All Forum Posts by: Richie Thomas

Hey @Jake Denning, I'm only an aspiring investor (not an actual one, yet).  So take what I say with a grain of salt.

The first thought that occurred to me is to double-triple-check that the property's conversion from a duplex to a triplex was approved by city or county inspectors, and recorded with the recorder's office.  If the foundation is literally sinking into the ground due to the weight of the upper unit, it seems to me like there's a greater-than-zero chance that some un-permitted work took place.  If so, any code violations become your problem once you purchase the property.  And that problem gets worse if you accidentally rent to a professional tenant.  One way these people can cause problems for landlords is by calling the building inspectors (see this guy's story for an example).  If the work wasn't done to code, you could end up paying repair costs, building code fines, and suffering loss of rental income, since some jurisdictions don't allow you to collect rent until the building's defects are cured.  The good news is that, if you find out before you purchase that the work wasn't up-to-code or wasn't recorded, you could opt to use this information as leverage to talk the seller down on price.

The other thing I thought of when reading your post was that an appraiser may want to see the new rent values stabilized before factoring them into the appraisal.  My understanding is that this means you need to achieve a certain percentage of occupancy for a certain length of time (i.e. 80% occupancy for at least a year, although those are just hypothetical numbers).  I believe this would normally apply to commercial properties, which in this case would mean those with 5 or more units.  But a 4-unit is right on the cusp of that.  And in an area with few comps like the one you described, my guess is there's more ambiguity (and possibly more leeway as well) in the valuation process.  If you want the property to be appraised according to its ability to produce income, they might decide to use their regular criteria for income-producing properties.  Hopefully the bank's appraiser would be cooperative and use whatever criteria will result in a higher loan amount (which seems like it would be a win-win for you and the bank).

Of course, that doesn't mean you won't ever get your cash out at the higher appraisal value, you just might have to wait awhile before you can refi for the maximum amount.  The good news is that, in the meantime, you can still charge those higher rent amounts and get your cash flow going.

@Timothy B. Dunn no problem, I geek out on this stuff so here are a few other thoughts I had this morning.

Google Maps tells me that Mt Vernon is about 4 hours from Nashville, 3 hours from Louisville, 3 hours from Indianapolis, and a little over 1 hour from St. Louis.  Not next-door, but not the other side of the country either.  And these are all cities with much larger populations (and therefore larger tenant bases) than Mt. Vernon.  If your real estate mentor friend isn't licensed in these areas then they won't be able to represent you, but BiggerPockets is the largest real estate social network in the world and you've got ample networking opportunities here to fill that gap.

I'm not a real estate accountant or attorney and you should consult with one before following my advice.  That said, all 4 of those cities I mentioned are located in states with an average property tax rate that is half of the average in Illinois, according to USA Today's 2019 ranking of property taxes by state.  Illinois ranks as the 2nd-highest effective tax rate in the country at 2.03% (although this could be skewed by the tax rates in Cook and Will Counties).  Missouri ranks #21 at 1.03% (although St. Louis' tax rate appears to be 1.40%).  I'd also be willing to bet that the tenant laws in these other cities are more likely to favor landlords, compared with those in Illinois.  This means that in the event of a worst-case scenario, laws regarding rent increases, damage deposits, evictions, etc. are more likely to favor you the landlord.  Again, double-check with a competent real estate attorney before making any decisions based on the above.

Best of luck in your investing career.  I'm jealous that you have so many options within driving distance haha.  Having said that, the fact that your mentor has 30 properties in town just proves that money can be made anywhere as long as you get the right deal terms.  

@Mero Hernandez you should still budget 10% for a property manager, even if you plan to self-manage.  If you're right and you don't need to hire someone, the 10% will just go into your pocket anyway.  If you decide you don't want the responsibilities of a property manager after all, you'll have the budget to extract yourself from the situation and hire the job out.

Hey @Ashley Rummage, I'm also a new investor so bear that in mind as you read this.

I'm personally wary of banking on appreciation, it seems more like speculating than investing (more experienced investors than myself have said essentially the same thing).  If there's another downturn and the property goes underwater, you'll need to cover the difference between your monthly income and costs, while you wait for the property value to recover enough to where you can sell it.  If your property is cash-flow-positive, you won't have that same pressure.

On to your numbers. CapEx and Repairs budget is a combined 18%, which seems OK to me. Vacancy budget is 5%, which might be low. 1 month of vacancy will cost you 1/12 (or 8.3%) of your top-level income, or $133 per month ($1,600 / 12 months). That would cut your monthly cash flow by almost 40%, from $347 to $214. The cash-on-cash return of 7.55% was already kind of slim (the stock market averages 8-10% per year), and that 1 month of vacancy would make it even more so. And if you're unlucky enough to get a professional tenant on your hands, and if you're unlucky enough to own in a landlord-unfriendly state, you could be looking at multiple months before you're able to initiate an eviction.

Looks like you haven't budgeted for a property manager.  That implies you'll be running the show yourself.  Which is fine, if it's what you enjoy doing.  That said, one of my favorite BiggerPockets cliches is that you want to buy an asset, not a job.  Remember that self-managing will be difficult or impossible to scale as your portfolio grows.  It's like investing in a Subway sandwich franchise- you can't be out scouting for new restaurant locations if you're behind the counter serving Cold Cut Combos.

If you raise your vacancy budget from 5% to 10%, and you budget 10% for a property manager (which you should do anyway, even if you'll be self-managing), the monthly cash flow goes from $350 to $150. And that's without any other monthly expenses like lawn care or snow removal, or the vacancy issue I mentioned. Also, the 3.4% interest rate estimate on an investment loan is lower than what FHA charges for an owner-occupant loan. Your actual interest rate will vary, but investors with 780 credit scores have been quoted 5.8% for conventional investor loans, and anywhere from 9-12% or more for portfolio and/or hard money loans. When you factor those costs in, this property is probably cash-flow-negative.

There are a few other issues too.  The up-front repair budget is only $1,000 on a $200,000 purchase price, which seems low to me. The total cost of your project is more than its after-repair value, which means you're losing money on both the monthly cash flow and the initial acquisition.  Lastly, the budget for closing costs is only 2% of the purchase price, whereas I've seen others estimate anywhere from 3%-6%.  These are of course negotiable terms of the deal, and you can always ask the seller to cover your closing costs as part of your offer, but there's no guarantee they'll accept your terms.

Hey @Account Closed, mind filling out and linking to a BiggerPockets calculator report?  That makes it way easier to spot gaps (or opportunities) in your numbers.  Link here.

@Dan Mothersbaugh I'm only an aspiring investor, not an experienced one, so take what I say with a grain of salt.  In addition, the source of these numbers is just as important as the numbers themselves, if not more so. So without more info on the property (address or at least zip code, age of the property, condition of the various components such as roof and foundation, among other things), it will be hard for others to gauge the reasonableness of these assumptions or provide specific feedback.  That said, there are some things which stand out in your analysis.

You're only budgeting 1% for a property management fee.  Most PM companies will charge 10-12%, depending on the neighborhood and the company's caliber.  Vacancy, repairs, and cap-ex all look low as well.  Hard to say what's appropriate since we don't know where the property is or what condition it's in.  But a conservative estimate would be 10% for each of those 3 as well.  At the very least, I've heard 15% combined for repairs + cap-ex.  With your current estimates, you're essentially assuming infinite lifespans for the property's various components (roof, foundation, HVAC, electrical, plumbing, water heater, etc.).  Even with your up-front rehab budget of $16k, that's obviously still not a safe assumption.

Where are you getting the 7% rate for the purchase loan?  Is that private money?  That's a pretty sweet deal for a hard-money loan.  If you've already got a quote from a lender for that amount of principal at that interest rate for the 12-month term you specified, that's awesome.  If not, maybe reach out to a few local lenders and get concrete data based on your current financial situation.  Remember that hard-money loans typically charge significantly higher interest than a regular 30-year conventional loan, and they'll typically charge up-front points and fees as well (which I don't see in your budget).

Your time budget for this rehab is 2 months.  Depending on your rehab plans and which part of the country this is in, that may not be enough time.  This time of year, the climate can often cause delays in construction which can drag out your time budget and increase your holding costs.

You've budgeted for covering all the utility costs.  It's good that you've built that into your budget, but if this is a 4-plex then check whether the utilities are metered separately or together.  If separate, you can have the tenants pay their own utilities and potentially save hundreds per month (which you can then put towards your property management, cap-ex, repairs, and vacancy budgets!).

Which brings me to vacancy.  Everything I read about vacancy tells me that it's the silent killer of real estate investments.  If your units are vacant just 1 month out of the year, that's 1/12 (or 8.3%) of your top-line revenue.  And if you have a tenant who falls behind on rent, an eviction, etc., you could be talking about multiple months.  Not sure what state you're in, but if the local laws are tenant-friendly as opposed to landlord-friendly, you may have to wait several months before you have the option of evicting them.

Speaking of top-line revenue: without knowing where this property is located, it's hard to tell whether your monthly rent estimates are accurate or not.  But given the implausibility of the other estimates, I'm guessing they need some work too.  Plug your property's address into Rentometer.com, and then discount the median rent amount it tells you by at least 10% to be on the safe side.  Also check Craigslist apartment listings for how much local landlords are currently charging.

I see you've submitted calc review requests before and gotten similar feedback, from people way more experienced than myself.  The members who hang out in these forums include some of the most experienced and successful investors in the country, and they're choosing to spend their valuable time coaching newbies like us on how to improve our processes.  Please take the time to study the feedback they give you and integrate it into your future analyses.  It's the least that we can do to say thanks.

I just uploaded a random PNG image file as a test, seemed to turn out OK.

What's the difficulty you're having?  Are you able to find the upload link?

Hi @Timothy B. Dunn, I'm only an aspiring investor, not an experienced one, so take what I say with a grain of salt.  That said, looks like the property is from this MLS listing?  I see you're only budgeting 7% for property management.  Most PM companies will want 10% for a normal listing.  And I see Mt Vernon has a pretty high crime rate, so you might need to budget closer to 12% or more.  Many of the top PM companies, who can afford to be picky about their clients, may choose not to manage it at any price.

In addition, I see from Rentometer that the median rent for a 2-bedroom in that area is $625:

And those are Rentometer numbers, which can sometimes over-estimate by a significant amount.  You know your area better than I do, so I'll defer to you on what a realistic rent amount is.  But the crime stats make it seem like a rough area, and a Google News search for Mt. Vernon turns up quite a few police blotters and crime stories. Therefore you may actually want to charge slightly-below market rents, so tenant interest is higher and you can be more picky about who you rent to. Cutting your top-line income will cut your bottom-line profit by a disproportionate amount, i.e. if you reduce your rent from $650 per door to $550 per door, that means your top-line goes down to $1100 and your bottom line goes from $350 to $150. Not sure what the new COC % would be but obviously it's not 20% anymore. Something to think about.

A related reason to proceed with caution would be the larger population trends in the Mt. Vernon area.  If we again go by the info on city-data.com, the population has decreased in that area by 8% since 2000.  That means your pool of prospective tenants will only get smaller if that trend continues, and there's no reason to think it won't.

I hope I'm not discouraging you with my post.  In general, it seems to me like it's better to avoid a bad deal than to score a good deal.  If you miss a good deal, there's always the next one.  But if you lose 20% on a bad deal, you have to make 25% on your next deal just to break even overall.  But again, I'm still looking for my first property too, so definitely listen to more experienced folks first.

Hey @Joe Hamiter, welcome to BiggerPockets!  It's great that you're submitting this analysis for a review despite its negative cash flow.  Since I take it you aren't interested in the property as an investment, it implies you're more interested in getting feedback on your process.

I'm only an aspiring investor, not an experienced one, so take what I say with a grain of salt.  That said, I feel like the source of these numbers is just as important as the numbers themselves, if not more so.  It's hard to gauge the reasonableness of these assumptions without more info on the property (address or at least zip code, age of the property, condition of the various components such as roof and foundation, among other things).

I see you've budgeted $0 for repairs.  The interior photos at the end of the report look nice enough, and the property appears to be in decent shape on the inside.  However, from what I hear from more experienced investors, there will *always* be something to fix when buying a property, even if the property is fully-occupied and you don't plan on doing any immediate rehabbing.  The cabinets, flooring, and paint look to be in good shape from the photos, but what about the roof, foundation, HVAC, water heater, etc.?  By budgeting $0 for any up-front repairs, you're banking on the best-case scenario happening and not leaving yourself any margin of safety in case a less-than-best-case scenario happens.

I also see you've budgeted exactly 3.5% for the down-payment. Does that mean you'll be living on-site and getting an FHA loan or similar? If so, have you verified that total closing costs between the loan and the property will be 1.25% of the $280k purchase price? I'm not an expert but that seems low. I'm more used to seeing budgets of around 6-8% of the purchase price.

By the way, awesome to see that you're budgeting 10% for a property manager even though you appear to be planning to live on-site.  A lot of the greybeards on this site will tell you that even if you plan to manage the property yourself, if you don't budget for that expense, then you haven't bought an investment- you've bought a job.  Depending on the age of the structure, you may want to increase the monthly repairs + cap-ex budget to a combined 15%, maybe even as high as 20% if there's a lot of deferred maintenance.  Even if things are in good shape now, they may not be in 5-10 years' time.  And the way to make sure you can cover any major surprise expenses is to calculate what your monthly amortization should be for each of the major components of the property, and then put aside that amount.  For example, if a new roof would cost $15,000 and last for 30 years (both completely hypothetical numbers), then you'd need to save $41.67/month just for that one item.  If it'll only last 20 years, you'd need to save $62.50/month.  Same goes for foundation, HVAC, plumbing, electrical, etc.

I don't see any budget for utilities, and given that it's a 4-plex, I'd expect there to be some common areas (hallways, exterior lights, etc.) which would incur utility expenses that you'd be responsible for.  In addition, depending on the part of the country in which the property is located, you may need to pay for landscaping, snow removal, etc.

Lastly, another reason why knowing the location is important, is that it might open up alternative income strategies which could turn a negative cash flow deal into a positive one.  If the property is in a tourist-friendly area, you might have the option of turning these units into short-term rentals, which could improve the top-line income substantially.  If short-term rentals are frowned upon by your city but it's near a hospital or school, you could turn them into medium-term rentals (i.e. longer than 30 days but less than 3-6 months) for travel nurses, visiting professors, etc.  Still higher income than what you might get from a normal tenant.

Good luck!

Thanks @Marcello I..  Yeah I Googled around a bit and discovered the flood zone issue.  I just wasn't sure if that was the one and only reason this property hadn't sold yet.