First Time Investment - Help!!!

16 Replies

Hello Everyone! 

I'm new to real estate investing, but have read my fair share of books and Bigger Pockets forums to prime myself for what's to come down the road. 

I've been searching through this sellers-market for a few months now, and I think I've finally found a multifamily worth investing into. It's a 5-unit all-brick apartment, built in the late 1980's, with recent interior updates. However, since this will be my first real estate investment, I'd like to see if anybody disagreed with my numbers or ROI. Any input is appreciated! Thanks in advance!

Note: I flipped the home I currently live in, and plan to use a HELOC for my 20% down payment. Therefore, I will have to pay for 100% of the house each month, rather than 80%.

Listing Price: $239,000

Purchase Price: $200,000

Down Payment: $40,000

Income Generated (100% occupancy):       $2,844.00 (In the process of being increased to $2,960 because of remodel)

Principle & Interest:

20% (HELOC): $227.00

   80%:                                                                                  $811.00

Insurance:                                                                           $125.00

Property Tax:                                                                      $229.00

Electric (Common Area):                                                   $60.00 (Based off previous electric bill)

Water (Entire Building):                                                     $115.00 (Based off previous water bill)

Trash:                                                                                   $110.00 (Based off owner's historical records)

Repairs (5% of Income):                                                    $142.20

CapEx (5% of Income): $142.20

Vacancy (8% - 1 month annually per unit):                     $227.52

Management (10%):                                                           $284.40

Lawn Care (Mowing & Snow Removal):                          $50.00

Monthly Income:                                             $320.68

JUDGE HARSHLY! Thanks Again! 

-Josh

Hi @Josh Huber ,

I used to work for a Turnkey provider and built the calculator generating the Investment Brochures. If you want it, I'll send you a copy of it later today. Same goes for ANYONE who PM's me.

Just going off your numbers and using my instincts...

-Since this is a 5-unit, you'll need a Commercial Loan, not a residential. That basically means banks look at the property without "Josh" being involved, but how sustainable is "5 unit Brick"

-Assuming "Income Generated" = Gross Rent, this looks good

-Insurance looks a little high, usually closer to .5% of PP

-Property Taxes, Repairs, CapEx, Vacancy, Management, Lawn Care, all seem acceptable

-You'll want a Reserves Fund (3-4% of PP) as an emergency account

If you're a more analytical numbers person, your math process is perfect. If you're not a fan of math and want to do these FAST, I go with 50% of (gross) rent goes towards expenses, and each $100k of a loan will cost $650/month. Fast math implies monthly mortgage of $1,300 and monthly expenses of $1,400. Since those rules allow room for extra caution, this deal looks worth pursuing.

TL;DR Buy for $200k and Rent for $2,900/month, you'll be pocketing $200-$300/month.

Go get 'em!

@Josh Huber - I don't know your area, and numbers are local, but overall I don't have any changes.  Just be aware that capex items cost the same regardless of the rent.  So the cost to replace a HWH is the same if the rents are $500/mo or $2000/mo -  so on my lower rent properties I use something like this to set my capex

Item Cost Useful Life Yearly Monthly
Roof $5,000 25 $200.00 $16.67
Furnace $2,500 20 $125.00 $10.42
Flooring $1,800 6 $300.00 $25.00
Plumbing $6,000 30 $200.00 $16.67
Fixtures $1,000 6 $166.67 $13.89
Water Heater $700 20 $35.00 $2.92
Appliances $1,000 8 $125.00 $10.42
Componants $1,000 10 $100.00 $8.33
Structure $10,000 30 $333.33 $27.78
Kitchen $4,500 15 $300.00 $25.00
Window $5,000 30 $166.67 $13.89
Paint $2,500 6 $416.67 $34.72

The seller is going to take 20% of the listing price for you? Or purchase price was taking into account the 40k down payment? That seems like a big jump considering the age of the building and the remodels underway. I don't know the area though, so I'm really more just wondering if that's a reasonable assumption for you. The numbers look decent though besides that.

@Nathan Platter - Thanks for all of the help and tips! I'm an analytical person, so I like to run it both ways between breaking things down completely and the 50% rule. It gives me that warm fuzzy feeling inside. Also, if you don't mind sending me the calculator you built for generating the Investment Brochures, I'd greatly appreciate it!

I tried finding a rule of thumb for estimating insurance, but had no luck. So thanks for the .5% of PP estimate! 

@Brie Schmidt - Thanks for breaking down your CapEx budgeting methodology. GREAT idea! I'll be using this concept moving forward. If you don't mind me asking, where did you generate the estimated costs for each CapEx item from? Historical experience? Or do you have a rule of thumb?

@Megan Phillips - I appreciate the input, Megan. $40,000 is my down payment. $200,000 is my target purchase price where I feel most comfortable. I believe this is achievable, based on how long the building has been on the market, the number of properties available in the area, and the current owner's eagerness to sell. If we aren't able to negotiate anything close to that number, I'll just move on to the next one!

Thanks again for all of the input, everyone! It's highly appreciated! 

-Josh 

Running 5 units for 320 bucks a month income might be too thin for me. Quite a bit of time, capital, and risk for right at 10 bucks a day. Marginal. But everyone had different goals.

BUT... crazy idea. As much as I like buy and hold, if you can get this for 40K off asking, I might have a contractor bid converting it to a proper fourplex (permits, all legit). 

If it would easily convert (like one shared wall coming down and some demo)...that would be interesting.

Maybe have a larger owner's unit and see if it would be a flip candidate as a more marketable 4-plex with easier financing... Lot more people have 3.5% down than 20-25%.

See if the 4 plex comps are strong in your area. If so, you may have an exit strategy if it could be done economically and feasibly (probably depends on the layout).. It could even be something you do right away or in a few years based on the fourplex market comps and inventory. 

Maybe with some cosmetic improvements and (ironically) losing a unit, you could add value. 

A recent example: a 6 plex on my street has been for sale for years it seems. 

My 4 plex three doors down just got a full price offer right when I listed it, just an example of the power of 4 units or less.

Just another option there (i.e. a marginal rental that might be a potential fix and flip).

Best of luck....

What are your calculations on how long it will take you to pay off the HELOC balance of 40k which was your downpayment? I am looking at using my HELOC for something similar but the cash flow needs to be just right so I can pay down the HELOC balance in a timely manner. Are you going to take the cash flow and put it towards principal payments? If not it seems with a calculation of $227 to your HELOC each month and let’s say at 5% Interest that’s about a $166 interest only payment and a $61 principal payment that could take you 655 payments or 54 years to pay that down. Did you look at that part of the scenario or have a plan B to pay down the HELOC portion?

Have you identified your lender and have actual terms from them? Looks like you're assuming a 4.5% 30 year conventional loan with your $811 first mortgage payment. But with a five unit you will need commercial financing, not conventional. That's likely to have a shorter amortization period combined with either a balloon or ARM terms.

You will also need to disclose that the 20% down payment (which may be low) is being borrowed.  Lenders don't always like that.

You make no mention of what markets rents are. 9 times in 10 there is room to push rents higher with a change of ownership. Tenants expect it. I would be looking to raise rents, in addition to reno upgrades, by an additional amount.

what are you going to do if or when your heloc is called .. remember helocs are not fixed term financing they are en extension of credit and can be frozen or called at the discretion of the lender.

now if you have a hundred grand in cash sitting in the bank and can easily pay it off that's one thing.

but these exact scenarios is what bankrupt untold thousands and thousands of investors when the market turned to the worst or they had extended tenant issues.

100% leverage for 3600 a year potential gain to me if far to much risk.

Originally posted by @Josh Huber :

@Nathan Platter - Thanks for all of the help and tips! I'm an analytical person, so I like to run it both ways between breaking things down completely and the 50% rule. It gives me that warm fuzzy feeling inside. Also, if you don't mind sending me the calculator you built for generating the Investment Brochures, I'd greatly appreciate it!

I tried finding a rule of thumb for estimating insurance, but had no luck. So thanks for the .5% of PP estimate! 

@Brie Schmidt - Thanks for breaking down your CapEx budgeting methodology. GREAT idea! I'll be using this concept moving forward. If you don't mind me asking, where did you generate the estimated costs for each CapEx item from? Historical experience? Or do you have a rule of thumb?

@Megan Phillips - I appreciate the input, Megan. $40,000 is my down payment. $200,000 is my target purchase price where I feel most comfortable. I believe this is achievable, based on how long the building has been on the market, the number of properties available in the area, and the current owner's eagerness to sell. If we aren't able to negotiate anything close to that number, I'll just move on to the next one!

Thanks again for all of the input, everyone! It's highly appreciated! 

-Josh 

 How closely have you been watching that building. Did it go pending and back on the market at some point ? Why is it on the market for so long? Did you check the zoning and U&O?  Sometimes it could be a pain in a neck.

@Michael Boyer - There are currently no 3 or 4 plexes available on the market, and there haven't been for a few months. Although there is a demand, I have no way of knowingly predicting the after-renovation sale price if I were to go this method. If you have any thoughts, feel free to fire them my way. 

@Gerry Gendron I'm basing the HELOC off a 30 year loan at 20% down ($40,000). The lender I'm working through sets up their HELOC as 10-year terms with no principal payments required. They only require you to pay market price interest +1%. In addition, they have no fees or terms if a person doesn't pay within 10 years, and carries the loan over for another 10 years. Therefore, they allow you to pay back the HELOC as fast or slow as you want, while keeping in mind that they are getting extra interest income.

@Cynthia Hairston - I'll send it to you as soon as I receive it! 

@Jon Holdman - I've only been approved for Fix and Flip properties and properties of 4 units or less. Since my initial post, I've found the issue that lenders tend to require 25%-30% down payments for commercial loans, along with shortened lending periods. Factoring that in, mortgage rates rise too much for me to be comfortable with. Thank you for the insight. 

@Thomas S. - The rent is actually slightly above average for it's location. I think it would be possible to raise rent slightly, but not significantly. 

@Jay Hinrichs - Thank you SO MUCH for this information. By the way my lender explained it, their HELOC has fixed terms where no calls or freezes could be made. Needless to say, I'll be making a phone call to my lender today.

@Lana Lee - To answer your questions, the building has been on the market continuously for 7 months (never taken off). Structurally, there are no issues with the building. In addition, all units are currently occupied. My belief is that the seller is asking too much for the market to bear.

Again, thank you all for your sharing your input! After factoring in everyone's comments, I've decided to move on and search elsewhere. The profit will be too slim for my own comfort level, and there are better deals to be found! 

@Josh Huber   I have never seen a true heloc without a call provision.. but there can always be a first time.  in your call ask for a copy of the note and mortgage or trust deed ... and READ IT line for line..

don't take any lenders word for it.. have the time the lender or MLO has no clue either remember they get paid to sell you a loan.. and because these clauses are buried in the docs many times they simply don't know either.

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