All Forum Posts by: Craig S.

Thanks Rob Gillespie for the feedback!

Thanks Prashant P. for the reply! I am still awaiting more feedback and opinions. Are you concerned with what the market looks like in the areas you invest in, or do you typically focus in more on the property and look for a cheap fix and rent opportunity?

Hello,

I am just getting into the real estate investing world (age 23) and have come across many different strategies to investing in real estate. My ultimate overall goal is to have enough rentals providing me relatively "passive" income so that one day I will be able to live completely on my rentals providing me a good income (200-300k+) per year or more. If I play my cards right and have enough equity and/or own enough properties free & clear, I know I can make this happen.

I have two major strategies I am considering right now and want others to give me your opinions and feedback on the risks and thoughts on both methods. I have talked to intelligent individuals on both strategies and want to learn more about both before I pull the trigger so to speak. I plan on managing the units myself for the most part.

Option #1: Start off by buying a rental duplex for about $110,000 that provides me about $200 /month cashflow ($100 per door) -- this being calculating the cashflow using the "50% rule".

This would be my first deal (listed above) as an owner occupant and I would plan on continuing with this type of strategy buying properties that are already in decent shape and with a sale price close to market value--hoping to make my profit on the monthly cashflow. I would start off with a few duplexes then move onto apartment buildings, etc. as I grew. Obviously buying as cheap as possible is key, but I would be mostly looking at MLS, newspaper, relators, or anywhere else I find deals and buying properties that are in decent shape and in decent areas/markets. Down the road I may venture into doing more rehab work, but starting out I am still learning so probably prefer to invest in properties that are already in decent shape--no major work like foundation problems, drainage problems, etc.

Option #1 seems to be portrayed similarly by @Rich Weese here on BP.

Option #2: Instead of using my cash to finance more expensive properties (duplexes, etc.), I would buy cheap properties that need minor rehab in lower income areas/cities or areas that the market is weaker and complete the minor rehab--own the property free & clear, and then do something like rent to own. I could put the homes on something like a 3 year rent to own contract and either sell the home at the end of the 3 year term for a decent profit, or continue renting it out with a contract renewal fee if they weren't able to finance the property.

My first property as a "minor rehab" project might cost around $10k to $20k to get into--paying cash free & clear. It may be in a rougher part of town, but I would own the property free & clear and I could keep a much larger portion of the income for cashflow. I would also have the opportunity to sell in a few years for a cash profit.

Option #2 seems to be portrayed/recommended similarly by @Rob Gillespie here on BP.

I am relatively conservative on investments and would love to make cash quick, but am also being realistic and want something that won't be a nightmare to run/manage, but still provides me good returns.

Let me know your thoughts on both strategies (Option #1 or #2) and why. Possibly providing another strategy that might also be beneficial. I know there are so many strategies to investing in RE, but I am looking for general overall strategies that would allow me to build a cashflowing portfolio of rentals over time.

I am scared to invest in areas that the market is way down (like local Cleveland, OH). I'd hate to pick up a property just because it is cheap, but then face a nightmare trying to attract renters, renting to people who destroy the place, and maybe not being able to sell the property due to the economy, etc. I wouldn't buy in war zones, but if I buy CHEAP it won't necessarily be in the best area.

Looking forward to your replies.

Craig

Will, yes I was agreeing with Steve and trying to say that I have been told that by others as well. I do agree it would be much better to have 20% down--eliminating PMI insurance.

Steve Babiak, I was told by others that PMI insurance would come off of my debt service side of the 50% rule--not the operating expenses side. So if I had a property renting for $1,300 per month gross, I would have $650 going to operating expenses, and $650 going towards debt service, PMI insurance, and then cashflow. PMI is the same thing as Mortgage Insurance as I understand--unless there is an additional UFMIP (up front mortgage insurance premium.)

I have factored the PMI into my deal analysis and still have positive cashflow for this duplex. I will be posting my actual numbers on BP once I get a good faith estimate on the exact PITI.

Jon Holdman, thanks for your reply. I will be using FHA financing as an OO, so will also be required to have PMI for at least the first 60 months (unless I refinance out of it later on). 3.5% interest and 3.5% down.

I agree that on AVERAGE OVER THE LONG TERM (10+ years) that using the 50% ratio might be very accurate. However, how would the 50% rule be correct if you purchased a property that needed a new roof, furnace, or all new windows within 1 or 2 years? Would you just consider those costs as essentially part of the purchase price? What if the property needed some upgrades that were not urgent but needed to be done relatively soon? I agree that over time these may equal to about 50%, but I am trying to watch my costs closely--especially for the first year, second year, etc. Sure looking at 20 years overall I can see 50% being close, but looking at a 1 or 2 year term, this seems to be more inaccurate. The more time goes by, the more accurate the numbers will seem. Do you see what I mean Jon?

My goal is indeed long term buy & hold, but what if I decided to buy & sell in 5 years. Wouldn't my "50%" average be considerably off if I had a major CapEx within that timeframe?

What are your thoughts?

Thanks Lisa Lunger! Also, how much cashflow do most investors shoot for PER UNIT with rentals? I have heard investors try to get at least $100 cashflow per unit (this being after all expenses, PITI, etc. are paid). I am shooting for about $200 /month cashflow for this duplex ($100 per unit). Obviously the more cashflow the better...

Hi Michael, thanks for the reply and your answers. They were helpful for me to look closer at. Regarding an "accurate estimate". You could have a "WAG" wild *** guess, estimate, accurate estimate, or exact answer. I want to estimate as closely as I can. Over time I will get exact numbers as I incur them.

I am looking very closely at my first deal on a duplex (owner occupied for 1 year). I have been looking at several duplexes and am trying to make sure I have all my numbers in a row.

What is the best way to ACCURATELY estimate the operating expenses for a property? I have used the 50% rule, but I want to get more specific as I am considering pulling the trigger on this deal and I want to make sure I am not underestimating or overestimating expenses.

Obviously, taxes, insurance, utilities, and vacancy expenses are relatively easy to estimate.

I will be also managing this duplex myself--should I still factor in the average 5% to 10% for management fees when looking at cashflow or because I am managing this myself should I LEAVE OUT management fees?

Maintenance, repairs, legal costs, and CapEx are more difficult to estimate however. What is the best way to go about estimating those types expenses?

Also, what am I leaving out/forgetting in what I mentioned above? I am doing my final deal analysis and want to make sure I have everything accounted for.

Here are all the "expenses" I am aware of that I need to find exact figures for:

Monthly Insurance
PMI Insurance
Mortgage Insurance
Landlord Insurance
Hazard Insurance

Monthly Property Taxes

Monthly HOA Fees (If Applicable)

Monthly Management
Management Allowance 8% of Gross Rents

Monthly Utilities (If Owner Paid)
Electric
Water
Gas
Garbage Pickup

Other Costs (Averaged Monthly)
Vacancy (7% of Gross Rents)
Advertising
Snow Removal
Landscaping
Maintenance
Office Supplies
Legal Fees
Evictions & Court Costs

Capital Expenses (Averaged Monthy)
Roofing
Furnace
A/C
Windows
Siding

Again my questions are:
1) How do I accurately estimate my maintenance & repair costs?
2) What is the best way to estimate, and how much to set aside for CapEx?
3) If I plan to manage myself, should I still factor in "management expense" of about 7% in my calculations, or can I just assume a higher cashflow?
4) How should I estimate for legal fees, court costs, advertising, etc?

@Andrew T. - I think that's what I may end up doing. I am going to still get the estimates on repairs, etc. and maybe just submit a low offer that would be profitable and see what happens. If not, wait on the right deal.