All Forum Posts by: Richie Thomas

I'm considering partnering with a wholesaler for my first deal. I found one here on BP who is both a realtor and a wholesaler, which reassures me because they'll need to keep their real estate license in good standing.  The research and online footprints of both the wholesaler and his business partner make them both seem trustworthy (licenses are current, no suspensions, active involvement with thousands of posts here on BP, no red flags on the BBB).  I also plan on finding a realtor in the wholesaler's farm area who offers consulting services, and have them look at the properties the wholesaler sends me, once that process kicks off.

I haven't found anything to make me doubt their credibility, but this is my first rodeo and I'd like to lean on the BP community folks who have been through this before.  I'm interested in performing sufficient research, both on these potential partners AND on the properties they send via their buyer list.  Trust but verify, right?

If you've been buying from wholesalers for awhile, what are the top due diligence checks you've learned to perform over the years?

I recently discovered that City-Data.com contains data on the # of single-family home construction permits issued over the last 20 years for many major and minor cities in the US.  For example, here's Bolingbrook, IL:

I'm showing it peaked in 2003 and then bottomed out over the next 5 years, and has stayed there ever since.  This is despite the permit cost in Bolingbrook being lower (sometimes significantly so) compared to the statewide average.  I'm assuming it's a negative indicator about the viability of this farm area, since builders are smart and go where the money is, and if the local market were strong then they'd build more homes.  My question is- how strong of a negative indicator is this?  Does anyone else use this as a signal when evaluating a farm area, and if so, how much weight do you give it?

No problem @Account Closed.  Also (and I'm blatantly copy/pasting here from something I just wrote on another forum post):

Just because this deal *might* not work as a rental, doesn't mean it's out of the question. One of my biggest take-aways from the BiggerPockets community is to replace "I can't make this deal work" with "How can I make this deal work?" in my vocabulary.

A surprising number of properties can be made to work at the right price, with the right creative financing, or with the right income strategy. If the deal doesn't make sense at the current purchase price, at what price would it work? If this property won't work as a straight-up rental, would it work as a short-term rental (i.e. Airbnb)? If it won't work as any kind of rental, would it work as a fix-and-flip?

I've found that my learning and comfort with deal analysis have increased exponentially since I start looking at deals from the above perspective. It also increases the number of options I perceive, which makes me feel more confident and in control of my investing future.

Also @Jason Lacourt, just because this deal *might* not work as a rental, doesn't mean it's out of the question.  One of my biggest take-aways from the BiggerPockets community is to replace "I can't make this deal work" with "How can I make this deal work?" in my vocabulary.

A surprising number of properties can be made to work at the right price, with the right creative financing, or with the right income strategy.  If the deal doesn't make sense at the current purchase price, at what price would it work?  If this property won't work as a straight-up rental, would it work as a short-term rental (i.e. Airbnb)?  If it won't work as any kind of rental, would it work as a fix-and-flip?

I've found that my learning and comfort with deal analysis have increased exponentially since I start looking at deals from the above perspective.  It also increases the number of options I perceive, which makes me feel more confident and in control of my investing future.

I'm not sure what you mean by "hacking the house", @Aaron Furr.  Is your intention to house-hack?  Or will you be renting out all the units to transitional housing tenants?

In terms of licensing requirements, I'm not a ninja Section 8 investor by any stretch of the imagination, but I did do some research and came up with the following.  It seems that Section 8 requirements for landlords look more or less like the following:

1) Landlord submits a request for approval.  The application may look something like this.

2) Pass initial and yearly HUD housing quality inspections.

3) Collect security deposit and monthly rent.  Section 8 apparently does not cover the deposit, and they only cover a percentage of the rent, not all of it.  The portion paid by the tenant will be paid directly to you by them, and the Section 8 portion will be paid to you by the government (not sure if this comes in the form of an ACH transfer, a check in the mail, or something else).

4) Adhere to the terms of the lease, and address any maintenance requests promptly in order to stay in HUD's good graces.

5) Notify HUD if you plan to raise the rent. You're only allowed to attempt a rent increase once per year.

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Source for the above info here.

More info from HUD, including how to determine Fair Market Rents in your area (i.e. how much HUD will let you charge) here.

How to find your local Public Housing Agency (if you want to apply to be a Section 8 landlord) here.

Info from HUD on inspection requirements here.

@Jason Lacourt not a problem, and welcome to BiggerPockets.  I'm less than a year into the real estate game myself, so please take what I say with a grain of salt.  I'm still looking for my first deal and I only know what I've learned from books, podcasts, etc., which isn't the same as first-hand lessons from the real world.  Good luck and keep us posted as you level up.

Hey @Account Closed, thanks for posting:

1) I'd absolutely agree with @Jaysen Medhurst about re-tenanting.  The opportunity to rehab + raise rents (forced appreciation), combined with getting rid of the bunk-beds in the kitchen (and the person who thought it was a good idea to put them there), is a double-win.

2) If you do decide to raise rents, you'll need to add money for up-front repair costs.  As others have mentioned, there's *always* something (especially in a house with interior issues like this one).  I'm budgeting $15,000 but I'd bet even this figure would be quite optimistic, considering the property was built in 1919.

3) I'm showing the rents for each unit are currently $900 + $450 + $500 + $750 = $2,600 for the existing tenants (according to the Realtor.com listing).  You've got $4,100 listed as income, plus that extra $100.  Even at market rates, each of the 2 studios goes for a median of $606, and each of the two 2-bedrooms goes for a median of $1,250.  So this is a total of $3,700 per month.

4) 3.70% for a non-owner-occupied property (I assume you're not occupying?) is optimistic.  Have you been quoted this rate?  If not, talk to a local lender and get pre-qualified for this property's purchase price and see what rate they can offer you, and factor that in to your updated report.  I'm writing up a version of your report (see below), for which I'll budget 5.8% (which I've been quoted for myself, but which depends on your credit and financial situation; investor properties are riskier for lenders, and therefore have higher interest rates).

5) +1 about vacancy, capEx, and repairs being low.  I'll budget 15% for capEx and repairs combined, although 20% (and 10% for vacancy) would be more conservative.  Keep in mind that if you re-tenant, your vacancy (and therefore holding costs) will be higher due to the (assumed) rehab you'll be performing.

6) Double-check that these 4 units are metered separately for utilities.  Otherwise, you'll likely want to have them split so that you can deflect the costs of electricity, water+sewer, etc. to your tenants.

7) Agreed that 12% might be a bit much for a property manager, although if the property is in an undesirable area, you may have to pay more than usual to attract a top-quality PM.  I don't know much about that area, but NeighborhoodScout.com gives it a crime score of 1/100 (as low as it goes), and City-Data.com shows the local crime rate is well above the national average.  I'll leave the estimate at 12% for now.

Here's an updated report I came up with. Unfortunately, I'm showing the property only cash flows at $110 per month, at a cash-on-cash return rate of 1.17%. California is tricky unless you're buying an off-market property. Finding a deal in this state on the MLS with a good projected cash-on-cash return would be surprising to me. You might want to consider either working with a wholesaler, starting a lead-gen operation of your own (i.e. SEO advertising, yellow letters, etc.), or investing out-of-state.

Good luck to you.

Hi @Theresa Gordon, a few thoughts:

1) I see that this property has been on the market for 89 days as of today.  That's a pretty long time, but I'm not sure it's safe to assume a 10% discount off the listing price.  I'm not a realtor, though, so I may be wrong.

2) $3,000 in closing costs on a $140,000 property sounds like a great deal.  Is that an assumption, or something you were quoted, or have you arranged some sort of creative financing (i.e. a loan from the seller)?

3) $0 in up-front repair costs, and 3% in ongoing repair costs, is quite optimistic.  The interior of the property looks nice from the photos, but listing photos are designed to look nice.  And they won't include hard-to-spot items which may need work, such as plumbing, electrical, HVAC, etc.  There may be big-ticket items that need repairs, such as the roof or foundation.  Lastly, I do see an old-timey radiator unit in several of the photos.  Maybe speak with a realtor about whether renters are accustomed to living in a unit with a radiator, or whether a more modern HVAC system is expected. . HVAC systems can be surprisingly expensive.

4) +1 to @Michael Albaum's comment about the down-payment. Even if you've got an FHA loan and this is a house-hack (where you live in one unit and rent out the other), you'd need a minimum of a 3.5% down-payment. And then you'd lose half your income, since you're only renting out one of the two units.

5) Will you be managing this property yourself?  If so, have you considered all the individual responsibilities of a property manager, and whether your current schedule has space for those duties?  Consider the fact that you'd be saving 10% of the property's monthly income (or $200), and divide that money by the # of hours you'd spend managing the property.  Decide if your time is worth that hourly rate.

6) Crime- looks like Lakewood is quite a safe community!  City-Data.com shows the crime rate is around half the national average, and median income and property values are up significantly over the last 20 years.  

7) Rentometer is showing the local rent rates are flat and/or slightly decreasing over the last 3 years.  Something to think about.

I updated the report based on the assumptions above, which you can see here.  The good news is, it's still cash-flowing (which is good news considering I feel like my assumptions were conservative).  The bad news is, it's only a 3.20% cash-on-cash return.  Not a very high-performing investment, unfortunately.  Maybe an investor with more experience than myself can take another look at the numbers and find a way to make this deal work where I couldn't.

Best of luck. :-)

Hey @Jason Lacourt, a few thoughts:

1) Not sure if you saw this in the property description, but this property is being sold together with this other property, because the 2 properties share a driveway.  This other property is $200,000 and quadruple the price-per-square-foot.  The interior looks to be in similarly acceptable condition, but it's only a duplex.

2) Water and sewer is 12% of your expenses?  Is that common in Canton?

3) Your combined up-front + ongoing repairs budget seems low (3.5% up-front + 5% ongoing).  The properties both look decent from the inside, but listing photos can be deceiving.  There may be issues with the roof, foundation, etc. which aren't visible from these photos.  There's always something that needs to be updated, even if it's just fixtures on the kitchen and bathroom cabinets.  It'll add up.

Also, tenants have a lower pride of ownership than owner-occupants, so your wear-and-tear will be higher.  Both of these are reasons to set aside extra money from your monthly budget.  Then if you've over-estimated, you can be pleasantly surprised.

4) I'd +1 @Dennis M.'s comment about the rent.  I had a look at Rentometer.com and found the following average for a 2-bedroom:

Note the average is $550/month.  If you're buying both properties (which you'd need to unless you're sufficiently talented at negotiating with the seller), you'd receive a total of $3,300 for the two properties.

Also note the ups and downs of the rent market in your area, from the graph on the lower-left.  Take that into account when setting expiration dates on your leases.

5) I don't see a budget for homeowners' insurance.  I'm seeing a combined budget of $75/month from the Realtor.com listings.

6) I don't see a CapEx budget either. This is for major repairs, such as a sudden leak in your roof or a water heater that conks out in the middle of winter.

7) I don't see a budget for a property manager.  Are you planning to self-manage?  If so, make sure you're fully aware of the workload you're taking on.  And in doing so, you'd only be saving about 10% of your monthly gross income, or $330.  Calculate how many hours of work you're taking on, and divide that $330 amount by the number of hours to determine your hourly wages as the de-facto property manager, and see how it compares with your current salary.  Then ask if your time is worth more or less than that.

8) I don't see any increase in yearly income, expenses, or property value.  You may be hanging on to the property for awhile, but if there's any chance you'll sell it at some point, it's good to know what you'll net at that point.

9) Your property taxes are at 8%.  That's incredibly high.  I found Canton's county tax assessor website and estimated the taxes for both:

Looks like a combined total of about $6,400=$6,500 (estimated).

10) I'd also +1 Danielle's comment about the vacancy rate.  Although I didn't increase it in the revised report below, I think you should.  10% would be my conservative estimate, but your mileage may vary.  And this site appears to show a much lower vacancy rate than even 5%.  More research is definitely warranted here.

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I've re-calculated the report based on my findings above, here it is.  If it were me, this deal wouldn't make much sense.  But talk to a local realtor and/or property manager about the numbers in the report, and see if they sound accurate or not.  Everything depends on the accuracy of your projections, and if those are screwed up, everything which follows from those numbers will be misleading.

I'd say it depends on your risk tolerance.  The fact that you both are fast learners will obviously serve you well in real estate.  If it were me, I'd prefer to learn from someone else's previous mistakes, rather than my own.  At least for the first few deals.  After you've got this PM handling your first few properties, you'll have built up enough experience to take over these and future properties yourselves.