All Forum Posts by: Benjamin Aaker

Hi @Thomas Cooper. I love that you are starting from the basics. I stumbled upon BP Podcast at episode 131, then had to go back to the start. Every one of them is gold.

I'm happy to hear you have some contracting experience. This will be valuable when getting help in fixing up houses. Your issue will be with trying to DIY everything (same as me). Continue doing what you find fun but be quick to hire others to work for you if it's outside your wheelhouse. Good luck in your career. And welcome to BP!

1. Loving it. Closing on a deal next Friday 9/10/21. Assuming we close without incident, investors will get an 80% ROI over two years. 80% is not a typo.

2. Seems like this is a great way to leverage investor money (there is a lot of it right now) into creating wealth.

Investors want an exit strategy. This makes multifamily similar to a flip in the residential arena. It's longer term. I planned to have a sale in 5 years, but happened to find a great buyer. 

The bank really doesn't determine value; they rely on an appraiser. That being said, the bank's underwriters will do this before the appraisal is even ordered. The bank determines value on 5 or larger plexes by the income method. This looks at the income minus expenses (NOI) before income tax and mortgage payments. Then they apply the cap rate formula I posted above.

The bank (and you) need to make assumptions about what is the going cap rate and what are the rents you should be able to reasonably get and what your expenses will be. With these three data points, you can arrive at the expected value of the property. 

@Chinda Eleonu The House Hacking Strategy by Curlop and Turner is a great way to get started.

Hi @T.J. Isaacs. I'm wondering if you are talking private money, such as friends and family, or hard money? Hard money lenders generally won't want to have any equity split, but will want a large interest rate. Private money will have a lower rate, but may want equity. Either way, you are paying a lot for access to that money. Hard money likely won't be worth it to you because these loans are typically short term < 1 year and you will need to have an exit from the property. I'm a big fan of the line of credit. Have you considered looking at a LOC on your rental property? Refinancing your home or rental?

Absolutely you should continue to look at the property. You aren't really losing $650, but you have $650 of upside in the property. I'm assuming the duplex is turn-key (no repairs needed). The sale price is what is going to determine if this is a good deal. That price you agree upon should be impacted by the fact that the property is bringing in whatever it is bringing in, not what it could be bringing in. If you can get at or around this price, you'll do great.

You asked for best practices. You are trying to predict who will be a good resident and pay the rent. You need to have a policy for whom you will accept and reject.This way, you are not making subjective decisions, which exposes you to liability for rejecting someone. That policy would have "income > 3x rent", at least one good landlord reference (don't neglect to actually contact the reference), no evictions, no violent felonies, no foreclosures...etc. I don't have a minimum credit score. I feel that if they pass the other ones, they have a good likelihood of paying the rent. Remember, they are renters. Many can't buy a house due to credit issues. If there is any question about why they were rejected, you reference your policy.

Hi @Jordan Becker. Great question. This is always the cash flow vs. equity question. The answer depends on your means and your goals. Just starting out, you will depend on cash flow so that you can pay for more real estate investing and possibly quit your day job. Later on, or if you are a high-performer, you'll want less cash flow (read taxes) and more equity. That equity, rather than cash flow, is used to purchase more properties, via lines of credit. Don't worry about the doors, they don't matter. It's all about the cash flow and equity.

Make sure you ask for a residential loan. Banks right now are falling all over themselves to originate these loans because they can be sold on the secondary market. FHA loans are residential. It sounds like your bank was proposing a commercial loan, on which 20-30% down is typical.

@Nicholas Rickman You are on the right track. We value the larger buildings as a business that produces income. We are willing to pay a certain amount to 'buy' that income stream. This is the capitalization rate and it is determined by the market. Cap rates are down now, meaning buyers are willing to invest money with a promise of less return.

Value is determined by the cap rate and the net operating income of the building. Value = NOI / Cap rate. If rents are down, then NOI is down, and value is down. But, that's retrospective, and you plan to make money prospectively. So you'll need to predict where the rents are going. That's where Ethan's comment comes in. Things change. The moratorium was struck down yesterday as unconstitutional. If you predict that rent collection will go up, then you can pay more. Your calculation of value is influenced by where you predict the NOI will be when you take it over and for years after that.