All Forum Posts by: Nathan Emmert

Given the structural issues, I wouldn't do a down payment.  Your down payment will be the investment you have to make in order to make the house safe and the instant equity back to the note holder that provides.  He hasn't sold it for 3 years for a reason.

As to purchase price versus rental... I don't know your market but there isn't much meat on that bone from a cash flow perspective... putting 15% down and paying for repairs makes it ugly in terms of CoC.

The structure itself... it's about what you'd get from a credit union... 5% is likely a little lower on a 30 year amort but with the 10 year balloon it is similar.  You definitely aren't getting a great deal but it's also something the seller should be able to live with.

Just to add a few to Bill's great list... look to see if you can help Home Inspectors, Appraisers, or Property Management companies as well. Depending on where you want to go with your career, these are all extremely valuable tools... spotting problems up front (not to mention saving yourself $300 - $500 routinely)... understanding ARV... or knowing EVERYTHING a landlord goes through from collecting rents, to repairs, to CAPEX, to finances, and beyond.

If you're looking to make money, maybe birddogging for a flipper or wholesaler would work as well.

Seller financing doesn't mean anything to me really... 0% down is good as long as it cash flows... I'm just not seeing this property cash flowing.  You hope to break even and either cash out paid down equity or let increasing rents start to provide cash flow long term and upon paying it off.

Pass.

$1,850 versus $150,000 is just over 1.2% rents and it appears you're paying the electric bill which artificially inflates that number.

Having to put 8% of your rents towards flood insurance and another 8% towards property insurance is crazy.

Property taxes aren't terrible, I like to see them under 1 months rent.

You have no property management, lawn care, repair contingency, vacancy contingency, or CAPEX contingency in your numbers.

The seller obviously isn't doing you any favors on financing... high interest and short amortization I'm guessing.  It's obviously not going to cash flow which is the reason I buy properties.  I would pass.

It has been posted here before so it's not completely out of left field for a realtor to ask this but many investors here don't like it.  The offer of a non-disclosure is the default response generally.

The 50% "rule" says, long term, you can expect 50% of your ideal (market rate) gross operating income to go to expenses.  It is an average across large apartment complexes across the country and many use it as a starting point, a sniff test, for how solid a deal is.

CAPEX is Capital Expenditures, your major repairs... things like the roof, HAV, hot water heater, appliances, etc. All have life expectancies and generally a 5 - 10% "repair" budget takes care of day to day stuff (rent readies, etc) but not those larger once every few years type repairs. I believe 10% is a typical set aside for those expenses but your mileage may vary.

@Daniel O. 

I'd go big to simplify my headaches.  I don't want to have to know 10 areas... and analyze 10 deals... and deal with 10 times the headaches that go with all of that.

I'd rather find 1 deal.

Additionally I think you can leverage things better if everything is co-located in 1 spot.  You can potentially get better lawn care rates, PM rates, maintenance, etc because of the efficiencies the density of your properties all in 1 spot allows.

I'm by no means a baller but you don't sound like someone who wants to dip a toe in... you're talking about dumping $300k a year into real estate... so if you're going that route, all in... go big or go home.

For most people I would say buy 1 property, wait 6 months to see what you missed in your first deal, and then move forward... but most people don't have $300k in liquid capital to dump... most tie up their entire life's worth in that first property.  You're in a different position, I made a different recommendation.

For me... I'd rather buy a house when I have $25k then wait 4 times as long to buy a bigger place so I'm more in the range of buying 10 good deals instead of one big good deal... only cause I don't want to leave all that money lying around waiting for it's little friends to show up!  But you're talking about generating monthly what I generate yearly in terms of capital to invest, different rules!

So your numbers look reasonable but I didn't see a CAPEX reserve? Snow/Lawn might be a bit lean in my experience... it's a minimum of $35 a week for grass and snow can get pricey quickly especially if they have parking lots and sidewalks. Taxes are reasonable (I try to keep them below 1 months rent)... water/sewer/trash is expensive (similar to what I pay which is high at about 1 months rent)... property management is likely high but once you add in leasing costs it probably works out in that range.

So lets analyze. This is 10 units so it will be commercial. I'm calculating based on a 5 year balloon with a 30 year amortization at 6.5%. Given a 25% down payment (and assuming you roll closing costs into your offer), you're looking at $106,250 down and a mortgage of $318,750. Given the assumptions above, that would be a mortgage of $2,014.72. That would leave Cash Flow at $12,403.36 for the year... an 11.7% CoC return.

That's a little lean by my standards.

I would check in to the price increase. This is a commercial property... there are only two reasons the price can jump. Either a change in market CAP Rates in the area... or higher NOI. If they didn't just rehab all the units to greatly increase rent rates... or if the market didn't suddenly change making commercial properties a lot more desired... I would go back towards previous numbers. At $400k you'd be at a 13.8% CoC which is more in line with my 15% minimum.

Things to watch here... lack of a CAPEX budget (given not low taxes... and not low water... and not low vacancy... the 50% rule may not work for you here)... and in a commercial property, you won't lock a rate for more than 5 years. Chances are rates will rise... a 1% increase in interest is going to cost you $2,400 of cash flow a year... that's almost 20% of your cash flow in just 1 interest point.

It's not analysis paralysis you are describing... that generally comes from unknowns (i.e. am I budgeting enough for repairs/vacancies/etc)... the unknowns leave the analysis incomplete and ultimately result in an inability to move forward do to fear.

Numbers are numbers, you can only analyze them once... 5 + 5 = 10 and it's impossible to be paralyzed by that analysis.

What you're describing is an inability to create a weighted decision process.  You have all the data, but you can't understand your goals enough to weight them to figure out which decision is the best.  That's hard for us to help with as it's a very personal thing.  Some hate having $200k of equity tied up generating $300 a month of cash flow... others like the security of paid off properties... others would ask if the $200k is appreciating fast enough... and some others would probably complain about the tax inefficiency of equity and having positive cash flow without a proper depreciation write off.  It's all personal.

You have all the data... what it would sell for (heck, list it and get an offer if you need to)... what it would rent for (call a PM company if you need to)... how much individual rooms would go for (hello Craigslist!).  The data is there, you just need to make a decision tree and add it up.

Then you have two choices.  Trust the tree and act... OR, when your "gut" (or any other body part) is telling you to do something else... just do that, don't bother modifying the tree...  you obviously have a desired outcome, go for it!

 Any time you can buy a house for $6,000 you should be really wondering why though.  At some point there is a floor for rent... even in terribly distressed areas, there is still some minimum a house will rent for and I'm thinking it's the $200 - 400 range for a 2 bedroom home.  Having a home available with anywhere NEAR that kind of margin is just a huge red flag.  Per previous posters... someone who have just gone rent to own before letting it get foreclosed.  Have a renter pay $400 a month for 3 years and they own the property!

Like I said, it just doesn't feel right to me.  Unless the house has wheels on it, anything below about $25,000 seems strange to me... generally the dirt is worth more than that... and if it's not, why would you buy a house anyplace where dirt has no value?

Take the hair cut and move on.

Maybe take the haircut on the land and use the cash to improve the house.  If you're good at flipping, you might add enough value to not only get your money back on the purchase and improvements, but enough to cover the haircut you took dumping the land.