All Forum Posts by: Lucas Mills

Originally posted by @Edmund Ricker:

@Lucas Mills

My first advice would be to attend your local REIA and network with other investors.

There are other avenues of REI that you could look at that are completely passive. You could consider being a private lender. You loan your money to other RE investors who need short term cash to fund their deals. This can be done with retirement and/or non-retirement funds. It would take a while to get to the point where it is going to generate 3k per month, but it is possible.

If you are pre retirement age, then you wouldn't want to invest with the intention of using the earnings to fund current living expenses.

There are many avenues and it may take a combination of different ones to reach your goals.

You could also consider partnering with one or more other people so that you are not coming up with all of your own money to fund your deals.

Good luck on your journey!  Hope this helps.

Ed

 Hi Ed -

Thanks for the input. As to what you said here:

"If you are pre retirement age, then you wouldn't want to invest with the intention of using the earnings to fund current living expenses."

Are you referring to being a private lender, investing in real estate, or investing in general? I thought that one of the major drives of people who are investing in real estate is to achieve "financial freedom" wherein they are generating enough income on a monthly basis that they technically would not have to work if not desired (save for perhaps a few hours a week to keep the wheels turning) - or am I misunderstanding you here?

I have to say that is my primary motivation. I would, in ~6 years, be able to get to the point where I own multiple properties that are cash flowing ~3k/month combined. That doesn't mean that I will necessarily quit my current job and just "do nothing" once that point is reached. And of course I would not stop investing in retirement at that point, either.

I'm in the very early stages of educating myself as it relates to REI, but I've started thinking about what kind of path I want to follow because I believe it is important to have a goal, or at least a path, in mind.

That said, my short-to-mid term goal is to achieve 3k/month in passive income within the next 6 years. When I say passive, I mean as passive as possible.

I have considered multiple real estate strategies and I gravitate towards renting, because it seems to provide the lowest potential time investment after the systems are in place.

However, in my market, it seems like I am doing well to achieve $100/month in cash flow after all other expenses have been accounted for. Here's an example of a recent analysis that I did. Granted, I am still extremely new at analyses so there may be some inaccuracies, however, I am trying to be as conservative as reasonably possible (i.e., perhaps I am allocating too much to CapEx each month?).

Ideally, I would find a halfway decent deal on a multifamily so that I could house hack. That would, presumably, free me of a monthly rent payment and also, hopefully, provide a slight positive cash flow on top. To me, this seems to be the most powerful way that a beginner can start because of the fact that multiple units are being purchased at once for a single, low down payment with FHA, thus, more cash flow power (as opposed to buying a SFR).

Unfortunately, multi families seem to be hard to come by in my market. There are a ton of SFR, but, as stated earlier, I think I would be doing well to cash flow $100-$200 each month after all expenses are paid. So why not just get a ton of SFR? Well, I am limited by cash reserves and the ability to pony up 15-20k as a down payment on an ongoing basis. And let's say I drop 20k on a house that generates only $100 cash flow each month; it will probably be at least another 6 months to a year before I'm able to amass this amount again from working my day job. In the meantime, I'm only (hopefully) getting an additional 100 bucks each month. While this is at least something, I just want to make sure that I'm maximizing my current cash reserves before exhausting it on a single option which provides a low amount of cash flow.

So I'm just trying to work through all of this and determine what the best course of action is with respect to making progress at a reasonable pace in my market. Thoughts?

Originally posted by @John Leavelle:

@Lucas Mills

Your numbers/ratios are better.  However, you are still projecting to pay List price.  That being said, with the House Hacking strategy, make sure the property will Cash Flow without you living there.  Negative Cash Flow during the time you live there is a normal result of the strategy.  Once you move out and possibly Refinance it must be able to Cash Flow.

A problem you may have with the SFH is there may be a minimum FHA loan amount. It is a complicated calculation. Check with your lender.

Hi John -

Yes, I was projecting to pay list price as a very conservative scenario. Arbitrarily speaking, I might try to get that property for 5-10k less than they're asking secondary to potential extensive repairs that may need to be done in order for it to make sense with the numbers. That said, I feel like I'd rather avoid this situation for my first foray into REI (an extensive rehab project) and instead get something a little nicer that doesn't require the knowledge and skills required to get something like this SFR to a rentable state (ceiling looks bad in places, walls look bad, etc.). Or maybe this doesn't look like an extensive rehab job - I really have no idea.

I just know that I've been warned to not spend too little on houses because what you make in cash flow you lose in vacancy, tenant issues, etc. I don't want to put myself in that situation.

Edit: Just saw your second reply. Yeah, that's what I was thinking. I think I need to be closer to the 100k mark in my area for the kind of property I want, but even then I'm somewhat concerned because I've seen nicer places with somewhat similar rent rates ($600 or so is fairly average here, for apartments much less dated than this), so I'm concerned about how the rent scales with the cost.

Originally posted by @James C.:

Lucas, 

At >5 you loose FHA, but why be married to that... find an investment partner to do the deal. If it makes sense financially, then someone will help. Yes, finding a partner is easier said than done, but if you want something bad enough.... you'll find a way.

The SFR looks like a better deal than the 4plex. Of course, it's a small house... but it works as a rental, and if that $350 is a good number, it's better than the OO 4plex at some 900+. So you could OO it for say 12-18 months while looking for a better deal, then rent it and take the ~$200/mo cash flow and it's your first investment. Yes you can take the FHA loan on it, OO for 12 months, then move to a new place (Just double check your loan docs).

About out of state: It doesn't have to be turnkey, but you should have a network in place so you can check and balance whomever is managing your assets. BiggerPockets is great for finding a network to help at that. The same rules apply all over in real estate, it's just doing it at a distance requires better processes, procedures and checking, since you're not there. 

If you are going out of area (OOA), that you are checking on the areas you are thinking about. I can show you good looking buildings, tell you that they cash flow at 14%-18%, show you real numbers etc., etc., etc.. The kicker is, if you went in, you wouldn't come out in one piece. OOA can be great for cash flow, but the same rules apply as where you are. You should have your criteria set in your business plan, so you know exactly what you are looking for, that makes those decisions easier.

Hope that helps!

Jim

Thanks Jim.

Yes, that does help. At least for my first investment, I'm 99% sure that I want to do it locally and learn some of those processes here in my area first.

When you say that I could "OO it for say 12-18 months while looking for a better deal", what does OO mean in this context?

If I'm going to look for an investment partner then it might make sense to consider higher income areas where I would, hopefully, have less headaches from tenant issues, vacancy, etc. That SFR is not in a warzone but it is in a somewhat lower income area. I wouldn't personally worry about walking up and down the street (at least in the daytime), but it does look like a bit of a rough area to me. I drove by today just to check it out in person.

I'm not married to the FHA, necessarily. I was considering homes like this SFA with which I could afford a 20% down payment thus avoiding the PMI. However, anything too far beyond that is out of my reach in the current time frame, unless I get an investor.

Additionally, it looks like it may be in need of some repairs/rehab. Here is the link to the listing, check out the interior photos if you have time:  http://www.realtor.com/realestateandhomes-detail/1624-N-Rogers-Ave_Springfield_MO_65803_M87605-55293

Thank you for the insight. I went ahead and joined so that I could start using the calc to its fullest extent, as well as have access to more educational tools.

Hi Ali Boone - I think you're right about not trying to live on the property, but as others have said, it just depends. Negative cash flow might not inherently be bad if I'm still netting more than I would be renting out the other units and not living at my former location (right?). Also, what you say you buy out-of-state, are you meaning turnkey? Any resources you might recommend to educate myself so I don't get a bad deal, or so the same rules that apply to what I'm looking for locally also apply to turnkey? Can you give me an example of what kind of passive monthly income one could expect from a 100-150k turnkey investment in the Midwest?

@John Leavelle

@James C.

@John LeavelleWhat do you think of this deal?

It's a SFR, so the cash flow is a bit lower. But, it's there. Even after the 50% rule and accounting for 5k in repairs upfront (kind of an arbitrary number, I admit). Is there anything I'm not accounting for or are these the deals I should be building up and, over time, increasing my passive income with?

Originally posted by @James C.:

Lucas,

I find it RARE to find properties that actually cash flow at this stage in the cycle in certain markets. Find out what renters are renting, if it's SFR, then buy those, if it's MH, buy those. At the end of the day, the numbers are the numbers, you can't force the market, only flow with it. If you can't cash flow in your market, find another one.

If you are trying to house hack, then you might end up putting in more than $0 to make it work. Sometimes, you have to make your own deals (Farming, wholesalers, yellow letters, networking etc.) to get the numbers to work. It ain't easy, otherwise everyone would be doing it. To top it all off, with "easy money" all around, the number of "STUPID!" deals increases exponentially. 

The definition of the "right deal" is situation dependent. I've seen lots of folks here talking about CA, DFW, Boston, MA and other "Hot" markets. IMHO, "Hot" markets are a great way to get burned. Those here who have been through more than one cycle have some experience there.

Housing is a necessity. If I wasn't able to move, I would calculate the cost of my housing choices. For example, the 4 unit, although it doesn't "cash flow" the way we would like it to, may be the best of all the options. Maybe you can find a 5 unit, and "decommission" one of the units, so you can get cheaper residential financing, and live in one of the 4, until you can occupy the 5th unit. If your SFR purchase option is <$952, then maybe that is the way to go. Is rent cost less than the after tax value of owning (probably not, unless it's in mom and dad's basement)? You won't know until you run the numbers.

Another option, invest in an area that has better returns, and use that to offset your housing costs, if you can't move. Remember, cash is fungible, that's what makes it great!

Talk to some lenders, friends etc. find out how you might need to put down for a >4 unit if you were going to occupy? They might not like it, but they might. Years ago, I was offered (and stupidly rejected) a 15 unit building by my HML, and THEY suggested I move into the top floor unit.

The point of all this: think creatively, think outside the box, examine your entire life from the "Lucas INC." point of view. You might be surprised what you come up with.

Hope this helps, or at least some food for thought.

Good Luck!

Jim

Thanks, Jim.

What might moving into a > 5 unit property do for me? At that point don't I become ineligible for the FHA loan?

Thank you guys for the replies.

Is it normal to have difficulty finding units that will actually cash flow, or does this mean I'm in a bad market for that kind of real estate investing?

There also seem to be many more single homes on the market than multifamilies. There are only a handful of multifamilies (on the market) in the city I live in (Springfield, MO), and virtually none in surrounding towns such as Nixa, Ozark, and Rogersville.

So am I barking up the wrong tree in trying to positive cash flow while living in one unit? For that matter, am I barking up the wrong tree in trying to positive cash flow, period? I know this is possible "with the right deal", but it is such that, in some markets, the "right deals" just don't usually come around?

Brandon talks about how he isn't interest in a unit unless it produces a 12% cash on cash ROI and also produces at least $100 of positive cash flow after applying the 50% rule. Based on my limited research thus far, those seem like some pretty unrealistic numbers. So far, I've been doing well to see positive cash flow at all, let alone after dividing the income in half.

Should I perhaps be focusing my efforts on a few single family homes instead, or even looking to commercial (though I don't think I have the funds for this yet)? I was really hoping to use the "house hacking" strategy (primarily for low down payment and also "free rent") but perhaps this isn't necessary? 

This is one of my first formal analyses of real estate rental property, and I am taken aback at how bad of a deal this seems to be. Here are the relevant links:

MLS Listing

FHA Loan Calculator (with property tax, HI, and MIP estimations)

BP PDF report

Is it possible I plugged in an erroneous number somewhere to be coming up with -$452.24 monthly cash flow? It doesn't look like an even somewhat good deal until year 30 when the loan is paid off. Am I doing something wrong here?