Hello Bigger Pockets.!
This'll be the first question i have asked on this website and boy is it a doozy. So I just moved into the Fayetteville NC area about a month and a half ago, I'm in the military but looking for a means to exit through real estate investment. I do have some experience in residential housing, I worked as a project manager for a residential builder and have seen the construction process from the first shovel in the ground to delivering houses to customer.
Today a possible opportunity was presented to me. I was speaking with an agent in the area (who I have not actually met in person) and she informed me of someone she is representing. They have a 6 town houses so 12 units total in a low income housing area that is up for sale for $350,000. They each rent for $450 a piece and all but 1 is currently rented. This is not section 8 housing but it is in a low income area. As of right now I have not been to the development to see the property but I was told that there is enough room for at least two more sets of duplexes. I will be visiting development later this evening or sometime tomorrow. Can anybody give me any advice as to what I should be looking for (in general) on my first visit to the development.
Additionally, what else should I be asking? What kind of paperwork should I ask to see regarding this development. I am completely clueless when it comes to this complex. In my opinion this probably is too much for me at this time, but I don't want to let a great deal pass if this is one.
I'm sure I can find a lot of these answers on this form, unfortunately I am computer illiterate. I have been fumbling around the site aimlessly doing my best to try and learn how to navigate it. I will continue to look around but if anybody has the time to lend me their opinion I would truly appreciate it.
I do realize that this is a very open ended topic, but I'm just looking for a general direction to try and focus my energy so that I'm not spinning my wheels.
As I stated earlier I do believe this maybe too much to take on, but I am not afraid of 12 units nor am I afraid of low income housing.
Thank you in advance,
$450 X 12 UNITS x 12 months = $64,800/yr in scheduled rental income
less 10% for vacancy equals $58,320/yr in gross income
less 50% for operating expenses equals $29,160/yr in Net operating income
divide by 12% cap rate (because it's low income) equals $243,000 MARKET VALUE.
$350K is too high.
Ask them if they are willing to entertain an offer of $200K. If they say YES, contact me and I will tell you what's your next step is. If they say NO, follow them up in 1 month.
I agree with Wendell, you'd be sorry if you bought at that price. Low income properties have a lot more overhead than you'd think. There's tons of great info on BP, but I always recommend that anyone interested in multifamily investments read “Insider Secrets to Financing Your Real Estate Investments” by Frank Gallinelli.(also available for download on Kindle, so you can read it tonight, haha!) It will give you a firm grounding on the process, and get you going in the right direction. Good luck!
Being in the military you I am sure have a lot of responsibilities. When were you planning the exit from the military??
1,2,5 years from now??
You need to analyze not whether it's just a deal but your time constraints and duties. Low income housing is VERY involved and is best usually left to local investors that live there that Is hands on. Especially with that lower number of units. Remotely with a higher number of units you could scale and put more systems in to be hands off.
I just do not want you buying this and then it becomes a nightmare while you are trying to handle the military duties. Define what annual COC return you want annually and money to invest. You might not have to take on something this intense. The low income tenants generally have low education and reasoning skills. The landlord almost becomes more of a parent relationship to get them to pay the rent and keep the place clean. Not all but many low income tenants have life issues versus upper income tenants with college degrees and better life skills to handle issues and meet commitments.
My husband is active duty Navy. We hope to retire on the cash flow of our houses. We currently own 5 houses, 4 rentals. Our houses are all class A. We operate on smaller margins (Southwest Airlines Model), but have lower Vacancy, maintenance and no management costs (self manage). I also love our houses because they appreciate both in sales and rental costs. We started out buying a personal and gutting it. We rented it out when we left due to orders. We have simply grown from there.
Since your situation is our situation, A couple of thoughts
- Commercial Loan- They are more expensive and require 20-25% down. Do you have that kind of capital?
- Reserves- Apartments also require a lot of reserves
- Management- Lower income can be harder to find a good management. Management can be 10% of the house. We self manage from a distance. We have professionals, and there is a lot of trust. I would not feel comfortable in operating in a lower income as a military member who deploys.
- Repair Costs- If you have to fix EVERYTHING you are going to find the simplest things will cost the most amount of money. Caulking and plumbers puddy cost me $245 when I had to hire a plumber.
I also worked in the property management industry.What you are describing in an area you don't know, being active duty, and low income would make me RUN! Just my thoughts.
Originally posted by @Frank Caputo:
but I don't want to let a great deal pass if this is one.
This is the wrong way to think. There are always great deals. If it is a great deal, you know it is a great deal, and you can pull it off - Buy it. But buying something becuase you "might miss a great deal" is asking for trouble.
Good luck - Ned
Wow, thanks everyone for your insight. I just got back a short time ago from looking at the property, and it was not as bad as I had expected. I have seen much worse where I grew up which just so happens to be in the Baltimore area( Ned ),Pasadena to be exact. All of the units had a new EPDM roof, and most had newer floors. All were 2 bed, 1 bath living room and kitchen. The owner only bought it last year, so that makes me a little leery in and of itself. Why would he want out, the agent said he is moving and is to old to deal with it.
Mr. De Guzman, thank you for those calculations, not sure how you came up with them but I'm sure the formula is on the site somewhere. I'll be on the look out.
Mr. Owens, I could be leaving as soon as 2 years or as late as 5. By the way it would be without a retirement, and you are right it would probably take more time than I can offer it.
Mrs. Elizabeth, thanks for the thoughts concerning the commercial side of things.
And Ned, if and when I get out I may wind up in good old B-More, who knows maybe we can work together some day.
I think I'll pass on this particular offer and focus more on a few of the foreclosures in my area. There are several single family and town home foreclosures available once again thank you all for the info..
@Frank Caputo I want to say thank you for this post as it has really helped me out as well. I just Honorably discharged from the Marine Corps. I decided 8 years was enough and I wanted to do my own thing. I am super green too and know every little but what I have learned has been due to this site and all the awesome pod cast, and reading as many books as I can get my hands on (audio books while I drive).
Account Closed situation.
I understand that formula for the most part but why are those percentages, such as the vacancy and maintenance, used as a basis? I am going to guess that once you know your market area a little better you can adjust those figures to more accurately match the climate? The only thing I didn't quite grasp was getting the market value (12% for low income). Is there some generic formula that you use for low, middle, and upper income neighborhoods? If not how did you come up with that 12% figure?
Frank!!!!! Lol, whats crazy is I was looking thru old pictures at my moms house yesterday and there was a pic of you in there from back in our Mago Vista days. Good to see you on here man, definitely alot of good information on here.
I agree with others that it doesn't really sound too much like an deal and you did the right thing to pass up on it. Definitely follow up with him a few months down the road, who knows how far he may go down in price.
@Frank Caputo I would ask what the HOA fees and what exactly they cover. For example, we have two small 615 sf condos and the HOA fees are about $270 month. Wow, pretty high! Yeah but that covers all utilities, basic cable and HVAC maintenance. Your property being in a low income area, it likely isn't that inclusive an HOA. However, it is still important to know where you stand and what the costs cover.
@Ned Carey Excellent, Ned. My personal scenario is this: if it's so awesome I gotta get it now, I'm probably too emotionally involved with this property, need to back way off and take a good, cold hard look at things. There's always going to be another awesome deal out there.
@James Schroeder , 10% vacancy - that's typical. 50% is the 50% rule - meaning 50% of the property's income is expenses. Lastly, 12% cap rate is typical for low income areas.
@Frank Caputo Here's the thing - I know you say you are not afraid of low rents, but there are low rents and then there are low rents:
If the rents are low due to mismanagement and can be pushed, then it's one things. If, however, rents are low cause the marketplace says so and there is nothing you can do, then it's a totally different investment. Do not be fooled by the CF - it's a smoke screen. Buy only quality, because only quality product will attract quality tenants, which is what you want for the stand-point of management and IRR.
@Frank Caputo I just got finished reading "Rich Dad Advisors: ABCs of Real Estate Investing" By Ken McElroy. It the book it shows you how to evaluate property. His number and projects are big, but the concepts would be the same. Get the book from Library or buy it. It would be worth your time to read it. It is also on Audible.com. Good luck
I will head to the library tomorrow, thank you for the advice.
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