All Forum Posts by: Cameron O'Connor

@Joe Splitrock thanks for reading it! You got me on the name mix up, that is for sure! But you are correct, I do not follow Dave Ramsey, particularly close. And my reference to him in my article was merely just referencing his commonly known belief that no one should have debt. Where as I am saying good debt is GOOD!

In regards to the flood zone, I agree, there is absolutely risk there. But aren't there always risks of a fire, earthquakes, tornadoes (especially in Indiana, where I am from), or other natural disasters. Risks are inherent in any industry and I think they need to be evaluated and take case by case. In this specific case, a several mile long levee has been built, the elevation of this specific property is higher than surroundings, and this property is located right on the cusp of the FEMA determined flood zone. I'm not denying the fact that a flood could get consume this property, but yet I look at it as what would my damage be. The basement is unfinished, so I would only be replacing 10-20k in equipment. The first floor is about 3 feet up, which based on this elevation would be equal to that of a property outside of a flood zone.

And regards to the index funds, I am looking at all of this in the long term gain. People that had to sell homes, stocks, anything in the down-turned market suffered a serious loss. Yet those that were able to hold through it have now seen significant gains even when buying at the peak before the crash. Any investment in the short term is alway much more risky than that in the longer 15-30 year range, which is the same loan duration as putting the house on a 15-30 year fixed rate mortgage.

And lastly, I completely agree, I only use the stock market (aside from a retirement account) as a tool to build cash until I have enough money for my next down payment on a property. Because I cant stand the banks .01% interest, which is losing money from inflation as it sits in my account. Although this last portion paragraph is contradictory to what I just stated with long term investing, this is just a personal choice of mine to get a 5-10% return, to more quickly build up my ability to put my next down-payment on a property. With this, though, I do have the full understanding of potential loss from a falling market, at which time I could pull that out and put it into a savings with no interest. 

@Terrell Garren Terrell, well I can promise I don't know all of the answers, this is just one of my recent findings that I enjoy sharing. I would say your strategy of a 10% ROI with no debt is a fine strategy, just not necessarily one I partake it. You are likely seeing this as a lower ROI as you have way more cash in the deal than your son who will only have 10k into it. While you are making way more per month because you are not financed, it is much smaller in comparison to the amount of money that you initially invested with a cash purchase. I would say your son's 30% ROI is very likely. Maybe $300 per month is a little high in my opinion, probably closer to 200 after vacancy, capx, etc, but I do not know any of the specifics. None the less still right around your 30%.

On a similiar note, if you have read @Brandon Turner's book on Investing with Little or No Money Down, you will see if you do a deal with $0 of your own money, your ROI would be infinite. It is all relative to your initial skin in the game.

Best of luck to you and your son!

@Vincent Gurko Analysis can be great, but sometimes a curse, as I fall into analysis paralysis. None the less, I enjoy running numbers so often that, frankly, practice time and time again is how I have developed this skill. 

I would say a great start would be to watch @Brandon Turner's webinars on how to analyze a deal. He has a way of explaining things in the simplest of ways. And then take what you learned from there and going to zillow or realtor.com or some online listing broker and analyze a deal daily and blindly. Even if you have no interest in investing in the specific property of region, just run the deal and you may be surprised. This can also quickly open up a lot of resources and how to find great tools in certain areas.

@Lynn McGeein Thank you! I think the best part with being able to put less money down, again if the numbers work, this allows you to keep a cash back up fund. You can hold 3-6 months of your mortgage, or more if you don't have to put as much down, on top of the vacancy rate that you should already be accounting for in your expenses. This can help you wade through the downturn and give you just enough cushion to ensure you can get a quality tenant in even if it takes a couple extra months.

@Zack Karp Maybe conservative leveraging is a poor choice of words. I completely agree with you there. I had nearly the same response to Marc just prior. By conservative, all I meant was make sure the property is a cashflowing positive with ALL expenses accounted for including Vacancy, Capx, maintenance, management, etc. I think a negative cashflow is not worth the money, even if the appreciate MAY get there in years to come. That is more of a gamble in my opinion. Leverage your purchases, with ALL expenses accounted for, and the only thing you should be worried about is getting vacancy's filled.

@Marc Winter I hear you loud and clear Marc. However, my cushion is built into my monthly expenses. Assuming all CapX, maintenance, vacancy, management, taxes, etc. fees are included in a conversative manner the cushion is there with little concern for fluctuation. All of the expenses listed in this article (with the exception of insurance) are fixed for 30 years. Insurance can increase, and will increase, but with flood insurance programs being Federally mandated, they are under strictly guidelines. And as long as I'm purchasing this property with the long term in mind, I could care less if the market plummets in 2 years or 5 years, or 3 days. My net worth may look less on a balance sheet, but it in no way effects my cashflow, as long as I can fill this property with good tenants.

@Zack Karp, thanks Zack! Conservative leveraging is key. I think people hear leverage and they think of the risk when the next recession hits. Most all of these mortgage expenses are fixed rates and won't change for 30 years. Your risk is mitigated and allows you to diversify and grow quickly.

I’m a number guy. I spend countless hours on excel spreadsheets running ProFormas on every possible situation. I want to know what the BEST possible outcome is, WORST possible, projected actual outcome, forced appreciation outcome, etc. I want to know if every single thing went wrong, what would it look like to my pocket book. And for giggles, I like to see if absolutely everything went 150% correct, how quickly could that accelerate me towards my goals. And, what steps do I have to take to force the latter option.

I constantly struggle between the Rush Limbaugh, no debt, and the maximum leveraged approach. I typically find myself somewhere in the middle, where I pay down a little extra each month, but I make sure that I have enough cash building up for my next financed deal. I think a lot of people fall here, and it is a reasonable approach.

I have run countless proforma’s showing what the upside will be if I pay down my principal in record time. Its great! … on paper. I see, WOW! I could pay thousands less on interest over the course of 30 years. Or I could be debt free on this property 10 years early and that will quadruple my cashflow. All things that are VERY appealing. However, in running these proforma’s I have recently discovered how much I am losing out on in the meantime.

I recently read Craig Curelop’s, Private Mortgage Insurance (PMI) Isn't All Bad, and it completely changed my way of thinking. Craig walks through 2 scenarios where one individual has an opportunity cost of building up enough funds to not pay PMI and the negative effects of this mindset. This was tough for me to grasp because I hated the thought of PMI.

I am currently in the process of finding my second house hack, a duplex – making Craig proud! I have landed on a potential property. The property is exceptional, and I am very excited about the potential purchase. However, there are two bruises rearing their ugly heads at me. These have taken quite a while for me to wrap my head around fully, even though the numbers work when I account for these! I cannot purchase the property at 20% down, so I will proceed with FHA financing, and PMI will be on the property for the life of the loan (assuming I don't refi, yada yada yada). Secondly, the property is in a flood zone. This one is particularly frustrating. Mortgage law makes banks require Flood Insurance on homes that are in FEMA flood zones. FEMA has not updated majority of these maps for years, but that is another complaint. I have had a difficult time accepting that I will have to pay nearly $400-500 per month additional for both of these combined. $400-500 out the door, not benefiting my principal, and hurting my bottom line greatly. All I get stuck on is that without these, I could make an extra $6,000 per year!

So, because of my personal need to run excessive proforma's to figure out exactly what I can do to better my situation, I determined, I can pay an extra $1000 per month (making this now a negative cashflow property), and make the property down 15 years soon! NICE! That means, in 15 years, I can cancel flood insurance, have no PMI, and now no financing! Perfect. I only need to put up with this for 15 years of a negative cashflowing property and then I'll be good! Right? But what am I losing in the meantime for these 15 years?

Like I said, the numbers work for me, cashflowing positively WITH PMI and Flood insurance. So, after reading Craig's article (mentioned above), it all finally clicked and I ran one more ProForma. This time, all I was looking at is the cost of financing, i.e. interest, PMI, and Flood Insurance.

As seen in the table, the purchase price is $380,000 and I am only able to put 6% down, bringing the loan amount to $357,200. And my current bank provided interest rate on a 30 year loan is 3.625%. At my first payment, my interest is $1,080 (rounded). I have received a flood insurance quote at $150 per month ($1,850 annual premium). And PMI is shown at .8% of the loan amount or roughly $240 per month. With all of this assumed above, I have shown the annual cost to financing this deal at $17,650 bringing me to an adjusted interest rate of 4.94% of the loan.

Yes, I thought I had a win with a 3.625% interest rate, and it hurts to see that interest rate at a 4.94% rate! But when I saw this, it made me realize, I can make more money through simple index fund investing (read Scott Trench’s Set for Life) and other real estate deals that beat my 4.94% interest rate. Not to mention, this rate will decrease as PMI decreases; although minimal, there is still an upside. So, if I were to stick with my original plan of dumping excessive cash into this property to get the loan paid off in record time, I would only be beating a 5% interest rate, but losing higher yield investment opportunities. Right now, I can count on index funds being between 7-9% and certain real estate deals as much as 11-15%. This has completed changed my mindset on debt leverage and the potential upside that I have.

With Flood Insurance remaining roughly the same and accounting for inflation and PMI decreasing over the life of the loan, I could expect to pay roughly $100-130k from these to costs alone. Now, if I choose to invest that $500 per month ($6,000 per year) instead of putting it towards principal the benefits could be astronomical. With the beautiful thing they call compound interest (the extend of which is not covered in the scope of this article) on an average of 8% on index funds I could see over $600k in 30 years. Or at a 12% return in real estate investing, I could see nearly $1.5million in 30 years.

In summary, I am an over analyzer as I like to see all options of every deal. That being said, don't shy away from PMI and other financing incurred expenses, if your deal is cashflow positive. They can be extremely discouraging at first, but if you look at the macro-level picture, it can be easy to tell that you still have a great opportunity to succeed. With easy index fund investing and real estate networking deals, explore all of your options to determine if these expenses are just a cost of doing business. Because the worst deal here, is no deal at all. It can be a tough pill to swallow, but you have to spend money to make money.

@John Wijtenburg,

I am in contract with my second deal right now actually, hoping to close in the next couple of weeks. Right now with my search being mainly on 2-4 unit multifamily, my biggest advice would be have at least 1 (get 2 or 3 even) real estate agent working for you. If you're buying, they are at no additional cost to you. Do your own search and your own due diligence, but if you work a full time job and can't spend 8+ hours a day searching then you need someone in your court that can do that for you. I am always surprised at the deals that they find just from talking within their own offices that haven't even hit the market yet.

My goal is to grow and search for 10-25 unit apartments as well. I have just begun this and am early on the process. Looking to contact some brokers shortly.

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $202,000
Cash invested: $50,000

House Hack/ BRRRR property. Bought this triplex, lived in one unit, fixed up and moved to the next, and repeat. Completed most of the work myself, all that was allowed by code. Now with all units renovated, rents have increased by 33%. Refinanced to pull out improvement cost and capital. I will hold this property for many years... unless the price is right.

What made you interested in investing in this type of deal?

I am very handy and enjoy doing a lot of work myself. While I understand that is not a "scalable" practice, with this being my first property, it gave me the opportunity to teach myself a lot and get into the real estate market slowly but with a solid foundation.

How did you find this deal and how did you negotiate it?

As this is my first true real estate deal, I would venture to say, my negotiating and "best deal" practices were not the best. However, that is no concern to me. I know I will hold this property for many years. With that, I don't care if I could have saved an extra $5k on the purchase price, because I have already made up for that in the capital improvements.

How did you finance this deal?

Conventional Loan, nothing really special hear. I'm an engineer, not an artist. But going forward, I plan to branch out as I learn more creative financing methods.

How did you add value to the deal?

I completely renovated all three units of this triplex and the outside. With future renovations of the units, from the kitchen cabinets, all new flooring, building out a room into an attic, tile shower, new vanity and countertops, and all new paint. However, some of the easiest and most visually impactful improvements are in the small/easy landscaping. I was able to trim bushes, add some low maintenance plants, and the first impression of the house has changed dramatically.

What was the outcome?

Outcome has been a property that I have fully switched to a property manager, making it a truly passive investment, with increased value, all capital pulled out with the BRRRR method, and increase rent (and cashflow).

Lessons learned? Challenges?

Tons of lessons learned in the rehab, the biggest one being, as much as I enjoy and am decent at doing the work, hire more of the work out. I would work my 9-5, which was more like 6am to 7pm, then come home and work on the house for 4 hours. It was draining and not a sustainable life style. So my enjoyment of renovations can be on a small built-in, or a nice piece of woodwork that I truly enjoy; not in my kitchen forcing me to eat microwavable mac n cheese from my lap.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I worked with two real estate professionals that I had a great experience with and have continued working with for my next deals.