All Forum Posts by: Michael Nathanson

Hi BP,

I am about to close on my first deal beyond my primary residence which will be converted into a rental next year. This new deal is an off market deal I found on craigslist and was able to negotiate down to a price of $167k for a purchase with 1k in closing costs covered by the seller. Based on my analysis of the market, I determined I could rent the house out for $1500/month without any issues, but based on the equity I thought was already in the deal I decided to also advertise as a lease option. I ended up having the house rented to a lease option tenant but they have a low income compared to the rent and a really bad credit history. They seem very interested in buying the house as soon as possible but I don't think getting the credit score up will be easy due to previous evictions and lots of bad credit card and car loan debt, some of which is being disputed. I decided to take them since I was charging a $5k option fee and $1600 for rent with $100 of that going towards a credit if the option is exercised.

Type: SFR 4bed 2bath

Purchase Price: $167,000

Option Price: $220,000, 2 year term

Closing costs: ~$7,000

Rent:$1,600 with $100 as credit towards purchase

Total Loan value: $125,250 (25% Down)

PITI: ~$750

Maintenance, CapEx, Vacancy: budgeting ~$300/month, though theoretically with a lease option this should be $0

Total out of pocket cost: ~$48,000

Cash Flow: ~$500/month or 12% CoC accounting for all costs with self management

*numbers are rounded and estimates, I do have a spreadsheet to calculate all of this but just obviously the numbers change with all assumptions that go into it

I know if all works out this deal is amazing, but I am worried about this tenant being a problem since there are a lot of evictions in the background check (almost every year it seems). Employment seems steady with a municipal job, but income is about 2x rent. There may be some undocumented income and also $300 in child support. 

The primary reason I was willing to take this tenant is because of the option fee being payed gave me a sense of security, and I like the idea of the tenant having a sense of ownership in the house. My question for the BP community is whether the option fee should give me enough sense of security to deal with any problems that come up. Is taking a less qualified tenant for an increase in cashflow and an opportunity for a large payout worth it to the other investors here, or do you screen just as hard for rent to own tenants. The pandemic and current economic situation is not making me feel any better about this either, but again, $5k in option fee security is worth over 3 months in rent.

The other question I have for more experienced investors is should I be concerned that the appraisal came in right at the purchase price? I know for a fact that they weighted bad comps the most heavily and that similar houses in the area are worth between $210k-$230k. 4 of 5 comps used had a corrected value greater than the purchase price and the one below was well over a mile away in a less desirable neighborhood. Are appraisers just likely to value a property at the purchase price to be safe? I would hate for this all to work out and the tenant qualify to buy the house only to have it fall through on a bad appraisal 2 years from now even though I bought this house with the intention of holding for a long time originally.

This is my first post on BP about a specific deal so please let me know if this is the wrong forum. I have been looking for about a year and this will be my second purchase. If all go well should be building the portfolio some more soon! Hopefully this can be encouragement for newer investors to get out there and make a deal happen, and consider multiple exit strategies in doing so. Let me know what you think of this deal.

I just realized my spreadsheet wasn't including the utilities, so I'm negative cash flow here if I include management.  This changes things pretty significantly.

@Tim Herman, for the 5 year lifespan the article is talking about carpet.  I find it hard to believe you would pay $5/sqft of carpet in a rental, at that price I would go with laminate or engineered hardwood.  I also agree that getting even 5 years out of carpet can be difficult depending on the tenant.  These apartments are entirely tile which I would think would be fine with a little grout cleaning after each turnover.  Granted I haven't had a chance to inspect the units, they appear to be in good condition.  If the tiles needed to be replaced in bedrooms I would probably put in carpet and anywhere else some form of laminate or engineered hardwood.  I'm sure it is still better to be conservative with estimates, and I know that there is also painting for each turnover to be included, but if I'm too conservative on these numbers I don't think I'll ever find a deal in this market.  I've been monitoring for months and there's really not much out there that's better by the numbers without going into bad areas where there's all the costs associated with having lower rents and lower quality tenants.

The floors in the apartments appear to be large tiles, which I would think should last more than 8 years and they appear to be in good condition.  Maybe cleaning the floors each time someone moves out but I agree that seems high for flooring.  

If I increased combined maintenance and capex to $500/month, it would still be cash flowing $100 including a management fee in the expenses and that's on FHA financing. That would be 7.5% CoC with only $16000 down. Is this a good way of looking at it?

To be more conservative I could run numbers with $700 rent as well though two of the units are already renting for $750 and I think that is a fair price for the area.

I suppose 10% for maintenance and capex combined may be a little low, especially at the beginning, though I think 10% for vacancy is pretty conservative to make up for it.

Thanks for the comments, I appreciate the input since I haven't done a deal by myself yet and it can be pretty daunting to commit to that much debt on a property for the first time.

Hi BP community,

I have been looking at a couple of 4plexs in the same area that have come up on the market near me recently. 2 of them are under contract (I had offered on them but never heard back since I offered much lower than asking). One went pending and came back on the market but it is higher priced than the others were. The one I am currently looking at is 260k list price. I would be using FHA financing and living in one unit

The numbers (my best estimate) would be:

Rent(current 2 units at 750/month, 1 at 700/month, 1 vacant)=2200

Potential rent(fully rented including my unit at 750)=3000

PITI=1800 (PMI is making this expensive, this is a rough estimate but should be accurate+/-100)

Maintenance=150 (5%)

Capex=150 (5% roof was just repaired and 3 units have new heaters)

Utilities=400 (best estimate for water sewage and trash seems high to me but would rather be conservative, this is what the last 4plex in the area I analyzed told me)

vacancy=300(10% again being conservative saying I will lose about 1 month per year)

management=300 (10% I will be selfmanaging at least while I live there but I want it to make sense financially with management)

cash flow=$300 (not counting me paying myself rent)

In these numbers I am assuming I increase the rent on the one unit that is currently below the others.  I would be putting around 16K out of pocket into the deal plus whatever initial maintenance.  I'm seeing a cash on cash of 22.5% which seems pretty good.  In reality I would be cash flowing $600+ since I would be managing it and I wouldn't have to worry about my own vacancy.

Is there something I am missing here?  Do you think this is a good deal to pursue?  My current rent is about $700 anyway so me taking up one unit would be pretty close to a wash as far as my personal cash flow, but I would be moving from a 1 bedroom to a 2 bedroom that I could also potentially find a roommate to further improve cashflow.

Any input is appreciated, thank you.

Why are you paying the real estate commissions?  That's why the number seems really high.  Those are typically paid by the seller. 

Thank you for this, it is very helpful as a new person in the ABQ area.  Definitely reinforces my early impression of different areas and gives insights on some I was unaware of.

Hi BP community, I am new to the forums but have been lurking for a while and listening to the podcasts as well.  I am new to investing in real estate on my own and in addition just moved to the Albuquerque area for a good job.  When I moved here I quickly rented a place with a 6 month lease (month to month after) as I knew I was interested in investing and wanted to be able to leave before some of the longer leases other places required.  So now that I've been here about 3 weeks I've been doing a lot of digging in the local market and think I'm getting an understanding of the prices in the local market (I'm not from here) and was thinking about getting pre-approved for a mortgage sooner rather than later.  My concern with this is that I am in no hurry to purchase a place since I'm in a lease and would prefer to work a little while and build up a larger down payment (just started "real job") and want to just keep an eye on the market with the option of making an offer if something really interesting came to my attention.  From what I've gathered, pre-approval lasts about 3 months before I would have to redo the process so that would get me through about April if I do it now when ideally I would be looking for June or July for a purchase.  Is there any negative to having to do the pre-approval again after 3 months other than another hard inquiry on my credit? (I have 2 from credit cards in the past year so the second time would be the 4th inquiry in a year)  My credit score is excellent (well above 740) and I have no debt other than my monthly expenses paid off at the end of each month on credit cards.  As far as what I'm looking for, in a perfect world I would find a cash flowing 2-4plex that I could house hack to start my investing career while working full time.  

What experiences have people here had with conventional and FHA loans being pre-approved multiple times before finding the right investment?