All Forum Posts by: Allen S.

@Jamie Rose - again, you're right. Major math error on my part... I had gone straight to looking at his NOI and missed his levered cash flow numbers. That'll teach me to use tiny phone screens.

@Sean Davis - obviously my comments above relating to your returns aren't correct.  However, I don't want you to think all is lost.  My guess is that you'll hold this property for a year or two and learn a ton.  Then sell it and get something else.  Jamie is right that you will likely have many hassles and proceed with caution with these investments.  Had you posted before purchasing I would be 100% in agreement with Jamie that this isn't a good return and you'll spend much more time that you think keeping up with it.  If you had financed 100% as a house-hack, I think you'd be in a much more precarious position.

@Sean Davis - I was actually thinking that your management was a tad low.  I would estimate 8% vacancy, 10% management, and at least 2.5% turnover, maybe more.  It was good to see that you had line items in for some of that above, and hopefully you can hit your targets.  Like@Jamie Rose alluded to, depending on the neighborhood, you might find that more challenging than you think.

@Jamie Rose - you're correct.  I am not a fan of investing in Mt View for many reasons, although the price and details make a lot of difference.  Also the question here was not one of if buying in a C-class neighborhood was a good decision.  @Sean Davishas already made that call for himself, so I found no need to second guess why he chose to do so. On paper he looks ok, it sounds like he put money down, and even if he makes 1/4 of the NOI that he is expecting he will still be above water. 80% LTV on a $330k 4-plex is a much different situation than 96.5%+ LTV on a $450k 4-plex in the same location.

Hi @Sean Davis!   Your expense ratio is slightly higher than 50%, and all of your numbers actually look pretty close to what I would expect in Anchorage.  We could go round and round over a % here or there, but in the end, this is just a planning tool, and meant to get you into the ball park to make your educated risk decision about a property.

It also appears that you've put enough of a down payment on the property to make it cash flow.  That's a good thing and will help you weather all of the unexpected expenses that will undoubtedly crop up.

An entirely different discussion is if you are happy with the return on your downpayment as an investment.  I'm estimating that you're at about 24% if your property performs as advertised, which should make most investors plenty happy.

What village are you in?

@Adam Benarroudj 

I'll recommend Stewart Title in Anchorage.  We've also used Alyeska Title and Yukon Title for other purchases...

@Jeremiah Lewis The straight line depreciation (value/27.5) that you're looking to get isn't really going to be a big player in your financial world.  It'll take the edge off of the income once you do get it rented, and you definitely need to take it.  However, it's kind of splitting hairs whether you start the depreciation clock the day you advertise it or the day your renters move in.   If you're using a CPA for your taxes, then defer to their professional judgement.  If you're a DIY tax guy, then it depends on how excited you are about the possibility of an audit and answering questions from the IRS based on tax law and prior tax court examples to support your case.

To me it sounds like all of that hassle isn't worth it just to start your depreciation a few months early.  It's not like you lose the depreciation if you don't start it when you advertise, you'd just be delaying it for a few months over the course of your lifetime.  Based on your rationale for moving to a 15-year note, it sounds like you're more interested in the long run than the short run...

@Katie Greenman FYI - you can pull out the principal amount you contribute to your Roth IRA penalty free. Look up the details yourself, but parking it in a Roth while finding your first investment isn't the worst idea I've heard on these forums. I bet that by the time you're ready to buy something you'll figure out how to close the deal without raiding your IRA too...

@Ryan Santiago STRs can be great in this town, especially if they don’t cancel tourist season again.   But it’s definitely not as passive as traditional rentals.   What’s your time worth?  Are you looking for passive income or a side hustle, emphasis on the “hustle”?  Running an Airbnb is more akin to running a 1-room hotel than owning a rental... and if you’re not careful about how you set up your entities, it’s also taxed as such (at your ordinary income rate if your average length of stay is less than 7 days).  What’s your exit plan when you PCS?  You’ll need to factor in management fees even if you manage it yourself while you’re here, or you might find yourself with a property that costs you money to own and operate.

@Adam Wuertz Your revenue numbers sound reasonable for most of the town.  Now the question of if this is a “good” investment or not comes into play... 

Starting with what you know:
Income = $2200 x 4 = $8800/mo

Now your guess at expenses?  I use 50% as a general rule of thumb.  A new property might be less on capex an mx, so maybe 45%, but I wouldn’t plan much lower.

Vacancy: 5%+
Management: 10% (+2.5% for leasing and other fees)
Capex/Mx: 6%
Taxes: 20%+
Insurance: 5%-8%

So your net income per month is now $4400, or $52,800 per year.  $52,800/$1,000,000 = 5.3% return.  Is that “good”?  It might be for you, might not be for others.

Now you can look at adding leverage. If you use an FHA loan and put 3.5% down ($35,000) on a 30-year note at 3.5% your payment will be $4,333/mo... which leaves you $67 of cash flow.

Obviously you can do things to lower your mx expenses and management expenses by doing it yourself, but what is your time worth?  And what happens if rents go down 5% even temporarily or you have a vacancy longer than expected?  What happens if you move or become disabled and are unable to continue to manage the asset?  If you’ve factored the above expenses in properly then the asset just keeps paying for itself (which is why we all love real estate in the first place)... if not then you’ve either bought yourself a side job (which might be what you’re after) or you’ll be in a position where you are now subsidizing your investment (which I am going to assume is the opposite of what you want).

The decision to build new or buy existing really just feeds into the top line of this discussion on how much you’re willing to pay to get a certain stream of income.  There might be other factors at play, especially if you’re going to live in this building forever, and that’s fine too, but that’s no longer a strictly financial discussion.  I’m also going to assume that like most people here, you probably want to house hack for a short time and keep the asset long after you’ve built or bought your dream house somewhere else...

@Adam Wuertz The total value of your land isn’t your down payment, just the equity in your land ($25k in your example).  Also, it’s very unlikely that you’ll be able to quit claim the deed to a property that you have a note on.  That kinda defeats the purpose of the bank holding the land as collateral.  I know the quit-claim to your builder is a thing, but I don’t prefer it and neither does my builder.  We are currently building a house in the Valley and will hold the title to our land in our name the whole time.  The likely path to building what you want will involve a construction loan, but that’ll require 20%-25% of the total project.

More importantly, I’m wondering where in Anchorage you’re planning to build a $1,000,000 4-plex and get your numbers to pencil out?  Will these be high end condos in bootlegger’s cove?  Everyone has a different tolerance for how they run their projections, but I suspect you might be underestimating some expenses or overestimating the rents you’ll realistically get.  I’m not anti construction at all, and it definitely makes sense sometimes, but in this town I think it’ll be hard to get a reasonable return out of a $1,000,000 4-plex.

@Walid M. Can you elaborate on how you have your SBA loan set up?  Is it only on the real estate?  Or do you have a separate note for the business?  SBA 7a or other?