Biting off more than I can chew - 2 big deals at once?

Question

Hi all. First real serious question so far. I've been mostly just reading, chatted a little about Boyle Heights but this week things just got real...

My brother and I have been trying to get a deal done for 3-4 months and things keep falling through but we're learning a lot and building relationships with lenders etc. Long story how we got here but this time we got an offer accepted and actually have 2 forms of financing already lined up (both a portfolio and a hard money lender provided proof of funds letters before we submitted our offer). Then right after, our realtor suggested yet another property which looks like an even better deal...but it's a bigger deal and more intimidating. I want to do both but am not sure if we can pull it off...or if we should.

Deal 1 (offer accepted)

650k 3-units property with $900/mo coming in on each 2 bedroom unit ($2,700 total, well below market).

I live essentially rent free in China so this was a great opportunity for me personally. In the short term it will probably cost me about $800/mo to start building up some equity and with a year I expect to be able to get the rent up to where it pays for itself.

Deal 2

A giant two floor 8 bedroom home (rent controlled but currently vacant) with a detached 2 bedroom in the back...we could totally cash flow on it with that front unit and slowly acquire this crazy 750k home super near downtown but there's no way I could swing the traditional financing without first having it rented so I could count that income so...bridge loan to get in and then refinance once it's rented? Our Realtor seems to think that's reasonable but the numbers are kinda scary.

Is this an insane idea? On paper it seems like it could all work and within 6 months we could have a 750k home at least paying for itself, actually cash flowing in LA if we had a regular loan and another 3 units that would not be costing much and could cash flow within a year or so (as we get chances to raise the rents, especially when the one unit goes empty）

The size of the numbers kinda freaks me out

Steve Vaughan · Answer

We were just discussing the 20x rule in another thread, referencing a sky high metric at which we would SELL. The 3-unit you are thinking about buying is the exact type of deal we were salivating over selling!

When price equals 20x gross annual rents (a .41% monthly producer), we're out- everyday of the week and twice on Sunday.

Who in their right mind would buy at that price, asked Brent Coombs, shaking his head. Apparently when the 'returns' get that low, there are people still calling these 'tantalizing'.

I understand that LA, in the right neighborhood, can have massive appreciation potential. But buying the 3-unit at 20x gross annual as a 1st, with a partner, from out of country, it would be hard to tell and a massive risk Account Closed

Mike Dymski · Answer

I'd recommend running the properties through your deal analyzer to come up with the proper return metrics and cash flow. You're not mentioning the rent comps or anything about the true cost of ownership, which includes vacancy, management, maintenance, property taxes, insurance, cap ex reserves, etc.

Account Closed · Answer

@Manalo D.

Oh no, I have a salary too. I just mean that it's the 1099's that are preventing me from filing. Otherwise I would have filed for 2017 already. It's a big deal because I made significantly more at my day job in 2017 compared to the 2016. So my actual debt/income is quite a bit better than what my lender is using, but without that 2017 return, I can't prove it to their satisfaction.

@Steve Vaughan

I'll have to search for the thread then. I'm a little confused. Current rent is only about half a percent, but market rent for that is about double what it's getting. And I wouldn't worry too much about a partner from "out of country". But I will definitely find that thread when I get a chance later today.

I am back in LA now and then, maintain a legal presence there. I still have my CA DL, my checking and other stuff is all in LA and I have no legal permanent residence in China. If this 3 unit deal goes through I'll be flying back to close it. I grew up in LA and all my family is still there. I created an LLC with my brother and sister (both in LA) as partners. The whole point, for me anyways, is to see if I can create a job that will let me move back to LA full time. I went to middle school in Glendale, high school in Torrance for college only went as far as San Francisco. LA is my home.

edit:

I just realized you thought I was referring to the 3 unit as "tantalizing". Nah, I mean the larger 10 bedroom that is out of my reach. The 3 unit is more like, meets the 1%, we can make it work, should appreciate nicely, jeez man we've been looking for 3 months let's get something done already...

Account Closed · Answer

*sigh*...might have to pass on the second one I guess.

fwiw, I left some of those numbers out of the post but I did run them. We could do either one individually no problem. It's just starting too look like the second one, which is actually the better deal IMO, will have to go to someone else. We're putting such a big down payment on the first that I think it won't leave enough of a cushion for the second.

The saddest part, for me anyways, is if it was just another month later we probably could. I'm doing at lot better at my day job this year compared to last year and once I get my 1099's in and file taxes for 2017, my debt/earning will be good enough we could swing a significantly lower down on the first and/or get portfolio lending on the second.

So tantalizing... :/

Maybe next year I guess

Account Closed · Answer

First of all, thanks a ton for teh feedback.

...I was thinking 6 months. Hadn't tried to run the numbers for a full year.

I'll go back an take a look. Probably need a family meeting too. I'm pretty sure we could cover it for a year but it would probably be pretty stressful. My brother has a potential partner too. A friend, and roommate, who did the foundation work on his current home. I know he wants to do an actual deal with us, so there's some more money there. And I have personal money that I did not include as this deal is mainly done with family money.

Well, a year with no rental income would be pretty terrible. But the listing says it's getting $1500 on the rear unit already. It say "actual rent“ for the front unit is $3500, but then says it's vacant so I guess that's just a lazy listing on Redfin (the number of bathrooms also don't add up). But my brother, in a slightly cheaper neighborhood, is renting out his upstairs 1 bedroom for $1,500, so I figure the listing estimate of $5,000 in rent is actually pretty cheap for the size. If we got half of that, then yes. I could cover it for a year. And the inside looks pretty nice afaik. Not "gorgeous" but totally rentable as is. It's mainly the exterior that needs work (perfect right?).

So instead of 6 months I should imaging not being able to refinance for a whole year.

What is a good "terrible" scenario I should imagine as far as renting it?

Joshua Myers · Answer

Can you make this work on your budget if you can't get new financing for 12 months? If not I'd say take it a little slower. I forget the podcast guest that I just listened to, but he talked about "jumping off the curb" vs "jumping off a cliff." Don't threaten yourself with wipeout risk.

Biting off more than I can chew - 2 big deals at once?

Biting off more than I can chew - 2 big deals at once?

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