All Forum Posts by: Nathan Emmert

You didn't tell us what you were investing for... Cash flow... Tax savings (at your implied income of $300+K a year this won't matter)... appreciation... something else?

This is debated about as much as the 50% rule around here... so pick a team (vampire or werewolf!) and go from there.

I'm a cash flow investor... I buy off the rule of "buy the numbers today".  I don't buy assuming rents next year will be 25% higher... I don't buy expecting the house to appreciate 5% a year with a 10 year exit strategy... I buy off today's interest rates and today's market rent rates for the shape the units are in (or will be in if I've figured in rehab costs).

From there the real question becomes are you better off buying ten $100,000 properties that each rent for $1,500 a month... or a single $1,000,000 property that rents for $15,000 a month.  You can either diversify risk (10 properties)... or lessen headaches (1 property versus ten... 1 loan process versus 10).  I can understand why some would want the discrete entities (could cash out just 1 property and keep $850k in property instead of having to cash out the entire $1,000,000)... but I think I'd go big personally.

 Hopefully a lesson learned on "free" houses.

Look at your numbers... lets say you're right... the comps are in the $20s... say $25k.

You want $6k... and I'm guessing that's a mark up from what you paid "just" to sell it to a wholesaler... the wholesaler is also going to want a market up to find a cash buyer fix/flipper.  What is his time worth?  Is he going to work for less than $2,000... $4,000... $6,000 a transaction?  Lets say $4,000... that's not a ton of money per "deal"... but man, that's a HUGE mark up on a $6,000 property.

So now he's in $10k selling to a fix/flipper... they want to be at 70% of $25,000 or $17,500.

So if he bought it for $10k... he has a $7,500 budget for repairs... if you read anything by J Scott, it's hard to do much for less than $15,000... and that's purely cosmetic.  By your own admission, this property isn't "that" distressed... which means it "is" distressed.  But lets say by some miracle he can do the rehab for $7,500.

Now what?  He took that risk... all for a $7,500 gain?  All it takes is 1 surprise in the walls and he's not only working for free, he's losing money... Electrical, Plumbing, Asbestos... any of them could completely wipe out his profit.  Sure... making $7,500 on a $7,500 rehab, two for one improvement sounds great percentage wise, but the numbers are too small for that to matter.

So maybe he isn't planning to sell, he flips to himself as a landlord, he wants to save the closing costs (which I didn't even mention above and would eat away $7,500 pretty quickly). He buys it, gets it ready, and rents it for $500 a month. But, why? He bought and rehabbed a $25,000 property for $17,500... I'm sure he can buy $25,000 properties for $20,000 or less all day long off the MLS, through Craigslist, wholesalers, etc... and NEVER have to worry about the risk of a rehab. He's a landlord, not a flipper... if he were a flipper, look above, the margins wouldn't make sense!

I agree with the wholesalers... get some capital back, lesson learned, and move on.  If you have access to the capital and believe your own numbers, chase it... but having money tied up with no clear way out... get the cash back in your pocket and put it to work in a useful way instead of allowing it to waste away in a sunk cost.

Write it into the lease either way... based on heads or square footage... heads tend to change, square footage doesn't so I believe the majority of people use the later.  You could also write in when the other unit is vacant the % goes from 50% to 100%.

In Utah, we can do this for gas and electric (I have to for my triplex) but it's a no no on the water bill.

There are lots of reasons to buy a negative cash flow property... you haven't really told us if this meets any of them.

Are you buying instant equity (i.e. below Fair Market Value)?

Are you buying in an area where the home will appreciate?

Are you buying in an area where rents are likely to rise quickly?

Frankly, I buy on today's numbers as my crystal ball is always hazy and I'm not much of a gambler.  That said, I would buy a break even property if I could get it for no money down even if it wasn't at a discount.

What I would not do though is buy a negative cash flow property... even for free.  That is what this is... unless you can answer 1 of the 3 questions above with a big Capital YES, sounds like a loser.

I'd wait 3 to 6 months after your first splash.

Why?  Simply to learn some lessons from that first purchase (whether it be 1 property or a couple) to incorporate into future buys.  Sometimes it takes a while for things to popup so immediate success doesn't always translate to long term positive results.

Beyond that, never grow too fast that you crunch your cash reserves.  There's a new "deal of the century" every single day.  If you're leveraged too far without cash reserves chasing one too many deals can cause the entire thing to collapse completely destroying the wealth you're trying to create long term.  This isn't a sprint.

I target 1.5% of purchase price for monthly rent as a minimum... given 25% down at today's interest rates of 4.5% and 50% assumed expenses, it gives me a CoC of something like 18%... I prefer to be closer to 2% rents but being a more passive investor, I don't shop for deals as hard as others.

I'll be honest, I have no idea what you're talking about.  I read this early in the morning so probably breezed through some numbers I shouldn't have...

But you say taxes and maintenance are 1.5% of list price... each... 1.5 + 1.5 = 3%... right?  3% of $600,000 = $18,000 but your expenses are only $16,000 a year?

What about property insurance?

In a triplex, the owner generally pays water/sewer/trash, where is that expense?

Who is taking care of the landscaping?

Where is the property management cost?

You aren't expecting any vacancies?

Are you CAPEX expenses figured into your maintenance budget or separate? What about the cost to get your vacancies rent ready and other repairs?

Texas isn't a low tax state... I would expect half your GOI to go towards expenses in the long term.  If they are recently renovated you'll likely be lower than that for the first 5 years or so as stuff ages.

Given all that, this property generates less than 1% rent versus the purchase price. With a 25% down payment you'll be lucky to break even. In my market I can "buy" that much rental income for less than $300k straight off the MLS. I'm not saying it's not a good deal for your area (I don't know your market) but it's a terrible deal from a cash flow or CoC perspective.

1% properties rarely cash flow that well... I would question the reserves you've established for vacancy, repairs, and CAPEX.

The comps you quoted require the same level of repairs to make them rent ready?  If not, sounds like you're buying a distressed property at fair market value which is generally not our goal as investors.  Most owner occupied buyers don't want to walk into a home that immediately needs repairs.  The need for repairs generally allows investors to buy at a discount beyond simply what the repairs cost.

Not really?

What are comparable properties selling for?  Are you buying at a discount?

What will it rent for?

I'm investing more passively as I work full time and have a family... that said, I target a minimum of 15%... my goal is to get at least 1.5% of purchase price in rents.