All Forum Posts by: Ray Johnson

@Aaron Lancaster Question regarding raising the rent on Unit B $100 per month, What is causing Unit B to be that much lower than Unit A? Is there a big difference in interior layout, finishes, appliances, etc. a $100 difference per unit on a duplex should be defined for the reason.

In regards to the $1,040 Gross rent, that number is irrelevant, The amount of rent that goes to your Net bottom line is what matters. because you're dealing with small numbers for a Duplex, you have to look at this deal as to when will you make your out-of-pocket money back?

Is this a cash purchase of financed? At what point in the cycle do you get your $23,000 in rehab cost and your 20% down payment or $75k cash purchase cost back? Keep in mind there is no true Cash Flow until all of your initial investment has been paid back from the Net Cash Flow. 

Run your numbers and let us know at what point in the cycle to you break-even and start making money, Is it in year 3, year 5, or what?

Looking forward to hearing your response. 

@Somaya Abdelhadi You mentioned you're trying your hand at "Virtual Wholesaling", A deal of this size will require you to be on the ground in the area of the properties in Memphis.

The first thing I'll point out is important, the value according to Zillow is worthless, If a Wholesaler presented a deal to me using "Zestimates" from Zillow, I'd know they don't know what they are doing and are wasting my time. You need an agent to provide you with recent Comps from the MLS because when it comes time to appraise these properties an Appraiser isn't using Zestimates from Zillow, they are going to appraise based on reality. It's easier if all the properties are very close to each other, if there are different zip codes, there will be more work involved establishing actual value.

You mentioned all but one is rented, What's the condition of the interior, exterior, and mechanicals? An experienced buyer doesn't have "shiny ball syndrome" this means they will not be enticed by the $7,560 a month, they will want to know what's this property going to cost during their projected holding period. Speaking of the "$7,560 a month", Is that Gross or net income, What's the breakdown per property? That's something else you want to list, often a bulk sale will have some good properties, some ok properties, and some really bad properties that the owner can't sell on their own so the bulk sale is the best or only way to go. Remember when you buy in bulk, there's an expected discount, especially for a cash buyer, so the seller is saying I have properties for sale that I'm willing to make less money selling in bulk.

I don't know much about Virtual Wholesaling, but this may require some in-person work so I'm not sure how to get around the fact that he doesn't want people walking the properties disturbing the tenants, I would never participate in a deal that I can't have each property clearly walked and inspected. You will also need the buyer to have their GC or several GC's walk the properties to provide reliable rehab estimates if needed.        

@Robert Hooks I think you should be looking at this as over the years your tenants will be paying the $350k in interest and not looking at it as if you're paying it. If you're doing this right, the business entity/Asset is paying the Interest from its business operations, not you.   

I say move into the property for the 12+ months to satisfy the Owner occupant requirement for the one year then lease that unit out, and ride the new lower rate out for the next 30 years.

After the one year OO timeline you can get the DTI hit off your books since the property cash flows and the income will cancel out the Debt hit if it's good enough.

@Eric M. I agree with you 100%. I usually perform online analytics first, get a realtor onboard to cross reference my data, then I usually take a week long trip to the area I invest in confirming my findings. I try to get a lot of the time consuming preliminary items out of the way prior to travelling to the area so I'm not making too many trips.

When I first started doing OOS investing, I would travel to an area first, check it out and I found myself constantly going back and forth for areas I missed or got referred to last minute, or an agent wanting to show me new areas once I've left, I was wasting a lot of money going that route, now I try to crunch as much as I can before travelling.

@Adam Sankowski Thank you for the very good insight! I never thought of looking at the school ratings that way in an area experiencing gentrification.

The properties close to the Fountain and Lilly are too expensive to cash flow as a Buy-and-Hold. I'm seeing some in Fountain Square but others are heading into nearby neighborhoods, I see some in the Bates neighborhood but I'm not sure how to read the neighborhood when I see a lot of security metal/bar screen doors on some of the houses.

What are your thoughts on the Irvington neighborhood?  

I'm going to send you an email I have a few questions regarding your experience in Indy as an OOS investor.

@Jay Hinrichs That's true! I'll leave the construction and development to guys like you that know what you're doing and can take advantage of those economies of scale building many homes in one area, I would never do a single site project, the cost would be too much and no money would be made if I tried it.  

@Caolan Hoff Thank you for that information. As an OOS investor I usually look for fundamentals to quantify my investments, I'm currently leaning towards Warren as I analyze the various Class B neighborhoods. I see there's more Class B product the further you get away from Downtown but I'm not a fan of the suburbs, I like having a larger pool of rental applicants to choose from to place.

What are your thoughts on Irvington?

I'll reach out to chat. 

@Jay Hinrichs I agree with your philosophy 100% on buying an $80k rental next to a $300K rental. I guess it's throwing me off because I've only bought this early into a gentrifying area once before. The last gentrifying area I bought into had just selected a winning developer, the contract award came with City approved plans for the developer to build out a combination of 2,600 new SFR's Condo's, For-Rent Apartments, and a Senior project, with some affordable units sprinkled into the mix to appease the local politicians for gentrifying the area and forcing the poor out, there was also a Whole Foods, Target, and others retailers committed. That I could quantify the value of paying a little more early in the gentrification stages, that property went up in value over 100K the first 18 months of possession.

What's going on in this area of Indy I can't seem to quantify it other than some people are buying $40k - $80K properties, tearing them down and building new, some are doing gut rehabs with a change in floor plans, and some are buying the $60k-$90k property putting $30k into it and renting it out in hopes of the spike.

When I see the land for these lots are valued at $4,000 - $6,000 depending on lot size, that's a big gamble to teardown and scale that $40k - $80k property purchase to the $250k - $300k properties that are being sold on some of these deals. If there were better fundamentals other than it's the next "Hot Spot" I'd feel a little more comfortable.

I may go one neighborhood over to Warren, a true current Class B neighborhood where I can get decent cash flow with less risk. 

As an Out Of State Investor acquiring Class B product tells you how conservative I am, If I were a gambler I'd be in Cleveland dealing in the high cash flow Class D/F product and dealing with the headaches that come with it.   

I'm looking for some B Class properties for my Buy-and-Hold portfolio in Fountain Square and Warren Park area of Indianapolis.

I was looking at this   Investors Guide to Grading Indianapolis Neighborhoods and noticed that Fountain Square is listed as a Class B neighborhood but the schools are rated 3 out of 10 (that's not Class B in my world), and the neighborhood doesn't look like a Class B neighborhood. I understand it's going through a gentrification right now, one of the properties I'm looking at has two new construction properties next door. It seems like sellers are trying to charge for this neighborhood gentrification on the front-end before it actually takes place, I don't believe in prepaying for potential/projected appreciation so this is throwing me off. Additionally all the sellers are saying the area is a trendy hangout area with bars, restaurants, and major employers nearby, etc.. Maybe it's because I'm from Southern California and grew up in Los Angeles but this just looks like a regular Class C neighborhood, What am I missing?

Warren seems a little more like a Class B neighborhood, better schools and a more suburban feel.

I'm seeing varying rents in both neighborhoods Fountain Square and Warren but Warren seems to be a little more consistent at the high range and I don't have to search for the good pockets, but there doesn't seem to be anything to draw people to the neighborhood like Fountain Square.  

Am I missing something in the proximity to Downtown Indy with these neighborhoods?

Other than the future possibility of a complete gentrification in Fountain Square, What else is there that's demanding Class B+ pricing in a Class C (some areas) and Class C- in other areas?

If you're an Indianapolis local please enlighten me.

Thank you 

@Steven Lewis Congrats! If you pull 80% of the cash out, Does the property still cash flow? If so, there is zero reason for you to leave the cash in the deal. I always tell people to look at the deal this way, the cash you have in a deal at Closing on day one is basically prepaid rent that you loaned your tenants and they are paying you back in monthly increments until you hit the break-even point of zero out of pocket dollars in the deal. You don't see true cash-flow or profit on a deal until you have all of your money out of the deal.

An example on the better option on your deal would be:

$420,000 - purchase price plus all closing cost etc...

 $84,000 - 20% Down payment

$300 per Unit NET cash flow monthly (Not sure what you actually get but this gives you an idea if you drop in your number)

7.78  - years before you really cash flow and start to profit on this deal if each of the three tenants pay rent of $1,500 per month.  Since this is before EBITDA the timeline does get reduced a little on the back-end after EBITDA. Rent increases and the future Coin Laundry facility can speed up this timeline as well.  

Basically leaving the $420,000 all cash in a deal is a really bad idea especially since you can use the $336,000 cash-out on another deal.

I would sit the $336k in my Savings account at Goldman Sachs earning 2.25% until I need it, that way it's earning money instead of costing me money every month until I use it on a better earning option.