Feeling overwhelmed

21 Replies

I am a new investor, but seriously dedicated to improving my financial position through real estate investing. I will be buying a property this year, and was aiming for something before June - but I have hit a bit of analysis paralysis, and generally feeling overwhelmed. I'm just not sure what path to take. I think small multi-families are the best idea for me, and I plan to self manage. I've read three RE books in the past 3 weeks, and working on another. Trying to cram as much info as I can into my head, while also spending time researching market prices on properties, rents, and people to work with.

I've got a few properties I've been considering, but just don't know what to do. 

There's a duplex in a maybe B- neighborhood. 3/1,2/1, with $2k in rent selling for $135. Thinking motivated sellers, as they dropped the price 4 times since November. But it is owned by an investment LLC, so not sure why they're selling.

Another close by is same BR and bth, $2050 rents and $115 asking. It was sold in 2013 for...I think $135, then relisted 6 months later for $150. After a walkthrough it looks ok, but has uneven floors, which makes me wary of structural issues. Had an offer fall through already, though don't know why.  Would be great cap rate though.

There's another that I love the house, but not sure on the deal. REO, $110. It's been on market a long time, and dropped from $179. Gorgeous house, large triplex. Needs work obviously - lots of cosmetics, maybe some minor water damage and work on the radiator system. Looks like walls were torn open in each bath to get to the water pipes, but don't know why. Figure I could get $2500+ in rent, but the holding costs could kill me - plus, would need to find a private money lender for financing, because I could not cover downpayment, holding costs, and rehab costs - and no conventional loan will cover a non-owner occupied prop. Could be a great house with great cash flow, but for my 1st investment seems like a huge amount of effort - including making sure the city is happy that it's livable when done.

Then just on Friday two duplexes went on the MLS 2 miles from my house - instead of 20 like the others. Cap rates are way lower. $1850 rent for $167 asking. I think those rents are low for the market, thinking maybe $1975-2050, but not seeing many rental comps available nearby. It would be really nice to have something 5 minutes away instead of 30 minutes(or more if traffic or construction). But not seeing the deal there without lower prices and higher rent. Comps for the sale price show it being pretty accurate - $154 on the low end a year ago, $171 a few months ago, and $165 in January.

Then the last - five plex 30+ minutes away. This would be a stretch, but seems like a good deal. $325, owner is offering financing with 10% down, claiming NOI of 31k and 9.6% cap rate.

I'm also seeing cap rates for the others no better than 8-8.5%, and most lower, like 5%. Maybe I'm over estimating some costs - budgeting for $6200/year for maintenance and CapEx.

Trying to wrap my head around home prices, rent prices, and just all the different deals I could attempt is frustrating me. I also have so much to learn about landlording - local laws requiring classes, etc. 

Wow. I'm feeling overwhelmed reading about all your choices @David S. !  I certainly won't ask you to read another book. At least you have decent properties to choose from!  I like the 1st one, $2k, B-, $135k. Shoot for 92% of asking. Unless it needs a ton of work, that should cashflow well for ya.  If you're single you could live in one side.  Uneven floors scare me, too, so avoid that one.  Look into the owner-carry.  If you finance the $135k then you could scratch up the down for the owner-carry. Then sit back and digest for a while.  You don't have to look at and consider every little property that hits the market!  You'll be fine. 

Hello

You have done your homework. Now it's time to pick the one that feels right. Your gut feels will help you. The biggest problem a new investor has is buying there first property or pulling the trigger. Look at the properties and listen to that voice in your head that tells you this one is right. Consider how close you live and which area you don't want to be in after dark.

Tommy

Are you working with a seasoned realtor?

Find a local REIA and offer to buy one of the investor friendly realtors lunch. It'll be money well spent.

Thanks guys.  My gut is saying avoid the rehab house. I think I'd love doing it, but it doesn't make sense financially. 

I do have a realtor, but she is young and not very experienced. Kind of got stuck with her due to connections, so can't drop her without pissing off some people, but she is not as helpful as I would like. 

What works best within your business plan?

Sometime the cheapest places with the most cash-flow are the best if these numbers aren't actually able to be achieved?

I buy class A properties, so my numbers look much worst. On the other hand they are newer, and stay very full. I have had friends who have great numbers in lower class areas but their property manager had a knife pulled on them, can't keep the house full and have thousands of dollars in damage. 

So buy in an areas that you can "full fill" your numbers. If you are having trouble with a non-owern occupied, can you live in it as a owner occupied and fix it up. Just a thought!

Also don't let your emotions get involved to me if I love a house my problem would be doing an over budget rehab. If you can find a good contractor to do some of these walk throughs with you it might help with the emotional jitters all in all you have done your homework well so it will be up to your gut just remember don't buy on emotions, good luck hope it all turns out well.

Originally posted by @David S. :

I do have a realtor, but she is young and not very experienced. Kind of got stuck with her due to connections, so can't drop her without pissing off some people, but she is not as helpful as I would like. 

 Don't count on a realtor to be helpful in picking a place to purchase.  That is up to you.  Count on a realtor to bring you deals and manage the buying process.

Originally posted by @Tommy Sowell :

You have done your homework. Now it's time to pick the one that feels right. Your gut feels will help you. The biggest problem a new investor has is buying there first property or pulling the trigger. Look at the properties and listen to that voice in your head that tells you this one is right. Consider how close you live and which area you don't want to be in after dark.

 Wow.  You don't hear this often as advice from investors.  I agree completely!  Go with the one that gives you the least conflict.  Stay away from the ones that you are trying to justify in your head.

1st property go for broke or go safe. There are going to be so many things you didn't anticipate either way. Given your research style (read: patience) you are more likely to be successful with a harder property. If you were my client I would get you into a decent sized condo building with not a lot of rules and nosy trustees and capitalize on the safety in numbers.

@David S.

 I remember the feeling, we all have been there and it takes time to get comfortable (in hindsight you will wonder what you were so worried about). It does not sound like you are stuck in analysis paralysis, rather you feel the pressure to make something happen. You are doing the right thing by running the numbers. The more deals you analyse the better you will get spoting a gem. The old rule is: look at 100 properties, offer on 10 and get 3 accepted. Buy one. Follow this rule!

Sounds like you are already looking at deals, if you have not looked at at least 20 I dont think you are ready to make an offer. And you dont have to go inside every house. What I usually do is I make a list of 10 potential deals and then do drive bys by myself. Typically I can tell from the outside if I am even interested in the deal. This way you dont waste your realtors time. (by the way, if you are not happy with her, find someone else - seriousley, its your money on the line, not hers and you want someone who either works a lot with investors or owns rentals. You can always pay her for her time if you want to.) I schedule showings only for properties I like from the outside.

Your next goal is to get 7 out of 10 offers rejected. This is going to be hard, because you will feel the urge to make a "good" offer and get it accepted. If you get your first offer accepted you are offering too much. You want to be rejected and that is certainly counter intuitive. I am not suggesting to make redicolous low ball offers, but you should ignore the list price and come up with your own math for you purchase price. Getting your first offers rejected will also make you a lot more comfortable with your position; you will feel a lot more confident with your first accepted offer.

Once you have an accepted offer it is time for a thourgh inspection. Have a good home inspector ready and go with him and have him explain the issues to you on site. He will tell you what real problems are vs. things that are easy to take care of. If something serious or unexpected costly comes up don't hesitate to walk away from the deal or adjust the price.

You dont need your first deal a spectacular one as far as cash flow or cap rate. If you make $150-200 per door after PITI, PM fees and reserves you are doing well. The most important thing is that your first deal is a safe deal. Buy a solid property in a desireable neighborhood. You will have to pay a little bit more and there is more competition, but once you own the place you are on the other side of that equation. Easier to rent, more rent, less vacancies and if you want to sell you will be able to sell it faster and for a better price.

Remember location is the only thing that you can't fix. If you are in a good neighborhood where people want to live and you have a nice place you will never have an issue keeping it rented. There is something to be said about investing close by and five minutes sounds much better than 30, but a direable neighborhood is more important. If your cash flow is a little bit less I would not worry about it, as long as it is positive and you know your deal is solid.

Expect your first property to be a learning project. I think the main goal for your first deal is not to make it the best investment ever, that will come later, just make sure you stick to your numbers and you wont have a problem sleeping at night. Good luck!  

@Tommy 

@Tommy Sowell Yes on the gut!   My first multi fam, a good cash cow, was a 5 minute drive and a 1/2 walk with my dog almost every day. So loved the time saver of that bldg. especially when something pressing went wrong, as my husband was in charge of maintenance. I now own 1/2 hr drive away, great bldgs, but those walks were oh so great!! As was the proximity for maintenance. 

Solid advice from @Marcus A.  A couple of items to keep in mind when looking at multi-family though.  It is unlikely that you will be able to look at a 100 deals that come close to your target properties.  Also, how you offer on properties is a skill that you will develop.  I have paid close to asking price on a number of occasions and had great success with the properties.  The trick there is to be able to recognize when you have found a deal.

Thanks all. I have been doing my research, made a spreadsheet estimating NOI, cash flow, c on c, etc. I've looked at every multi family in my area on the MLS, and know what it takes to cash flow. I feel I'm ready to buy, and just need to be sure it isn't a terrible deal, or too many hidden issues.

@David S. - I am going to be frank, but don't let my comments discourage you.  I had similar advice given to me several times before I finally got it through my thick skull.  I don't know your area, or property values versus income in your area.  None of your deals sound good enough to me, especially for your first buy.  You want your first deal to be a solid base hit.

Deal 1 - price drops don't mean it is now a good deal, it means it was way overpriced to begin with

Deal 2 - I don't see how it will cash flow after servicing debt.  Uneven floors don't HAVE to be a big deal depending on your rental market.  Worth an inspection before buying but I don't see money in this deal so I wouldn't waste the time on it.

Deal 3 - You love the house, in your words, so walk away.  I bought a historic property (3-unit) several years ago that I fell in love with.  Rehabbed it and it turned out beautiful.  It was the worst investment I have ever made in my life and lost my shirt on it.  I ran the project on emotion, was very proud of the work I did, but it was a HORRIBLE waste of time and money.  Invest because the numbers are gorgeous, not because the property is gorgeous.

Deals 4 & 5 - Again, I don't see cash flow on these.

Now for the agent, you are in business to make money, not friends.  If you aren't comfortable with the agent, find a new one.  With that said, an agent brings you possibilities, it is up to you to determine if they make sense or not.

Now that I have spun you around, let me offer some advice that I was given.  Don't rush to pound a square peg into a round hole.  I appreciate your motivation, keep going and don't give up.  Keep learning.  Pencil out a number of deals to see if the numbers work, it will help you fine tune your buys so that when you do finally find the right deal, it will be a solid base hit.  I have bought several properties at a heavy discount from wannabe investors that didn't run numbers right when they bought.

Important numbers to include in your analysis - Property management (even if self-performed, you may want to hire somebody later AND your time managing still  has value), vacancy factor, rent-loss factor (not everybody will pay what they should), reserves for maintenance, normal maintenance and apartment turnover, any landlord utility costs, taxes, insurance, garbage, legal and accounting.

Never, ever "talk" yourself into a deal.  Trust your gut.  Also, trust your numbers, especially the first analysis you run.  For example, you look at a property (on paper or in person) and decide to run numbers on it.  The first time you run the numbers in your spreadsheet, you don't know for sure whether the deal works yet, so you are most likely using REAL numbers.  Once you are done with the first run-through, it either works, or it doesn't work.  If it doesn't work, you are wise to stop and say "NEXT".  A common mistake is to try to massage numbers to figure out how it MIGHT work so that you can rush into a deal just to say you did it.  Don't do this.  You are better off waiting on the sidelines for the solid deal versus talking yourself into a mediocre or even worse, bad deal.  Numbers don't lie and they have no emotion.  Trust them implicitly.

Somebody else quoted find 100 deals, etc. etc and hope to close on one.  That is probably pretty accurate.  You will find that you look at EVERYTHING.  You will also find that almost all of it is junk as far as an investment goes.  If this was easy, everybody would be doing it.  Be persistent and be ready to act when you know you have a solid deal.  Don't rush to do a deal simply to be able to call yourself an investor.  Otherwise, before long, you will find that you are a broke investor.  Investments put money in your pocket, they don't take money out of your pocket.

Never be afraid to ask questions either.  The only stupid question is the one that never was asked.  Stay with it, you will get there.  Be patient and persistent.

Best of luck, happy investing! 

@Adam Johnson 
I  appreciate your frankness. You're right about deal the - I need to wally away. 

As for deals 1 and 2, both should cash flow. Figured with realistic numbers and the 50%rule, NOI around 10 to 11k, which on a 30 year at current rates should mean at least a few grand a year in cash flow. You're right on 4 though - my estimated cash flow would be under 2k a year, maybe a low as break even.

The fifth seems possible. With 31k NOI, debt service would leave about 10k, but I'm worried about the pro forma numbers being accurate.

Thanks though. I do feel like I'm pressuring  myself to find something,  and I need to step back and just look at the numbers, evaluate, and think. 

Or you could put it all on Lafayette in the NCAA tournament.

Originally posted by :

Somebody else quoted find 100 deals, etc. etc and hope to close on one.  That is probably pretty accurate.  You will find that you look at EVERYTHING.  You will also find that almost all of it is junk as far as an investment goes.  If this was easy, everybody would be doing it.  Be persistent and be ready to act when you know you have a solid deal.  Don't rush to do a deal simply to be able to call yourself an investor.  Otherwise, before long, you will find that you are a broke investor.  Investments put money in your pocket, they don't take money out of your pocket.

 I do believe that looking at 100 deals that fit your criteria and only buying one, would lead to a purchase every four or five years. 

I find that the agents that I work with usually bring me things that I may be interested in.  When I do see something that fits my wheelhouse, I rarely try to lowball them.  Most multi-family sellers know how to play this game.  If someone lowballs me on an offer, they are off the table. 

I have paid close to asking price on my last few deals and have made a few hundred K on each of them.  It does take experience to be able to quickly recognize a deal and what you can do with it.

Back to agents.  You do not need a buyer's agent.  There is no problem using one if they bring a deal to you.  But, you should be contacting everyone that does multi-family in your area and ask them to keep you on their list of buyers.

Getting three accepted offers and only buying one: if I came across this buyer and saw these games, unless played very well, I wouldn't be a happy listing agent and would be an even less happy buyer's agent. Bad move if you want to be a player in a given area. All that needs to happen is a deal with another serious buyer lost because they thought I was the one playing the games.

Just pick the one you like best, and get on with it.

@Donald Morrison

Let me ad a little, maybe I did not do the best job explaining this - I don't think the 100/10/3/1 rule is to be taken literally. It is more a guideline like so many other rules of thumb that are commonly discussed on BP. It does certainly not mean that you can't buy a house before you have turned 2 other AOs away or have completed your 100 list. It just says that you can turn an AO away if you find something during the inspection that renders your asumptions/numbers invalid - like a bad foundation. By all means if you got a good AO and the property is ok, why would you not close?

Last year I talked a friend of mine, who has been renting for almost 15 years into what Brandon calls house-hacking. She never owned a house before and I was horrified when I found out that she offered almost asking price for a massive fixer upper duplex after looking at a grand total of 4 properties on one Saturday afternoon. It blew my mind, as she would go back and forth over buying a pair of shoes for weeks, but buys a house in an afternoon.

Well, what can I say, to my relief everything worked out well, its a great property in prime location and the rehab stayed almost on budget; she got really lucky.

I will second the comments made by @Marcus Auerbach .  I consider "looking" at a property to be anytime that I hesitate and spend more than 10 or so seconds considering it.  Looking through ads doesn't really count unless you pause for more than a couple seconds to give it consideration.  By this definition, I "look" at far fewer properties now than I did when I first started out.  This is simply because, after running numbers on so many duds, I can tell fairly quickly if it is an effective use of my time to consider a property further.

When I get a call lead, I usually know within 30 seconds of the start of the phone call if it is worth any more of my time.

The 100/10/3/1 is simply a way to illustrate that you will not find a truly worthy investment easily.  You have to dig through a pretty big haystack to find the needle in the middle.  One year you may look at 10 properties and buy 2 of them.  The next year you might look at 200 and buy nothing.  The bottom line is to keep in mind that you should NEVER buy something just for the sake of buying something.  If the numbers don't work, say NEXT and keep looking.

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