First Time Investor Here
Hello BP peeps!
My wife and I are new investors and working on getting our first deal. We located a property that we've walked through with a contractor and another local investor friend. I'll list the details below. I'd really like to see if anyone has any input to the approach we're taking and would be willing to offer up any advice for us. We've been visiting the forums for a while now and have been listening to the podcasts. So we feel like we, at least, know enough to get ourselves into a decent deal.
The house is a tri-plex and is currently on the market for $50k. It's owned by the County Land Bank, which acquired the property after 3+ years of tax avoidance.
Back taxes are currently $1,500.
Estimated annual taxes is $2,100.
The renovation estimate is $40k.
I'm estimating closing costs to be $5k including the $1,500 in back taxes.
All in budget looks to be roughly $95k. Once the house has been renovated, it's estimated worth is $140k-$180k, from what we've been told.
Being that this is owned by the land bank, we are required to show all proof of funds and a renovation budget/plan. This shouldn't be a problem, but just one more hoop to jump through.
How we plan to pay for it:
We are finalizing our HELOC which should give us ~$71k. We will use the HELOC to provide the 25% down payment on a mortgage. $12,500 from the HELOC and the remaining $37.5k in a mortgage. That gives us enough headroom to use the HELOC for the renovation budget.
With all this in mind, here are the estimated details of the income stream.
We can take the easy way out and grab renters from a local agency that vets and places homeless veterans. They do all the vetting and also pay the monthly rent. This would give us a $2,200 income for all 3 units. Alternatively, we can rent out the old fashioned way and bring in about $3,000.
Using the BP Calculator, we used the $2,200 income rate to see our lowest option for income. After saving 5% for vacancy, 7% for Cap Ex, 7% for repairs factoring in $350 for utilities (we'd have to pay if we used the local agency), we'd have a monthly cashflow of ~$640.
This seems like a great deal to pursue, but I'd like to hear others inputs.
Anybody ever deal with land banks? Am I missing some expenses somewhere?
Thanks for taking the time to read my story!
I don't know anything about land banks.
But I DO appreciate your interest in working with homeless vets!!! As a vet, I thank you for being interested in serving those who've served.
That said, I know several folks who are currently in housing situations a little like you are describing. And while it's not the norm (here, at least), there have been some problems with property destruction and drug use/arrests (and even 1 OD, though it wasn't on the property). I'd suggest you ask if you can speak with other property owners who work with this agency to see what their experience has been like and if they have any recommendations. (For example, I just rent to regular folks and I calculate 9% for vacancies, repairs, and CapEx. One month is something like 8.33%, so I just round to 9% to be very safe--I'm not great at taking a lot of financial risks. lol)
Also, you mention the cash flow, but you didn't mention the cash on cash ROI. That's important, too. It's a personal preference, but Brandon shoots for at least 12%, so I opted to go with that, too. My financial planner is much more aggressive in his searches for properties and much more selective in his choices and only gets ones with 20% cash on cash. (Fyi, he's crap tons richer than I am, so maybe his plan isn't so bad. lol) The cash on cash ROI might tell you which option go to with. But then, money isn't EVERYTHING (if you can otherwise make it work), so maybe doing the nice thing (vets) is how you want to go.
Good luck!
So from what I am seeing you can more than double your cash flow by managing the property yourself. I would go that route. I have 11 rentals (all single family properties) and I manage them all. It's pretty easy honestly. 3 in one location should be a walk in the park if you are local to the triplex.
While I can appreciate that you are interested in helping homeless vets, I would be hesitant to make your first landording experience one where you work with a high risk population. Yes, rent is guaranteed, but managing tenants that have been recently homeless, presumably unemployed and hopefully drug free could be daunting to say the very least.
Consider what the market rents in that area are- what quality of tenant do you think you could attract? Could you get gainfully employed tenants with reasonable credit?
Beyond that, your numbers look fine to me, I would just be concerned about your tenant placing plan, it could be very difficult to manage as a newbie.
Best of luck!
Maybe consider doing regular tenants until you get another couple of properties and/or your triplex has aged a bit, then turn it over to be used for homeless vets? Again, I'm not saying don't do it. It's a VERY noble gesture! I just don't want you to regret it, or worse, start resenting them.
Thank you all for your replies! This is so exciting and we're trying our hardest to make sure this deal happens!
@Jody Schnurrenberger, first of all Thank You for your service! My friend also has rentals in the same general area this house is located and is the one who got me interested in the homeless vet program in the first place (15 total doors with vets). In a nutshell, he's stated that the ones that have been placed with him are generally happy to have a roof over their head and have not been a problem. I realize this is not always the case, but I figured it's a least worth talking about. I myself have never served and I wish I had. This seems like a good way to serve those who've served. However, I'm still debating this route. You mentioned you used 9% for each category. This is the area I've struggled in a bit....How much to save. I chose 7% only because I seem to remember hearing that number in one of Brandon's books I listened to on Audible. The cash on cash ROI on this place is 23.44%. I do try to make sure when evaluating that I'm at least around 12% and this is close to double that. But as a new investor, I wasn't sure if this was a number I could bank on and base my decision around that. But it sounds like if it's 20% or higher, I should be very happy with that!
@Kelly Moniz, Yes we plan on managing this ourselves as it's about a 15-20 minute drive from our house.
@Corby Goade, that's an interesting way to put it. I guess I considered that the agency vets their candidates before I would rent to them and i wouldn't have anything to worry about. But, I don't know enough about their vetting process to know who passes the test and what criteria they are looking for. We could attract gainfully employed tenants or college kids that are at some of the local colleges/universities. If we charged market rates the more traditional route our cash on cash ROI would jump to 41.15%. I think I'm starting to see the picture here.
Partly I chose 9% for vacancy because my financial planner suggested it in case I need to fix any damage from a renter before getting a new person in. (Remember, my 9% is just rounded up from 8.33% which is supposedly 1 month's vacancy.) But also, because according to the housing stats on Sperling's Best Places to Live, that's the average vacancy rate for my area. If your area has an average vacancy rate of 11%, I'd use that. But if it's 5%, I'd stick with what you have now to be safe.
My heart hates that you might be leaning toward regular renters instead of homeless vets. But my head is happy you are. ;-)
Is that organization you are talking about nationwide? I might want to look into them myself! lol