New to Real Estate · San Diego · Member since 2019 · 34 posts · 22 votes
Hey BP Community,
My partner and I are just starting out and have a goal to purchase our first Multi-Family property in the next 90 days. We have our down payment secured and will be investing from out of state. The next step in our process is to identify which markets we'd like to explore and have narrowed it down to the following three: Austin, TX, Baltimore, MD and St. Louis, MO. We're going to use either the Buy and Hold strategy or BRRRR method. Our question to the BP community is if anyone uses similar strategies in any of these markets would recommend one over the other.
Good Luck Steven!!! Now is a great time to invest in real estate. I am biased as I believe in the BRRRR strategy. I agree with Arn, the Austin market is very competitive and may not be the place for the best return on your investment. Many times we are drawn to the hot markets, but that does not make the best place to invest. If you are looking to grow your portfolio and you do not have unlimited funds, consider the BRRRR but make sure you are buying the property right. The purchase price plus the rehab amount should be not greater than 70% of the after rehab value. Another way to look at that is to access the after rehab value (let's say the ARV is $200,000 for a simplified example) take 70% of the ARV (70% of $200,000 is $140,000). Then determine the rehab costs making sure you have a 5% to 10% contingency built in that for surprises (let's say that is $40,000 in this example). Then subtract the rehab costs from the 70% of ARV number and you have the maximum you should spend to purchase the property ($140,000 - $40,000 = $100,000). In this scenario the maximum purchase price would be $100,000. This is a guide and by following this once you refinance you will get all or most of your investment back to be able to purchase a property. In the BRRRR method the 70% rule is the first consideration in determining the purchase price and whether this is a good investment. The second and equally important calculation you need to make is what is your NOI or how much money will you make a month.
As a lender we look at numbers a little differently, but you want to make sure that your NOI will cover a debt service ratio of 125%. This means your rental income minus your expenses will cover 125% of the mortgage payment. You must also ensure that this meets your minimum return on investment.
These 2 formulas are key to refinancing your property. From a lenders perspective we will lend (cash out) up to 75% of the property value as long as the rent minus expenses covers 125% of the mortgage payment.
In the BRRRR Strategy, you will successfully grow your portfolio if you add these key financial metrics to choosing the right property.
Finally, the numbers are important but they are not the only factors. They say the key to real estate investment is , Location, Location, Location. You choose the Location by numbers and many other factors. Numbers say no this is not a good deal but never say buy a property for the numbers alone.
Understood, thank you for the clarification. We have our goal cash flow and our target CoC return ironed out (10 - 15%) so now we just need to settle on a market. Thank you for the advice.
Steven, if Indianapolis or Kansas City are on your radar, I'd be happy to help. Both are good cash flow markets but additionally they both have solid population growth, job growth (pre Covid) and modern, diverse economies.
Hi - I am reading David's book and living in an expensive area (Hawaii) - investing locally is hard. I am looking forward to investing long distance. Best of Luck!!
I currently reside In upstate NY and have 5 doors, two are in the Charlotte NC area. I really like the Greenville SC area and would like to get into the multi family domain.
regarding contingencies, nothing in life is 100% sure. But if you have a small rehab job, just cosmetic work and you have had a home inspection, 5% is usually ok. For large inspections, 10% or more. The important thing I said here is to have a home inspection. Many real estate investors ignore this, but this is mandatory in my book. The inspector will uncover potential problems and get you an estimate of the costs (a real good idea when dealing with contractors - no offense to those great contractors we have in BP)
I invest in small (10-12 unit) properties and just bought 6.5M of assets in 2020
I am going to first say that be sure you understand what cash will be required to close. Covid has really impacted how much cash you need as Covid reserves have been a thing. In my case they wanted 6-12 months of PITI as reserves which was a large chunk so be prepared.
I also will suggest that doing any kind of renovation from afar is going to be challenging - unless you have some deep experience and a known team.
Finally you are going to rely on property managers to manage your nest egg. And while there may be excellent property managers they wont take care of your property the way you would and IME its an hourly employee that is usually the person doing the "managing" and they will have zero idea how to manage your wealth.
Finally in Covid times you need to be prepared to cover your costs when rent isnt coming in.
Now I am a firm believer in MF and self sufficiency but hope maybe you get your feet wet closer to home where you can keep your eye on your nest egg
Hi Steven, I have yet to purchase a multifamily, but like you I'm located in southern California and the returns elsewhere (not to mention the prices) are much more appealing. I am wrapping up on a SF BRRRR and the process went smoothly. I am lucky enough to have a combo broker/PM/construction in the market in which I'm invested, Michigan. It can be done but I certainly recommend getting some familiarity with a potential market. I grew up in Michigan so I knew the area in general I am invested in.
Having a team is incredibly important - I disagree with the poster that said you are giving away profit. Not if you buy right, and not if you calculate those costs into your purchase.
Thank you for the recommendation. BRRRR is definitely appealing to us however, based on some of the information we're received from people on this thread, it seems like managing contractors on the rehab process can be a big hurdle and a challenge. Definitely a food for thought as we approach our first deal.
We don't have any infrastructure currently setup, however we are now exploring our "competitive advantages" that are in market like personal friends and family who can help us with identifying good contractors, lenders and agents, etc. As this seems to be an important piece of the puzzle.
I am familiar with REIT's as an investment vehicle and will likely add this to my portfolio later down the road however, I think as of current we are lazer focused on small MF as an investment. Thank you for the advice, it is appreciated!
Agreed! And thank you for the insight. Yes, we would never pull the trigger on a property without getting an inspection. I recently purchased my home here in San Diego and through that process, i've realized how important the inspection is when understanding the work that will be needed on the property.
Congratulations on your success in 2020! Very exciting.
Hmm interesting, this is the first I am hearing of this. Does this apply to small multi-family properties as well? From my understanding you can use a conventional loan on a small multi-family but need a commercial loan for anything larger thank 5 units. Was this required because you were taking out a commercial loan?
Yeah, from what I have been reading through all of these posts, managing a renovation from out of state may be a challenge and something we look to avoid (at least on our first purchase where the learning curve will be steep im sure).
Yeah I hear what you're saying in terms of managing a PM company, however investing in market just really isn't an option. San Diego is incredibly expensive and it is hard to find a deal that works with our criteria without an excess of capital. I think OOS investing is our best option at this point. But I do appreciate all the wisdom! It means more than you know.
Hey Courtney - agreed! I saw that you are in located in Lake Elsinore, so you understand the challenges of Southern California. That's awesome, congrats on a successful BRRRR. How did you put your team together in market? Were they all personal connections or did you build it from scratch from out of state?
Kansas City is great. And so is St. Louis. Great potential in both. As someone who is born and raised in St. Louis and then moved to Kansas City I can see both sides!
I actually found my broker through BP. I set up searches for the cities in which I was interested purchasing and ran into some of his old posts where he had done some rehabs. Because I have family back in Michigan, I've met him in person (as well as seen the properties). I definitely recommend honing in on your market and doing the same! For people who are looking for cashflow, I think out-of-state investing is an incredible opportunity, but it's worth the cost to fly out and get familiar with your team. Once you find one great person as well, they will typically have referrals, and all my broker's referrals have worked out well for me.