All Forum Posts by: Richie Thomas

Hi @Joel S., I'm a new investor so take that into account.

Where are you getting the 5% property management fee from?  My understanding is that most PM companies charge 10-12% depending on their reputation and the property itself.

How old is the property?  How old are its various major components, such as roof / HVAC / plumbing and electrical systems?  That will go a long way toward determining both your up-front repair costs and your ongoing repair / capex allocations.  As it stands, both of those seem super-low.  Very few properties have literally no repair costs.  At the very least, I'd expect there to be some cost to modernize fixtures, outlets, and maybe paint touch-ups.

Your interest rate is 4.5%.  Is this going to be a house hack or something?  That seems like an incredible deal for a non-owner-occupant loan.

Why are you putting 30% down on this property? Is that how you're getting such a low interest rate? How does the cash-on-cash ROI % compare if you pay a higher interest and put down less money?

How many units is this property?

What is the source for your monthly income estimates?

Hey @Kisha Peterson, I'm still an aspiring investor, so take the following with a grain of salt.  Re: managing the property yourself: I'm curious what your goals are for your career as an investor.  Do you plan to grow your portfolio to a significant size?  Are you becoming an investor in order to free yourself from your day job, like a lot of others (myself included)?  If so, consider budgeting for the expense of hiring a PM, even if you do initially plan to manage the property yourself.

If it turns out you don't need to hire this job out, then the money will go into your pocket anyway, as if you hadn't budgeted for it in the first place.  But if it turns out you want to extract yourself from those duties, you will have the budget to do so.  Say you decide to spend more time scouting properties and growing your portfolio.  Without someone to take over the property management, I'd think this would be hard to do (or at least, harder) if your PM duties at this property take up the bulk of your time.

You've obviously got more experience as a PM than I do, so feel free to correct me on that.  But the metaphor I've heard (which seems accurate) is that, if you buy a property just to manage it yourself, you haven't bought an investment- you've bought a job.

Hey @Jahbari McLennan, I'm a rookie investor so I may be wrong, but I believe one major benefit to the seller is that they get less of a tax hit.  The payments are spread out over a number of years, so the sellers are much less likely to be bumped up to a higher tax bracket, compared to receiving a single lump-sum payment.  The exact dollar amount in tax savings depends on their current income level and tax bracket, which I doubt they'd divulge to you.  So you could give examples based on a number of different income assumptions, i.e. if your income is currently $X (placing you in tax bracket Y), then your tax obligation would be $Z if I pay you in one lump sum, or $Q (which is hopefully much lower than $Z) if I pay you over a period of 30 years.  Do this with various assumptions for $X, and they'll get the picture.

Also, you're paying them interest!  Say the selling price is $100k and you agree on 3% interest per year.  If you amortize that over 30 years, the total interest you will have paid them is $51,777.45 (according to BankRate's amortization calculator).  This doesn't take into account the time value of money, but as long as the interest rate is greater than the inflation rate, the net effect is that they're earning more from your offer than from another offer which is financed by a conventional loan.  And as long as the agreed-upon interest is less than what your bank is quoting you, your mortgage payment and total interest paid is less, too!  So it's a win for both you and the seller.

That would be my sales pitch, in a nutshell.

Hey @Jermaine Chad Ingram, have you confirmed that your lender will lend you 50% more for the repairs than for the purchase price of the property?  All lenders are different, but I have seen terms which include the repair cost can't exceed the purchase price.

Another risk factor on this deal is the ARV. I'm not an experienced investor so bear that in mind, but I would think that the more repair work is needed, the harder it is to accurately assess the ARV. And that $200,000 figure is pretty round. In my experience, round numbers in pro-formas mean they're ballparks, and aren't based on the sum of estimates of many smaller, more specific repair costs. Can you share where this number came from?

Also, what kind of loan are you using for the refinance?  I see the interest rate is 4.5%, is this an owner-occupant loan or an investor loan?

Lastly, where do the income figures come from?  I see you've budgeted for a property manager (glad to see that); have you identified a PM already, and have they said that $850 per unit will not only be achievable, but will help you attract enough tenants so that you can be picky about who you rent to?

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@Jacob Humiston a rental room is only worth what people are willing to pay for it. You can name whatever price you want, but unless people are willing to pay it then you’ll be out of luck.

Also, careful about charging too high a price relative to properties at a similar quality level and area. If you do so, the only people who will agree to pay it are people who have been turned away elsewhere, i.e. problem tenants with a history of evictions or other red flags. From the property managers I’ve talked to, some will actually slightly under-price their property in order to have the reverse effect- lots of interest in the rental, therefore they can be picky about who they rent to.

Hey @Jacob Humiston, your income estimates are quite high. A quick glance at the Craigslist apartment listings for the West Ashley neighborhood tell me that a 1-bedroom rents for around $550-750 per month, giving you income of *maybe* $1500. You could try Airbnb'ing the property, and that would get you to $75/night * 30 nights * 2 units * 50% average occupancy = $2,250, but even then you'd have additional expenses which you wouldn't incur otherwise. I agree with @Jaysen Medhurst, this property won't work as strictly an investment.  It's got curb appeal, and you may be able to reduce your mortgage payments by renting out the rooms you don't occupy, but it's not great from an investment perspective.

@Geren Knight III I use a combination of City-Data.com and NeighborhoodScout.com, although I'm always open to learning more.  One quick shortcut I've sometimes used in the past is to do a Google News search on the specific neighborhood the property is in, and see what kinds of stories come up.  If it's a lot of police blotters and violent / property crime reports, I know it's a D-class neighborhood.  If it's mostly stories about bake sales and farmers' markets, I know it's an A- or B-class neighborhood.

The one time I *might* consider investing in a D-class area if it was directly in front of the city's immediate path of progress.  For example, if a major university was opening up a new building in a formerly rough area, there might be a need for student housing nearby.  This happened with my university (USC, near downtown LA) right around the time I was graduating 20 years ago, and I wager the folks who bought those properties made a lot of money on those deals.  But these are exceptional circumstances, and depend on the investor having information that most people in the community don't have, so it's probably something that is reserved for investors who are already successful and / or have political access.  Still, it's a great idea to keep abreast of your farm area's development trends and the likely path of progress.  It's something most individual investors likely aren't prioritizing.

@Alejandro Obando I wouldn't include the rent for your unit as income for the period you plan to occupy the unit, but I would include it for the time period you don't intend to occupy it. For example, if your plan is to live in the property for a year and then move to a new FHA-financed multi-family and repeat the process, then you'd assume income from the 2 tenant-occupied units for year 1, and from all 3 tenant-occupied units for years 2 onward. Keep in mind that that you must live at the property for at least a year in order for you to keep in compliance with the rules of your FHA loan.

If you're not looking to become a professional property manager, and if you are looking for mailbox money, I'd suggest you budget for (and hire) a property manager for this and all future properties.  It's like investing in a Subway sandwich franchise.  Do you want to become skilled at scouting new restaurant locations and growing your portfolio of restaurants, or do you want to become skilled at making Cold Cut Combos and interacting with hungry customers?

The 5-6% figure was with respect to the purchase price.  A non-exhaustive list of closing costs includes loan application fees, points, prepaid homeowners' insurance, appraisal fees, inspection fees, transfer taxes, escrow fees, attorney fees, recording fees, prepaid interest, prepaid private mortgage insurance, title insurance, and title search costs.

Hope that helps.

Hey @Billy Sarno, I'm only an aspiring investor (not an experienced one by any means).  So take what I say with a grain of salt.

The price-per-square-foot looks decent, these are the PPSQ comps from PropertyShark:

By comparison, PropertyShark says this is a 3,395 sq ft property, making it $32.40/sq ft.

Make sure you're aware of what kind of neighborhood this property is located in.  Here's the NeighbrhoodScout.com crime map, side-by-side with the Google Maps pinpoint of this property's address.  You can see it's... deep purple:

You know your farm area better than I do, but keep in mind that with a D or C-class area, you'll want to factor in higher repairs + capex rates, as well as higher vacancy rates (due to the likelihood of more frequent non-payment of rent and evictions you'll face.  Make sure you budget a few extra % points for a property manager who has seen it all before, so that job won't fall on you.  You'll need to at least double your current 5% budget to 10%, likely 12% to be safe.  Some PMs won't take on D-class properties no matter how much you offer them.

Your property insurance might actually be high.  Realtor.com's listing is telling me $50/month, not $150/month as per your analysis.

Repairs + CapEx are 10% right now. This property was built in 1890, so you may want to double those.

You mentioned this is a 4-plex, but you didn't mention how many bedrooms are in each unit, and neither does the MLS listing. I *think* $600/unit is fair given what Rentometer is telling me, but I'll defer to you if this is your backyard. Talk to a competent property manager about what they think they could take down for this neighborhood:

5.0% might be a *bit* low for a non-owner-occupied loan.  I have 780 credit and I've been quoted 5.8% for a 30-year fixed, for my first property.  That's with a point or two on top.

Speaking of which, this property looks to need significant work.  I really want this to work for you but the amount of rehab required gives me cause for concern.  Have you considered partnering with a more seasoned investor for this property?  A financial base hit on this property wouldn't be so bad if you could learn-by-observation from a seasoned vet.