All Forum Posts by: Richie Thomas

Thanks @Joshua Uelmen!  Super-helpful.

Oops, @Brenden Mitchum forgot to @ ya.

Brenden, the acquisition loan amounts appear incorrect.  What I've seen most people do is fund the purchase and rehab with a hard-money loan, with an interest rate of 9-12% and 6-12 months of interest-only payments, followed by a balloon payment of the principal balance at the end of the term.  Amortization doesn't come into play here, because a) you're making interest-only payments, and b) there's that balloon payment I mentioned.

Here, you've set an amortization period of 1 year, meaning you're paying off the full $169k over 12 months.  That's why your monthly P&I is so high, and why your monthly cash flow is so low.  That monthly P&I figure of $15,090 includes both principal and interest, which is why it's so huge.

The goal of BRRRR is to fund the deal with the kind of loan which is friendly toward rehabs, and then refinance out of that as soon as possible (since those loans are relatively expensive). This refinance only takes place after completing the rehab and getting the property appraised at the new, (hopefully much) higher value.

Try revising your analysis so that the purchase loan is interest-only for the same 12 months, and see what happens.  Also, assume it'll take you more than 1 month to rehab.  I have no idea what improvements you have in mind, but I agree with the comment above that $40k implies a much larger scope of work.  Try 3, 4. and 5 months as a series of experiments, and see what that does to your calculator output.

@Troy Robin the old cliche "The devil's in the details" seems to apply here, in that the origin of the numbers in your analysis is just as important as the numbers themselves (if not more so).  For example, iIf it's a triplex, how many beds / baths in each unit?  How did you arrive at an income of $2,800/month?  Is that an estimate?  Have you talked to local landlords of properties nearby to the one you're considering?  Have you used a service like Rentometer or looked at local Craigslist ads?  I'm not familiar with Timmins as a rental market, so I'm guessing $2,800/month for all 3 units is wildly generous, incredibly stingy, or somewhere in-between.  I'm curious to know where it falls in that spectrum.

The same applies for purchase price, after-repair value and rehab costs.  Those are some of the more important numbers in a rehab project (at least, according to the BP podcasts I've listened to), so you're in good shape if you can get close to accurate figures for those.  For example, I see the list price for this property is $76,000, but you've budgeted only $50,000. I'm curious what leads you to think the seller is motivated enough to accept that large of a discount. Has this property been in the market for awhile?

Double-check with your first lender that the loan amount for the rehab can exceed the purchase price itself by that amount (looks like double in this case).  I believe some lenders can the rehab costs at 100% of the purchase price.

Also, the property needs $100,000 worth of repairs, but they'll be completed in 2 months?  That seems ambitious.  Since the required rehab time will affect your holding costs, and overall profitability, consider budgeting for a longer completion time (4-5 months, maybe?).

Hey @Bryan Morton, welcome to BiggerPockets!  Looks like this property was built in 1964.  This means that, unless the major components such as roof / water heater / HVAC / etc. have been replaced recently, you'll need to budget for their replacement in the near future.  The interior photos look quite decent and it seems like the sellers took pride in maintaining the property, but I'm always a bit paranoid and I tend to assume other major issues that wouldn't be mentioned in the listing. For example:

1) What if there are zoning issues, such as minimum setbacks that the property doesn't currently conform to?

2) What if there is a major upcoming special tax assessment from the city?

3) I see gutter downspouts that don't extend 6 feet beyond the property. What if improper water drainage has led to cracks in the foundation?

One way to check if these had been replaced recently is via the Spartanburg County Permits online portal, but I took the liberty of doing this check and I did not find anything to that effect.

@Joshua Uelmen sorry to hijack your thread here, but your post raised quite a few questions in my mind.  I'd love to keep the discussion going even if you're no longer interested in this property:

Alternate methods of determining ARV?

I tried to find comps on this property (MLS here), but I had difficulty doing so. I suspect this was due to a combination of the relatively small town, and the uniqueness of the property in its area (i.e. it's a 16-unit multi-family, not a 2- or 3-BR SFH). I'll defer to those on these boards who know more about appraisals, but given how hard it is to find comps in the area, I suspect that the listing price of $565,000 is a bit arbitrary, and that a different valuation method may be called for. Would cap rates be a valid strategy for estimating ARV for a property of this type?

Is this the right way to use cap rates to calculate ARV?

Loopnet doesn't have any cap rate info for the town of Omro, but I did find some for Oshkosh (which is 8 minutes away).  I'm seeing multi-family cap rates of anywhere from 5.75% to 10.2%.  I even found a stray 2.4% in there.  Out of curiosity, I took a crack at evaluating the property using this method.  If my math is right, and if we assume a cap rate of 7%, that means this property has a net operating income of $565,000 (the list price) * 7% / 12 months / 16 units = $205.99 per unit.  Given the per-unit gross rent is $480 (taken from the original post above), that seems... unlikely, and implies the list price is artificially high.

If we assume a 10% actual margin on gross rents (an arbitrary figure, but it's a starting point), that gives us $48 per unit per month in NOI. If we then work backwards (i.e. $48 * 16 units * 12 months / 7% cap rate), that gives us a price of $131,657, much different from the actual current list price. In fact, it's so different that it makes me question my methodology. I'm not super-handy with cap rates- did I screw up somewhere in my calculations?

Last post, I promise. :-)

Since your profile says you're already a property manager (albeit for commercial space), you might actually have an advantage that few other people on this site can match, i.e. prior business relationships with landlords (either directly or through mutual colleagues).  It might make the most sense for you to put the word out to your industry peers that you're looking for owners of multi-family properties in southern California who are burnt-out and want a quick exit.  If you can find a landlord who is tired of problem tenants and all the headaches they cause, you may be able to offer them a win-win solution which helps them exit their property quickly in exchange for giving you an off-market deal at a below-market rate.  It's a truism in real estate that you make your money when you buy, not when you sell, and this is one of the ways that experienced investors make that happen.  I would think property managers would be the first to hear about landlords who are interested in selling (although you would know better than I would about this).

FYI, out of curiosity I ran the numbers for this deal assuming a house-hacking strategy, with you occupying the studio and using the 1- and 2-bedrooms as Airbnb rentals.  This property's neighborhood is likely to be a very popular neighborhood with Airbnb customers, and short-term rentals can sometimes be a way to turn an unprofitable deal into a lucrative one. Los Angeles does have strict rules limiting short-term rentals, but from the county's records website, it looks like this property doesn't fall under the local Rent Stabilization Ordinance. And as long as it's your primary residence, you can rent it out up to 120 days a year on Airbnb with an $89 fee (or all 365 days with an $850 fee). More info here and here.

I was hoping this would up your income enough to afford to make a higher offer on the property, giving you that advantage you were looking for over other bidders. And after running the numbers, I see it does raise your income by a decent bit, but not enough to outweigh some of the expenses that were left out initially.

Here's how I calculated this report:

These numbers assume an income of $150 per night for the 1-bedroom (i.e. private), and $100 per room per night for a shared 2-bedroom (i.e. 2 separate guests share the 2-bedroom), with you living in the studio rent-free. It assumes this rate will be the average rate year round (higher in the summer, lower in the winter), and assumes a average 90% occupancy rate.

However, I also added more expenses. I assumed 6% closing costs, $50,000 for furnishing the property (which your FHA loan won't cover and which will depreciate in value as soon as it leaves the furniture store), 10% each for CapEx, repairs, and management, 5% vacancy (in addition for the 10% vacancy which I factored into the Airbnb income above), $1,300/mo for property taxes (just slightly higher than the $1,250 listed on realtor.com), $780/month for PMI (BiggerPockets recommends $45-65 per month for every $100k in property value), and $500 for monthly misc expenses including re-supplies and cleaning (honestly, even $500/month may not be enough if you plan on hiring cleaners, but may be enough if you plan on turning over the rooms yourself after every guest checkout). Unfortunately, these additional expenses more than outweighed any income gains you would receive from Airbnb'ing this property. The total losses are $2,379 per month, and I didn't even factor in utilities, which you'd need to pay for in full if you're running an Airbnb.

One crazy thing I learned while analyzing this deal is that Los Angeles has a significant "gotcha" sub-clause in their short-term rental rules.  It states that, if the city decides that "further review" of your short-term rental application is warranted, they can charge you a processing fee of $5,660:

So anyone reading this who is thinking about Airbnb'ing in Los Angeles, watch out for this.

Moral of the story- California in general (and Los Angeles in particular) seems like a tough nut for residential investors to crack.  I couldn't figure out how to make this deal work, but I hope you can.  If so, please do let us know how you did it.

Best of luck!

Hey @Amanda Cheng, welcome to BiggerPockets!  A few things I noticed about this property:

1) According to various MLS-affiliated sites like realtor.com, the property's size is 1,655 sq ft and the lot is 7,193 sq ft.  But unless I'm reading the report incorrectly, according to Los Angeles' property records website, the size is significantly less: only 1,282 sq ft building size and 1,368 lot size:

I'm not sure where the difference comes from (again I could just be reading the report wrong), but definitely have your agent find out.  If the property does have less square footage than advertised, this could potentially be used to your advantage when negotiating the price.

2) The property's price is $1.2 million, but you only have $2,000 in closing costs listed.  I'm curious how you arrived at this figure.  For reference, on other deals I've seen posted here, closing costs were 6-7% of purchase price.

3) I believe the BP calculator does allow for private mortgage insurance, it just isn't listed in the same section as the rest of the loan inputs.  Instead, it's listed in the "Fixed Landlord-Paid Expenses":

4) You've got 4% listed for insurance, but this property is on a hillside and also in a "Very High Fire Hazard Severity Zone" according to the county:

This could increase your property insurance expense.  By how much, I'm not sure.  Best to check with a local homeowners' insurance broker.

> I'm not sure how best to get him to come down on price? Perhaps show him the BP PDF?

@David Lewis I was listening to episode 349 of the BiggerPockets podcast today, and the guest said something related to your question above which really resonated with me.  He was able to make an offer on a large apartment building which was over $1 million less than asking price, and that offer was accepted within 30 minutes.  He said that, if you're going to cut someone on the purchase price and cut them deep, your odds of success increase greatly if you can back up your relatively low offer with ample evidence (i.e. hard numbers, backed up by research) on why the low offer is appropriate.

This could be any number of things.  I'm just spit-balling here, but some examples are: your inspection tells you that the grade of a property drains water toward the foundation rather than away from it, and this is causing cracks in the  concrete which are serious enough to require a structural engineer's intervention which will cost $X.  Or your preliminary zoning search with the county assessor's office has determined that the property's setback doesn't meet zoning requirements, and fixing this zoning issue would cost $Y.  Or that the upcoming winter weather will cause delays in the exterior portion of your rehab, increasing your anticipated holding costs by $Z dollars per month, and this deal's numbers don't make sense unless the purchase price takes those delays into account.  Obviously you have to be telling the truth when itemizing these costs (i.e. obviously don't say an inspector mentioned the foundation if they never did so), but this is a situation where it pays to be as pessimistic and conservative as possible.

This strategy may or may not work on this property with this specific seller, but it could well work on similar properties in the area.  Speaking of which, it may make sense to take into account the seller's industry experience (and likely large information advantage) when deciding whether to move forward with the deal.  Presumably, if the property is a good investment, the seller's experience allows them to discern this fact and would tell them to hang on to it.  So I'd be sure to get a convincing answer to why they're now looking to part with it.  As they say in poker, if you're at a card table and you can't tell who the sucker is within the first 30 minutes, you're the sucker.