My current status: 3 rental properties... Am I doing it right?

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My current status: 3 rental properties... Am I doing it right?

Chris B.
Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes

This question is for experienced investors...  Am I investing correctly? Or should I change strategies? I am buying the worst houses in good areas and fixing them up and renting them out.  The below numbers I am not including maintenance and inoccupancy. The rehab costs include any maint over past two years for two of them. The third, everything is new.,  Everything is in tip top shape and easy to manage. (2 Bed 1 bath single floor under 1000 sq ft.   All profits go back into the business for those rainy days.. I haven't taken a dime out.

First property purchased off of Auction.com. 

Purchase price: $42,000

complete rehab cost: $45,000

rental:   $1250  month

expenses monthly: $400 taxes and $70 insurance

I am refinancing this one. Appraisal came back @ $140K. Taking $84,000 @ 5.5%

Second property purchased off mls.

Purchase price $60,000

complete rehab cost: $60,000

rental monthly: $1500

expenses: $500 taxes and $70 insurance

This one I purchased through a S corp and would need a commercial loan to refinance.  Holding off for now because of the higher rates.

Third property purchased off of the mls. Which is my best deal yet, but didn't realize it when I bought it.

Purchase price $60,000

complete rehab cost: $43,000

rental income: $1550

This just appraised @ $190K.  I am going to take out $114K @ 5.5%.  I could take out up to 80% @5.875, but don't want to push it...

So the money I am taking out is going to help pay off my HELOC that I used to purchase these. I should be closing in next week or two. Are these good investments? Should I look to continue adding more now that I have more money to spend? Are there better opportunities elsewhere? Currently these are within 10 minutes of my house which I am managing on my own. Goal is to get 10 doors in next few years and quit my job working in NYC...

Would like to get into multi family, but not finding any opportunities near where I live in North New Jersey.  Any thoughts, or things I should look to change for future investments, or constructive criticism would be greatly appreciated.  

Thanks so much.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
7y

@Chris B. Sounds like you are nailing it!

Keep up the good work.

I beleive that the key is to finding a deal, that is were you make your money.

If you can keep using the BRRR methode you can keep buying houses.

You are meeting your goals so much faster by reinvesting in yourself instead of spending some of the profits along the way. Great Job!

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  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @Thomas S.

     I really appreciate your input but you talk in riddles to my novice brain...

     My comment: 

    "If I can get these all paid off, there’s a ton of positive cash flow."

    Your response:

    That is the common opinion of a novice or hobby investors. Not being able to differentiate between earning income and buying income. Dead equity comes at a very high cost.

    I understand earning income very well but am confused by buying income and dead equity?  When you do not have a mortgage on a property.  Is that considered dead equity?  I would think it should be called the best equity.. Can always tap into it anytime if needed. Or does a professional investor just continue to leverage? What is your strategy?  Thanks again..

    0Reply
  • Sachin Bhat
    Rental Property Investor · Lancaster, CA · Member since 2016 · 68 posts · 26 votes
    7y

    @Chris B. You are doing great! Keep it up. Only issue I see with SF is that you run into issues after refinancing 10 homes with conventional financing. Unless you get a portfolio lender to finance properties if you own more than 10. I believe you already knew that.

    0Reply
  • Stephen Karakitsios
    Rental Property Investor · Sicklerville, NJ · Member since 2017 · 17 posts · 8 votes
    7y

    @Chris B.

    Hey Chris I think you're doing a great job. Numbers look awesome and you are building a lot of equity through your rehabs. I am also using the BRRRR strategy right now, getting close to the end of my rehab and looking to refinance ASAP.

    I know this is a bit off topic but could you share your experience with the auction, the auction process and some resources you used to prepare yourself for the auction? I’m also in NJ and have found what look to be great deals on Auction.com but I’m not sure where to start.

    Thanks,

    Steve

    0Reply
  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @Stephen Karakitsios

    Hi Stephen. The first one I bought that started this off was from auction.com. Prior to it being auctioned off, it was on the MLS. It was down to around $55K and I was able to do a walk through with my agent. I looked at it and we offered them $35K. They countered with $50K or else it was going to get auctioned off. I walked. So when it hit auction.com, I waited a few days, then guess what I offered? 35K.. A few days later they said it was between me and someone else so give Best and Final. I offered $42K and they accepted. Holy S%#it, I was now in the game. Its been the best thing I have ever done. Taking Action and getting in this game.

    4Reply
  • Annette Hibbler
    Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes
    7y

    How far north are you? Have you looked in areas around Wayne, Kinnelon, or in central Jersey? Areas along Rt 23 and 78 are easy to rent.

    0Reply
  • Javier D.
    Investor · FL · Member since 2017 · 266 posts · 220 votes
    7y
    Originally posted by @Chris B.:

    @Thomas S.

     I really appreciate your input but you talk in riddles to my novice brain...

     My comment: 

    "If I can get these all paid off, there’s a ton of positive cash flow."

    Your response:

    That is the common opinion of a novice or hobby investors. Not being able to differentiate between earning income and buying income. Dead equity comes at a very high cost.

    I understand earning income very well but am confused by buying income and dead equity?  When you do not have a mortgage on a property.  Is that considered dead equity?  I would think it should be called the best equity.. Can always tap into it anytime if needed. Or does a professional investor just continue to leverage? What is your strategy?  Thanks again..

     I can't speak for @Thomas S but what I think he is saying is important as well as another thing I'd like to point out:

    Your goal of paying down houses to not have any debt service will reduce the amount of working capital you have. A house worth 200k bringing in 1500 paid off has a pretty crappy internal rate of return. The same house leveraged (not aggressively in today's market) will increase that IRR.

    I have paid off properties but did not do so until I had more than 20 doors. I figured with 12 paid off anything can happen and ill be ok. I would not venture into that strategy just yet. that will come when you have more properties and the opportunities present themselves such as very high cashflow, selling one off with great appreciation, etc.

    Another thing you said which I didn't think is the best idea was that you walked away from a good deal 30 minutes away because you don't want to hold rentals so far away. My goal is to 

    be a passive investor(whatever that means in real estate) meaning I have property managers that handle day to day stuff and I just focus on acquiring more properties. Yet, I would not walk away from a house that I can flip and make money on just because I cant hold it and rent it. Get your liquidity up and you can compound your purchasing power. Don't marry your investments. I buy them, I sell them, I refinance them, I pay them off, I flip them if I don't like it anymore or xyz. Maybe the cast iron plumbing is getting suspect on one, sell it if a better deal comes along. Mcdonalds sells chicken sandwiches too not just big macs. 

    anyways just my 2 cents and crappy metaphors. 

    7Reply
  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @Javier D.  WOW...  Thanks for your post.  That was motivational and it actually struck a nerve.   Makes great sense. This was the reasoning for this post..  For constructive criticism and advice like that....  

    Probably the same thing  @Thomas S.  is warning me of...

    Thanks guys.

    2Reply
  • Michael LaGarde
    Rental Property Investor · Thibodaux, LA · Member since 2016 · 9 posts · 5 votes
    7y

    Man it sounds like your deals so far are killing it. We would need to dive into way more and over a stretch of time to truly see how they perform, but as far as I can tell more likely than not you are set on the right path. Personally, I don't like to self manage while in acquisition mode. I manage one house that is 2 miles away from me because historically that tenant does not bother me for anything, and source out my other 7 units. But I think (especially if you work a day job) that when you are getting properties you do not need to be worried about finding time to show to tenants, fixing toilets (or even lining up calls for toilets), writing leases, taking photos, fixing floors; you get the idea. When you have enough units, you actually would end up better off creating a position for 1 or 2 people to work directly for you and have a team to manage properties so you can still continue to focus on the big things.

    1Reply
  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    Doing well my friend. These are good rentals in my book. 

    2Reply
  • Dwayne Lee
    Rental Property Investor · Jersey City, NJ · Member since 2018 · 10 posts · 2 votes
    7y

    @Chris B. Seems like your doing well according to your numbers. Continued success to you! I do a lot of investing in Trenton, NJ. From what your saying it’s a very similar market to the things you spoke of.

    Would love to connect and see if we could help each other in any way

    0Reply
  • Stephen Karakitsios
    Rental Property Investor · Sicklerville, NJ · Member since 2017 · 17 posts · 8 votes
    7y

    @Chris B.

    That’s awesome! Well done. Do you have any suggestions or resources you would recommend looking at to get more familiar with the auction process before going in there?

    0Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    7y

    @Chris B.

    Thanks for sharing your experience with numbers, it helps us all learn as well as you!  I'm not as experienced as those you seek advice from but I'd like to join the discussion and ask questions to learn with you.  

    I was curious why you don't include the following when referencing your expenses:

    maintenance

    capex

    vacancy

    leasing costs/comission paid to find a tenant if you didn't do so yourself

    property management (I know you self manage but I'll come back to that)

    debt service (including the rehab funds if it was through financing)

    utilities (even if tenant paid, factored in for times of vacancy)

    As for my question about property management, and this is just my 2 cents, I'd still build that in to the expenses even if self managing and basically paying it back to myself.  Reason being if ever came a time were property management became necessary it has been budgeted for in advance.  

    Also, like others asked, why did you want to keep them rather than collect the equity you built with a quick flip? For example with house 1 you put 87k in to it. In calculating your cash flow I see 1250-400-70-477(the mortgage on the 84k you're going to refi)=377/mo (and this doesn't include subtracting for the expenses I asked about). From my calculations at 377/mo (and I could be doing math wrong) you're getting about a 3% return on the value of your home....you could get close to that with a savings account. granted there's appreciation, paydown etc. But personally it looks like your property was better as a flip than a rental. The authors of some of the same books we probably both read recommend buying a property at 75%ARV - expenses...you exceed that.

    Not saying your choice is wrong nor that my perspective is correct.  I'm sure someone more experienced than I am could poke some holes in my analysis.  I'm like you and would rather hold than flip.  BUT if I created that much equity that fast I'd sell that joint.  Take your 140k (minus selling costs) and boom you have more cash than you started with to put in to more properties rather than letting all that money chill in just one single property with a lot of expenses to come your way that weren't mentioned in your initial post.  

    If I missed something or got something wrong please share.  Good job man!

    0Reply
  • Jim Cummings
    Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    7y

    @Chris B.. You're just bored making all this easy money. Keep at it!

    1Reply
  • Jonathan Nixon
    Rental Property Investor · Fort Lauderdale, FL · Member since 2018 · 86 posts · 33 votes
    7y

    @Chris B. Well done finding these properties. I have to say I'm more on board with flipping at least one of those properties that you have created so much equity in. As stated, I personally prefer less leveraging and you've essentially created a nice nest of cash (equity) that in a down turn could be lost. 

    That lump 40k or whatever it is that you raised is something like several years worth of rent after you've paid it off? I feel like with your success finding deals that you should be able to do more with your cash in the short term :)

    1Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Chris B.:

    This one I purchased through a S corp and would need a commercial loan to refinance.  Holding off for now because of the higher rates.

    Get this property out of the S-Corp - rental property has no business in an S-Corp.  Talk to you CPA as to why.

    0Reply
  • Dale Varnado
    Investor · Atlanta, GA · Member since 2016 · 4 posts · 0 votes
    7y
    @Chris B. How did you fund the first rental?
    0Reply
  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @Dale Varnado. My wife found the first deal. Her sister was looking for a house and my wife spotted this and sent it to her.  She said it was to small and needed to much work.  So my wife and I took a look at it and saw it’s potential.  Then the whole auction stuff happened...

    0Reply
  • Ayne C.Pro Member
    Rental Property Investor · Tampa, FL · Member since 2018 · 251 posts · 124 votes
    7y
    The contractor has alerted me of termite dust spotted during the rehab. He says active termites, suggests an inspection. Please tell me how bad is this and what tips do you have for me.
    0Reply
  • Ayne C.Pro Member
    Rental Property Investor · Tampa, FL · Member since 2018 · 251 posts · 124 votes
    7y
    @Ayne C. Ooops posted on the wrong spot. My apologies. (((Please move along, nothing to see here)))
    0Reply
  • Greg McGuire
    Madison, WI · Member since 2017 · 5 posts · 2 votes
    7y
    I have a duplex that is just 3 years from pay off of my 25year mortgage. I have two other duplexes purchased last year with 25% down on each 4/2% rates. I've been told I should refi out 70% of my first duplex but have no idea what to do with that money as deals are very scarce around my home base. Any ideas? I don't see refi out at 5.8% only to be sitting on cash at 3% in a a money market or CD...
    0Reply
  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @Greg McGuire​​ listen to the 6 steps in the bigger pockets podcast that came out today. 1/3/2019. It talks specifically about this and things you may want to implement in this market environment....

    0Reply
  • Greg McGuire
    Madison, WI · Member since 2017 · 5 posts · 2 votes
    7y

    @Thomas S. I agree SFH are more risky for investors based on your two points, but we are in a prolonged SFH shortage, and homes are the gold standard of rentals so only the best creditworthy people should be renting them.

    And if you have no cash cushion for bad renters you have no business buying them IMO. However, higher maintenance, capex, require more price appreciation to balance that fact.

    0Reply
  • Greg McGuire
    Madison, WI · Member since 2017 · 5 posts · 2 votes
    7y

    I'm interested in the comment "buying income" vs investment income. Any examples would be appreciated.

    0Reply
  • Chris B.
    OP
    Investor · Newfoundland, NJ · Member since 2017 · 37 posts · 50 votes
    7y

    @ I am bored.  But analyzing more deals and hope to close on one more by the end of this quarter.

    0Reply
  • Dan Oakley
    Hamburg, NJ · Member since 2017 · 16 posts · 1 vote
    7y
    @Chris B. I just came across this thread and saw that you too are from north jersey. I really like the job you have done so far on your deals. I am just trying to get started and am happy to know someone is doing it here.
    0Reply
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