All Forum Posts by: John Matthews

@Jamal Pitts I think a lot of people avoid places with structural issues for that reason. It's for a buy and hold, so yes, I should be concerned about all exit strategies, but really the biggest issue is the potential of a bank not taking on a loan for the property. But at this point, I'm not locked in, as if I can't get financing (because structural issues will be too costly to repair) then the deal is nullified.

Any other thoughts?

Hey BP,

So I just got my first house under contract (woohoo!) and everything looks good. Rehab is pretty straight forward, except for one thing: there's definitely foundation issues. There's a pretty solid vertical crack in the back of house in the garage (see picture attached) and the rest of that wall seems to be crumbling a bit. I did my best to factor that into my purchase price, however the inspector ordered by the hard money lender mentioned that they really like to have a report detailing that I have that foundation issue squared away. Essentially they want to protect themselves in the event that I cannot refinance (or sell) in 12 months to pay them back because the issue isn't adequetly fixed. I guess they want someone to be liable if the work isn't done appropriately that they can go after. I had a mason and a contractor come out and look at it, and they seem to think they can fix the issue, but I don't think they'll shoulder the liability.

So, with all that said, what would you all recommend is the best, most cost effective (both short and long term) way to handle this? Getting a structural engineer out to put together a report / cost estimate? Are there any other types of people that will shoulder the liability for this type of work?

Thanks for your help!

PS. Any recommendations for a structural engineer in the Philly area are appreciated!

@Mike J. First: Where did you get the "80% of a year's rent to cover 3% of the home's cost to break even"?

Second, just to be clear, the 50% rule says that all costs (taxes, maintenance, capex, management fees, vacancy, etc) but NOT mortgage payments will equal 50% of the incoming rent. So if rent is $1000, the first $500 goes to those costs. The remainder must go to mortgage. Whatever is left is profit.

Third, does Jane own the home free and clear, or still have a mortgage on the property?

Forth, What is Jane doing with the cash if she sells the house? Putting it in the stock market? A savings account? In order to determine if it's worth selling you need to compare it with what the money would be doign elsewhere. For me, I'll compare to the average stock market return, or about 9% unadjusted for inflation, since that's where most of my money that's not in RE sits. Also for me, since it's work, even with a PM, I'll say that I need another 10% over that to make it worth my time, otherwise I'll just get another job.

Let's assume she owns the home free and clear, and that after selling it, she could get $90k. In the market she could earn about $675/month, but remember her money is pretty illiquid here as well. If she wanted to earn at least my 20% in RE, could she?

Let's propse for her home she could get $1000/mo rent so she'd be pulling in $500/mo profit. Comparing to the $90k baseline, that's a 6.7% return. If rent was $2000/mo then she's getting closer to 20% return. Let's consider another possibility.

What if she keeps her home, and does a cashout refi at 4% for 30 years of 75k, and uses that money to buy 3 other identical homes with identical rent, with a 20% downpayment on each (5k for each deal goes to acquisition costs) at identical rates and terms.

Now she's got more expenses (about $1500/mo in debt service and more money in other costs), but she's got 4 times the income.

So let's go back to the scenario where she's earning $1000/mo/door gross rent. In this scenario, she's making closer to 6% Cash on cash return + any equity that she's growing which turns out to be about $500/month or really an 11% return. What if she could rent them all at $2000/mo/door? Now she's getting over 30% for her money compared to the 9% she'd get by selling at putting it in the market.

@Anne Morales tax value (or assessment) is not the same thing as property value (not necessarily even close). You'll need to get an idea for what the ARV for the place is based on comps before you can determine if that's really a good deal. Educate yourself on ARV and how to determine it and that'll give you one side of the equation you need to determine if it's a good deal.

I'm not familiar with the area whatsoever, but if you PM me the link I can have a look at it for you and give you my two cents.

BTW @Carlos M. in order to make the "@" function work properly, do the following:

Type "@" followed by the first couple letters (3 works for me) of the persons user name (no space or quote marks) then look at the bottom of where you're typing, you should see some names appear beneath the window. Click whichever you're looking to communiate with, and it'll get added in blue. Hope that helps!

See here for how it's supposed to look: http://imgur.com/KW0n2Jd

@Ryan McElroy Welcome to BP.

It's great that you've got a goal to work towards. Here's my 2 cents:

First, you mentioned you want to transition to full time REI, what about that interests you? That would be the first question I would answer. For me, it's laying the groundwork for "passive" income so I can spend time on other entrepreneurial ventures and not be tied to my W2 income. But if you truly love REI and are still ok with an active investment, that's something to consider. Maybe that's becoming a wholesaler, then flipping once you've got cash / financing / partner deals in place.

Anyway, once you figure that out, you need to work backwards to figure out what you need. Use that goal of $25k/month and work back from there. So for example, if you want to buy and hold, then that $25k/month comes rent. Well the next thing you need before you can get a plan is when you'd like to have your goal met by. Say it's in 10 years. So let's assume you can get $150/door/month after debt service / holding costs. If so, then that means you'll need about 167 units. From there you can back your way into how accurate you want your plan to be. If you assume linear acquisition, then you'll need to acquire 17 doors a year. Linear growth probably isn't the best way to go as you'll have more money coming in to buy more properties as you grow, but you can figure out what makes the most sense to you. Maybe instead this means you need to wholesale 40 deals a year, or flip 20 houses a year - start with your first one, and work your way up, setting tangible goals along the way.

All of this depends on your current situation, how much time you have, your financial situation, your skillset, etc.

If you have no idea where to start, do some research on the main ways to invest in real estate and start from there: http://www.biggerpockets.com/real-estate-investing/strategies-niches

@Brian Yost Welcome. It's always good to see other engineers looking to get into RE. Good for you for finding an engineering gig in the city - I looked for a while, but ended up in KOP.

Also I live in Hawthorne if you ever need anything.

@Tania Jones Welcome. Where is your current property located / where are you looking to invest?

Not sure what the cost to take the Realtor exam is, but if you're already through with your classes, like @Larry Fried mentioned, it might be worth getting your license anyway. If only so you can a) search the MLS on your own, and b) deduct your RE investements against other active earnings since you could potentially quailfy as a professional investor - though I'll let those more qualified than myself get into this one.

Let me know if you ever need anything.

Welcome @Mehdi El H 

Sounds like you're ready to go. Let me know if you need anything from another new Philly investor, I'm always looking to help.

@Account Closed I wouldn't worry so much about "recommended guidelines". I'd worry about what makes sense to you. Maybe that's cashflow per door, maybe that's CoC return (thats the important thing for me), maybe it's hoping for appreciation, etc.

Assuming your goal is cashflow per door or Coc Return, run the numbers on properties at that price. Are you going to be living there? If so, maybe you can get in with as little as $14k (+soft costs), so maybe your debt service is in the ballpark of $1.6k/mo. So if you can get a 3 unit, you've got $2k coming in per month with $1.5k misc expenses + $1.7k P&I, so you're out of pocket $1.1k.

So you said rent was about $1k/mo? Is that what you're paying now? If so, you're paying $100/mo +$14k up front(or really closer to $50 if you factor in equity assuming 0 appreciation) to learn the tools of the trade. What are you doing with your money now? If it's just sitting in a savings account doing a whole lot of nothing, and you know you won't need it for a while, maybe that's not a terrible deal? Consider also that you might be doing most of the work yourself so maybe the numbers look a little better. Maybe you bring in a roommate to your unit, to add an extra $500/mo. Now you're "making" $400/mo vs renting yourself which is a not too shabby 30%+ Coc Return.