All Forum Posts by: Aaron Montague

No to the taxes.  They are not a closing cost.  They ARE cash you need to bring to closing.  Taxes are part of your operations as  @Mitch pointed out. 

Therefore taxes are part of your monthly cash flow OUT.  So hopefully your tenants are actually paying for this line item, albeit indirectly.

On my books the closing cost are mostly Down Payment + Fees. So your CoC return will be an estimate initially, then an exact number once you close. Example: On a duplex we bought, we estimated 28k in closing costs. The actual number ended up being $28,404.02.

@Athita Covington

1. Ask the seller for a copy of their current bill

2. Get familiar enough with the area, by evaluating lots of deals, that you know the answer to the question within ~100/year

3. Call a local insurance agent with a specific property in mind.  These are good people to have on your team.  

4. Ask other owners in the area

Hello @Ely J Lara, welcome to BP.

The numbers look good on this deal.  My only question is "How are you able to put such a small down payment on an investment property?" 

If these numbers are accurate, it certainly looks like a good buy.

@Patrick McCracken it depends slightly on how you define "closing costs."

At M&A we define them as the expenses that we incur at closing.  This is a different amount than the amount of cash we need to bring.

The list of items we define as closing costs are the items on HUD-1 form that do not recur. Bank fees, points, wire fees, appraisal, inspection (this isn't actually on the HUD-1 form), and the like are what we define as closing costs. The items that we are going to escrow, namely taxes and insurance, are not "closing costs" on our books.

We do this for accounting reasons.

My initial number for closing costs is $5500 + points.  This $5500 number is fairly consistent whether we are looking at 90k properties or 340k properties.  Many things in real estate are not accurately portrayed by %.

Hope this helps.

Struggling is good in the beginning. Practice makes your numbers more accurate.  As you are figuring out where the answers lie, you are learning all the skills you need to evaluate deals in your area.  @Brandon Turner will tell anyone new to the game to "analyze 100 deals" as a good starting point.

Here is the breakdown of my spreadsheet on the BP Blog: https://www.biggerpockets.com/...

I use this spreadsheet as a preliminary evaluation tool.  If the numbers look good, we get in touch with the selling agent and verify all the numbers as well as we can.  The reason you practice on properties in the area you want to focus on is so you can identify HOW good a deal is.  

I'm pretty good at telling you where rents should be in an older, 900 sq ft, 2 bedroom apartment in my geographic area of expertise.  So if I see 4 apartments like the description above in Farmington, NH with rents of:

850
900
1100
925

I know what I'm looking at.  If that same list came to me for a property in Cleveland, OH I would have no initial reaction because I have not practiced in Cleveland. Now I know where to look for various reference points, BP Insights, Rentometer, Craigslist, but I have no instincts for the non-NH market. 

Each line in my spreadsheet has hundreds of deals behind it that have taught me whether or not I'm looking at a number that makes sense. The same thing will happen to you once you've looked at 10s of deals.  Does this insurance number make sense for a 4-plex on Smith St? What about MLK Blvd, it is only 3 streets over, yet $300 cheaper.  Why?  

Find the area you want to buy in, open up Realtor.com, and make your own spreadsheet.  The exercise could be circumvented by using the BP analyzers though it won't teach you nearly as much.  Once the spreadsheet is done, start looking at houses and figuring out what kind of deals they are.  The first one is going to take you hours, as you'll need time to set up.  The next ~10 will take 10 minutes.  After that you'll know exactly where to find the numbers and these initial evaluations will drop to 2 minute each.

House hack @Mitchell Behm! Buy https://www.realtor.com/reales... and you two should be living for close to free.  Or if you are feeling super handy: https://www.realtor.com/reales...

But yes, house hack starting now. Reduce your housing expense to zero or close to it and put that money towards your next place.  Once you have a nice bit of extra coming through your business, then use the business to buy your house on the water or whatever floats your boat.

Call up @Sonya Mays and have her show you some things that tick off MOST of the boxes on your list. Milwaukee is FULL of rentals that look like solid deals on the back of napkins.

@Andy Pate

I'm going to cast my vote into the "house hack" side of things.  Philosophy aside, here is my financial plan for you:

Buy this place in Raleigh, NC (I don't know where you will actually be employed, so I started with the town in your profile):

https://www.realtor.com/reales...

If you can get it for 270k, you'll own a duplex that'll cost you about ~2300/month to own, assuming we look at the house hack like the long term rental it actually is :)  I'll post my numbers below. The people renting from you should cover about $1800 of that.  This comes from my craigslist crawl of the Raleigh area.

Now you don't really have to pay the $240/month in property management fees to anyone but yourself at this point.  So you are down to $260/month in housing expenses. Keep that 10% in there so you get used to paying that money out each month. This enables you to move, hire a property manager and not blow your entire investment due to poor cash flow planning.

That alone is a good enough argument to house hack.  Your $900/month income is only going to be reduced slightly by your housing expense.  Once you have a job, you can save a huge portion of your income.

Now onto your debt. You should be able to pay off the entire thing for $40k by purchasing:

https://www.realtor.com/reales...

That place should cash flow about $380/month.  Coincidentally, at least for my arguments, your 60k in debt refinanced over 20 years at 4.5% will run your $380/month :)

8-10 years down the road you should be able to BRRRR the place in Barre, VT and get your 40k back. So you could argue that you really won't pay anything for that debt if you play the long game.

Raleigh Duplex Numbers 2020. In 5 years I figure you'll be able to raise the rents to $1400/side, which should let this property cash flow just over $400/month.

Barre, VT Numbers:

@Janesly Lafortune I vote "flip it."

This is going to cost you money each month as a rental. I'll post my numbers below, it assumes you borrowed 100k at 3% to BRRRR the place.

The flip option looks good here. If your 50k number is good, you can still miss by 20k and make money on the flip. If your numbers are accurate you should make almost 40k after paying your realtor :)

Here are the numbers to back up my argument that this is not a good rental:

Hello @Daniel Stamenkov,

No.  This is not a good deal as a rental.  You have no money allocated for fixing up the big systems, Capital Expenditures (Cap Ex), operations, or property management.  Those 3 items will exceed your $182 remaining cash by quite a bit.

Cap Ex should be at least $250/month unless the property is either small or brand new. I recommend property management forecasts at 10% of gross rents.  Your general operations budget need to cover lawn care, snow removal, minor repairs, rekeying, and other seasonal expenditures.

@Khalil Kelley

5% might be closer on a deal that pricey.  6% is the "standard" though that can drop as the price of properties goes past a certain point.  I would always make sure you are figuring in the 6% on the back end of a flip.  Remember that a realtor needs to split the commission with her/his broker.

From my history: make sure you have enough money to cover a good portion of the down payment, some of the rehab, and enough for a nasty surprise.  Other people's money is good, if you plan on making them money AND you have enough to do the deal :)