First Investment Property Purchase Question

16 Replies

Hello everyone; I live in the Ft. Lauderdale area of South Florida. I'm looking to purchase my first income property, but as many of you know, things are expensive here in South Florida. I own a 2 bed 2 bath condo that I payed off, and I'm thinking of using a Home Equity Loan to purchase my first income property. Because it's my first property, I believe I should be looking for a turnkey operation due to the fact it would be the least riskiest situation for me. I would like my first income property to be a 4 unit multifamily property, but a quick look on Zillow reveals those properties are going for anywhere from $900,000 to $1.2 million, not really sure how feasible it will be to obtain one of these properties with a Home Equity Loan from my condo. I'm thinking I may need to step down to a duplex instead. Can anyone offer any advice on my plan?

Also can anyone tell me if there are any real estate investor meet ups to network with local agents, investors, contractors, etc?

Mike,

Avoid the HELOC if your going to be buying a 4 unit in that price range. When I run approvals I use cash for collateral or DP and a HELOC will not count. The HELOC is a debt obligation and will be used as a DTI factor. Why add an extra "open end" trade-line and possibly affect credit when you can have that cash pulled from the primary and sitting liquid in an account. Using a HELOC you are going to be required to provide a statement where the lender will examine LTV/CLTV on primary and that can take a toll on total equity/collateral they use for the approval. To help you avoid delays right now there is a hold on anything 5+ units under $1-Million (They can be done but the rates are high) 5+ units and over $1MM all day long and rates are good! If you can stay around 1-4 Units is safe and rate are good under or over $1MM everything is still funding on time and rates are good. Just watch out for that 5+ under 1MM...probably until September. Let me know if I can be of any help...

Hey! I really enjoyed Jason's answer. As far as the affordability of 4 units, you will be hard pressed to find a four unit building that cash flows. Duplex and triplex deals are there to find with some digging and patience in most parts of Florida.

I am not exactly sure why, but in my research I have found that most traditional small apartment-building style fourplex's are grossly overpriced for most investors. This is not to say deals do not exist, but they are very hard to find compared to duplex/triplex deals. One reason I can come up with for this is blind speculation. Another reason, and correct me anybody if I am mistaken, is that perhaps while constructing comps the owners and agents factor in sales of properties which were bought not for their cash generation as-is but because of zoning considerations that meant these parcels could be developed into something larger at a later date, perhaps in combination with properties and lots nearby that are already owned or were bought separately in different ways. So in essence I think it is a classification error, you base your property's sale price on other sales in your market, however a percentage of the price of these other sales is due to considerations that your property simply does not have.

All of the above is true and also the potential whataboutism of owners who hear of sales nearby for exorbitant prices, and then simply will not part with their properties for anything less than 50% more than what they are worth despite all reason and research otherwise, you see that a lot, even in people who are otherwise very savvy business people and very rational. One of the hardest parts of being a real estate professional is properly correcting the expectations of sellers whose expectations can be way out of whack, they start to see red. In any case, to me the reasons are mostly due to human error and folly which all humans are prone to.

Many of these expensive fourplex's simply do not move at all, and if they do move they move after sitting a long time and at a heavy discount, or to someone that knows something about zoning or development that the average investor does not, or they move to someone that already has a property nearby and plans to develop later for a huge profit even after factoring in carrying cost, or they move to someone who is going to lose a lot of money. Sometimes all the above at the same time.

For whatever reason, the same is not as prevalent with duplex's/triplex's... perhaps because there are more of them? 


Let me know if you have questions...

Have you run your numbers on the 4-plex? A $900,000 loan with ballpark taxes and insurance is going to cost you somewhere in the $5,000 - $6,000 range for principal, interest, taxes and insurance and a maintenance reserve. $250,000 a door sounds really expensive for a rental unless you are getting premium rent. I would suggest your money would be better spent buying cheaper single family / duplex homes (from an ROI perspective). What do you forecast to net on each door a month? As a new investor you definitely want to compare your monthly ROI of your target property against other opportunities in the area. At the end of the day it really comes down to the basics of the numbers... dollars of net income versus the dollars of yours invested it took to generate it. What I figured out in my area is that I can generate the same NOI off of a $75,000 rental that I can generate off a $250,000 rental. So why would I invest 2-3 times more capital to net the same amount of NOI? I'm way better off investing the saved capital into additional properties. The $75,000 figure is an older class C property in my area (but in good overall condition for its age), while one would hope the $250,000 unit is a class A property in yours... so there is obviously a category difference there, with advantages to the A class property. I choose to accept the lower class "risks" (namely dealing with more maintenance issues and lower caliber tenants) to reap the financial rewards of 3 times more units in my portfolio, which generates three times more profit.

When I first started out I wanted duplexes for the safety of knowing if one side was empty the other side would pay the rent.  With more units under my belt I now don’t worry about this as much - partly because other units can act as a shock absorber if a unit is empty, but more so because I have learned that our typical turnover time is well under a week to put a new tenant in, so the financial loss risk due to vacancy has not been an issue where I’m at in Florida. This assumes that you actively market the property and you get a 30 day notice from your exiting tenant.  

So I would question your need for a 4-Plex - especially if at such a premium price in your market.  Look for the properties that  will maximize your net return. 

Randy

@Randall Alan

I grew up in Plant City but have been away for >10 years.  I have read Lakeland is booming due to its proximity to Orlando and Lakeland being a commuter town.  I've considered investing in Lakeland but don't really have a good bearing on the current environment.  It sounds somewhat favorable based on your post and you clearly know your numbers.  If you have the time, I would be interested in learning more from you about your take on the areas of Lakeland worth investing.

@Jason Wray , I was going to use a home equity loan instead of a HELOC because I don't like the adjustable rate associated with it. I was thinking about purchasing a turnkey property until I read Engelo Rumor's and David Greene's posts about purchasing turnkey properties found here: https://www.biggerpockets.com/... and here: https://www.biggerpockets.com/... Both make really good points,but here's my concern. Let's say I buy a property under market value because it needs some renovation; let's also say the reno is going to take 3 months to complete. If I use the HEL as the down payment and for the reno, I now have two loans to pay back, but there is no cash flow coming in from renters for the first 3 months because we have to reno the building. How do the loans get payed if there is no cash flow coming in? Can you defer both loan payment for those first 3 months until you get the renters in? How is this done by others purchasing their first investment property? What am I missing?



What you are describing are carrying costs.  It would also include utilities, utility deposits, etc.  You either have to have those Funds in reserve, or, you can pay them with more of those respective credit lines... presuming available space.  

Real estate isn't a cheap game, but it is a rewarding one. Carrying costs are just something you have to budget for unless your particular credit lines offer some form of deferred payments.

Randy 

Thanks Randall; so I guess this would be where the creative finance aspect of real estate comes in. I.E. purchasing a property with no or low money down. I'm guessing the easiest thing to do in this situation would be to subtract those costs from the down payment / renovation fund.

Generally I try to put down as little as possible, so unless you are over-paying your required down payment, you usually can’t subtract those funds from there...but if you are saying account for them from renovation funds, yes. 

Randy 

Right Randy. What I meant was, from my perspective, there wold limited funds from my end; that's not to say it can't be done, I just need to figure out where to get the rest of the money from. The HEL is really the only place I have to play with here. If the county property appraiser's website is any indication of the market value of my condo, then a HEL @ 80% of the value would give me about $75,000; a decent chunk of money, but with some of the preliminary checks I've done in my area, probably not enough to cover a traditional down payment, holding costs, and a reno.

So county assessments are usually about 20% low.  My best suggestion is to be very picky on your purchase.  

I’ll describe my path and you will have to adapt it to your area / buying conditions:


I think your best bet is to target a smaller property to start out.  We can find single family homes in our area for around $75k that will rent for around $1,000 a month.  We specifically look for properties that need less than $5,000 in repairs to be rent ready.  It takes us about $23,000 to close on a property. Then the 5k or so in repairs and we have about $28k into the property.  This is way more approachable than trying to do a 4plex with limited funds.  Get your feet wet with a single door, then build from there.  
Trying to do 4 doors out of the gate with limited funds could be a real challenge. 

Randy, I'm all for stepping down to a single family home if I have to; I only chose multi-family because everyone says it's the best way to scale. I think I may actually have to look more North of me because I really don't think I'm going to find anything in my price range here in South Florida. Based on the amount of money I'll have to work with, it also seems like the brrrr method will be my best bet.

Do you have experience with renovations? it's not the greatest time for refinancing... my bank isn't even writing them right now. Anytime there is crazy things going on... like COVID, banks pull back on lending until they understand the risks. They will change their terms... like only lending to 65% LTV instead of 75%, etc.

So while BRRRR is a perfectly acceptable approach, it takes a lot of things going right. Finding a great property at a cheap price, having contractors you can trust, estimating your renovation well, getting a good valuation from your bank, etc.

My suggestion Is to keep it simple. Find something you can afford that is close to rent ready. If you like multi, try looking at a duplex. In our area you can find them for about $150k... so about $43k down plus closing costs.

If you do decide to do a BRRRR, keep in mind that unless you buy it without financing up front, there is a seasoning period of 6 months before you can refinance it. So you would need to do a hard money loan or buy it outright with cash to be able to immediately refinance it.

If you take a duplex that will be worth $150k once it is renovated, if you bought it for $100k and put $20,000 into it to fix it up, your cash out at refinancing time would (typically) be 75% ($112,500)... so you would get back out of it all your initial money, less $8,000 of what you spent renovating it... but this plan requires $120,000 in cash to pull off... so you can see that BRRRRs can be complicated on limited funds. Also, keep in mind you will ha e closing costs twice! So you have to really find a good deal for BRRRR to work well. That's why I suggest looking for something more rent ready.

All the best!

Randy 







Randy, what you're suggesting is exactly what I would like to find, something that is rent ready. I only suggested BRRRR because I thought that would be the only way I would ever be able to afford an investment property. I just looked up my condo on Zillow yesterday and their "Zestimate" of my unit came in at around $124,000. If I can get a HEL for 80% of that which would be about $99,000, I think $150,000 rent ready property is definitely within my grasp. I spoke to Jason Wray (posted above) on the phone yesterday for about an hour discussing loan options.

Hi Mike, I am a real estate consultant and I have been investing in South Florida for the past 20 years, if you have any  questions regarding investing/renting etc in Florida feel free to ping me. I agree with the statements above, I would start with a single family home.

Thanks Shmou N., I may reach out to you some time this week. I've been looking at duplexes and single family homes in Polk County and I've seen a few on Redfin that are rent ready and in my budget. The big obstacle right now is finding and vetting a good management company, and I'm probably going to have to get my condo appraised to really know how much it's worth which will give me a much more accurate idea of how much equity I pull out of it. I'm about 60 Mi North of Miami, so if I buy up in that area, there's no real practical way for me to manage the property myself.

Hello all, so I've been looking on Zillow and Redfin over the weekend and actually found some single family homes and some duplexes near me that are within my price range there are also a lot more in North Florida; if I were to buy in North Florida I would need to hire a management company. I was looking at some of the highest ranking national management companies.  Has anyone used any of the national management companies like Greystar? And if so, what would you recommend?