All Forum Posts by: Michael Garofalo

Hi Frank,

Depending on the condition of the property--cash may be your only option for acquiring that type of asset. Are you going to hold the properties in an LLC? If so, almost no banks will lend on an investment property that is vacant, as they want to have assurance that an income stream is established.

If you have the means, a good strategy is to purchase with cash, rehab, stabilize with tenants and then once you have a signed lease agreement (or have satisfied the bank's seasoning requirements), you can then refinance to pull most if not all of your initial capital back out. Just make sure you don't overpay, and that the rehabbed property will appraise at the very least, at an amount that equals the purchase price+construction costs. 

Finally, I would strongly caution that you educate yourself immensely on the neighborhoods of interest, and find a reputable property management company for placement and to provide an ongoing buffer between you and the tenants. 

@Kevin Leahy, great story and very inspiring! I live in Washington DC as well, and pretty much took the same route you did by making my first purchase a 1 BR condo. Currently I list it on AirBnB when I am out of town, and previously I had questioned this purchase because of all the negativity surrounding condos on BP. However like you, I am very bullish on DC over the long haul and actually think that asset class makes more sense for the city, especially if as an investor you have hopes of turning a profit. Single family homes usually do not provide the desired cash flow (although appreciation is very solid), and multifamily are too hard to come by because of the lack of supply.

If/when you find more info on marketing directly for short-term corporate rentals, I'd be really interested to hear what kind of resources you identify. I have lived in my unit for 2 yrs and my plan is to do another 2-3 before I move out and have longer-term tenants cover the mortgage and HOA fees.

In my opinion, renting is always the least ideal situation--there are no tax benefits and you are not building any equity. If you can't house hack, you could still buy a primary residence and rent out rooms (or the entire property) on weekends or at other set intervals via AirBnB. I do see both sides of the argument about a house being an asset vs a liability, but the fact is, owning will help you build equity which you can then leverage for future purchases.

@Devyn Grillo, I live in Washington DC which is arguably one of the most expensive markets in the country. I rented for a few years then decided to make a sacrifice by living at home for almost a year to save up necessary cash for my first down payment. If this is an option you can take advantage of while you're first starting out, I would highly recommend it. Despite what many people may lead you to believe, building up a real estate portfolio takes time and discipline--it doesn't just happen overnight and that goes for any market (no matter how inexpensive or expensive it might be). 

My candid advice would be to save your money and be very smart about your first purchase, rather than rushing into something right after college.  As you know, real estate is a relatively illiquid investment so you want to be really sure about what you are getting into before you pull the trigger. 

I would hold. Long-term you cannot go wrong in Washington DC. I have lived here my entire life and seen all the transformation that has occurred in so many of the neighborhoods. Things are only trending upwards for the city and I would expect population to continue to rise as people flood in from job growth.

@Oscar Beteta these percentages are on the more conservative end of what you could expect to pay, based on my own properties and information from those more experienced than me. The 12% is really just a maintenance reserve, so think of it as a forced savings plan to cover any issues that come up (which includes both major repairs like HVAC and standard ones like a broken toilet). Apologies, I should have clarified this, as CAPEX technically only relates to major items like the roof, appliances etc.

Hi @John Stewart, you are on the right track, but you really need to go into more details for the expenses. Subtracting out a generic 50% in dangerous, because that number could actually be higher and then you'd be misled to believing you have a better deal than you really do. A detailed evaluation should include the following (all % are based on monthly rent):

-8% Vacancy cost

-8% Property Management cost (regardless of whether or not you chose to use)

-12% CAPEX reserves

-Utilities 

-Property Taxes

-Insurance 

-HOA fees (if applicable)

-Yard work/landscaping (if applicable)

When calculating the 1% rule, I include purchase price+closing costs+rehab costs, and that becomes my denominator for the ratio. For rents I take the lower end of the spectrum in the market. For financing I would recommend plugging in 20% down with a 20 year amortization schedule. If it doesn't cash flow $100 or more each month per door under these conditions, walk away from the deal. If you follow all these rules, you can be certain you are being as conservative as possible. Ultimately the success of any property depends on how you manage it, and the quality of tenants you are able to place inside it.

@Steve Mitrano, if a tenant is willing to pay for a brand new w/d, why turn that down? You could caveat that by doing so, the tenant understands that when he/she moves out, that appliance stays with the property (thereby also creating an incentive for them to stick around for a longer period of time, if they want to get their money's worth). Also, if all the units have dishwashers that are functioning, why spend money and time to perform work that is not necessary? 

I don't know your specific market, but generally speaking, luxury items like dishwashers and w/d will make your unit more rentable in a C class neighborhood. This means you may not be able to command higher rents, but the chances of attracting higher quality tenants will increase. In my book that alone is a reason worth keeping these types of items in your property. For A and B class neighborhoods, often times these amenities may be expected, tenants will be more than willing to pay extra to have them. 

@Diamond Lovelace, I'd second what @Russell Brazil said. You'd have better luck house hacking with roomates via a 2-4 BR townhouse, Condo, or SFR in the DC metro area. True multi-family buildings are hard to come by, and even when they do pop, the price point would make it challenging to break even and live for free (let alone cash flow). That being said it's not impossible, but you should go into it knowing what you're up against and setting expectations accordingly. Best of luck in your search!

Hi @Sharnita Smoot, a good rule of thumb for estimating rehab costs I like to use is $50/sq ft for a total interior gut. Then I also tack on an additional 10% to deal with the unexpected. So if a house is 1,000 sq ft in size, I would budget $55k ($50,000 + $5000).  For a cosmetic rehab, I'd apply the same logic but go with $26-$28/sq ft. This is a good way to get a rough estimate of what you may be looking at, but you'd still want to have a licensed contractor do a walk through and give you a more targeted SOW. Feel free to PM me if you have more specific questions about the exact costs of what specific types of renovations should run and best of luck with this deal!