All Forum Posts by: Jonathan R McLaughlin

Good luck with the purchase!

The biggest mistake in your calcs may be 1) single families aren't valued by cap rate but by comps

 Cap Rate and return should be calculated after expenses such as vacancy, repairs, management, insurance, taxes and utilities are taken out.  You do say "net" rent so maybe you considered this? 

Does the 4K difference from 18K gross rent to net include all of this?

The cash on cash is not the only return, you have any appreciation (or depreciation potentially) as well as pay-down that goes to IRR. You may have tax savings as well depending on your situation. Also, if you keep track of your records you should be able to deduct travel and other "management" expenses.

But yes, that amount COC sounds normal for a retail-bought house (broker involved, mls, not exclusively for investment etc.). Sounds like you bought something relatively safe and low maintenance and you should expect a lower return to go with that safety.

And we have been on a pretty extended bull run (even including 08) so 10% is likely above the historical average. I think its actually 7% or something like that.

You can dispute the appraisal. I’d start with the appraiser themselves and give them a signed statement from inspectional services that it’s a 5 bedroom. Docs help cover everyone’s **** I’d also spend 50 bucks on an armoire and ask the seller to put it in the room, include a photo to go with the letter, maybe an ikea twin bed? Talking to the bank might help, too, use the same docs. Be nice, but be a pain :)

Sounds like a dogfighting mill....

@Tammy Graham Not an accountant here, though have talked lots about this with our accountant and lawyer  and other pros to make sure we get this right

There are a few bars to cross to change rental income/losses from passive into active so and its very easy to get tripped up. 

The first bar: You have to be a "real estate professional" which means you need 750 hours of real estate activity. You can tie multiple properties and activities together to meet this test, but that alone won't necessarily allow you to turn passive losses into active, it merely changes the presumption that they are passive

2nd bar:  You have to show you are actively engaged in rental activity/property management for at least 500 hours in the year. Financiing, brokering, acquisition etc. won't count towards this number.

3rd bar: Need to keep records of  time and activity to document his status 

If he meets these tests then he should be able to actively put losses against other taxable income 

Pros on here....please correct if any of this is misleading.

@Emily N. "We have looked into management companies, but unfortunately our property has a higher occupancy rate than those in the area with PM companies".

Hmm....how much higher occupancy rate and what does it actually get you after evictions, behind-in-rents and other collection issues? What do those guys know that you are still learning? 

You can do some emotional and actual math and see if being willing to carry lower occupancy can help your quality situation. Good luck. this sounds hard. 

Hi Niya,

I think your expenses are low actually, though I don't know Kentucky.  

Vacancy should be at least 8% (most banks will underwrite that way or to the historical rate). Capex is WAY low at 3%, especially with 3 roofs, systems etc. and repairs seem low as well.

Your PM rate may be high at 10% but when you add in turnover, lease commissions etc. it seems likely to be about that. One beds turn over a lot more frequently than two beds and you have refurbish money, etc.

 Legal? Collections?

@Nick Cucci just a question but why a three year lease? Was that at their instigation? Thats an awfully long time and is a bit of at least a yellow flag....

If you are going to use MLS--and you should be really familiar with offerings on it, at least to find the going asking rates--and you are looking to buy yourself I would try to look for quirks such as:

estate sales, short sales, "dependent on seller finding suitable housing", properties that have fallen through on a previous deal, some rehab work needed etc. Look offseason.

@Ray Lai is absolutely right on, but depending on the numbers, you may be able to get in with a little equity in the right market. The catch is that you need to be able to move quickly, and that this isn't easier or less time consuming than DFD, quite the contrary. You need to spend enough time so you can recognize patterns and shifts and potential opportunities when they arise. It might be a better fit right now with sleepless nights and a new baby though. 

Sometimes, hitting singles can work well enough. Good luck.

Actually, right now I don't think you have much of a problem, maybe a month or two. Usually, you have 60 days to occupy by the letter of the owner oc loan from the date of closing . If refi was January 18, an you make an offer in Sept/October, close November and can occupy as late as January completely legit with no extenuating circumstances. Also, I believe  a lot of lenders would be ok on an extension if the sellers were waiting for suitable housing, job prevented move in for a limited time but you plan to do so, etc. and you have a written statement. And maybe the seller would take a longer close for extra earnest money.

Check the paperwork, of course, and it wouldn't be perfect but you are closer to the timing working than not and lots of ways to stay on the right side of this. Intent counts for a lot.

Good luck!

um...you may be missing the forest for the trees here. "I get a free 8K towards my mortgage for being in the program"  and 0 points? take this deal immediately. Check the math of the extra half percent on less than 100K vs. 8K....not sure what the refi options are but this seems pretty good to me. 

Check out historic norms of interest rates and don't obsess over half percents.

@Nathan Godson