELOCs generally have a lower interest rate than a "Home Equity Loan," but the rate is variable, so it would be wise to pay off the HELOC as fast as possible (at least that's what I did).
However, I have to respectfully disagree on the point you make about it being "very hard to close on a conventional loan" using a HELOC. I had absolutely no problem using my HELOC to partially fund a downpayment for one of my rentals. For folks who don't know, once you're approved for a HELOC, you are issued a type of checkbook. All I had to do was write a check for whatever amount of the HELOC I wished to put toward the downpayment. As far as any downtime, I do recall having to wait 2-3 days for the funds to enter my account, but that was it. No months of waiting.
Our mortgage broker also advised that HELOCs are very commonly used this way.
Seattle, WA · Member since 2017 · 12 posts · 4 votes
9y
I purchased a triplex in Ballard in Seattle, five years ago. The purchase price was 600K. The mortgage was about 3k a month ( I put 25% down). The rent roll was 3245 a month And I was responsible for the water and garbage bill, which was 600 dollars every two months. I doubt if any person on this conversation would have recommended I buy this property. However, my current rent roll is 5900 a month. I put in submeters so now the tenants pay all utilities. Property is now worth over 1 million dollars. Mortgage is actually less than 3k now because I found cheaper insurance. My vacancy rate is basically 0% Did I make a good decision to buy?
My point is that maybe this could be a good deal if the timing is right. What are the projections for rents in Auburn WA in the next few years? Is there a way to increase your cashflow by charging tenants for utilities?
One thing I did have in my favor that others have pointed out- I did have cash to cover repairs during the first couple of years when things were tight AND I have a pretty good paying day job!
Tampa, FL · Member since 2017 · 240 posts · 153 votes
9y
Have you considered the fact that this is clearly a horrible deal? Someone should have said it already to prevent her from going into misery. Just LOL @ paying $215,000 with only $1390 total in rent per month. At least if it were $1390 from each side per month, then at least the deal would just merely start to make sense.
If you get into this deal - mark my words, it may very well be a career-ender. Run before the seller literally TAKES YOU TO THE CLEANERS
It allows for like kind exchanges in the future. That are tax deferred so you find a buyer who wants to buy yours that is willing to co-operate with a 1031 and a seller that is willing to work and then you move from one into another without needing to pay tax at that time.
Buying out of state requires a ton of energy because in order to get comfortable you have to physically go to the area and walk the opportunities as people in 2% areas (Indianapolis) can potentially have less scruples and don't have a problem taking your money because your from the "RICH" west coast. Unless you work with a partner you trust on the ground.
Since your buying an older place how old is the roof?
What is the type and condition of some of the internals of the house (water heater, pipes, electrical system ) What is the useful life left for those items? Some of these things you can know before you have the inspector walk the property with you.
Given the pictures that you have seen and the comps will you need to do a full turn if a tenant leaves? To move it to market rate ?
Older homes will often hold water better than you want so there will be some amount of rehab work and if you have taken a lot of money out of the deal that would pay for those things already. Then you might have to build that into your cost model.
@Travis Dawson - I agree with you that one must be careful about using a HELOC as a downpayment, as it essentially creates a second loan aside from the mortgage. HELOCs generally have a lower interest rate than a "Home Equity Loan," but the rate is variable, so it would be wise to pay off the HELOC as fast as possible (at least that's what I did).
However, I have to respectfully disagree on the point you make about it being "very hard to close on a conventional loan" using a HELOC. I had absolutely no problem using my HELOC to partially fund a downpayment for one of my rentals. For folks who don't know, once you're approved for a HELOC, you are issued a type of checkbook. All I had to do was write a check for whatever amount of the HELOC I wished to put toward the downpayment. As far as any downtime, I do recall having to wait 2-3 days for the funds to enter my account, but that was it. No months of waiting.
Our mortgage broker also advised that HELOCs are very commonly used this way.
There's absolutely nothing wrong with using a HELOC or whatever type of exotic loan you can think of if the DEAL is so GOOD that it justifies the actions you take to attain the property.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Jason Chen,
First, your awesome. Lol! The way you described the deal was hilarious. Your right, bad deal for sure. I should have known from the get go. What's funny is 215 is 20k BELOW asking price. How do they expect to sell that place at that price?.. let alone at 215. I think to be making any reasonable amount worth the effort, the price would have go well below 200,000.
Originally we were trying to buy a quadplex that brought in 3500 a month in rent but then some big shot came in and bought it and flipped it to a price increase of 200,000 which was absurd. We took too long getting financing figured out. Anyway, that was where we started and soon after a couple months all the quads were sold, then all the tri's and our real estate agent was trying to get us to settle on a duplex which is where this came into the picture.
But, I'm glad I came on here, got a reality check about 20 times by 20 different people. Prevented a big mistake.
I actually talked to a CPA today and he had some good advice for me. Nice guy, and he didn't try to charge me. He basically gave me free advice and we talked for a bit. He did say if we wanted a full review, it would cost us but he gave us a bunch of advice to start off with.
Secondly, this CPA said he doesn't like Helocs and recommended refinancing to a fixed home loan bc the interest is lower and not adjustable. Before doing that, we would like to pull aside our down payment into a savings and then get the 30 year fixed to pay the heloc.
We want to save the down payment until a clearly good investment home comes along at the right price. Ideally a quadplex.
But, from what I have heard, if someone wants to use a heloc for a down payment, they can. I got approved for the new loan with them knowing I was using my heloc for the DP so I'm not too sure why people say they won't allow it. My lender was aware and I got approved. None the less, I'm not doing it that way.
First, your awesome. Lol! The way you described the deal was hilarious. Your right, bad deal for sure. I should have known from the get go. What's funny is 215 is 20k BELOW asking price. How do they expect to sell that place at that price?.. let alone at 215. I think to be making any reasonable amount worth the effort, the price would have go well below 200,000.
Originally we were trying to buy a quadplex that brought in 3500 a month in rent but then some big shot came in and bought it and flipped it to a price increase of 200,000 which was absurd. We took too long getting financing figured out. Anyway, that was where we started and soon after a couple months all the quads were sold, then all the tri's and our real estate agent was trying to get us to settle on a duplex which is where this came into the picture.
But, I'm glad I came on here, got a reality check about 20 times by 20 different people. Prevented a big mistake.
I actually talked to a CPA today and he had some good advice for me. Nice guy, and he didn't try to charge me. He basically gave me free advice and we talked for a bit. He did say if we wanted a full review, it would cost us but he gave us a bunch of advice to start off with.
Secondly, this CPA said he doesn't like Helocs and recommended refinancing to a fixed home loan bc the interest is lower and not adjustable. Before doing that, we would like to pull aside our down payment into a savings and then get the 30 year fixed to pay the heloc.
We want to save the down payment until a clearly good investment home comes along at the right price. Ideally a quadplex.
But, from what I have heard, if someone wants to use a heloc for a down payment, they can. I got approved for the new loan with them knowing I was using my heloc for the DP so I'm not too sure why people say they won't allow it. My lender was aware and I got approved. None the less, I'm not doing it that way.
If you can't get all of your money back within 7 years or better (after all expenses, and even income tax), then it's a good idea to walk away from the deal. Every now and then you can accept a deal that pays back in 8 years, but only if there's a kicker to it, like the total cost of your investment (after repair) is clearly underneath what the property will actually sell for.
Being super picky and selective in real estate is the key to success. Notice how unsuccessful real estate investors all have one thing in common: they weren't selective enough in their deals and decided to enter into very marginal or worse deals.
If you could be just 0.1% as selective in real estate as a typical 21 year old girl is with dating, either on Tinder or some dating website looking for a hot looking Chad or Brad that isn't psychopathic, and that looks financially stable and reasonable, then you will succeed in the game of real estate. You will find that 99.9% of deals readily available in a trendy are not even worth looking at because they're all disastrous for your bank account.
I've only been here for a few days and have already witnessed people getting into deals that I would rate a 2 or 3 on a scale of 1 to 10 (1 being a total career-ender and 10 being a home run into the earth's atmosphere). I'd actually rate this deal a 1 or a 2.
Typically what happens when people purchase properties like the one you mentioned is this:
Year 1: No return as there is zero cash flow
Year 2: Still no return as there is zero cash flow
Year 2.5: You find a deal that produces even more cash flow than your current one, possibly in a comparable neighborhood, except it's selling for 65% of what you paid for your current one, and for some reason, there isn't really any interest or a bidding war going on for it. Then you realize that all along, this was the property that REALLY would've put you several steps ahead in life - not BACK.
Year 5: You see the buyer of the discount property make good cash flow, and sell their property for close to twice what they paid while you still have yours
Year 10: The other investors are now a hundred steps ahead of you toward their goal to financial freedom, whereas you are stuck in yours
The only upside to your deal you presented is that the value of the land/property will appreciate a good amount over the next 3 years, but that is speculation. Speculation is all good and fine as property appreciation is something we should all be looking for, even if our primary intention is to generate cash flow, but is it something you really want to risk on your first deal? And even more importantly, could you make the same amount of price appreciation with an even lesser amount of money and risk in another market? There's not a lot of point in buying for $250,000 and selling it for $350,000, when you could've purchased a $150,000 and sold it for $250,000 and still make $100,000.
Just some things to think about.
Also, check out this duplex for sale in Ocala, FL to put things into perspective
Now the $110,000 asking price is nonsense, and the fact that it's been on the market for several months and not sold proves it.
Each side rents for $625 I think, and the location is not bad at all. It's really worth about $70,000-$75,000, and that would just be a very average/mediocre deal if one were to get it for that price. Similar properties have sold over the last few years for around that much. For $210,000, you could get 2 of these instead, and still have lots of money left over to do other things with.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
J-chen
Alright, I will keep those points in mind. 7 years to get my money back and be super picky in my real estate deals, basically don't settle. Especially at the advice of a real estate agent, who stands to make money on me.
Lol, well, I was never one of those type of girls to seek out "hot guys" on tinder or online at all. Psychopaths is pretty much spot on. At least that's my devil's advocate playing it's role.
Love the comparison though. Haha
And yeah, that duplex in Ocala does put things into perspective. It may take some time for duplex prices in my area to drop that low again but, I'll hold out for it because like you said, the pickier you are, the better you will do.
I'll just always be looking at the market waiting and saving money until that perfect deal pops up.
Thanks for taking the time to write this response. I'll take this to heart and try to live by it.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
There are already tons of replies, and I'm being lazy asking this before reading them, but why would you buy this?
There should be more deals than you can count offering better financials
Alright, I will keep those points in mind. 7 years to get my money back and be super picky in my real estate deals, basically don't settle. Especially at the advice of a real estate agent, who stands to make money on me.
Lol, well, I was never one of those type of girls to seek out "hot guys" on tinder or online at all. Psychopaths is pretty much spot on. At least that's my devil's advocate playing it's role.
Love the comparison though. Haha
And yeah, that duplex in Ocala does put things into perspective. It may take some time for duplex prices in my area to drop that low again but, I'll hold out for it because like you said, the pickier you are, the better you will do.
I'll just always be looking at the market waiting and saving money until that perfect deal pops up.
Thanks for taking the time to write this response. I'll take this to heart and try to live by it.
Keep on snappin necks and cashin checks
But that's the thing. Why a duplex specifically? Are you still open to triplexes and 4 plexes and such? I'm assuming you want to live in the property, so looking at a market up to an hour away from you might not be something you're interested in. You're never really know what you're going to find. I'd also look for odd properties like a lot with two small houses on it. There was a property like that in a great location in Ocala about 4 years ago. It was for sale for $35,000 (they wouldve taken $28,000 I believe. I'd have to go check and see how much it sold for). There were two tiny houses about 750 sq ft each on this 1.25 acre lot of land. Each was a 2/1. One needed a new roof soon, and the other needed some cosmetic repairs. I believe each side was paying $450 a month, which I only would've increased to $475 once I got new tenants, and $500 a month for the possible third round of tenants.
For $50,000 total, that was a pretty good deal. There were no garages though, and the landscaping was kind of bare which wasn't a really bad thing. Your area is clearly more expensive than Ocala's, so I guess an equivalent deal would be about $115,000 total for you.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
We are not planning on living in it. We own our house outright except for the heloc which ends up being a pretty low payment since its a relatively small amount.
We definitely want a quadplex or for the right price, a triplex. We have ruled out a duplex after this whole deal also being that it's less diversified as a quad where if you have a vacancy, you still gave three other units for possible income. That is direct advice from the CPA I talked to.
Yeah, I was going to say houses over here rarely go as low as that without some serious flaws. Like I've seen just land going for that price and not even a large lot. But I can make the comparison to what you are saying about a lot that has multiple houses except at the 115,000 price.
Basically I want to stay in my area for a number of reasons, most of which I got from advice in this forum.
First, it's my first property and having it near me makes for less complications
Also, we don't have state tax which would eat some of our profits and having my place nearby will allow me to save on a property manager too.
I'm also not familiar with the area if it were out of state which could allow for some variables like crime rate or vacancy to escape my attention before buying.
I may do that down the road once I have more experience as well as capital to invest out of state. Also, by then, maybe I can gain some contacts that know that market and that i can trust to help me to get a location that is good.
We are not planning on living in it. We own our house outright except for the heloc which ends up being a pretty low payment since its a relatively small amount.
We definitely want a quadplex or for the right price, a triplex. We have ruled out a duplex after this whole deal also being that it's less diversified as a quad where if you have a vacancy, you still gave three other units for possible income. That is direct advice from the CPA I talked to.
Yeah, I was going to say houses over here rarely go as low as that without some serious flaws. Like I've seen just land going for that price and not even a large lot. But I can make the comparison to what you are saying about a lot that has multiple houses except at the 115,000 price.
Basically I want to stay in my area for a number of reasons, most of which I got from advice in this forum.
First, it's my first property and having it near me makes for less complications
Also, we don't have state tax which would eat some of our profits and having my place nearby will allow me to save on a property manager too.
I'm also not familiar with the area if it were out of state which could allow for some variables like crime rate or vacancy to escape my attention before buying.
I may do that down the road once I have more experience as well as capital to invest out of state. Also, by then, maybe I can gain some contacts that know that market and that i can trust to help me to get a location that is good.
Here's possibly a good idea you may or may not have thought of.
It's a little tactic I used to give myself a real edge over the competition.
I decided to get a real estate agent license which took me a total of about six weeks to get. The studying was semi-intense and it wasn't easy, but it wasn't super difficult either. For a total of about $650, I was able to take the classes and get signed up with Keller Williams.
Once you are a realtor, you get to see each and every new public listing in your county, including investment deals such as duplexes and quadraplexes. You're gonna see them as soon as they pop up. I would focus on bank foreclosures and would be able to make offers on a property pretty quickly, and usually there were only 1-3 other bidders max who prob had close relationships with their realtor.
Now you'll have to pay a monthly fee to stay signed up with whatever brokerage company, but it was still well worth it. The fee should be close to $200 month. However, when you are your own agent, don't forget that part of the commission of the sale goes to YOU because you are your own buyer's agent. If you do three or four investment deals per year, you're rolling in the green.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Cody, unfortunately at the moment in Washington state, there is very slim options especially if you want a multi family home. But also, I was very new to this so I honestly was not completely sure what i should expect in returns as well as some bad advice from people that stood to profit from this. But after researching on my own and running the numbers all kids if ways, I just could not justify what they were advising me. I had trouble finding a unbiased third party that wouldn't make money from me to get advice from which was why i turned to this forum hoping I would get some very honest advice from some seasoned professionals.
Which I did and then some. Everyone here has been very nice and helped me to validate my uneasiness about this sucker deal.
I definitely have a better understanding of what not to do. I'm sure to you, being a professional, my question sounded really odd and naive. But, I was frankly.
I felt like it was a bad deal but my confusion was with my real estate agent and a family member telling me that it really was good for this area and that the appreciation was bound to happen and that i would be able to raise rent. Also they said if they had the money, they would do it. I kept looking at my math and wondering what is it that I am missing that they think this is a good deal?
But being so ignorant in this field, I wasn't sure if my math was wrong or my outlook in general.
Either way, I read all the advice on here, concluded that this obviously is a terrible deal and am now just stepping back for a while until a perfect deal comes up (quad like I originally wanted, for the right price with a good cashflow)
I've also got into contact with a fiduciary CPA today, thanks to advice on here. I didn't know who I could trust to talk to without forcing some kind of sale on me or making commission.
But hey, at least my post got a lot of attention and feedback. Lol
It's been nice meeting some of the experts and getting great advice that actually makes sense. And making some professional contacts too.
Graham, WA · Member since 2017 · 33 posts · 10 votes
9y
Jason,
Look at you with the insiders info! You wanna hook a girl up? Jk You are from Florida anyway, so wouldn't see the deals in my area.
Seriously, a smart strategy though. If I had enough to invest in that many properties a year or had an interest in selling to others, I could validate the 200 a month.
But speaking on foreclosures, are those usually cash only? When I asked my agent about those, she said they usually get bought in cash bids and it's hard to beat a cash bid.
And what about those sites that you can pay to see foreclosure info? Are any of them worth It? I almost paid for one once but was worried it was a scam. There are a lot of sites that do it too, so had to figure out which ones are legit
Look at you with the insiders info! You wanna hook a girl up? Jk You are from Florida anyway, so wouldn't see the deals in my area.
Seriously, a smart strategy though. If I had enough to invest in that many properties a year or had an interest in selling to others, I could validate the 200 a month.
But speaking on foreclosures, are those usually cash only? When I asked my agent about those, she said they usually get bought in cash bids and it's hard to beat a cash bid.
And what about those sites that you can pay to see foreclosure info? Are any of them worth It? I almost paid for one once but was worried it was a scam. There are a lot of sites that do it too, so had to figure out which ones are legit
Ok, so there a couple of other HUGE advantages to being a real estate agent.
One is that when you have access to the MLS system, youll be able to see all properties that have sold within a certain timeframe. You will tinker around with it at nighttime at odd hours, and slowly start to learn so much about the market in your city that within a year or less, you'll probably have your entire market on total lockdown. It's extremely easy to get signed up with a brokerage because they profit $200 a month off of you. They'll take you on right away pretty much...not really ant "requirements".
Yes, foreclosures are pretty much cash only for the MOST part, but they are worth it. If you want to do the financing gig, then a HELOC is just as good as cash since youve already technically have the funds available to wire.
Also, after two years with a broker, you could theoretically start your own brokerage company or even your own property management company. The potential learning and advantages you can get for $650 is ridiculous and Ive barely heard of any investors getting a real estate license for fun or for a competitive edge.
Investor · Ocala, FL · Member since 2015 · 157 posts · 88 votes
9y
Jayme, being a mom who was also in your situation, I might have a different perspective. I see your problem being two-fold. I think you need to consider generating an income while being home with your little one. I don't know your skill sets but I run a digital agency - from home - and all my virtual workers are stay at home moms that do SEO, or writing, computer work, VA's, web design or other things and they all earn at least $2000/mo or more. They work during naptime or evenings. Weekends. Anyway, I think that extra income you could set aside as a slush fund to get you through any maintenance/repair or vacancy problems and cover low cash flow. I own properties that have no or low cash flow but love that my renters are paying off homes for me. I get 15-year loans that just break even barely but in a few years they will start paying off and I will be able to retire if I choose to. The hardest part is taking that first step and getting your first property but you will be glad you did. I don't know how much your HELOC is for: it may be wiser to use it to buy 2-3 lower priced out of state properties in Florida or another no-income-tax state where you can cash flow even if a little. If you have friends somewhere in these areas to help look over the properties OR can find a very dependable PM (property manager) there, you wouldn't have to worry so much. It seems like most all the investors buying FL properties are out of state so they must have a way to manage it. However, there are advantages to buying local and being able to "see and touch" your property anytime. Watch the BP podcasts, talk to people here, read some of the books they recommend. Learn and learn some more. You will feel confident about your first buy.. After that, you won't be able to wait to buy your 2nd or 3rd. (also I have found CPA's give the worst advice...they advise against everything that involves risk)
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
9y
just use redfin, they get you fast access to MLS... You could probably learn a good bit from becoming a agent, but doing it to hunt down deals probably isn't the wisest use of time at this point.
just use redfin, they get you fast access to MLS... You could probably learn a good bit from becoming a agent, but doing it to hunt down deals probably isn't the wisest use of time at this point.
Don't forget that as an agent, all you have to do is call the listing agent during normal business hours for the keycode to the house lock, and you get go inside as soon as you get the number from them. Super useful to have a license