All Forum Posts by: Ben Wilkins

@Luther Kyrin Creecy - there are several low money down options, such as house-hacking or wholesaling. Take a look at those two and see if either interests you. While wholesaling is a fine way to get started (and helps build networks, learn the business, etc), it never revved my engine so I never went that direction.

House-hacking might be a good option for getting out of a housing situation, but I don't know if that is a viable option for you. Get a FHA loan (more expensive in the long run due to PMI) and put very little money down to buy a duplex, then rent half of it out. After a year, rent the second half and buy another place, rinse and repeat.

Try here to see if there are any local REI meetings. I don't know your area, so I'm not sure which is closest for you.

Advice: 

1. Go to the link above and find a local REI meeting through meetup.com.

2. Research into househacking and wholesaling to see what excites you

3. Focus on what excites you and is possible, and start learning and doing. Don't get stuck learning forever!

4. Determine how your short-term methods can expand to your long-term goals.

Keep asking questions!

@Val J. - when buying a property, financial institutions will usually loan based on a percentage of the purchase price (although there are some that will loan based on appraisal).

After you own the property, you can refinance based on appraisal value - that's why the BRRRR strategy works when you force appreciation on the investment, allowing you to take out more than you put in (hopefully)

Call around and find a different mortgage company that will refinance on a shorter term. Mortgage brokers can help here if you have any in your network.

You do not have to use a local mortgage company, although local credit unions or smaller local banks are usually interested in portfolio investing.

@Kimberly Harten - using security deposits is risky, and you might want to check with the state laws. Some states require anything above a certain amount to be held in an escrow account, and require the landlord to provide proof of the bank account and funding to the tenant at any given time. Unfortunately, there are professional "out-to-get-you" tenants in the world who could land you in trouble if you aren't careful.

Pro-rated rents at closing is a fantastic idea, and I tend to do that for every property. Adding cash to your account at closing? Yes please!

Sit down and talk with the owner to find out why he is selling, and what he plans to do with his earnings from the sales. If he likes the monthly cash flow and is just getting burnt out, he might entertain the notion of financing directly to you for some of the properties. You could purchase the first one through conventional financing in order to give him a chunk of change up front, plus put some skin in the game. After that, see if he would finance the rest to you. He gets a monthly cash flow, plus tax benefits, plus collecting on the interest that the bank would otherwise collect? Sounds like a win for both sides.

@Adam Bradley - not a problem. 10% is conservative, and is a good number to start at. If a property is newer, or if it is in a great neighborhood with great tenants, I'll consider dropping maintenance and vacancy percentages. I almost never go below 8% though, which some would still consider conservative.

As you learn your market, you might find that actual vacancy is lower. It's always better to have better cash flow than you expected rather than worse though ;)

Glad I could help!

@Adam Bradley - I'll just run down through the list of easy questions. Also, be warned: Wall of text, and some math.

1. To renovate, it depends on the property and the work being done. If the work is unobtrusive, I usually start with the worst unit and vacate it for rehab, then go from there. There's no point in vacating the entire property if you're only working on one unit at a time.

If there is work that needs done on all of the units and it is easier to do them all at the same time (for example: have all of the plumbing or flooring done at the same time in all units), then it might make sense to vacate all of the units from the beginning.

I screen all of my tenants, even the ones that I inherit. It's a business, and in the end I want to make sure that I get paid. If one of the original tenants passes all of your screening criteria, then you can give them first dibs. Don't bend your criteria because you feel bad about vacating the unit.

2. For a five unit (and all commercial properties), the market value is generally based on comparable cap rates. Formula: Cap Rate = Annual NOI / Purchase Price

So find out the average cap rate in your area for small commercial residential properties and the NOI for this specific property. Purchase Price = Cap / Annual NOI

3. Cap rate is technically important to determine purchase price. I usually only use it when evaluating what I believe a property is worth, but cash flow is generally the deciding factor for my investments.

4. Insurance: Call a few agencies and ask for a quote for a five-unit rental. After a while, you'll have an idea of what the average is based on property size and location.

5. Not a question that you gave, but an observation: Maintenance and CapEx of 5% is marginal. I would aim for a more conservative 10% as best practice, or 8% as a safe practice. Don't decrease these numbers in order to make a property look good on paper - you may lose a lot of your future savings if (when) things start breaking.

6. Your numbers are at $8k short term because you amortized $90k over one year. You won't be paying the full $95k in one year. Your initial loan will have wording of "$X for Y% interest with Z amortization". Even though you are planning to refinance in 1 year, you still use those terms when determining your short-term cash flow.

7. If I was going to do a full analysis, I would determine all expenses and income based on once it was fully rehabbed. From there, I would back-calculate to a purchase price. Here is my longhand math approach at determining a purchase price. There are online tools that can do this for you, but it's always good to understand how they work.

So let's assume that your rehab will allow you to raise rents 10%. Initial rent numbers are $2,585.00 * 1.1 = $2,843.50

Now let's get your monthly NOI:

Taxes: $77
Insurance: $2000 Annual = $167 / month
10% Maintenance: $284
10% CapEx: $284
10% Management: $284
8% Vacancies: $227
Utilities: $83 (just in case)

NOI = $2843.50 - All of that = $1437.50

Your desired cash flow is $150 * 5 = $750, which means you can have a loan payment of $687.50 per month.

Fun fact of the day: Excel has a function that will give you the loan amount based on the interest rate divided by 12, the length of the loan in months, and the monthly payment. So in excel if I assume 5% interest rate, 30 years:

=PV(0.05/12, 360, 687.5) 

will give $128,068.61 as your total loan amount. Subtract out your renovation cost, and the most you should pay is roughly around $103k purchase plus $25k renovation in order to achieve $150 per door per month.

Since you are looking to refinance, you have to take into account your closing costs which I won't do for the sake of running numbers.

I hope this helps! There are no dumb questions: each and every question will help someone else, and there's always something to learn.

@Ben Smith - @Greg Scott is correct that anything lower than a 5-unit is considered residential and is thus evaluated based on local comps.

That said, I always treat any of my rental investment properties as a "commercial" and will evaluate it based on income. Cash flow is what I am after as an investor - not appraisal value or local comps. If I am flipping or rehabbing and refinancing, then I am always interested in the ARV based on comps. However, my decision to purchase is always rooted in cash flow. Even if I want to refinance, I will still base my decision on cash flow rather than market value; the only reason that ARV is important to me is to determine what a lender will give for financing.

If this is a question as to how the property will be evaluated: Sales Approach

If this is a question about personal preferences: Income Approach.

@Frank Pilipauskas - looking at this using the 50% rule, but increasing expenses to 55% to account for higher taxes, this would give you roughly $80 per month cash flow.

Given the details that you provided, that's the best estimate that I can give you. I assumed the lower end of your rents: $1100 for the 2 bedroom and $700 for the 1 bedroom (to be conservative). I also assumed 20% down, 30 year loan, 5% interest.

In my opinion, this deal is too tight to use hard money - the typical points could tip you into a negative cash flow.

Again, this is all based on very little detail. However, I would pass by this deal if I came across it during a preliminary search in the markets that I am purchasing in. Your market may be different, or there may be other facts that would swing this into a good investment.

When running a more in-depth analysis, make sure to account for maintenance, CapEx, vacancies, management - stacking those on top of the high taxes means that this property has a lot of expenses even though the utilities are split. The only real way to increase your cash flow would be to purchase at a lower value, which would decrease your mortgage payment.

@Ryan Horne - there is another thread here that is along a similar line (it was an obscure thread, so you'd probably never find it haha)

I gave some advice for splitting the profit with the seller. You might ask the original poster of that thread what he decided to do.

Basically, it is a win-win situation if you successfully flip the property and sell it for him. He makes more money than he normally would have, and you earn more at the cost of funding the rehab.

Just make sure that you have a firm grasp of what the rehab costs will be, along with the true ARV of the property. Take into account the closing costs and fees, and preferably have a 1031 exchange in the makings so you can avoid some taxes. I'm not sure if you'll be able to do that since the property won't be in your name - someone who knows more about that can probably help out for that information.

Best of luck! Keep us posted if you move forward with this

@Jason Turo - 25%? It's usually 50%, assuming you include maintenance, CapEx, management, vacancies as "expenses". I've never heard of using 25%

Unless if you mean 25% as your utility operating expenses? Some clarification might help me understand what you mean

@Ben Hudnall - a few quick notes.

"I believe the market value" - use RentJungle and do a search in your zip code to determine what the average rent values are for something of similar size.

Vacancy - this is based on the local values. 5% is close to most averages; I usually use 8% as a conservative value.

Repairs - 8% is fine. I prefer 10%, but that really depends on the area. Lower class rentals usually need a higher maintenance cost. Lawn care, snow removal, etc also should be taken into account.

CapEx: 5% is low. I would only use a number that low on a newer property. Anything pre-2000 should use a higher CapEx value, preferably between 8%-10%

Shorter answer: It depends on the local market and the specific property, but I would generally say that you are not overestimating.

This would be a walk-away deal for me, since I am in the business for cash flow. Something as tight as $96 per month using the percentage expenses that you used is not something that I would personally invest in. The only way that I would go into this investment is if I had a solid plan for how to increase the cash flow, whether that's by decreasing expenses or increasing income. This does not seem like a property with those options.

Key take-away: You're doing a great job of asking these questions. It's easy to decrease the percentage expenses since they are somewhat abstract in a way (they aren't concrete numbers such as a water bill or property taxes). Set aside those percentages in order to increase the chances that your investment will succeed.