I recently posted what my idea of a "Good" buy and hold deal looks like.
"$100.00 per door cash flow after all expenses are covered, is what I would consider a great deal (@Brandon Turner ). To add to this strategy, the $100 per door cash flow has to be from the property operating at the next lowest rent rate offered in the area. To elaborate on this, in the area i am looking to farm, a 3/1 would rent for around $1100. A 2/1 would rent for about $900. My potential 3/1 units have to produce at least $100 per door at $900 rent in order for me to take the next step. I have thought that this may be too conservative of an approach, but I won't find out until I make offers. I personally feel that this strategy would also give me more of a competitive edge with my units."
What are some you your strategies for buy & holds? When analyzing, when do you feel "the calm", right before you pull the trigger on what you think is a good deal?
I look for foreclosures or short sales that will provide gross revenue of 2% per month of the purchase price. When analyzing the numbers if they make sense I am calm and know I can execute. I am an engineer so I do dwell on the numbers, but if I know the area then I will pull the trigger, I am anti-analysis-paralysis.
I would go with 6% return on initial investment and if all numbers make sense, its time to pull the trigger
@Anil Samuel - I like the approach which you take. But to add another perspective do you hold properties for long term and maintain a cash flow, or is it better to pull the trigger and move to another property.
The question I am pointing towards is how do you maintain the financing for buy and hold portfolio?
@Nilesh Makhija Is the 6% ROI or cash on cash return?
I hold properties for the long term. I have been reading a book (Nickerson_William_-_How_I_Turned_1000_into_Five_Million_in_Real_Estate_in_my_spare_time) which talks about pyramiding properties. Buy properties that need to be rehabbed and fix them up (forced appreciation which will allow you to possibly increase rents), rent them out for a year or two, then use the equity built into the first property as a down payment for the next property. When you say move to another property do you mean acquire another property or sell the one you have and up one to a bigger one with more cash flow?
You may want to look at the following article by @Ben Leybovich:
The financing for a buy and hold portfolio via a portfolio lender requires 20% for each property generally from the banks I have spoken with. You can buy a homepath home with a mortgage that requires 10% down or you have can use HML to acquire a property and fix it up, but you still have to come up with "some skin in the game" of 10% (purchase price or rehab costs, sometimes both), then you will have to re-finance out of HML into a conventional loan since hard money lenders only want to lend for about 6 months and they want you to have multiple exit strategies such as selling retail or refinance.
@Anil Samuel @Nilesh Makhija These are some great tips. The pyramid structure is the structure I plan to use in by business as well. I will definitely add (Nickerson_William_-_How_I_Turned_1000_into_Five_Million_in_Real_Estate_in_my_spare_time) to my book collection. I will be buying low income multi units, my only concern was purchasing a property and getting in over my head will rehab cost. Most of the multi-units in my market were built in the 1920's. Some were well kept, but are in rougher areas, while the not so well kept are in my target neighborhoods. Any suggestions?
I like to purchase under $100K and see at least 12% cash-on-cash unleveraged, or at least 15% cash-on-cash leveraged. Just a couple years ago, it was 18% and 22%, but it's getting much more difficult to find good deals in my area these days...never thought I'd be talking about "the good old days" just 6 years into this business... :)
I think I answered my own question after reading my post. My fear is pretty much every conservative investors fear...
@J Scott Are you looking to invest in Baltimore city or outside?
@J Scott I have never considered using my cash-on-cash % to analyze my deals. I have the percentages available to look at, but thought that they may be skewed due to my purchase price. It definitely makes sense to compare my potential buys, as this would be the common factor each of my investments would have.
You'll realize the greatest return with even a moderate rehab & NOI optimization. Conservatively estimate repairs and if you can't get a purchase price below 60-70% ARV (including repairs!) don't waste your time with it. If it passes this test, then look at actual vs. potential rents and expenses... Can you increase value there as well?
To me it's just smarter to avoid headaches with due diligence in the numbers upfront, rather than lose money and get headaches later... I personally prefer a greater profit margin like 15-20% COCR to make more room for the unexpected.
If you're confident in your target area's rental market and it passes these tests, I don't see any reason why you can't expect huge cash returns
Originally posted by @Anil Samuel:
@J Scott Are you looking to invest in Baltimore city or outside?
Outside the beltway. In the city, those numbers are easy... :-)
@Gerard Pechal That is great advise. How do you determine the repair cost? Do you get bids before you make an offer, or do you estimate yourself, make an offer, and then get bids and make a counter offer? Thanks
I'm looking for:
Good school systems
Low crime areas
Residential areas with few renters
Quiet side streets, cul-de-sacs are great
Close to amenities
Close to transportation
Must be positive cash flow
Bargain priced is usually a good thing
Not next to: highway, bar, junk yard, sewer plant, commercial area, loud areas, negative things that you can't change.
Non flood zone areas
Public water & sewer
Non oil heated houses
Yard not too large or too small
Yes, I would estimate basic repairs & upgrades conservatively on a $/sqft basis before visiting the location to see if the numbers even work out. Repairs could be more extensive than you expect (even after the inspection), so if it doesn't pass the blind evaluation then it likely won't pass the full inspection and then you're stuck trying to force the deal.
Some may rely on these last minute adjustments as a negotiation opportunity, but I have no interest in wasting time with multiple inspections and negotiations.
@Anil Samuel Is the 6% ROI or cash on cash return?
I was referring to ROI. This tells me if it is even worth thinking about the property and do the next set of analysis
When you say move to another property do you mean acquire another property or sell the one you have and up one to a bigger one with more cash flow?
What I meant to ask "is it okay to sell the one which you have and move to the next opportunity". I think you are suggesting, you always have to find ways to fund the future opportunities without selling the ones we have (exceptions are understood)
Having multiple funding mechanisms is the only way to generate consistent cash-flow. Would this be a fair statement?
Also reading William Nickerson's book is definitely on my to-do list.
IMO, $100/mo/door is very conservative. In a number of markets, you can do much better than $100/mo/door leveraged or unleveraged.
I agree with @J Scott and I have only been doing it for just about 4 years and it already feels like a different market now than when I first started out, but there are still some good deals out there, just more buyers for them now than "the good old days"
For some properties, I am paying 20% more now than I would have 12-18 months ago, but they still generate cash flow.
The best thing you can do is use the power of compounding interest in your favor. Keep reinvesting the money earned from real estate and you will be surprised at how fast it grows. I love this quote from Albert Einstein:
"Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it."
I'm probably a little less technical than most.
I'm a cash purchaser who looks to make a minimum 1% of the total purchase and rehab price per month on properties that are charged less than $3k a year in property taxes.
I think the numbers are going to change with different rental markets.
I invest in southern Maryland and the rental market is pretty good here. I pay cash for purchase and rehab costs which ends up around 70% of ARV. Place a tenant in the property and do a cash out re-fi of all my money back (70% to value) with a portfolio lender and the property has to have net cash flow of $500/mo after re-fi.
10% cash ROI using 20 yr loans, not in a war zone. Currently investing semi locally in multi units but when I expand my focus I will expect better returns
@Timothy Riley In Chicago, almost everything on the north side is over 3k taxes. Whenever i think i have found potential, i scroll down a bit further and see 5k+ taxes... Most of the cash flow properties i have found are on the south side of the city.
@Sharad M. I definitely plan to reinvest into my portfolio. I have spent a lot of time analyzing deals that i would consider, as well as creating my 5 year business plan. My goal is to buy 2 properties within year 1 leveraging both mortgages with 20% down, and funding my own rehab cost. I am choosing to rehab my first purchase because it just seems to make more sense in my market. I read that it is safer for new investors to purchase retail, but there is no room for cash flow after all of the expenses.
Lol @Christopher Malone Im well aware of the northside and wouldn't use that equation if I could afford to pay cash for a north side buy n hold. Another four rentals and I'll get back to you on how I should figure 300k and up properties.
@Timothy Riley I look forward hearing about it!
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