All Forum Posts by: Benjamin Aaker

Are you a real estate agent? The reason to have comparables is if you are representing someone or perhaps purchasing a house for yourself to live in. As an investor, comps tend to harm you more than help.

Every buyer wants some way to determine if they are being offered a fair deal. But, a fair deal and a good deal are two different things. A good deal for a retail buyer is something they can pay for which has most of the amenities and location they want. They are willing to pay a premium for this. If enough buyers do so, the comps will reflect the premium price. The investor has to be gaining cash flow or equity to make it worth it. Buying a house near the comps would be a bad deal since they would be buying at a premium. The investor would buy an ugly black box that produced money if it was the right price. Location doesn't matter.

Start to evaluate deals based on the income approach and you'll do much better long term investing. 

Sounds like a problem with setting expectations. What do you have in your lease about repair requests? You should have a system for how the tenant puts in a request and what may be requested. A light bulb replacement, for instance, might be the responsibility of the tenant. If there is something going on that is making you fearful then you may want to get law enforcement involved. Threatening each others' safety is never allowed.

Looks like you made a good decision with property management. You'll have to look at the income and expenses to predict whether your cash flow will improve. It probably will with good management in place. Feel confident turning over management. If it doesn't work, put it up for sale when the lease ends. 

Sounds like a problem with setting expectations. What do you have in your lease about repair requests? You should have a system for how the tenant puts in a request and what may be requested. A light bulb replacement, for instance, might be the responsibility of the tenant. If there is something going on that is making you fearful then you may want to get law enforcement involved. Threatening each others' safety is never allowed.

Looks like you made a good decision with property management. You'll have to look at the income and expenses to predict whether your cash flow will improve. It probably will with good management in place. Feel confident turning over management. If it doesn't work, put it up for sale when the lease ends. 

I'm a fan of using the HELOC to help purchase new property. The most important rule is to have the cash flow of the new property be able to pay all its expenses, mortgage, AND the line of credit back. You clearly have factored this in already. With only that information, I see no reason not to.

I am surprised you found a bank willing to do this. Make sure you tell them exactly your plan and make sure there isn't a catch.

Another thought - are you considering an FHA loan on the next one? You could bring less down and possibly have a lower interest rate since you will be living there. Great start on investing!

Hi Franklin and welcome to real estate investing. Congrats on buying an investment property. A lot of people say they can't find a good investment in LA, but you are proof that deals can be found.

Most banks won't want to come in with a line of credit that is second lien on the property. Their ability to recover their money should you default is much lower in this position. You should ask to speak to the commercial lender at the bank that carries your property's current mortgage. This bank will be more likely to lend given they hold the first lien. 

I purchase my personal investments to maximize their equity and hold long term. You will want enough return for the deal to support itself or you won't be able to scale well. If you have a high personal income and can support the property if it needs cash, that helps, but is also not scaleable.

1. Get replacement cost hazard insurance along with an umbrella policy of at least $1M, probably double in your area. Try to put a bigger down payment in than you might need to give yourself some breathing room.

2. Looking for high equity growth areas is a bit of a gamble. How do you find one that hasn't started equity growth and now stagnated? If you have a solid deal in the Finger Lakes (which you have said has high equity growth), keep the bird in the hand.

3. The cash on cash return is only meaningful when you evaluate it based on your long term plans. You may not need a lot of cash flow if you want to maximize equity.  On the other hand, maybe you are going to lose some personal income due to retirement and want the cash flow. It's dependent on your situation. 

2. don't use an appreciation rate. Find out what rate rents are increasing and expenses are increasing in your area and use that in your underwriting, then work out each year of ownership. 5% rate in 5 years seems ambitious. No one knows what the market will look like. At least run this with good, bad, worst scenarios. I'd say you are overestimating maintenance - though that depends on the state of the property.
3. 5% vacancy might be low. If you are doing long term rentals and raising rents, you will have turnover of a significant number of tenants after their year of renting when you raise their rent. Every 12 months you should budget 1 month of vacancy to turn the unit. Perhaps you can do better than that. Are you certain?

Here's one of the biggest bangs for your buck to learn this: Read The Millionaire Real Estate Investor by Gary Keller and Jay Papasan. That book gives a lot of great information on underwriting.

Have a look at your numbers again. With 0% down and 30 year amortization, your monthly debt service will be $1756. That looks pretty bad for your cash flow.
I'm not as worried about the 9 year balloon. With that low interest rate, you will have paid down a lot of equity in the deal and should be able to finance with a bank.