All Forum Posts by: Michael R.

@Dar Shan & @Mary Bodrato You should definitely listen to Podcast #151 with Clayton Morris.  He talks about how everyone has their "Freedom Number" and the way you find it is by doing the following:

-Take an average of ALL of your expenses for a 6 month period.  Do not include the holidays since spending on gifts can skew the figures.  Lets assume that number is $5,000/month

-Once you have your average expense number he says to add a 10% "fudge factor" so you have some extra in case you need it.  $5,000*0.1=$5,500

-Then take figure out the average amount, per door, that you can/want to make from your investments.  This could be based on the deals you've done, or the criteria you've set for deals you intend to do.  Lets say that number is $200/door

-Divide your average expenses + the 10% fudge factor by the average per door income you've determined.  This will give you the total number of doors you need to own before you can quit your job. $5,500/200=27.5 doors

Now figure out how long it will take you to achieve that number and you can essentially determine the time, give or take, that it will take you to become financially free.  

I hope this helps!

I'm surprised it hasn't been mentioned yet but you'll need to take all of the realistic expenses into consideration (taxes, PM, insurance, vacancy, capex, repairs wont be much if rehabbed but you should still budget for some) and calculate the Cash on Cash return for each scenario.  Sure you'll have all of your money out to buy something else, but what will be the returns on the property you already own assuming you get it rented right away?  1-2%?  At that point you're just asking for one bad month to turn this into a venture where you're taking some of that cash you financed out and putting it back into the property in some form or another.  

It's painful to leave cash tied up like that, i know, but if you're in this for the cash flow and all of the benefits that type of investment affords you, cash out only the amount that still allows a solid CoC return. I'm in a similar situation as we speak and on month two of no renters. You just watch your CoC drop slowly day by day. It's a comforting feeling to have a cushion instead of banging your head against the wall because you spent too much money up front or pulled too much out.

$30???  There are a number of services that are free or almost free so please don't go paying the bank that ludicrous fee.  None of which I am affiliated with, I might add.  We are signed up with Cozy.co, which I've heard good things about, but are having a tough time getting our tenants to transition to since they like to do things "old school".  I believe it takes a few days for the payments to clear, there's no fee, and the beauty of it is it gets treated like everything else they would auto-pay.  It just happens, you know you need to have the money in there, and you don't really have to think about it.  It also triggers less of the pain center of the brain associated with writing and handing over a check...or worse...cash.

Hey, Nick, thanks for the invite.  That's a bit of a hike and we're in the middle of a project in Crystal Lake.  Please keep me in the loop for the next one. 

Yes you're correct, the home would have to be owner occupied for a year and, if it was in need of repairs to the point where it's a deal it wouldn't meet FHA's requirements. I'm with you on the fact that i couldn't claim owner occupancy and not live there.

One method I didn't mention, and oddly enough is the way I purchased my most recent SFR is using owner financing. You'd be amazed how many people own a home they've either inherited or gotten themselves into a pinch and are motivated to sell with negotiable terms. You get a house you can fix up and rent out while they get rid of a headache and earn some interest on their money. You could even bump up the interest rate in return for a no-money-down closing.

Your next question is probably "where do i find these people?"  Try driving for dollars or using some of the money you have on direct mail.

Just some suggestions, i hope this helps, and sorry for the confusion.

Do you have an FHA loan on your primary residence? The only reason you wouldn't be able to use FHA financing is if you already have an FHA loan on your primary or any other residence you own.

In the event that you already have an FHA loan and want to use conventional financing, they will typically require a 25% down payment along with 6 months worth of seasoned funds to cover PITI (principal, interest, taxes, and insurance). This may seem like overkill, but it's fairly prudent to have from a risk perspective. Especially if the building has more units and there's a chance of having multiple vacancies at one time.

I'm not sure what you mean by "take the risk and hope my analysis and all the due diligence will pay off", but I wouldn't make a move unless you've done enough homework to make a very educated move where hope is a less pivotal factor.  Not to mention, you may be able to acquire the property using creative methods with little left for reserves, but what happens if you have a major repair you didn't account for right off the bat with no way of covering that expense?  That being said, you could always find an experienced partner who has the reserves/repair money you need and split the deal to learn the ropes...

Hey @Shelly F. we've met a couple times at local BP meetups.  I hope you're having great luck out there and would appreciate it if you could add me to your buyers list as well.  I live in Cary and have properties in Crystal Lake and a 30 minute radius from there so anything in that range is great.  Thank you!

Hello @Account Closed

The same thing goes for a property that currently has tenants.  You have to find out the costs associated with evicting a tenant in your area (lawyer fees, court fees, etc.).  Then you have to add a buffer of holding costs in case it takes a number of months to get them out of there.  Add that to your projected holding costs and rehab numbers to make an offer based on all of those details.  Most importantly, don't let emotions get involved since this will influence you to skew your numbers.  If you've done your math, added all of your safety margins, made an offer, and the deal doesn't work out, on to the next!  None of the "well maybe the tenants will take cash for keys" or "If I can get them out in a month I can afford this higher offer number".  Operate as if a great deal may be right around the corner and be prepared to walk away.

this is not legal advice, i am not a financial advisor, or a CPA

Hey @Account Closed I'd love to join in on a meetup with you guys to discuss our strategy and see if we can collaborate in some way.  I currently invest in the NW suburbs in and around Crystal Lake.  Let me know when you'd like to get together.

@Matt Motil Thank you for your insights on this. I have a local agent coming by the property to take a look at it this weekend and give me a rundown on what they feel is necessary based on their experience. Since she'll likely get the listing it'll be a win-win. Based on my analysis of the market over the past 3-6 months the as-is value of this home is right around $140,000. The ARV, assuming a full cosmetic rehab, is somewhere between $165,000 and $170,000.

Like you said, it makes sense to do a $20,000 cosmetic rehab (assuming that's all it will cost) if it will net an additional $25,000+ sale price due to the ROI. If that work takes 2 months it's an additional $1600 in holding costs which would still lead to a return of 17% in worst case. I have the funds to do so which helps eliminate any need to pay fees or percentages to a partner. Then it comes down to the hassle factor. How much is it worth to deal with contractors or do some of the work myself over that 2 month period? Am I spending less time on acquisitions as a result, and what is that cost?

It looks like I'll have to sit down and write out all of the large and small details associated with both options before making a decision.