Property valuation always good are we doing something wrong?

20 Replies

Almost all of our properties that we are evaluating seem to be good investments. We have only had one investment that was not a good investment in our local market. We are wondering if we are evaluating them correctly? If it would help we could also upload some of our evaluations on our local properties we have been looking at. Thanks for your help in advance all advice is welcomed and appreciated.

Originally posted by @Randy Wiley :

Almost all of our properties that we are evaluating seem to be good investments. We have only had one investment that was not a good investment in our local market. We are wondering if we are evaluating them correctly? If it would help we could also upload some of our evaluations on our local properties we have been looking at. Thanks for your help in advance all advice is welcomed and appreciated.

 Can you give an example of a deal you've analyzed and determined it's a good deal? You can take a screen shot of the spreadsheet and post it as a picture or image. Or you can save it in Google sheets and get the link and share the link here.

Well first off....there isnt a good or bad investment. There is only the underlying risk of the asset and market, as measured against the expected return.  

That being said, while you are throwing up there an example of a $37k property, I dont need to know anything on that particular beyond the list price to know that it is an incredibly high risk property.  That's less than my car costs for a reason.

The main problem in your assumption is that you get a loan for $30K with no closing costs. Good luck with that.

Banks start lending from $50K, so the purchase price should be $70+K. Even then, you’ll have $4-5K in closing costs and your property will feed the bank more than you....if any bank would even lend on that old piece of garbage. From my experience, the best ration of price of money vs value of investment you’ll get after $100K. 

Below that you’ll feed the banks

These houses should be bought cash only, huge reserves for maintenance and vacancy (if there is steady employers in Port Huron?). Your ARV is lower than purchase price - it's already a problem. When I buy for $15-20K, I know I can sell tomorrow for $25-30K - that's a deal.

To buy asset for the full price to recover your money invested for 5-6 year IF there is no vacancies, repairs, market downturns etc- it’s a long term.

Then, these 50% assumption on expenses are good for MF as a rough estimate. For each SFR you have to get real $$: taxes, water for duplex, holding costs during vacancy, maintenance (the older the house - the higher %%).

If you live in Port Huron - then it’s your only choice, off course. If it’s far away and you’ll pay PM, placement tenant, hourly rates on each maintenance call - you’ll be in red in no time

Thank you for your reply. We understand what you are saying, after reading your comment we reviewed our calculations and found a few errors. We are thinking about doing a HELOC on our paid off house. Rent in Port Huron on average is 700-800 for a 2/3 bedroom and there are no "bad" areas. Purchase prices are relatively low compared to surrounding areas. We are just getting into REI, and any advice biggerpockets community can help us with is very valuable.

The house for $37,500 check out the property lines... There is maybe a couple feet on the side and the back of the house to the property lines, the lot is to small to rebuild so I have seen financing fall through because of that. I have 6 units on that block and it can be hard to find good tenants in that area. But you can make money. In the past couple years I paid $10k for a 3 bed house, $15k for a duplex, and $30k for a triplex with a barn. I also offered $35k cash for that house and full asking price subject to financing with the lot being so small (both were rejected). The house is decent but some stuff was done wrong. It will be interesting to see what happens to the vacant lot next door. It's supposed to be a soup kitchen but so far they aren't doing anything good so it will be interesting to see when something opens if it helps or hurts the area. 

 

I primarily invest in lower end homes as well and the main problem with them is even though they cash flow greatly, your exit strategies are compromised because you can't refi out of them do to the appraised value being so low. I learned that the hard way on my first property. It's not the end of the world but it hampers your ability to scale. You won't be able to pull money out of that house right away.

If I was in your shoes I would do that deal If there we're no other options out there for better appreciation. But if you get this house it's not really *bad* on paper by any means. @troy young seems to have insider information however. 

Originally posted by @Tyrone Jackson :

I primarily invest in lower end homes as well and the main problem with them is even though they cash flow greatly, your exit strategies are compromised because you can't refi out of them do to the appraised value being so low. I learned that the hard way on my first property. It's not the end of the world but it hampers your ability to scale. You won't be able to pull money out of that house right away.

If I was in your shoes I would do that deal If there we're no other options out there for better appreciation. But if you get this house it's not really *bad* on paper by any means. @troy young seems to have insider information however. 

Have you spoken with a portfolio lender to see if you can put 3 properties together to secure 1 loan? I know a portfolio lender operating in DE. They were at a local REIA meeting. I suspect they would look at a package. No guarantees as to the outcome. Just that they hold the loans so they are a bit more flexible. It will be all about the cash flow.

Originally posted by @Randy Wiley :

Thank you for your reply. We understand what you are saying, after reading your comment we reviewed our calculations and found a few errors. We are thinking about doing a HELOC on our paid off house. Rent in Port Huron on average is 700-800 for a 2/3 bedroom and there are no "bad" areas. Purchase prices are relatively low compared to surrounding areas. We are just getting into REI, and any advice biggerpockets community can help us with is very valuable.

Randy,

Where are you based? Are the examples in your local market (30 min to 60 min from where you live)?

Strategies for very low priced markets are different. Others have pointed that out. A lender has an issue processing such a small loan. So, you need to work with private money or create bundles of homes which are refinanced with 1 loan and a blanket lien over all the properties in the bundle.

 

Originally posted by @Troy Young :

The house for $37,500 check out the property lines... There is maybe a couple feet on the side and the back of the house to the property lines, the lot is to small to rebuild so I have seen financing fall through because of that. I have 6 units on that block and it can be hard to find good tenants in that area. But you can make money. In the past couple years I paid $10k for a 3 bed house, $15k for a duplex, and $30k for a triplex with a barn. I also offered $35k cash for that house and full asking price subject to financing with the lot being so small (both were rejected). The house is decent but some stuff was done wrong. It will be interesting to see what happens to the vacant lot next door. It's supposed to be a soup kitchen but so far they aren't doing anything good so it will be interesting to see when something opens if it helps or hurts the area. 

 

It sounds like you have created a pragmatic strategy for investing in a low priced area. Buying really low, holding for cash flow and expecting some extra issues finding tenants who want to stay.

Have you looked at financing a group of properties with 1 loan?

Have you looked at syndication where you bring in outside investors who are happy with cashflow only? I am guessing this area is not going to see much in the way of appreciation.

 

Originally posted by @John Corey :
Originally posted by @Tyrone Jackson:

I primarily invest in lower end homes as well and the main problem with them is even though they cash flow greatly, your exit strategies are compromised because you can't refi out of them do to the appraised value being so low. I learned that the hard way on my first property. It's not the end of the world but it hampers your ability to scale. You won't be able to pull money out of that house right away.

If I was in your shoes I would do that deal If there we're no other options out there for better appreciation. But if you get this house it's not really *bad* on paper by any means. @troy young seems to have insider information however. 

Have you spoken with a portfolio lender to see if you can put 3 properties together to secure 1 loan? I know a portfolio lender operating in DE. They were at a local REIA meeting. I suspect they would look at a package. No guarantees as to the outcome. Just that they hold the loans so they are a bit more flexible. It will be all about the cash flow.

Yeah I've considered it. I want to wait a little bit before I go down that road. Get my amount of properties up first. 

Hi, yes I have different loans that are groups of properties bundled together. I use both private lenders as well as bank money. Both I just pay a certain interest rate amortized 3-5 years for private and 10 years for banks. I'm happy with appreciation in this area for what I have. Like this 3 bed house being a good deal for $40k would also put my 3 bed house a good deal at $40k and I paid $10k less than 3 years ago. There is also a plan to spend $800-1 mil on a new building on that block. It's close to water, down town and between main Streets going in and out of town. So I expect to make about $5-10k per year on my house there using 100% opm and can get the $5k even with no appreciation although I expect something big to buy me out and pay well at some point. 

Originally posted by @John Corey :
Originally posted by @Randy Wiley:

Thank you for your reply. We understand what you are saying, after reading your comment we reviewed our calculations and found a few errors. We are thinking about doing a HELOC on our paid off house. Rent in Port Huron on average is 700-800 for a 2/3 bedroom and there are no "bad" areas. Purchase prices are relatively low compared to surrounding areas. We are just getting into REI, and any advice biggerpockets community can help us with is very valuable.

Randy,

Where are you based? Are the examples in your local market (30 min to 60 min from where you live)?

Strategies for very low priced markets are different. Others have pointed that out. A lender has an issue processing such a small loan. So, you need to work with private money or create bundles of homes which are refinanced with 1 loan and a blanket lien over all the properties in the bundle.

 

John,

I am located within 5-10 miles of where I plan on investing. Plan on keeping everything close for a while then branching out to about a 20 mile radius. I am not ready to purchase anything right now, my wife and I are learning how to find a good deal, trying to network, and figure out as much as we can before we invest. Port Huron is a pretty good market, we are thinking of just rentals no flips.

 

Local banks or similar lender will tend to be OK with lower valued properties. They almost have to be if they want to keep the door open. That does not change the economics that much. The cost of processing a small loan is a high percentage compared to loan that was 10x the size. 

Speak with commercial lenders and portfolio lenders who are familiar with the area. See what they will be open to if you put a few properties together.

You buy 1 at a time and then when you have 5 or more (what ever it takes to hit the loan size they want), you refinance with a loan and a blanket lien across the 5. Rinse and repeat.

At some point, you can look at syndication or other legal methods to create a small fund. Either working capital to fund the batches you create before refinancing or as a way to just hold with little to no debt. The investor would be earning a return off the portfolio.

From what he shared, Troy knows the model for a lower priced area. It is less about what 1 property can qualify for with a traditional lender and more about what a bundle of properties will qualify for.

Strong cashflow is great. Assuming you do not end up with a poor tenant mix, strong cashflow can make for a great life.