All Forum Posts by: Joe P.

The 1% rule has been taken completely out of context. It was an evaluation rule (possibly Brandon Turner's) that said "hey, if this property doesn't meet the rule, I'm going to exclude the property from further analysis." That's my understanding on the 1% rule.

Every property should be evaluated on specific numbers, but if you know in your area that you can't make money unless that rule is hit (or another rule) then you can use that to exclude the dogs and perform further analysis.

For instance, I invest in a town in NJ. I know that unless its a 2% rule property, I probably won't make money. Why? Taxes mainly, but also the utilities can be expensive. So, yes, if its a $1000 per month rental, I need to pick it up at $50,000 to meet my return needs. Some people may read that and think that's crazy, but in this particular town, its required.
 

Hi Kevin. If you are house-hacking you might want to look at an FHA loan requiring 3.5% down plus closing costs. If you're buying conventional, you could go as low as 5% down...the more money you put down, the less your payments will be.

A good rule of thumb is to have 6 months in reserves for what's going to go wrong. If you don't have the cash to do it, start by strengthening your personal finances, reduce debts, and save money for the eventual purchase. Lenders are leery right now given the sudden economy troubles -- good reserves, low debt/low debt-to-income ratio, high credit scores, etc., all strengthen your financial position going into investing.

That's the beauty of BRRRR, in that there is a built in exit strategy if needed.

The "trick", like most things, is to buy a property that is severely undervalued. You want to be able to create the value by restoring the home to at or near its ARV.

I'm under contract on a BRRRR (on hiatus due to corona) where the purchase price is about 35% of ARV. That purchase price, plus the rehab, should be about 70% of ARV. When I refinance -- likely at 70% ARV, I'll have a cash-flowing property (~$150 per month, with very conservative estimates if anyone here is familiar with my posts) and a net-even money after I refinance in 7 months from purchase (6 months to refi, plus a month to close).

A lot of people may say hey -- right now, there's no inventory, and prices are too high. Agreed. You've got to hit the pavement to find the value, either through discussing with wholesalers or working off of aged MLS properties that might be ripe for a low-ball offer. Point is, you need enough room between ARV and purchase price + repair to make your money and cash flow. Unless the property is in a rapidly appreciating area, I don't think I would buy a house that would end up with negative cash flow after refinancing, but that's just me. I'm extremely conservative with my investments and I have a desire to pad my holdings each year, not become the next real estate baron. So my risk tolerance is relatively low compared to some of my peers - decide where you want to be and then start executing.

Wait...maybe we're approaching this wrong, Nathan -- she's telling all of her social media friends not to rent from you. Maybe she's doing you a favor by excluding this particular social circle? :D 

Unless your business is impacted, I wouldn't respond. I firmly believe in this day and age, businesses provide great service, but sometimes the outcome doesn't satisfy the receiving party -- you can't be everything to everybody.

If you have otherwise fantastic reviews online, I wouldn't let one bring you down. If you have a ton of negative reviews, you might want to reconsider your practices. One person won't speak for many, but many can speak about one.

Great points already -- condos typically appreciate better, especially in urban/booming areas, because they're typically very nice, are well-maintained, and builders pack those units in where they expect more affluent population increase. "2 Years to a Million in Real Estate" by Matthew Martinez was one of the first books I read on RE investing, and if I recall correctly, his first unit was originally his primary that he refinanced/HELOC twice to get to a million. It can be a great buy for a rapidly appreciating area, because of the equity you may gain in short amount of time.

As others have said though, HOA's and condo fees can be absolute KILLERS of cash flow and tenancy. Typically bylaws change and HOA fees never, ever, ever (maybe not ever, but I've yet to see an example) go down. It's two items you have very little control over (unless you're on the board) and typically work against investors.

A deal today, also, may not be a deal tomorrow. HOA's and taxes could go up and nix any cash flow you have in a deal. Unless you're buying at a supreme discount, I don't see how an investor makes money in this market. Recession, growth, mediocre economies, all of these need the same entry points -- a deal. Unless you've got good cash flow and an opportunity to grow in appreciation on a property, I'd personally stay away.

For a real life example of a HOA-gone-rogue, right now "theyoungretireeby33" on Instagram (I know, Instagram is for millennials, but it can be a great way to disseminate information about fellow investors quickly) is going through it right now with his HOA on one of his STR's during quarantine. Basically the gist is the HOA bylaws were written by a lawyer who was some combination of drunk, high, and uneducated, so there is room for interpretation on the rules written, that of course they are not siding with him on, costing him dollars during this turbulent time. While this is an extreme time for all of us, it goes without saying that they can typically control a lot when it comes to your property and charge you money to do it.

Going back to my original point -- personally, I'm staying away from condos unless the deal is unreal for me, and I'm re-evaluating every year to ensure profitability when the HOA sends its FY dues notification.

Thanks David -- honestly its not a lot to look at if you do it often. But the numbers are vital.

Have you confirmed the P&I number? 60k at 3.5% comes out to $269.

Have you walked through the property currently to see how the unit looks? Rent rolls, promises from the seller, et al, should all be taken with a grain of salt.

Hi @Tim H., congrats! This was a sale of the duplex at 1.73 mil? And you and your investors were all-in for just over 500k? If so, wow, great work.

Hi @David Bowles, looks like you're ready to strike on your first deal...if so, congrats. While I don't know the true number, I'd venture to say that 80% of people here on BP don't get this far. They post, they watch, they listen, but push never comes to shove. So the fact that you're close is a good thing.

Now, lets ask the tough questions.

1. I don't see anything that tells me about your cash flow on this deal. 15k equity doesn't mean anything to me if I'm losing money every month. 15k equity doesn't put food on the table, at least not initially. Equity represents an exit for me, although you absolutely should make your money when you buy.

2. If you believe ARV is 60k (you're buying at 75%) but the property recently went through a full house rehab...where's the ARV coming from? It either needs repairs/enhancements to get to 100% ARV, or its at ARV.

3. Remember that buyers and sellers have different and competing desires. Of COURSE this guy wants to sell. Of COURSE he wants to finance you. This is a blowout deal for him, likely dumping an underperforming/underwhelming property for cash and then financing you so HE makes his money. To that end, you need to have a full analysis of this values of this property -- rent, minus all expenses (including set-asides for problems). I don't believe we've seen that and if you haven't done that, then you are making a ton of assumptions.

4. I think I'd rather have the property delivered vacant -- tenants that are not on time will be a headache for you, especially as a new investor. What makes you think this'll get better during a transition from seller to you? I'd have it delivered vacant, and for 20k less.

Without knowing much -- I'd say this deal is underwhelming at best. You may have an analysis that shows otherwise, but there's too many things here that (this still novice, but learning) investor would walk away from.

I think in the bathroom gut you forgot to rebuild it. 😂

Add another 8k to 15k depending on design.