All Forum Posts by: Brendan M.

@Jay Hinrichs - It's like you read my mind! Since this deal took no skin off my back, my plan for the next year is to grab another 4-12 unit with either seller or traditional financing next Jan/Feb, then when I'm eligible to use my VA loan again in May '16, I'll refi (or not) and use my remaining ~$160k or so in eligibility to purchase another 2-4 unit to live in for 0 down. At that point I'll have exhausted my VA loan benefits, but I'll have a decent bit of cash flow and time to figure out my next pivot.

@Jeffrey Price - For what it's worth, I just bought a 4plex to house hack here in the springs with a pretty solid prospective. I could definitely recommend my agent, broker, insurance etc if you end up coming this direction. Plus if you want to get really ambitious Denver is just a stones throw away and that market is exploding right now. Feel free to connect if you have any questions.

@Robert Blanchard Good luck with your VA purchase! If you're interested in debt relief, I would focus on getting the seller to agree to pay as much as possible in closing costs. You don't even have to ask the seller if they'll pay your debts. If you do, your seller might not be receptive to the notion that they're paying for your bills. Instead, you just have to get them to agree to pay $XXXX in closing costs - that's much easier to negotiate (and seller paid debt, for all intents and purposes, is written on the settlement as a closing cost). Then work with your mortgage broker to figure out the best way to minimize the other closing costs. The difference between the total closing costs and the amount the seller agreed to pay for you is how much you'll get in debt relief.

Example: When I contracted my place, the seller agreed to pay $2800 in closing costs. At that point, I had no idea I could even do debt relief. But after talking to and negotiating with my mortgage broker, he worked it so I would have to pay 0 in closing costs. Because of that, everything the seller agreed to pay on my behalf instead went towards my debt relief. Honestly, I'm not even 100% sure that the seller knew he was paying off my car loan even at closing.

@Lauren Lockett- Thanks! I'm glad to hear my post helped!

Thanks! I will say it hasn't been 100% roses though. I was in the unfortunate situation where the property changed hands a day after a tenant moved out. The old owner did a quick walk through and gave the old tenant his security deposit back on the spot, and when I moved in after the purchase I noted a few hundred dollars worth of damage. The tenant managed to put holes in 4 doors of the unit, destroy a set of blinds, and seemingly ran off with an overhead light fixture. Fortunately, while annoying to repair, the money saved at closing made it easy to budget for immediate repairs. Somehow this all got missed in the inspection (or happened after). I suppose the lesson learned here is either coordinate with the seller for post-contract vacancies or avoid this situation altogether where possible.

I’m writing this post for all the newbies (especially military) out there who have yet to complete their first deal so they can hopefully see that getting a decent deal on their first purchase is actually achievable. I’d like to give a huge shout out to the entire BP community for opening my eyes to the possibilities of real estate investing and being there to give advice, recommend books, and answer my questions along the way. You guys are awesome and indispensable.

The deal itself is a 4plex I found as a FSBO on Craigslist, in a B to B- neighborhood. Here are the numbers:

Purchase Price: 0% down on $265k purchase price @ 3.5%. Total loan amount is $270.7k after VA funding fee.

Closing Costs: There's a great VA loan benefit where the seller can agree to pay up to 4% of the value of the home back to you in closing costs in the form of concessions – most people typically use this (if they can convince the seller) to pay down the VA funding fee. However, since I wanted to leverage to the max, instead of using this to pay off my funding fee, I chose to wrap up my funding fee in the total loan amount, and instead used the seller concessions as debt relief (the seller pays your bills for you – it doesn't get much better than that!). So I used this to pay off my car loan and a good chunk of my monthly credit card bills with the $2800 I received in concessions. I also received all $1000 of my earnest money back, $1350 in May rents, and received another $650 in fee reimbursement from my mortgage broker. Total closing table gain = $4800.

GOI: $31,290/yr (2650/mo rents - 5% vacancy + $90/mo coin-op laundry)

Operating Expenses: $11,905/yr (assuming 10% maintenance – very conservative for property condition)

NOI: $19,385/yr

Cap Rate: 7.35%

GRM: 100 

Current Cash Flow: Using conservative numbers for everything, I should see cash flow of around $364/mo or $91/door (Yes, I am living in, but I perform all analyses as if I am just another rent-paying tenant, since that is how an outside investor would analyze this property). Not bad for 0% down. For comparison, if I had put 20% down, I’d see about $156/door.

By raising rents to market, I should see my GOI increase to 33k. Further, this property is a great candidate for submetering or subdividing the water bill (all other bills are tenant paid), allowing me to further reduce my operating expenses down to $9,676/yr, with little to no increase in my vacancy. This should increase that cash flow by an additional $329/and also force appreciate the property value by about 29k. I am a little skeptical of how long I’ll be able to get away with an expense ratio of about 30% but I triple checked my numbers - I’ll update everyone in a few months to see how this plays out.

By closing on this house I eliminated my car loan of $582/mo, will be cash flowing a projected $364 per month, and paying myself an additional $265/mo to self-manage my properties. This all adds up to a $1211/mo total effective increase in personal cash flow! Yes, my car loan would have been paid off in a few months anyways, and no this isn't what it would look like to an outside investor, but this is my difference I'm seeing to my bank account just by closing this deal.

8 Lessons I learned:

1. Everything is negotiable. The seller initially was unwilling to work with me as I was using an agent to avoid the fees, but when I put a contract in front of his nose with a 2% agent commission listed (my agent’s idea, not mine), the seller signed it with only minor negotiation. People can huff and puff all they want, but it’s what happens when you put paper in front of them that matters.

2. Assume the seller is full of BS - due diligence is king. He gave me ridiculous self-reported numbers for maintenance (0.25%, really!?), vacancy (0%!), insurance, etc. Maybe that’s what he really had, but I came up with my own, more realistic and conservative numbers. Also be prepared for your seller to have incomplete information – either get comfortable with your own estimates or adjust the purchase price accordingly.

3. If you’re looking for a great deal on the MLS, you might be looking for a long time. I spent 5 months looking at everything that came onto the MLS in my area that fits my criteria and have yet to see something I'm comfortable putting an offer on.

4. Object to as much as possible in the inspection objection. This property is pretty turnkey, but I threw in a bunch of minor things into the inspection objection with the idea that the seller would negotiate me out of half of it. Turns out he accepted almost everything I asked for, saving me around $3k in immediate maintenance costs.

5. Try to close at the beginning of the month when possible. I closed May 1, so I received the entire month of May rents but was at the end of the cycle for the escrow interest calculation for the lender so I paid very little there, which is what really allowed me to walk away with so much at closing. If I would have closed on May 2, my first mortgage payment would not be due until July (vs June for May 1), which essentially is like getting an extra month of cash flow for free. Unfortunately I wasn’t able to arrange for a financially viable way to push back past May 1 – lesson learned for next time though!

6. Try to contract the seller into paying as much closing costs as possible. This one is especially important for military taking advantage of concessions - you cap the maximum amount you are eligible to receive back in debt relief at the amount you ask the seller to pay in closing costs on the contract! I didn't know this when I drafted up my contract - if I did, I could have received substantially more (up to 4% = 10.6K) back in debt relief. Fortunately I didn't have enough debt to take advantage of much more than I got, but be aware of what it means to you. Also, by extension, if you have no debt, you can't get paid cash. It has to be applied to existing debts.

7. Shop around for everything. I was originally going to work with a Mortgage Broker who promised to get me $300 of my $1000 earnest money back at closing and I’d pay nothing else – that sounded pretty good to me. But then I reached out to another Broker whom I’d heard good things about and told him what my current offer was. After about 2 days of each broker offering my progressively better deals in hopes of earning my business, I ended up settling on receiving all of my earnest money back, $2800 in debt payoff, $650 in fee reimbursement, and a slightly better interest rate. Same goes for things like insurance – 4 or 5 extra phone calls saved me close to $900/yr.

8. Read everything. Read books, read blog posts, read the forums, read everything. And listen to podcasts when you’re not reading. A little bit of knowledge goes a long way in establishing the confidence to take the first steps into becoming the master of your own financial destiny.

I’d love to field questions from beginner investors on the process or hear feedback from the more experienced investors. I don’t think I totally knocked it out of the park with this one, but I’m definitely extremely happy with the numbers for my first deal (especially for 0% down), and exited to continue onto the next one! Thanks for reading!

[Edited because formatting hates me]

@Account Closed Wow thanks a ton for the summary there, I really appreciate you sharing that.

Hey BP!

First time investor here. I've found a property and I'm interested in putting in an offer. However, the Colorado contract is pretty foreign to me and seems to be less than straightforward. I have been working with an agent, but he had no part in finding this property for me and because of that I'd like to avoid paying typical commission if possible. Is that reasonable? What are my options for counseling here to make sure I do this right? It's being financed conventionally with a VA guaranteed loan if that makes a difference.

Thanks!

-Brendan

@Elizabeth Colegrove , by split you mean take out more than one on multiple properties?

@Eric Black Perfect, thanks for the answer!

Does anyone know for VA loans if the funding fee is applied to the purchase price of the home or only the financed amount? I assume it'd be the financed price, but I just wanted to verify. The VA website isn't really clear on which it is. Thanks!