All Forum Posts by: Christopher Blanco

@Doug Woodville He didn't account for turnover, property management, vacancy and i would argue his capex and repair budget are low. Again, I have a completely different rental model than the traditional buy and hold so take that as you will.

I would argue that the price of the property is too high for the rent he is getting. I lost a property that I had under contract with repair for half that with the same rent in Cleveland, and its a good thing I did because once I did the analysis I just did for the OP I realized it was a loser as well. If I was OP I would find out why rent is so low and see if I could force appreciate the units by upgrading them and increasing the rent and lowering the payback period. If not, i would not buy this deal. 

Financing makes no difference and only makes the payback worse. You are just paying the bank instead of yourself.

Just remember as an investor, it is your job to talk yourself out of deals, not into them. Good luck to you. 

I tend to look at rentals a little differently, but using your numbers and adding 10% for property management and 5% for vacancy, I get an net operating income (NOI) of 9800 a year. You say your initial investment is 130,000, assuming you pay cash that is a 13.26 year payback. If you finance you need to deduct the cost of money and your payback gets worse. So that means you will not be making ANY money on this property for at least 13 years from NOI.

In that time frame what do you think you will need to replace? Since you are doing nothing at the onset,  I would say at the very least you will be replacing a roof, hot water heaters, and probably furnaces (lets say $15000 total in cap ex and thats being generous). In addition you have turnover. Average tenant stays 1.3 years, so in 13 years you will have on average 20 new tenants between the two units. Each turnover will cost you on average around 1 months rent + $800-$2000 for repair and repainting, carpeting etc. 

So lets run the numbers again:

• 13.26 year payback period so NOI is a wash in 13.26 years until you pay back your investment.
• in that 13 years you collect $53,300 in Cap ex, repair, and vacancy saving
  • $15,000 of that gone in actual repairs
  • Lets go easy and say each turnover only costs you $2500 total (including vacancy). 2,500*20 = $50,000
  • Lets also go easy and say each unit only costs you $500 a year in repair, so again over the payback period: 13*500*2= $13,000 in repairs
• Totaling up: $15,000 + $50,000 + $13,000 =$75,000. 
• You've only saved $53,300, You just lost $21,700 over 13 years. 

This is why I don't do long term turnkey buy and hold. I just don't see the value. In 13 years I could do WAY more with $130,000. 

Welcome @Kate Beletskaya. I sent you an invite.

Your goal should be to tenant proof your rentals as much as possible and work on getting the highest rent possible. The extra $1,000 you might spend on granite and stainless appliances can be made back in several ways:

1) Depreciation. You can depreciate those assets faster than the building

2) Higher rent. Charge $25 more a month if you hold the rental for 4 years or more you've made your money back

3) Plan for the exit. I don't buy rentals to hold for 20 years. I buy rentals to hold for 5-7 years with the plan on flipping them when i am done. All of this gets factored into my initial offer price.  

@Brian Garrett  Private funding can be secured in several different ways depending on how the deal is structured:

1) 1st Lien Mortgage. If you are the ONLY investor and funding the whole deal, you sit on 1st lien on the mortgage. This works for short term flips and hard money loans

2) Deed. If you are funding a longer term (in my world that's longer than a year, but less than 7) then you and I would be joint venture partners. You would be a capital partner and I would be a managing partner in an LLC. You would get a promissory note and listed as an owner on the deed.

3) Promissory Note. If you are doing gap funding or even general loans this is how I would do it. A promissory note is a contract between you and I and a legal document that is as secure as a 1st lien mortgage...probably better as you don't have to go through foreclosure if there is an issue. 

Need to have a policy, and a strong one. If rent is due on the first, and its not paid at 11:59pm on the 1st, then the 3 day notice is on the door with a late fee the next morning, the tenant cannot be allowed to make partial payment of rent.  Full rent with late fee or the eviction process starts. 

At the end of 3 days, go to tenant and offer them cash for keys. After 3 days no longer accept rent, and start the eviction process. 

Private money? Hard Money Loans? Seller Financing? Capital Partners?

I don't plan to ever use a traditional bank...

With $1M, join a REIA and become a private lender for deals. Not more passive than that.

I would only look at partnering on short term (no more than 5-7 years) deals. I would also only structure the deals so that one partner is a capital partner and the other is a managing partner, unless I knew the person I was JVing with well. Having CLEARLY defined roles in the partnership is the only way to go.