All Forum Posts by: Andrew Johnson

Are you look at actual properties or is this more a theoretical discussion?  You're right that 5 unit+ properties are commercial, reduce the number of lenders, and in all likelihood you will have a 5 year timeframe and then refinance.  I would say that if you think the market will drop by 25% in the next 5 years the last thing you should be trying to do is leverage.  On a more practical level, if interest rates hit 9% it's unlikely (but not impossible) that would happen without inflation and rents rising along with it.  So in the commercial property example your top line would be improving as your loan payments increase.  

Having 20 units in one complex is arguably easier to manage. It's one asset, one thing you have to worry about, and can be a little more passive. If 1 unit is vacant you still have rent for 19/20 (95%) of the units and can likely easily pay the mortgage. You probably have less yard per unit so some maintenance costs go down. Less exterior per units (more shared walls) so when exterior painting/siding/etc. maintenance is to be done it costs less per unit. You might not have to deal with garages that always seem great until they get filled with junk and then parking becomes an issue. You might be able to afford to have an onsite property manager (which you couldn't do with triplex). It would cost you more from an insurance perspective (all things being equal) to insure one building over an array of disparate properties. Not to mention when you're vetting deals the 20 unit property has probably been professionally managed so you have a better chance of getting a genuine/objective T12.

There are advantages to 4-plexes but it seems like you're leaning that way so I'll still with the "devils advocate" for larger unit complexes.  As an aside, I own both a 4 plex and a 27 unit building so I don't believe that one option is materially better or worse than the other.

@Julie Greenhouse Have you been to Nashville and visited the property? If you haven't then I'd definitely go through a broker/agent who (at least in theory) has your interests in mind. Engage that person and put in the offer at he original price...or lower. I've gone both routes (FSBO owner was an agent) and I'm not sure there was a material change in the deal quality.

@Terry Smith Good feedback!  I think you and I are on the opposite side of the spectrum.  I like later builds where I don't have to worry about lead based paint, asbestos, etc.  Then again I invest in out-of-state properties so buying a fixer when you're thousands of miles away is a scenario fraught with challenges.  One thing we do agree on is that you should buy what you like.  Or, at the very least, buy what you want to own.  If you like it checking on it, touching base with a property manager, etc. doesn't have to feel like such a chore.  The risk is you overpay because you buy with your eyes and not your pro-forma.  Best bet, establish your cap-rate requirements and then find properties that you like that meet your threshold.  Keep it objective.

@Rae Edwards Property management companies all have standard templates for leases and usually have good reasons for why they like the particular terms of conditions for those leases.  Your realtor might have access to it or someone on BP might be able to send you templates for your specific geography.  

@Meaghan Penilla I haven't had any experience with it.  My properties are all multifamily and aren't in California as I've been optimizing for cash-flow rather than appreciation.  There are a lot of people better equipped to talk you through what to look for in a fixer and the pluses and challenges of that strategy.  My only caution is to look at the life left in high-dollar capex items like roofs and HVAC systems.  Most of the people that I've chatted with that are starting out typically don't have huge cash reserves and it's really hard to use cash-flow to pay for a major expense in the first couple of years.  

Austin Sharp I agree with the others, don't let him work on it as the liability risk is too high. Hire a licensed contractor, document, and retain receipts. It would hurt to ask the contractor to add a follow-up appointment in 6-12 months to ensure everything is okay. Replacing a light fixture is a lot different than having them work on black mold, lead based paint, deal with asbestos, etc.

Anthony Arnt I know I'm probably overly suspicious but when it's: their CMA, they say it only needs cosmetic updates, and their post-rehab rent estimate is $1500 it's putting a ton of faith in the organization that has a vested interest in selling the property. Have you toured it with a contractor? Have you tried to look at other homes that are listed/for sale in the subdivision? Have you searched for rents in the area for similar homes in a similar condition? Like I said, I'm probably overly suspicious but if someone told me that I could slap some paint, replace the carpet and increase the rent 40% I would definitely think there was more to the story.

Keith Behney I wouldn't worry about "retail" prices on the MLS. Get a T12, look over the property, establish the cap-rate you want, and build a pro-forma to back into the price that it's worth to you. Make an offer accordingly.

Michael Sockwell One word: TAXES! So you two things happen when you leverage: 1.) I can write off mortgage interest, and 2.) I have a larger multifamily property to depreciate. For me it's less about what I cash-flow than what I actually keep. Yes, I do have to keep my reserves higher because of a reduction in cash-flow and the higher likelihood of something going wrong. However, there is some risk mitigation to using leverage to get yourself into a larger property. If you leverage and get an 8 unit apartment vs. 1 SFR it's unlikely that all 8 units will be vacant, that all 8 units will need a refrigerator replaced, etc. so the property can take a little "stress" and still cash-flow. My suggestion (since it doesn't sound like you want to be leveraged to the hilt) is to work out how to get yourself to the lowest tax burden.

Jason Hawkins Trying to time this market (or any market) is tricky to impossible. If you have a cash-flow positive deal in front of you and you pass you miss on the cash-flow you could have had while waiting for the market to drop. Additionally, you have a Fed that may raise interest rates 3 times in 2017. If a property drops 10% in value (and rents stay steady) but you go from paying 4.5% to 5.25% for an interest rate it could be wash (or worse). But, hey, I'm no economist. One thing that I always think about is if I'm competing with homebuyers for a deal or investors for a deal. Homebuyers (right or wrong) can and will pay more for a home as they get an emotional attachment to it. If you're competing with investors you're competing with others looking for a cap rate (less emotion). You're also only bidding against other people who want a "deal" (read: purchase price with the potential for return) so the market adjusts the pricing accordingly.