All Forum Posts by: Joshua Nudell

Hi Erik,

I would say that this is worth doing more research on, but there are some things to consider:

Zillow is not a good source for comparables.  Talk to a realtor that is familiar with the neighborhood and ask for comps for similar properties.

The listing states that the property is AS-IS, which means you get to inherit all of the problems it comes with.  It could require minor repairs, but most likely will require a lot of work instead.  If you're going to end up putting 50K - 60K into rehab, then it's definitely not a good deal.  I think the margin might be too thin on this one, unless you can get it inspected and estimated and put in a good low offer that gives you a cushion.

If you're looking for a first time flip, I would recommend doing some legwork and either drive-for-dollars or put together a mailing list. You might have better success finding a deal that way than looking on MLS.

Once something hits MLS, you're competing with everyone else out there, including end buyers who are looking to live in a house after it's fixed up.

-Joshua

@Ryan S.  I just posted the details about my first buy & hold deal on BP.  Take a look at the numbers and let me know what you think.

-Joshua

Hello BP community,

I would like to get some opinions on a buy & hold property I've bought.

I just closed on my first buy and hold rental property on Friday. Here are the numbers and estimates so far:

Property Type: Two-family, side by side, 3 bed / 1 bath each (vacant)
Location: Honesdale, PA

Ask Price: $77,000
Buy Price: $70,000
Closing Costs: $3,341.45
Estimated renovation costs: $25,000
ARV: $120,000
Taxes: $1,840
Water: $1,200
Sewer: $1,140
Maintenance: $500
Insurance: $1,611
Miscellaneous: $600
Rent: $750 / $900 (tenants pay for gas & electric)

My plan is to put in new bathrooms & kitchens and clean up the rest of the areas. Currently the attic space is split between the two units, but I plan to close it off from one side, and make it a bonus room / bedroom for the other unit (hence the higher rent for that one).

Once completed and rented, I will do a cash-out refi to obtain my optimal ROI numbers (I paid all cash for the house and will probably use a home equity line of credit to do the renovations). On $120,000 @ 70% LTV for an investment property I can finance $84,000 (unless someone can point me to a lender that will do 80% LTV for a 30-year fixed rate cash-out refi on an investment property).

Therefore;
Investment: $73,341.45 + $25,000 - $84,000 = $14,341.45
Income: $1650 x 12 = $19,800
Expenses: $6,891
Mortgage: $84,000 @ 4.875% = $444.53 / mo = $5334.36 / year
Cash flow: $19,800 - $6,891 - $5334.36 = $7574.65
ROI = Cash flow / Investment = $7574.65 / $14,341.45 = 52.81%

Now obviously this might change depending upon what happens, but I feel I've given myself a comfortable cushion to make "newbie" mistakes on this deal. If my ROI comes out at anything over 30% I will have met my goal for this property.

Is there anything glaring that I've miscalculated or left out?  Opinions?

Thanks all!

-Joshua

@Steve Babiak I believe that you are mistaken about the information @Jon Holdman provided. The numerator does NOT stay the same in this case, but it decreases at a lesser rate than the denominator when you use leverage (financing part of the deal as opposed to putting all cash up front). Simple numbers: $100K property brings in $24K rents annaully 50% expenses means $12K annual cash flow. ROI = 12,000 / 100,000 or 12%. In that case I believe Jon is saying CAP rate and ROI would be the same. Now let's say you finance 80%. You're in for $20K instead of $100K, but your cash flow is less as well because you're paying $500 per month for money, annual cash flow is now $6K instead of $12K, but your invested money is much less: ROI = 6,000 / 20,000 or 30%. It's going to be a little less because I didn't include closing costs and other considerations, but it's just to show that leverage (borrowing and putting less up front) increases your ROI if the deals make sense.

-Joshua

@Jill Drebing Following up with you to see if you got the information you needed to make a sound decision.  I agree with @Nilesh Makhija that you should leave the reserves alone and use leveraging to complete the deal you're looking at.

@Ryan S. It sounds like you're in need of some better tools to give you the answers you're looking for.  It also sounds like you're trying to move quickly.  I would recommend against that because this is your first deal.  From the little information that you're providing it seems like this particular property does not meed a basic 50/50 rule (from what I've been reading, your expenses NOT including any cost of money should be 50% or less than the rental income).  Right there that should make you sit back and reconsider.

I found a useful tool online that was helpful for me in making basic decisions on whether to move forward on a property or not: http://www.rentalpropertyreporter.com/resource-cen....

This tool will help you analyze your cash flow and your return on money, and it has different levels of detail that you can customize for your needs.

In addition, it seems like you're going to be paying for this property all cash and not financing, which means as @Jean Bolger said you're only going to be making 6% on your money, which is horrible for a rental property in my opinion.  It looks better if you leverage instead (use the tool provided above to play with different financing scenarios).

Personally I set a return on investment goal of over 30% for my first rental property (which I'm working on now), so that if there are any major gotchas or expenses I didn't figure because it's my first deal, I could absorb that and still make a profit.  And as a matter of fact, I DID make a miscalculation with regards to city sewer fees (they were monthly @ $45 per apartment for 2 apartments instead of quarterly, which is an additional $75 per month I didn't figure but it's ok because I picked a property that was going to give me 45% - 50% return on my investment after financing.

BiggerPockets also has a deal analyzer that you can use (limited to 5 uses I think without paying for a membership) under the Analyze tab above.

Also, I would not be concerned about appreciation on a rental if you're looking strictly at cash flow.  If you can find something that appreciates, that's an added bonus but should not be the deciding factor in a buy and hold decision (although it can be a contributing factor).

I would like however to hear more about your flip deals that you successfully completed!  That sounds exciting!

@Ryan S. I think you would need to provide some more information to let people determine if it's a good deal or not. What is the purchase price? What is your out-of-pocket to get that $200 - $300 cash flow? Which is it, $200 or $300? All of these will help determine what your ROI is. How are you calculating that $200 - $300 (did you include all operating expenses such as insurance, interest, taxes, vacancy rates, maintenance, property management, etc)?

@Ryan Billingsley  Awesome work!  I'm excited for you and look forward to hearing how the deal works out.

I would also like to know what resources you used to get your mailing list?  I've read a few posts and people have mentioned various listing sources.  What criteria did you search for in your desired target area?

Good luck closing this one out!

-Joshua

 Steven,

Doesn't that apply to monthly rental rates?  I believe that she was talking about $1,000 - $1,200 per WEEK during prime season, which would be more along the lines of $4,000 - $4,800 per MONTH (or 2%+).  HOWEVER, it's a seasonal rental, so I would think that there would need to be some more research done.

Some questions; What is the rental like during off-season times? What is the vacancy rate during prime season (will it sell out all summer, every year)? I would come up with an average (trying to be conservative) of the monthly rental rate to see if you're close to the 1% rule or not.

As for financing, it seems like you have lots of options with your existing rental properties if you wanted to a cash-out refi to use for the down payment on the vacation home and then get a fixed rate 30-year on it.  You would probably only need to pull money out of one of your rentals to come up with a down payment for the new one (20% would be 40K - 45K).  If time is a factor, you could do a equity line of credit against one of the rental properties until you could close on a 30-year fixed product for one of them.  The equity line of credit can probably be established pretty quickly.  Check with your local lenders to see what their current terms are.

I'm not a landlord (yet), but from how this reads, it sounds like these people are living check to check and if one loses their income they will not be able to afford all of their bills.  Is that correct?  I might verify employment status for both the husband and the wife, just to be on the safe side.  

If their credit scores are good, they likely know how to manage their budgets and money.

As for the storage space, maybe they're bringing along all of the items from their house that they previously owned?