Ready to pull trigger on first deal- would appreciate feedback

OP

Rental Property Investor · North Texas · Member since 2014 · 13 posts · 16 votes

5y

Originally posted by @Chris Tarpey:

I understand you are not co located with the property, but there are great systems/companies out there that make land lording and property management much easier to do remote.

Just something to consider!

I actually am co-located with the property and will be self managing for at least 3 years but I still accounted for management fees.

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Jaylen Crawford:

@Joe Villeneuve I know this answer would be different for every person but what would you say is a reasonable amount of time to recover your cash back?

That depends on you plan, but my max is no more than 5 years, but my goal is 2 is 3

2 Reply

OP

Rental Property Investor · North Texas · Member since 2014 · 13 posts · 16 votes

5y

Originally posted by @Jesse Glatz:

Its exciting to get into the rental portfolio business but like most successful investors know, you aim for an at least an 8% CoC return to stay even competitive with the general market return such as stocks, mutual funds, etc . 8% is considered a base hit, 10-12% is a home run and 15% or more is a grand slam. For your first one, I would really try to aim for 8% CoC minimum. Try reducing down payment, I know it will add PMI to the loan but again, rental income will pay that fee and with $345 net income, you have about $145 per month to play with based on the $100 per door for SFR and $200 per door for MF scenarios. Also look for other ways to add income such as a storage building, laundry, etc. You could even offer services such as lawn service, cleaning etc and tack on a bit to those charges. For instance, I have a lady that cleans all mine, charges me a reduced fee for multiple units but I charge a bit more on rent on each one for that service, increasing my net income. It works out so I am even making a slight bit on the cleaning fees.

But look for at least an 8% CoC return, at least $100 Net Income after all expenses per SFR and $200 Net income on multi family. $345 has a good return but if its not 8% CoC, I'd rather invest in the markets and do nothing and earn a higher yield. Sounds simple enough, but make sure you use the rental calculators on BP to adjust the sliders and play with the numbers to make it work.

Remember, every deal is a good deal. Every deal has a certain number that will make it a good deal, you just have to try to get to that number. Either reduce the down payment which would in turn decrease your net income (not as desirable) or decrease the purchase price which in turn decreases loan amount and decreases monthly debt service and doesn't effect rental income at all.

I will be self managing for first 3 years which would save me $9000. If I roll that $9000 back into my calculations (subtract it from closing and down payment costs), my Cash on cash jumps to 7.4% and if I can get the seller to come down just $5,000 on sales price, my CoC is at 8%.

(Yes I'm aware of time value of money but just trying to keep it simple as possible)

And I'm pretty sure I can raise rents by $50 in 3 years which would increase my CoC further.

Is my logic valid or am I starting to get too emotionally attached to this property?

Marina Cordova

Real Estate Agent · Lodi, CA · Member since 2020 · 1 post · 0 votes

5y

@Chris Tarpey Hi Chris, can you please share what kind of systems/companies are out there that help make land lording easier to do remotely. Thank you!

@Steve Kim good luck with your investment!

[email protected]979-292-6482

Jesse GlatzPro Member

Real Estate Broker · Lake Jackson, Texas 77566 · Member since 2020 · 18 posts · 16 votes

5y

Originally posted by @Steve Kim:

Originally posted by @Jesse Glatz:

Its exciting to get into the rental portfolio business but like most successful investors know, you aim for an at least an 8% CoC return to stay even competitive with the general market return such as stocks, mutual funds, etc . 8% is considered a base hit, 10-12% is a home run and 15% or more is a grand slam. For your first one, I would really try to aim for 8% CoC minimum. Try reducing down payment, I know it will add PMI to the loan but again, rental income will pay that fee and with $345 net income, you have about $145 per month to play with based on the $100 per door for SFR and $200 per door for MF scenarios. Also look for other ways to add income such as a storage building, laundry, etc. You could even offer services such as lawn service, cleaning etc and tack on a bit to those charges. For instance, I have a lady that cleans all mine, charges me a reduced fee for multiple units but I charge a bit more on rent on each one for that service, increasing my net income. It works out so I am even making a slight bit on the cleaning fees.

But look for at least an 8% CoC return, at least $100 Net Income after all expenses per SFR and $200 Net income on multi family. $345 has a good return but if its not 8% CoC, I'd rather invest in the markets and do nothing and earn a higher yield. Sounds simple enough, but make sure you use the rental calculators on BP to adjust the sliders and play with the numbers to make it work.

Remember, every deal is a good deal. Every deal has a certain number that will make it a good deal, you just have to try to get to that number. Either reduce the down payment which would in turn decrease your net income (not as desirable) or decrease the purchase price which in turn decreases loan amount and decreases monthly debt service and doesn't effect rental income at all.

I will be self managing for first 3 years which would save me $9000. If I roll that $9000 back into my calculations (subtract it from closing and down payment costs), my Cash on cash jumps to 7.4% and if I can get the seller to come down just $5,000 on sales price, my CoC is at 8%.

(Yes I'm aware of time value of money but just trying to keep it simple as possible)

And I'm pretty sure I can raise rents by $50 in 3 years which would increase my CoC further.

Is my logic valid or am I starting to get too emotionally attached to this property?

I don't think your getting too emotionally attached, your running the numbers and that is what it is all about, run the numbers and if they don't work, no go.

If you are going to self manage, then that will increase your net income, and your CoC, so win win! Just be sure to pay yourself a market rate. I've heard Brandon say, my time is worth something, it sucks to be crawling around fixing leaky pipes etc working for free becasue if your fixing broken things, making monthly property check-ups, etc, then guess what you are not doing? Generating leads and looking for the next deal. But again, just starting out, you may want to try it to create more net income and CoC, let it get going, then look for the next one. Trust me, I get it. I have 5 SFR rentals and I self manage still to this day and what I have come to realize is, I don't want all the calls anymore, its time to let someone else manage so I can keep looking for deals. This is going to be the year I 1031 all of them and invest in a minimum 1M or more building and have it professionally managed so I can keep looking for deals.

I say if you are going to self manage, get the seller down on the asking price then you should be good to go as far as NOI and CoC. Also be sure to keep good records so you can write off all your expenses. Mileage, fuel, etc.

Jaylen Crawford

Indianapolis, IN · Member since 2020 · 14 posts · 7 votes

5y

@Joe Villeneuve How do you go about getting that capital back in 2-3 years? Whenever I analyze a property it usually takes at the minimum 8 years to my initial investment back.

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

5y

Originally posted by @Jaylen Crawford:

@Joe Villeneuve How do you go about getting that capital back in 2-3 years? Whenever I analyze a property it usually takes at the minimum 8 years to my initial investment back.

Strategies. It's all about the terms of the deal that make the deal. Learning how money works, and learning that the property isn't the asset, it's the vessel that holds the asset until the time comes to move that asset to the next vessel. Learning how to move the cash in every form as fast as possible. Understanding what the difference is between total cost of the property, and the cost of the deal to the REI...they are not the same. Throwing out percentages as a way of measuring the success of a deal, and focusing on dollars instead. Stop using the stock market as a comparison, and as a rule book for REI. Think always in terms of compounding returns, and make sure every decision you make follows that principal. Never spending your "seed money"...use it to infinity, buy never spend it. Realizing that REI is mostly a math problem, and then spend all of your time on the left side of the equal sign.

12 Reply

Josiah Patrick Zebarth

Rental Property Investor · Denver, CO · Member since 2019 · 76 posts · 70 votes

5y

@Jesse Glatz

I really like what Jesse said, that is great advice.

In my opinion, shoot for higher CoC and overall ROI, especially if you have enough capital to put towards a down payment of that size. When you find a property with a high enough Rate of Return your going to do well.

Best,

Josiah

Matt M.

Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes

5y

@Steve Kim

No way no how would I put $65k out of pocket, and carry a debt of $240k for $345/month.

3 Reply

Sebastian MarroquinPro Member

Real Estate Agent · Pasadena, CA · Member since 2015 · 476 posts · 263 votes

5y

My initial reaction is to ask:

Why is the realtor/ developer selling it in the first place?
if it were a great deal he would not be selling it...

(His answer is irrelevant at this point) you should simply ask yourself that question. He is an investor and there is no way he would sell it with any type of profit margin attached... that’s just not how investors think (not a bad thing, since you will be thinking the same way later when you sell it).
most new construction doesn’t make sense from an equity or cash flow perspective - the benefit usually is in holding its value for the next 15 to 20 years and the avoidance of maintenance issues.
6% or 8% is very low for a state like Texas (or any other state with similar home prices)

That would be good in CA of example of you are banking on appreciation.
if you feel comfortable - you can go after a fixer duplex : where you build equity with renovations and potentially get your capital back by refinancing afterwards (brrrr )

A cosmetic fixer (paint - kitchen- bathroom remodel) would be good for a beginner.
you could also explore purchasing as a primary home: that way you only put down 4% to 5% (downpayment )

If the “intent” is for you to live in it, you could do that and if life changes in the future after 6 months - you could simply rent both out (since your wife does not want to house hack)

Some of my clients also fenced the middle of the lot (assuming the units are detached ) and then you would mot be privacy issues but just treat the tenants as neighbors (never let them know you are the owner ) you are always the a manager collecting rents. :)

OP

Rental Property Investor · North Texas · Member since 2014 · 13 posts · 16 votes

5y

@Sebastian Marroquin

He's selling because he's building his dream forever home and needs cash.

There are handful of other properties that are performing at >10% CoC are at least 50 years old and are all very outdated and in C class neighborhoods which I assume will have significantly larger maintenance/CAPEX costs and lower quality tenants.

So I guess my question is, how do you factor in the age of the property and its higher end finishes?

Chris Tarpey

Investor · Jacksonville, NC · Member since 2018 · 193 posts · 107 votes

5y

@Marina Cordova I have experience with Stressa and Cozy, although there are many others out there, most have reviews via different posts on BP. Some are free, while others have a small mouthy/yearly cost. Check one out and see how it works for you!

John Woodington

Brooklyn Park, MN · Member since 2017 · 57 posts · 24 votes

5y

@Steve Kim I say go for it. Your Capex and vacancy numbers are pretty conservative for a new property, so your cash flow will probably be better than your projection. And if it truly is only three years old, you really shouldn't have any maintenance issues for quite some time. As long as you get the right tenants in there, that sounds like a pretty stress-free investment to me.

2 Reply

Lucia Rushton

Realtor · Dallas - Fort Worth Metroplex, TX · Member since 2016 · 1k+ posts · 925 votes

5y

@Steve Kim a brand new Duplex in North Dallas for $300K, I'd take those all day long. Does it have a garage or carport?

Just a couple of thoughts, as there are no comps is it's zoned for MF?

I'd increase your closing costs to 3% of the purchase price. Because of our property taxes it's a safer estimate.

I'd increase your vacancy to $208/mo; one full month's rent over the year.

3 Reply

OP

Rental Property Investor · North Texas · Member since 2014 · 13 posts · 16 votes

5y

@Lucia Rushton

It has two car ports per unit and it is properly zoned (verified).

There’s zero comps as it is the only newly built duplex in this entire area thus making my analysis a bit more difficult.

I’m in Wichita Falls so I also won’t be seeing appreciation like you would

Alfred Litton

Rental Property Investor · Valley View, TX · Member since 2018 · 174 posts · 87 votes

5y

@Steve Kim One thing others haven't raised here. I'm afraid you are way off on the taxes here. I live in N. Texas and am familiar with a number of the cities and towns here, and there's no way a $300K rental property is going to come in at $4800/yr (1.6%) on property taxes. More like $600/mo. (about 2.4% if you're lucky). Once the sale is effective, they will revalue that property next assessment season (this spring), and you will see a WHOPPIN' big increase. And on an investment property, there is no cap on annual increases in tax and no homestead exemption. Believe me. They stick it to investors. That may be the tax your seller has been lucky enough to get, but you won't inherit it.

Hate to say it, but I think you're monthly cashflow is overstated by at least $150-$200. Take it from me. I've paid enough property tax to buy a middle school football stadium! Be careful here.

OP

Rental Property Investor · North Texas · Member since 2014 · 13 posts · 16 votes

5y

@Alfred Litton

That’s good point. I did verify the current tax (which has been consistent at $4800 for past 3 years) but you’re right- I didn’t think about the city reassessing and nearly doubling taxes...

Is there any way to know beforehand/be certain of how much it would increase by or if at all?

Alfred Litton

Rental Property Investor · Valley View, TX · Member since 2018 · 174 posts · 87 votes

5y

@Steve Kim What I would do is check the assessments of newly sold (2019) multifamilies in your appraisal district to see what they are paying. So, for example, if there's been a couple of duplexes in the $250K-$400K range sold about 12-18 months ago, you'd want to see what they're paying now and how far off their appraisal is from what you think their market value is. A real estate agent could help with that. Or, better yet, just look at what the published city, county, and special fee rates are overall, and you can bet that if you are paying $300K, it'll be assessed at a smidge under that but pretty close. If the rates are 2.5%, for example, assume that you'll be assessed at $290K at least. Every property I've ever bought has had a property tax pop the year after I purchased it. They have no mercy on us investors! I'm almost certain you are going to be paying $7200/yr on a $300K property by next year. Maybe more.

Dennis Wayne

Member since 2020 · 339 posts · 356 votes

5y

This Deal sucks . Keep looking . You are justifying a bad deal and you can see it considering what you typed ,you know the deal sucks .

3 Reply

Mike L.

Rental Property Investor · Madison, WI · Member since 2019 · 32 posts · 28 votes

5y

I think of real estate assets similarly to stocks and bonds.

For example:

Highest risk - requires high expected short term return to consider deal
- Penny Stocks > D class properties in bad areas with large vacancy/non payment risk and low appreciation potential or potential decrease in value

Medium Risk:
- Growth Stocks - B or C class, medium aged assets in average quality neighborhood with low vacancy - property maybe has some deferred maintenance or major systems nearing end of expected life - probably will be a little smoother ride than the high risk ones, you'll likely get some appreciation long term but have some updates to deal with in the near future.

Low Risk
1. Bonds - Best/safest assets in a market - highly desirable neighborhood/school district with strong, diverse job growth, high quality building that's newer or has has had a full cosmetic and mechanical rehab. These properties will likely have lower vacancy, higher rent increase potential and in some cases may not need any capex items for years.

The return you expect in terms of cash depends on which category you fall in. If it's in a low risk area, it's unlikely you'll hit the 10% COC return in todays market. Not familiar with your area but around here it's very hard to get those numbers on a high quality asset but that doesn't mean that you're a fool for purchasing due to all the other ways you can make money.

For example - If your duplex falls into the high quality/low risk category, the low cashflow on those low risk assets is offset by a variety of things:

Appreciation potential 300,000 * X%
Principal reduction $6500 in year 1 assuming 3% mortgage for 25 years
Depreciation: your $4500 of income is offset by $8700 of depreciation leaving you with a $4000 passive loss assuming your land is 20% of the value. This may be able to be applied to your W2 income or carried over to future years when your rent goes up or you pay off the property.

Therefore, before factoring in any potential appreciation your actual internal rate of return is:
$4200 cash (would need to be a return of closer to 6000 in taxable investment vehicles)
$6500 of principal reduction
$4000 of passive loss which is worth 4000 * your tax rate in either this years taxes or a future year. let's assume 25% and assign this a value of $1000.

Therefore, with 60K down, you have $4500+$6500+$1000 = $12,000 of value generated before any appreciation which is about a 20% internal rate of return. There are some caveats i.e. principle reduction isn't liquid and only a benefit if values don't decrease, things like depreciation are recaptured at sale and you pay some tax then but if you're in a high quality market, buying and holding for the long term, etc it may still make sense to consider below the 8% CoC level if your confident in your numbers and have appropriate reserves. The low risk assets are a longer term plan and probably not ideal if you're goal is to generate max cashflow now but could be good if your goal is to generate max wealth 20 years from now. It's up to you to make that determination given your situation, market, and long term goals/cash flow needs but thought I'd share a perspective and some metrics I don't see shared as often on this site.

8 Reply

Alfred Litton

Rental Property Investor · Valley View, TX · Member since 2018 · 174 posts · 87 votes

5y

@Steve Kim @Dennis Wayne I have to agree with Dennis on this. I'd probably take a pass on this unless the seller is willing to cut the price by quite a bit. No offense to any real estate agents out there ("Some of my best friends are real estate agents"), but I am always a bit wary of buying investment property from them. Not because they're dishonest. Not at all. They're just danged aggressive on their asking price. Hard to get a good deal from them. Hey, they negotiate for a living. But whether it's because they are aggressive or just overly optimistic, their properties are just too high for me.