All Forum Posts by: Account Closed

Dennis,

Here's how I would analyze the numbers:

Gross income @100% occupancy - $73K
less 10% vacancy ($7.3K)
GOI = $65.7K
less expenses (not including the mortgage) - say this is 50% or $32.85K
NOI = $32.85K
less debt service ($200K x 6% interest only)- $12K
Cashflow = $20.85K

You invest $150K cash
That's a Cash-on-cash return of 13.9%
Not a bad deal. But since you're paying off $50K additional per year to pay off the loan, it's apparent that you have a negative cashflow of $2500 per month (yes, the loan is going down by the same amount but it's still money coming out of your pocket).

This is not a deal I would do because I want my properties to pay for themselves and not put money in them. Having said this, if your objective is to have as many properties free and clear in the shortest possible time and you have other sources of income to pay off the properties, then by all means go for the deal.

Makes sense?

MItch,

I agree. Seller financing is a good way to buy houses without going through banks because they're a pain to deal with right now.

The other alternative, is to raise money from private lenders - not just the downpayment but the whole thing. Believe me - there are investors right now with hundreds of thousands of dollars they're willing to lend at 7-8% given that they're not earning that in money market funds and the stock market is too volatile for them.

Dustin, even though you and your parents have some money, I always advice young people like you to go into real estate wholesaling first before jumping into rentals.

The reason is pretty simple: with wholesaling, you learn the very valuable skill of being good at finding properties that can be acquired at a steep discount (30% to as much as 70% discount!). The other reason is that rental properties are full of risks and headaches - specially single family homes. I have acquired and kept houses and apartments and the latter is easier to lease, manage and they produce more cashflows with less risks.

When a rental house is vacant, it's vacant 100% so you're paying the rent out of your pocket. A 10 unit apartment on the other hand will still be profitable even with 1 vacancy and depending on how you buy it, can be breakeven even with up to 3 vacant units.

Here's what I would do if I were you:
1. Acquire and wholesale a house - buy it and sell it "as is" for a small wholesale fee of $5,000 to $20,000 (depending on the deal). DO this several times to accumulate, say $100,000 in cash.
2. Find a 10-unit (or bigger) apartment building that already produces cashflow and acquire it using your cash reserves you've built doing wholesaling. Of course you have to buy it right (it should produce 12% cash-on-cash return or more).

Doing #1 and #2 ensures you have ample cash and cashflow.

Hope this helps.

Jaden,

Instead of the customary...

MAO = 70% x ARV - Repairs

My formula for making offers is:

MAO = CF x ARV - Repairs - Profit

CF = is the cost factor. This is the % reduction of the ARV related to the cost of selling and carrying a property. In a normal market this is around 90%. Which means, roughly, it will take 10% of the ARV to sell and carry a property. For instance, in a normal market, you have...

3 months before you get a property sold...
you use a hard money loan at 12% annual interest or 1% interest per month...
you pay a real estate agent 6% commission...
you pay roughly about 1% in closing costs...

Adding these things you get:

6% realtor commission
3% carrying cost
1% closing cost
Total: 10%; CF = 100% - 90%

For a $100,000 house that, say needs $10,000 in renovation, a typical rehabber would want to make $20,000 in profit. Using the formula...

MAO = 90% x $100,000 - $10,000 - $20,000

MAO = $60,000

If you use the 70% rule, you end up with...

MAO = 70% x $100,000 - $10,000
MAO = $60,000 - the same answer!

Bottomline: the 70% rule is based on being able to sell the house in 3 months or so, with a 20% profit margin for the renovator.

The reason why it does not work in a declining market is because you end up with a CF lower than 90% (which means you spend more than 10% of your ARV selling a house). Your financing cost is higher because there's a lot more risks for the hard money lender. Lastly, you also end up lowering the price of the property in the form of seller concessions (e.g., you pay part of the closing costs, you put more extras, you sell the property 5-10% below market, you stage it, etc.)

For instance, if it takes you 9 months to sell a property, and you use 15% as your hard money rate, and assuming you give your buyer a 5% seller concession...your CF becomes:

Realtor commission: 6%
Carrying cost
9 months x 15%/12 = 11.25%
Seller concession: 5%
Closing cost: 1%
Total costs: 23.25% --> let's round this up to 25% which means you use 75% as your CF.

Let's still use $20,000 as your renovator profit and you end up with...

MAO = 75% x $100,000 - $10,000 - $20,000

MAO = $45,000
This is $15,000 BELOW what the 70% rule would predict. In other words, if you follow the 70% rule without questioning how the rule was derived, you will have spent $15,000 more for this property - which almost wipes out all your profit!

Makes sense?

Vikram,

I don't know how much you've paid for the property (if you've paid $135K for the property - you've made a mistake...but if you've paid less than that read further). What I would do is fix it (since you only need to spend $6K) but still sell it 10% below market or at $135K - line price it with the REOs (given that REOs are the majority of the houses in the area).

To sell houses quickly in today's market, you need to price your house 10-20% below market and make it the best house in the neighborhood.

Selling quickly and making a smaller profit is better than holding onto the house 6 months or even a year because you want to make your profit. You want to build momentum and you want your buyer to realize he/she has gotten a "steal" or a bargain. Why? So that he/she will refer you to his/her friends. The word of mouth marketing or referral business you will get by doin this will fuel your buying and selling houses business for many years to come. Again, the momentum and repeat business this will create will more than pay for making $14K less on one deal.

Makes sense?

I agree with Ted. You have everything you need to start investing in real estate. If I were you, I'll focus on wholesaling first. The reason why is so that wholesaling is a strategy where you can buy and sell houses without using your cash or credit...and you can structure your deals such that there are no risks. Let's connect. If there's anything I can do to help you, let me know.

1) does this property fit my goal

2) what are the numbers (as Tim said)
a) Purchase price
b) Repairs
c) Re-sale price (assuming you want to re-sell it)
d) Rent that you can collect (assuming you want to lease it)

3) What's the best exit strategy?

Mike,

Can you explain the 2% rule?

On the 50% of the expenses rule - that's a good starting point for apartment buildings that are class B- or class C. Class B+ and Class A buildings will have lower expense ratios than 50%. I own one so I know and the expense ratio is 40-45% for class B and can be as low as 35-40% for class A.

For single family homes the ratio is even lower (usually 20-30%) specially for newer homes. The reason is you (as the landlord) does not pay for cleaning and utilities for single family homes. Moreover, you can get the tenant to pay for all the expenses for single family homes specially if you sell them on a rent to own basis. For example, for single family homes, you can make money if the mortgage is $1,000 and you can rent it for $1500. The expenses are NOT going to be $750 (or 50%) for taxes, repairs and utilities. The expenses will be in the range of $300-$400 per month based on my experience. Of course, this is just a rule of thumb. You need to get the actual numbers to make a more accurate assessment.

Suzette,

If he really wants additional income coming in, he can wholesale houses (buy them "as is" and sell them "as is"). Also, he can buy houses from sellers directly and do owner financing. He does not need a bank loan to buy houses and he can rent them out.

Right now, with banks getting tighter with their lending and underwriting guidelines, your friend has no chance to get qualified for a loan to buy a rental property specially with his house being upside down.

I always tell beginning investors that they should learn how to buy houses without using cash or credit. Doing so reduces their risk and allows them to buy more houses without being limited by banks. If you need help on how to do this, let's connect.

I agree with Jon. There does not seem a deal here at the current numbers. The seller does not seem motivated also.

What does the seller need (vs. what he wants)? If the seller needs cash upfront, doing owner financing might not work. You can probably create a note that you can sell to a note buyer so the seller gets the cash but this won't work either because the note buyer would want to pay for the note with some discount.

Move on to other deals. There are tons of good deals out there.