All Forum Posts by: Richie Thomas

Hey @Scott Hawks, more experienced investors might correct me on this, but I would imagine that it costs roughly the same to (for example) re-roof a $200k property as it does a $60k property, everything else being equal (i.e. similar roof shapes and sizes). That's why it's tricky to use 10% as an estimate for things like monthly CapEx and repair reserves. With a lower-priced home such as this, you may need to go higher than the standard 10%.

Also, how old is the home? Have you walked the property yet and gauged its condition first-hand? What kind of neighborhood is it in? Generally the more down-market the neighborhood and the older the property, the more you should budget not only for regular wear-and-tear, but for major CapEx items as well.

It appears that the total year 1 income estimate assumes 12 months of income ($9180 / 12 months = $765, quite close to the monthly rent of $750).  You won't see a full 12 months of rent though, unless your tenants will occupy your property while you're carrying out those repairs you've budgeted for.  How would your cash flow change if you budgeted for (as an example) 1, 2, or 3 months of vacancy due to that construction?

Lastly, it looks like the year in which your annualized rate of return is highest would be year 1.  Have you considered selling the property after you've owned and rented it for a year?  I'm not a financial planner and can't give you financial advice, but I *believe* that profits from properties sold after 1 year or more of ownership are taxed at investment income rates, not ordinary income rates.  So holding the property for a year and a day might (?) get you that 41% annualized return that you see on page 2 (assuming your closing costs on the buy and sell end are accurate).  Most of that 41% appears to come from the forced appreciation you created from the increased after-repair value, and only some of it comes from the 12 months of cash flow.  So if you sold it before a year was up, you could re-deploy that capital more quickly, although you'd then be taxed at the ordinary income rate.  So it's a case of "pick your poison".

Hi @Jon K., welcome to BiggerPockets.

If I were going to properly analyze this deal, I'd want to know more about where you got your numbers from.  Specifically, the 3% interest rate, $5,500 in up-front repair costs, $2,000 in monthly gross rent projections, and $180k after-repair value would be a good start.

I'm especially curious about the interest rate on the loan.  Is this for a non-owner-occupant loan?

Lastly, I see you're putting down less than a 20% down payment, but I don't see a line item for mortgage insurance in your monthly expenses. Make sure your lender will let you put only 16% down on a non-owner-occupied property without paying that PMI.

For those unfamiliar with the Four Square Method (as I was until just now), Brandon Turner explains it here.

@David M. I'm still an aspiring investor, so take what I say with a grain of salt.

If this is a triplex, are the utilities metered separately?  If they are, typically the tenants pay their own utilities.  But if not, typically the landlord pays them.  Be sure to confirm that since these can wreak havoc on your cash flow.

You mentioned the electrical/wiring has not been looked at.  Do you know if it's got a fuse box vs circuit breaker?  That could be a clue as to whether the electrical has seen any kind of updates.  If not, pad your repair budget accordingly.  

Also, it's likely that the electrical and plumbing systems would have been treated with a similar level of care (i.e. it's unlikely that they'd neglect the electrical and take excellent care of the plumbing, or vice-versa).  Therefore, if you decide to budget for wiring upgrades, you may want to budget a healthy amount for new plumbing as well.

Do you have any info on the foundation?  Is the property in a part of the country with lots of rainfall, and if so, what do the gutters and downspouts look like?  If the gutters don't divert water at least a few feet away from the foundation, with a house this old you could be looking at bulging dirt pockets, which can put inward pressure on the foundation and lead to cracks over time.

Are there any trees particularly close to the property's footprint?  Tree roots can be another source of cracks in a foundation.

You mentioned it's an older house, in which case 5% might not be enough for ongoing repairs budget. The property's age is a big factor for me in deciding how much to set aside each month for repairs.

I don't see a zipcode or neighborhood specified, so it's hard to tell whether the vacancy estimate of 5% is adequate. CapEx and PM budget of 10% each look good IMHO.

Where are you getting your after-repair value and monthly rent figures from? Are you already working with a realtor/property manager? If not, I'd suggest finding one you like and trust, and getting these figures from them. Finding a single person to handle both of those tasks also helps you develop multiple exit strategies for a property, i.e. if you decide to BRRRR the deal then they can be your PM, and if you decide it works better as a flip, they can be your listing agent.

Hope this helps.

Hey @Joaquin M Dugan Jr, I'm a first-time investor, so take what I say with a grain of salt.

I'm having a hard time finding comps in the area. My PropStream subscription only shows 3 properties within a 1.5-mile radius that sold within the last 12 months, which is already a wider geographic net than I prefer to cast. And two of those properties were for all-cash offers, which tends to skew the price-per-square-foot average down and implies that most of the people doing the buying in the area are other investors, not owner-occupants. To me, the lack of owner-occupant comps tells me that the neighborhood may not be as up-and-coming as you thought, and that the property may need to sit on the market for awhile if you decide that the BRRRR isn't working out and you want to cash out. The longer it sits on the market, the higher your holding costs would be.

The lack of comps will also mean a higher risk of an appraisal coming in low when it comes to refinance.  Appraisers in different regions rely on different metrics, but comps are one of the metrics that almost all appraisers will lean on heavily.  The fact that there are none in this area will mean the appraisal will become much more speculative and subjective.  A more subjective appraisal means you *might* not get as much cash out of the deal as you initially planned for.

You've budgeted for an ARV of $100k, or $43/sq ft. (property appears to be 2,326 sq ft). The one non-cash transaction I've seen within the last 12 months within a 1.5-mile radius is 3414 Christine Circle, Memphis 38118. This property sold for $125,000 (or $58/sq ft) in Feb 2020, but this house was built in 2007 and is in an area with lots of curb appeal (see Google street view photos from March 2019).  It does appear to have a similar risk profile in terms of safety (a 3/100 on NeighborhoodScout), but the fact that the two properties have such different levels of curb appeal tells me that your property should skew lower on PPSQ.  Which it already does (i.e. $43 vs $58 / sq ft), I just have no idea whether or not that's enough of a discount.

Speaking of which, having a backup in case the BRRRR doesn't pan out is probably a very good idea, given the characteristics of the neighborhood. I'm not local to the Memphis area so I plugged the address in to NeighborhoodScout, and it's telling me that address scores a 1 out of 100 on the safety / crime scale (100 being the safest). That's... not great. Another data point I like to use is checking Yelp for which major grocery chains serve the local area. I find this helps me identify which areas are "food deserts", or places which the major chains won't serve due to economic reasons. Here's the Yelp results I found.  There's an ALDI about 2 miles away from your property, but that doesn't say much as I've found that ALDI will service areas that other chains won't touch.

I see you've budgeted 10% for a PM which is a good idea, but you may want to make sure that you can even find a PM who is willing to take on a property in this neighborhood.  The best PMs are picky about where they manage, and it could be really hard to find a PM who is both high-quality and willing to work in such a challenging part of town.  If you can find one, they may end up charging significantly more than the industry-standard 10%.

Last but not least, this property was built in 1930, so it's 90 years old at this point.  I'd be concerned about the remaining lifespan of the property's major components (roof, foundation, HVAC, electrical, plumbing).  $20k in repairs sounds low for a property this old and in this kind of neighborhood.  If you're unsure whether that amount is sufficiently conservative, I recommend including an inspection contingency in your offer.  If you determine there will be much more work needed, you can use this to come back to the negotiating table and try to get the price down to something that will cash-flow for you.

Good luck with the deal, I hope it works out.

Richie

Hey @Mason Aulsbrook, I'm only an aspiring investor, so take what I say with a grain of salt. The first things which stand out to me are the relatively low budget for up-front repairs ($8k on a $50k property) and a lack of ongoing CapEx budget in your monthly cash flow projections. Judging by the purchase price, I'm guessing this property is a relatively older one, and maybe even in a C-or-below neighborhood. These kinds of properties typically require up-front rehab budgets and monthly CapEx budgets which are much higher (relative to their purchase price) than more expensive properties in nicer neighborhoods. $8k in particular seems low- even properties which are advertised as "move-in ready" typically require some updates. I do see you've budgeted 15% for repairs which is great, but depending on the neighborhood and the age of the property, even that might not be enough. From what I hear, the farther down the scale you go in terms of neighborhood, the more wear-and-tear your tenants will leave your property with.

Also, I don't see a budget for a property manager here.  Are you planning to self-manage?  If so, and given my assumptions about the neighborhood this property is in, you should prepare yourself to deal with significant headaches given the type of tenant who gravitates toward living in this kind of neighborhood.  Even if you plan to self-manage, it may be safest to budget for a PM anyway.  If you end up liking the management part of the job, that budget just goes in your pocket (like it would have anyway).  But if you end up hating it, you've got the budget available to extract yourself from that situation and hire someone else to do it.  Just make sure you've identified PMs who are willing to take on new clients in the neighborhood where your property is located.  Not all PMs will work in C-or-below areas, and the best PMs are picky about where they manage.

Good luck with this deal.

Richie

Thanks y'all.  Another category to add to the list of C-class businesses is pawn shops.  Drove out to see some neighborhoods here in Atlanta where I found CashAmerica locations on Yelp (Brookview Heights Pomona Park, Lakewood Heights, Custer/McDunough, Thomasville Heights), and they all looked like C or even D-class neighborhoods (boarded-up buildings, vacant lots where people dump their trash, etc.).  This seems like a good metric to use.

But as other people mentioned, this is mostly a snapshot in time as opposed to a moving picture of a neighborhood's path.  I was thinking that filings for building permits would be a good way to get that information.

I'm currently testing out a theory I have about whether the presence of certain name-brand companies in a neighborhood is a useful proxy for its class.  I figure these companies spend much more on (and have much more experience with) identifying neighborhoods that fit their target demographic, and I as a new investor am happy to ride on their coattails.  It's a short list so far, and I'm hoping folks in these forums can help me add to it.  So far I feel like the neighborhoods I've driven through have mapped fairly closely to this proxy.  I know it's a bit of a lagging indicator, however since I'm investing out-of-state I need a strategy for quickly assessing the rough potential of many unfamiliar markets, after which I'll dive into a few specific markets in greater detail (crime rates, population growth/decline, path-of-progress info from city councils, etc.).

At the moment, I have the following:

-Whole Foods: A or B-class

-Dollar Tree / Dollar General: B- or C-class

-MoneyGram or other check-cashing companies: C-class

-Bail bonds companies- C-class

-Psychic readings: C-class

I'm trying to stick to companies that people patronize frequently (i.e. a Tesla or Mercedes dealership would be less-useful, since people only purchase cars infrequently).

My questions:

1) So far, I've only been able to identify B-class neighborhoods if I find an A-class company and a C-class company in the same shopping complex.  Can you think of any businesses which would map to a solid B-class neighborhood by themselves, without me needing to do this averaging?

2) Has anyone used a similar strategy in the past, and have you had any success with it?

Thanks y'all!  Also, let me know if you're reading this from Atlanta, Charleston, Savannah, Jacksonville, Sarasota, Tallahassee, Huntsville, Memphis, Nashville, Austin, Salt Lake City, or Boulder.  I'm doing a multi-month scouting trip for my first out-of-state market and would love to meet for coffee or a beer.

Sure thing @Brendan Moehn, mostly because I decided to re-focus on other markets / other states.  I'm currently looking at Indianapolis, IN and Fayetteville, NC.

Hey @Brendan Moehn, I did not purchase that property.  Currently looking in other states.