All Forum Posts by: Michael Randle

Is that $4050 per unit (as in all 3 units individual rent for $4050) or total monthly rent from all 3 units is $4050? If the property is only bringing in $4050 a month total you are losing over $1k a month just in P&I. Let alone CapEx, Repairs, PM, VacRate and Taxes. And a 3% Cap rate on a C property?

Unless this property is sitting on some sort of Gold mine and gives you rights to mine once you buy it I do not see how this is even a question of being a good deal.

HOA adds a layer of complications that some people are not comfortable with. I myself am one of those people.

For instance, if you want to add some zero-scape or other curb appeal to your property, you have to get approval. Perhaps your HOA has some sort of rental restrictions in place. Covered parking and assigned parking spots for more money, approval needed. Also HOA's are another way your tenate can cost you money by them not following the rules, in the end YOU are responsible for everything the HOA says you have to follow.

This isn't to say that all HOA's are useless (they are lol), but I have seen some that provide for common areas like pools which would be great. They might have a collective negotiation with trash to get an overall cheaper rate, perhaps they provide maintenance for the lawn etc.

Unfortunately the benefits are far outweighed 95% of the time by the restriction, in both time and money, that are placed on a property owner any time they want to improve their investment. I have learned that HOA's mainly exist to tell me what I cannot do with my property/investment rather that contributing any meaningful addition or benefit to my investment.

Fair Enough,

Like I said I am trying to learn the DC area and was wondering if this was an unusual deal and on which side of the fence it fell on.

Thank you for the feedback.

@Cassidy Burns,

Congratulations and well done!

I want to preference the rest of this message by saying I am not trying to rain on your or your clients parade. But I do have some questions about the numbers. And I do want to give credit that a win with a 4-plex in DC is amazing and clearly shows your skill and the determination of your client. I am mainly writing this for yourself and other people to pick apart my math and my theory craft.

But I do have some questions about the numbers, and please correct me if I am wrong in any way. I would like input for the community as a whole also to see if I am missing something.

You client is having a positive cash flow of $2,300 a month, is he not putting anything aside for CapEx, Repairs etc? My numbers state the only way to get that positive cash flow, from $11,200 Rent, $8,900 Mortgage, would be to forgo any sort of CapEx or Repairs fund, I do know the company has a 0% vacancy rate for the first 2 years, but he also isn't factoring any sort of possible VacRate?

It seems your client is getting a $27,600 ($2,300 x 12months) yearly return on a $500,000 cash down payment (I might have misread your opening and it might be $450,000). That comes out to a 5.52% CoC return rate. That isn't bad, but it isn't amazing either.

Next, the projection of $2.3M in 10 years indicates less than a 1.2% year over year property value increase. Which doesn't strike me as overly impressive. But I am not 100% on the D.C. market right now (Learning, which is another reason for me to write this).

Lastly, if everything goes 100%, with no extra funds needed for repairs or CapEx, and a 0% VacRate over the next 10 years. And the investor is able to contribute 100% of the $2,300 to paying down the principle he will have a balance of $840,000. And if he sells for $2,300,000 that will have been a profit of $960,000 on an initial $500,000 investment. (Not counting fees etc).

That is a great return on investment if I give someone $5 and in 10 years they give me my original $5 back plus $9.60. But it seems like there is a lot of variable that will probably not sustain for a 10 year period. Foremost a 0% VacRate, 0% CapEx, and 0% expense rate. Plus the ability to continually pay down the loan further with the $2,300 a month.

Am I wrong somewhere in my theory craft and numbers crunching or am I perhaps being to pessimistic with how things are going to play out?

Thanks for taking the time to look this over.

Those more look like quotes for extremely high end materials and finishes. (Hence the tier A / tier 1).

The prices for those bathrooms should be quotes for full re-models, not touch-ups like the quote implies.

I am not a great handyman, but at least 7-9 items on that list I would feel comfortable doing myself.

Doing basic math the last item of (tile the remainer of the house spelling?) comes to about $9.72 a square foot. And most likely it is higher since he has a line item in there for Master bath title and Guest bath title. Assuming 500 sqft based on his Kitchen tile quote, and 100 sqft per bath room, he is actually charging you closer to $13.60 to do the 'remainer' of the house.

I think you are getting taken for a ride with this one. Write him back and ask him if he mis-placed a decimal.

So I have not dealt with MD voucher program, and the knowledge I am about to drop is from CO. But I would assume the broad strokes are going to apply. I have looked into MD's program, but per-government effectiveness not much information is available without going down in person.

So first you have to get your rental approved by the city to take part in Section 8. This includes a first inspection which they will point out annoyingly small details that must be fixed, and then a second inspection in which you show said details are fixed. The city will then TELL YOU how much your unit qualifies for, based on similar units the government told them how much they where worth and the amenities that you might offer. Most likely you will not get close to the 3 bedroom $1490 amount she is getting. But you can always put your unit for rent for more then the voucher, and the tenant has to make up the difference.

Example, you get your unit certified to take part in the section 8 program and the city tells you it will give you $1000 a month with the voucher. You can put your unit up for rent at $1300, but the renter must come up with the $300 difference every month.

Granted your numbers will be different and your situation will vary. But some things to keep in mind: You will need to get at least 1 inspections (at the speed of government efficiency) and if I remember correctly take a weekend course provided by the city before you can accept vouchers. This means to expect at least a month of downtime before you can accept. I know in CO the voucher price paid was considerably lower than fair market value, but Baltimore might be different due to economics. If an issue comes up with the tenante you need to go through an arbitration process provided by the city (I remember reading this detail but the nuts and bolts escape me right now).

Hope that helps a little and I am sure someone who deals with Sec 8 here in Baltimore can offer some more insight. @Ned Carey answered some of my questions in the past.

I agree with Steven on this one. Just because he doesn't come down in price doesn't mean to just walk away. I would double check your numbers, but do not fudge or budge on the CapEx, Vac rate just to make the numbers work.

If your numbers are accurate, then ask for his rent roll and see what he is charging for rent. Perhaps he is getting $1200 a month per unit somehow and you are under estimating what you might be pulling in. 

Then come back at him with your numbers and clearly state that his own asking price doesn't make any sense for any buyer. If he still doesn't come down in price (you cannot always fix stupid) tell him to keep you in mind in case he does decide to come down in price.

The above would be the most professional way to go about the situation IMO.

But...

If you want to follow some guru's advice, get the house under contract at his asking price. Nickel and dime your way down during the inspection and do diligence phase, and walk away with the property at your original asking price. 

Personally I think the second way is in the very least is un-ethical, but people have successfully gotten deals using the process, and businesses are built on un-ethical practices all the time. In the end this is business and not an ethics course you have to worry about failing out of.

"We’re banking on appreciation in the area and looking to refinance as soon as we hit 20% equity" - And what happens if you do not hit that 20% in two years and you have to wait 6-8 years? What happens if you lose a tenant for 6 months, can you cover the payments for that time?

Using your own words of "banking on appreciation" "living paycheck to paycheck" "realtor comped are not accurate enough" I would be VERY hesitant to jump into this 'deal'. I am not saying appreciation isn't a good goal, but I know most people who have been around do not "bank" on it for financial success, that is called a "bet", and you always eventually lose on bets.

My 2c,

If you have a Mortgage that falls under federal law (Freddie, VA, USDA, anything that the Big governement touches), you can kick a tenant out for smoking medical marijuana in your rental because you are subject to federal laws (hence a class 1 controlled substance).

If you are more wanting to get some extra money from a tenant that smokes vs making sure they do not smoke at all, you can put in the contract that a cleaning fee will be assest (possible getting a larger deposit depending on local laws). Sort of along the lines of a service dog is allowed, but the tenant is still responsible for when that serice dog craps on the floor and gnawls on the baseboard. They can have the dog/medical device, but they are also responisble for the damages and clean up said dog/medical marijuana cause.

Hey Ryan,

It lookes like we are fairly on the same waive lenghts when it comes to the basics, just a little different in the details. I go for the saving upfront and cash flow in the back side. Where it seems you roll all cashflow forward back into your buisness.

I do have to ask if having Repairs/CAPEX in the same line item, even tho it can be at 15%. Vs Repairs 10% CapEx 10% has ever been an issue.

Also, I have always been asked to show 6 months of liquid funds to close on a house, which is why I have that 6 month minimum. Have you found that this isn't the case for you?