All Forum Posts by: Jaysen Medhurst

@Moshe Streicher, I like the 2nd option. Keep your cash on hand for renovations or another deal. It's usually easier to finance the purchase than the construction.

Hi @Rodney Dixon, if you don't have a track record and/or relationship with the HMLs, it's foolish to think you can go in with $0. Apologies if that sounds harsh.

Look at it from their perspective, you have nothing at stake. If things go bad you can walk away and lose nothing. They don't know you and can't be sure you won't bail at the 1st bump in the road or if another shiny ball bounces in front of you.

Just as importantly, you trying to finance 110% (40% from owner + 70% from HML). That raises a HUGE red flag. You could just take the extra 10% and skip town.

Rodney, true "no money down" deals are extremely rare. Especially, for a novice with little experience and few relationships.

Can you partner with someone who has money to invest? Say 20% of the deal and split the profits. 1/2 of a good deal is better than 100% of no deal.

What about buying the property yourself using an FHA loan and then turn it into a full investment after living there for a year or 2?

Hi @Jean-Claude Governale, this is a good question.

Cap Rates don't take financing into consideration for a few reasons:

1) Financing varies widely by property. Since property A may be financed w/ 40% down at 5% over 20 years and property B is financed w/ 30% down at 4.5% over 30 years, you can't compare them using Cash Flow alone. Cap Rate give value regardless of the terms of the financing

2) Financing varies over time. Rates and terms change over time (the last 7-8 years not withstanding). So again, Cap Rate allows you to evaluate properties and markets over time. 

As to what's more important, Cap Rate or ROI, that's a question each investor has to answer for themselves.

Finally, your example of the $400-500 cashflow property that has a Cap Rate of 2%. A lot depends on the situation. For example a duplex that CFs that much might be a good investment. A 24-unit apartment community...not really. 2% Cap Rate in a super competitive/hot market might be acceptable (though not to me) if you're investing for appreciation or have other plans for the property (e.g. taking apartments condo).

To better understand investing metrics and their limitations, I highly recommend the @Frank Gallinelli book .

Hi @Kyle Forbes, you'll need more than a walk through video. There are a lot of good sources here on BP. Look in the tools section I think BP has a whole book on estimating rehab costs.

Hi@Gallagher Wilson, the motivation for the seller is a steady income stream for the next 20-30 years (or however long the note is) and it's still backed up by real property. If you stop paying, he can foreclose and take back the property.

This provides less risk than equities and more return than bonds. On top of the tax advantages. Expect to pay a higher interest rate than you would at a bank. Run your numbers at a couple of different rates so you can pitch him a number that will work for you.

@Brian Campbell, is this a legal 5plex? Reason I ask is anything over 4 is considered a commercial property and value is based on NOI x Cap Rate. It wouldn't be appraised like a 1-4 family residential property. This will also change what kind of financing you can get.

$2185 GSR

+$100 Laundry 

-$679 Expenses (I don't see repairs, CapEx, vacancy, or property management here)

= $19,272 yearly NOI * 8% CapRate (need to confirm for your area)

$240,900 - Property Value

Thanks, @Julie Marquez, I think it's important include ROI in the understanding.

@Brittany Harrington, I wouldn't make this kind of commitment w/o the title in my name. What's your recourse if he changes his mind after you've done all this work? If he doesn't need to sell, why isn't he just doing the reno himself and making the money?

Based on your numbers above and using the 70% rule, you'd want to buy around $212k.

I don't know, this sounds fishy to me. Don't let your enthusiasm for a deal get in the way of solid decision making. 

That being said, you wrote "don't tell me I shouldn't do it, tell me the best ways to protect myself," so at a minimum:

You need a clear title.

You need an air-tight financing contract (reviewed by YOUR lawyer).

You need a great contractor to keep you at $50k

As an alternative: Would the owner be willing to partner on the flip? You run it as PM and bring in the some cash, then split the profits? They might get you around the title, equity questions.

Act now, @John Mossaad, and sell. The place is empty and that's the best time to sell. Cut your losses and move on.

My only hesitation would be if you think you can dramatically raise the rent with a new tenant.

Hi @Ryan Olejnik, good idea to run your numbers by the BP community.

I see a couple  of red flags: 1) Repairs too low, plan for ~7% ($161/mth); 2) You need to plan for CapEx, same amount ~7% ($161/mth); 3) What about lawn care/snow removal? 4) Is water included in your "building utilities?" 5) Are the garage spots included in the income numbers or are they additional income? 6) Figure 8% ($184/month) vacancy.

Due diligence on the rents. Check rentometer, Craigslist, Zillow for rents in your neighborhood.

You wrote "50% rule = $280/month" but 1/2 your rent for expenses is $1150.

I estimate expenses at ~$1407 (based on your figures and my adjustments above), which leaves NOI $893/month - $871 debt service = $22/month cashflow.

Make sense?