All Forum Posts by: Joe P.

Marek -- could you describe the grant itself you are planning to get? If we know which one and can read up on the rules, we can answer your questions.

Mike -- well you have 12 properties, so I'm assuming you're doing something right. We're just different investors -- I want to put my money to work to pay me positively per month. If my properties appreciate, that's an added bonus, but I invest for cash flow. I don't have properties in Philly (at the moment) because they are, as you said, an issue for monthly return.

This seems like a big investment for very low return at a peak market. I am concerned for you as the price you are paying is peak market, market rate (assuming), with only $1500 going back to you. You might do all those repairs yourself, but that still costs time and materials, and like I said, I think its a great deal for your seller. I wish I was them right now -- I am selling at a pre-corona price, peak-market, and getting out of a property that probably did well for me.

Proceed as you'd like -- you've asked for feedback, and that's my feedback. If I can't make money in a market, then I'm not going to invest in that market.

Mike -- I urge you to read up on any real estate rental book. I like Brandon Turner's "The Book on Rental Property Investment" because I believe he has a straightforward way of explaining things and breaking down the keys on investment and management.

The biggest issue with your deal is, it isn't a deal. You think it is because you took taxes, water, insurance, a mortgage, and then see what kind of numbers would come out. You see a positive number and think...hey, this is a deal.

Here are the many, many problems I see before you even give us more details -- and I've shown this visually on the attached pictures.  First, lets look at this from the numbers you provided:

• You don't hit the 1% rule (monthly rent / purchase price). This isn't the be all/end all, but I avoid properties that don't hit it, unless something tells me its a great property for long term projections and it'll be worth not having good cash flow.
• I took your numbers and input into my spreadsheet (you should confirm the taxes/insurance actuals). Putting them in my spreadsheet, (you think, but it won't be...) your cash flow is about 6.5% -- not great, but not horrible, especially if you are in it for appreciation. You'll get your money back in just over 15 years (it'll be way longer than that, stick with me).
• Notice all my conditional items at the bottom are false except for positive cash flow. These are the conditions I use when evaluating a property -- whats my cash return, what's my cap rate, does it hit 1% rule, will I get my money back before my balls hit the floor, etc. And you aren't there on any of them with the numbers you provided.

Now, here's your dose of reality, @Mike A. -- and I think I'm going to save your financial life right now. You have no idea how to properly evaluate a property for profitability. You will lose your shirt on this deal. At this point, you're probably thinking I am a jerk, but I'm telling you, this property is going to be a black hole of lost income and I don't even know a thing about the property itself. Why? You haven't accounted for ANY other expenses -- not a single one! Even if this house is brand new you will still encounter issues. You will still encounter vacancy. You need someone to manage this property for you (or pay yourself for your time). You will have other costs like paying the city for registrations, inspections, licenses, etc. You accounted $100 per month for water -- which I think is incredibly low -- but nonetheless this is also on your plate. These expenses cost money and if you aren't financially prepared you will be sucked in.

Here's the real sheet with the numbers I use when evaluating a property:

Congrats my friend -- you are LOSING $7,000 a year on this property. You might think this is extreme, but it probably isn't. Most properties early on will typically need about 10-15k in stabilization monies to fix deferred maintenance and CAPEX, and you have vacancy walking in you want to prepare for. Houses cost money. The real estate investment vehicle itself is wildly different than the stock market -- you don't put your money in, close your eyes for 15 years, and hopefully make 50% on your deal and sell your stocks. Its an active, breathing lifeform that needs interaction, management, maintenance, et al.

Ok, lets try a different model. Lets say you come back and say, "Joe, there isn't a thing wrong with this property. I'm going to manage it myself and not pay myself (you should, but that's besides the point), everything is brand new, I think you are putting too much aside for maintenance, and while a couple of units are vacant now, I think our vacancy will only be about 3% per year because demand for rentals is so high. So -- I removed the PM costs, dropped maintenance and CAPEX to 5% each (a catastrophically low number, but better than nothing)

In this bare bones model, you'll make about 3% per year. You could put 200k in a high yield savings account (saw something yesterday on TV that was FDIC insured with 2.5% - 3% annual return) and basically end up in the same place with cash return. This model, depending on your age -- your kids might see payoff point, not you.

So, basically, this deal is garbage. It looks fine to you on paper but you've accounted for nothing that will happen when rubber meets the road. Since you haven't accounted for those items, it tells me you either don't know what they are, or haven't thought through them. Do yourself a favor and put the 200k back in your pocket until you have a better grasp of what it'll take to invest in real estate. I'm sorry to be so rude, but I want to make sure this message gets through to you -- unless you are investing for long term appreciation (a stupid idea, because you're buying at a peak market heading into a very likely recession) this will cost you money.

TL;dr version:

• You make money when you buy in real estate. The only person making money here is your seller, who's selling at a peak market, at the market price, and will cash out in spades.
• You haven't accounted for basic property expenses, and therefore, will lose money.

I hope this is helpful -- if I were you, I would use this extra diligence period to get out of this property, somehow. And if someone thinks my numbers/evaluation are wrong, let them talk you out of it. But if I had 200k in my pocket, and this property came across my desk, as per my own investing criteria, I'm not considering this property as a viable investment. 

What are the projected rents on the other units?

What are the annual taxes?

Are you financing this deal or paying cash? What is your total PITI?

What are your set aside numbers for maintenance, CAPEX, etc.?

What you've provided is a sliver of information...we will need a ton more to help to analyze the deal from a numbers perspective.

Agreed with Eric, you need to consult a lawyer. These are tricky waters to navigate to begin with, add a worldwide pandemic with national and local impacts...you want someone who knows what they are doing advising you.

@Yuriy Skripnichenko I agree, perhaps my point was mistook -- I think we can work with tenants in these very unfortunate and unprecedented times. I'd rather have half a payment in 15 days, half a payment in 30, and have the remainder paid over 2 months, for example, versus tossing someone onto the streets (garnering an unsavory reputation) and then trying to fill a vacancy with a smaller tenant pool.

There is a difference between a person having no control over a pandemic and having their primary source of income shut down for 2 weeks, and a deadbeat trying to take advantage of the system. Every situation is different and I'm fairly certain most of our leases wouldn't highlight this situation.

Also consider the repercussions of being in front of a judge in 90 days because you evicted someone who lost their income due to a pandemic. I highly doubt they will rule in your favor, especially if the person returned to work and offered to remedy the situation (fairly for both parties) over a reasonable period of time. Then you lose an eviction case, have a hostile tenant, and still have unpaid rent.

Of course my heart sides with your view -- I'm not subsidizing this pandemic out of my bank account. But my head, thinking through how this will play out both for me and others, tells me a softer approach will be needed.

The same. I think we need to be cognizant of folks who lose their income -- we shouldn't complicate matters by tossing people onto the streets because they have to temporarily stop working and may not be salaried. If they've been good tenants to this point, then work with them. I think that approach will pay off long after Coronas is off the street.

I just find it strange that its been on the market for a year with no takers. At 105k and 37k annual rent, I mean, that's a hell of a deal. Something just doesn't seem right about this deal. Too good to be true.

You should do your due diligence to determine if that's the case, because if the rent is accurate and there aren't any major problems, then kudos, you found a great cash cow.

So this quadplex is listed at 105k, has a rental income of 37k a year, and no one has picked it up yet? That tells me something very strange.

Lets assume everything is kosher on the property and when its all fixed up, its a cash cow.

First thing I would do is check on the repairs needed. You put down 20% CAPEX, which sounds great, but you'll blow through that in the first month. Rather put together a repair budget for everything needing to be fixed on day one and set it aside. This is part of your cash-in/acquisition costs and I would add 5-10% contingency on top of it for anything not expected. Now you have a fair market offer (purchase price+repairs = ARV).

From there, I like 10% CAPEX, 10% maintenance, at least one month vacancy (sounds like $3100 a month?), 10% for management (trust me, add it in. You live 2 hours away, you'll want a manager). Don't forget utilities (is water not covered by landlord?), city costs, garbage fees, any advertising costs, etc.

Another thing to consider is this is an investment property, so expect to put in 25%, have a ~5% interest rate, and pay closing costs. In other words, there is no chance your monthly mortgage payment is $329. A traditional lender probably won't even do a mortgage for less than 75,000, I think that's typically their line. So if you offer 80, and are not paying cash, you won't be able to get a traditional loan.

You're correct to assume extreme CAPEX costs but 6k per year will run out very, very quickly. If you can't afford to have 20k-30k in a true "rehab" budget for this, I think you'll find you are fronting a high CAPEX bill up front with no/little income coming in, and that can be a major strain if you aren't expecting it.

For a standard cash out refi (6 months seasoning plus 1 month to close, 70% LTV) I plan on using Greentree Mortgage (Dom Postorivo) -- he has helped me in the past with saving my duplex deal and we talk shop often. I can pass along his contact information if needed.

Jay Hendricks on BP has touted Visio Lending as well; I just called them (for my own benefit) for my BRRRR just to compare numbers. For qualified investors it sounds like (and you should verify) they could do a 30 day seasoning, point buydown, 70% LTV. Good option if you need to cash out quicker.

Definitely hearing if folks have good options combining a higher LTV, lower rate, and fairer seasoning requirements...