All Forum Posts by: Austin Fruechting

You do what you need to do with the time you have. Learn to be efficient as possible in all things. Set up systems for your life and tasks that can help you get them done quickly and efficiently. It may take some extra time to figure out the systems to be efficient, but will save a lot of time in the future.

Interesting thread... another thing to consider in calculations would be the time value of money. Adjust higher end LA properties to a higher rental increase and lower expense ratio as David Faulkner mentioned. It would most likely win over the long run. But what is the IRR of having the higher returns, but not most of it achieved later in the timeline vs the lower overall, but higher beginning returns of the cash-flow investment.

Thanks for taking the time to answer David. Great info and insight and I agree with a lot of what you say.  To expound a bit more for others readers (and correct/add to this if needed)... 

The biggest point of caution investors need to look out for in the lower end markets for cash flow is the capital expenditure plan. If that's not properly accounted for, and you are buying something around the 1%-1.25% rent/purchase ratio, it's going to be near impossible to make money on the long haul with the lower markets. If you're buying something turnkey near the 1-1.25% ratio, you may want to consider having that 5-7 year exit strategy as David mentioned. Otherwise when the CapEx stuff hits again, you may end up with no cash flow. Yes, you could refinance at that time and pull out equity to pay for it, but you shouldn't have to do that with any property. If that's what it requires, then you have a pretty bad investment as compared to others.

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So, make sure to have a plan for that stuff.  Make sure to run your numbers where you are accounting for ALL capex and still making money.  If your rent/purchase ratio is in the 1.5-2% range you'll probably be ok. I have a portfolio that averages $715 per unit across 28 units (20 properties). I purchased that portfolio, $19,380 per month gross rents, at a 1.95% ratio.  Last year we did 6 full HVAC systems (should replace 1-1.5 a year based on a 20+ year life cycle), and we did one complete gut remodel of a 3/2 last year.  We did that all out of cash flow and we were still cash flowed positive for those 12 months decently. 

For reference, here's what our cash flow would have looked like at different ratios and 20% down, 4.5% interest, 20 yr term. 

1.95%, $24,300, 12.2% cash on cash return

1.75%, $17,400, 7.9% cash on cash return

1.5%, $6,200, 2.4% cash on cash return

1.25%, -$9,504

1%, -$33,044

You can see in that 1-1.25% range you stand to lose quite a bit when you have to take care of CapEx. Yes Capex was a little higher in that year, but not by some crazy amount. Yes, I had an extra 4.5 HVAC units more than a typical year will have. The gut remodel was more extensive and costly than the others would be, but I didn't have to do any roofs which will average to one every 1.5 years.

Know your numbers, make sure you're accounting for ALL capex, and have a plan.  

So many capital letters!

Amazing work in just two years!!! Well done @Dustin Lavender !

Yes it needs a closet and a point of egress to be considered a bedroom, and more bedrooms typically equal higher appraised value.  Otherwise it's just listed as a 2 bed with a bonus room.  If people have their search criteria for a 3 bed they won't see yours.  I would put a small closet in the room for it to count.  It won't cost much to slap up two walls in a corner of the room with a door and a closet rod. 

Yes you want to have positive cash flow. The difference to take into account is if you have an extra $20k to put into another investment.  If you're getting 10-20% cash on cash return with a rental property, but only paying 4-5% on a mortgage, you come out ahead by leveraging more.  $20k financed over 20 years is only an additional ~$125 a month at 4.5%, and investing that $20k at 15% return into another property gets you an additional $250 per month.  So you get an additional $125 every month for every $20k leveraged at those rates, which would be an extra $625 for every $100k financed.  That's the power of leverage.  

I believe you could post in the "Local Real Estate Forums" for contractor recommendations. 

Look around at other rentals in the area, see what level of finishes would get you the best bang for the buck (such as is there a big difference in rents if you do solid countertops/stainless appliances/tile floors/etc or is there a minimal difference between that and a good looking laminate/white or black appliances/vinyl floors/etc). If there's a significant difference in the rent, or if they all have the higher end, it may make sense to do it higher end.  If there's only a small difference in rent, or if no one is doing the high end, it would make sense to do the cheaper finishes. When you know that you could visit it with a contractor and get an idea of costs based on the finishes. 

You'll also want to know the approximate value of it after the work is done.  With purchase and work you'd be about $110k in.  If it would have a market value of $115-20k, it would probably be better to just buy something already done.  If you have a couple overages you might end up at the same costs.  If it would have a market value of $145k then go for it.  Afterward you could refinance it for 70-80% (depending on the bank) of the value and get most/all/more than your cash into it and do it again. 

The bubble will pop someday... wether that's a month, a year, or ten years I can't say.  I'll just keep buying the great deals when they come along.  A great deal at the peak is most likely still an ok deal with a correction.  

I'm not an agent, but will be driving by that area either tomorrow or Tuesday.  Sent you a message.