All Forum Posts by: Steve Milford

@Steve Kim

Here is what I see based on feedback and my own comfort level.

Income per month = $2,500. Vacancy of both units 1 mo = $208. Tax = $500. Cap ex = $250. Debt servicing = $1,030. Insurance = $100. Net = $412. If you don't self manage then subtract another $250 per mo for $162 net.

If you get a conforming loan you need to put down 25%, or $75000. Add in realistic closing costs of $7,500 all divided by $412 = 200 payments to get your money back.

If you house hack with a 5% down of $15,000+cc of $7500 = $22,500. Though you have an added expense of PMI $206+/- per month, so net is $412-$206 = $206 net per month. But because of lower down, break even point is 109 payments or 9 years. And if you use a property manager, you never break even on it. 9 years is a long time to break even imo. And the variable I didn't change is the debt service although it should be assumed to go up, which will lower net and pushes break even point.

How can this deal be improved? Lower purchase price, or use seller financing. Or the only win here may be appreciation, if it exists.

Only you can determine if it is a good deal. My recommendation:

1) Talk to a lender first prior to putting in that much in renovations is my thought, to make sure it can work. I have seen predictions that rates are going to tick up 0.5%. I just talked to an investor today that wants to put $45k into renovations into a home, and if the refinancing doesn't work out, then at $175 per door, it would still take 250+ payments to break even. 

2) You inherit the renters already there. Be sure to read the tenant law in your area about raising rents, and be mindful of the eviction/raising-rent moratorium. In my area, they are getting expanded. Expectations should be "out the window". Fully leased, does not mean fully paying from my perspective.

3) Look at rents of nearby properties from CL. to see if raising rent is even feasible once moratoriums end.

4) I am curious what a high expense is? A new roof is a high expense for me. 

Great reminder for many. I have done this too!

@Jose Gallegos

My recommendation is that you self-evaluate and perform a mind shift. The answers are right in front of you.

1) A job is just a source of income, it is not "who we are". It is often easier to qualify for a new mortgage with one. I suspect that the "rat race" you feel is because there is a perception that this time spent in your job, is your primary income. If so, find ways to diversity. I have a job aside from being a Realtor (it is a side hustle for me). I commit 40 waking hours per week to my job (so what), that leaves 79 hours for side hustles and fun (I didn't count the 7 hours per night for sleeping). It provides subsidized health insurance, PTO, other benefits that my side hustles don't provide. I go look at homes or meet with clients on my lunch break. I look at this forum and others on my regular breaks. Your engineering background is a win. It will help you evaluate all the mousetraps together, to pick the best one for your needs. And let you realize there is no 100% perfect model.

2) Amount of doors is irrelevant, cash flow is paramount. I used to think $100 a door was a decent goal until I realized that 1 month of vacancy rips net profit out the door for the whole year. Now I shoot for a larger number.

3) I look at all investments, and ask the question, "In one year, will I kick myself for not pulling the trigger?" If yes, then pull the trigger. If I don't have the money to pull the trigger, go find or build it. Read "Profit First". I didn't become a Realtor for a job, I became one to get paid a transaction fee for helping myself, friends, and family; to build capital.

4) Real estate investing is just another way to invest and diversify that may provide cash flow or appreciation fueled by leverage. It should be taken in stride and compared against all other types. I find that diversification affords me less stress and I realize that there is no such thing as the 100% perfect model.

Want an easy way to measure? Project capital gains or cash flow into the future versus investment required. Yes, there is a little bit of speculation involved, but you can also evaluate base on past returns. The point is to make money grow, to beat inflation. 

Every house I look at has potential, but they all don't make fiscal sense. If I can't see getting a 1.4+ DSCR on a house and/or the appreciation does not add to the net return, in my opinion, it is not worth investing in it. Likewise, I don't see the point in investing in stocks that only pay a 3% dividend, or that do not appreciate at least 10% annually.

I looked in your area, if the average price is $220,000, appreciation is 1% or less, and it costs 6% (not including any estate tax etc) to sell at the highest value to realize your capital gains, you are going to need to hold onto it 5-6 years before you can break even. What about cash flow? If it only cash flows $100 per month, for a return on $1,200, maybe you can but that break-even point to 4 years? And probably only if there is no vacancy. Is that better than investing in Moderna right now or an index fund that performs at 10%+? If the initial investment is $11,000 (5% of $220,000) what is the apples-to-apples comparison? If I buy Moderna at $110 per share and it goes up to $150 in a year, I will have made $4,000. My cost to sell is negligible @ $10, so not even worth bothering with it. If I hold it another year, and it goes up $40 again, now I am way up. Now let's say you can buy a house or multi-family that will cash flow that or better per year and cover the interest expense, even if there is little return on the appreciation, then purchasing the house is better. 

My 2 cents.

@Michelle Sullivan I don't get it. You want to upgrade the bathroom for a renter, that you didn't upgrade for you to enjoy?

Make upgrades based on what you would want if you lived there only if those upgrades pay for itself. And how do you know? Look at what rents are requested for properties around you of similar kind, i.e. Craigslist. If you do anything, first you need to make upgrades that don't have built in maintenance (like someone stated, non-jetted tub). Then go for improved utility, then for cosmetics. Or, maybe improve at lease renewal? Otherwise save money for repairs that will come sooner or later. To me, it is a break even analysis on the upgrade. If you can increase rent to cover the upgrade and then cash flow some more, then go for it.

If it is a good deal, I would just go get financing as cheap as possible and be done with it, and then refinance later, etc. If they don't want to do Seller financing, at what point do they get tired of you fussing over it versus just letting the whole market look at it, by listing it? So what if it needs $5,000 worth of work, if the market will bear it, it will still sell. I tell every Seller that asks me for the best options; put the home into the MLS to let everyone fight for it, which results in the highest net cash most of the time.

So you made some mistakes, so what. Learn from them, don't give up. And resolve to keep building your "team". Selling all seems a little drastic. And create systems to use to be better, or invent a "partner" that you need to run everything by. Maybe that partner is the person that stares back at you in the mirror.

I.e. I always ask for at least 2 contractors on any issue and I tell them all that I am getting at least 2 bids. In the latest round, I was selling a house for an investor (I took over the selling of this property after the investor fired the last Realtor) and they referred me to a contractor they had used previously. When I contacted this contractor, this contractor told me weren't going to bid unless they were either promised the job prior or they would fix issues identified in a prior bid he submitted to the prior Realtor. I just laughed and told them I couldn't promise, but it sounded like I needed to find someone else. Lol, I will NEVER call that contractor again. And I still check in on contractors un-announced, to see if they are doing what they say. How can you do that from afar? Just pay someone to show up and take pictures of the house when they are there and send them to you. In another instance with the same house, I had 2 cleaners visit at the same time. 1 cleaner was offended a little "because there was another service present". Lol, I sidestepped that objection and asked what their price was and availability was, and just reminded, "Well hopefully your price can be competitive."

The is the same for electricians, roofers, cleaning services, lenders, Realtors I refer to out-of-area stuff too, or if I was using a property management company. On my speed dial just means I call them first, that doesn't mean I am asking to be taken advantage of. I had 1 general contractor that I used repeatedly over 3 years, as their pricing was in-line and I had used previously. Then on one and another and other bids, their pricing became a lot less competitive over time. I asked them to revise in each instance, although they lost more of the bids vs what they won. 

What most don't understand (even though I tell them all), is I value open communication and fair pricing more than being the "cheapest". In the above situations, I don't like it when I get a higher bid, then ask some questions, and then I get presented with a cheaper bid. I ask for fair pricing. I've used the same photographer for 5 years. They respond promptly when asked and offer great service, and they are NOT the cheapest.

If there is a general gender issue, the contractor doesn't really want the money in my opinion. And you can always tell any contractor that you need at least 1 day to consider terms or you need to talk with "your partner", or to send you an email to look at it when you get back to your office. 

Steve

Check out the laws in your area. In my area I found, if I accepted that options payment, it actually counts toward the purchase and if purchaser/tenant stopped paying me then I would have to go through the foreclosure process and that options fee is legally refundable. The payment they make toward me is NOT rent, it is a payment on their mortgage based on the terms that we agreed on. In the end, seemed like more hassle than it was worth.

A lease-option sounds great on YouTube, but I don't see the magic in them (after I read the legal fine print). 

Considering the scenario you are in and disclosed details, it sounds like the Buyer wants you to take the risk. My advice is to either make the deal more favorable to you, i.e. maybe a 50% down, point them toward down payment assistance programs in your area, and/or offer them seller credits for closing costs or down payment, and let them obtain their own financing. If they can find someone willing to cash you out, then they can have the house.

If I sold to someone that wanted "no interest", I would just explain to them that the fee to using my equity to fund their loan has a cost, because I could potentially use the money elsewhere, and that cost is X. I used a simple mortgage calculator and on a $200,000 note, over 10 years with @ a 3% fee, this is a payment of $1,931 per month. If they got a classic 30-year mortgage it would be $843 per month. 

My 2 cents. 

Steve

I think you are making it too hard, and are confusing it by combining 2 different ideas.

#1) If I accept a service fee in a real estate transaction, then I need a license. That's what the rules say. And this means that my business practices are regulated.

#2) For my services in helping people buy or sell their homes, for "being the connector", I can charge whatever fee I want. I just need to be transparent about it to the people I am in business with.

You meet Jane who wants to sell their house, to just "be done with it". You tell them your fee is $30,000 and then it will come out the proceeds at closing. They are of sound mind and say yes and sign a contract. Then sell it. Even put it into the MLS. Just because it is in the MLS doesn't mean it has to be pristine. I have seen some real dumps in it.

Or you meet an investor that wants you to find them a home. You tell them your fee is $30,000 due at closing, and they agree. Then find them a home. 

In essence, the whole thing is asking buyers and sellers, "Do you want my help?"  And, "Here is how I get paid, and here is what I make." If you can't or won't talk about it, or have to hide how you get paid, then that is a problem. 

Sounds like a win in my book. Now concentrate on improving the rent on the other unit, and stockpiling for the next buy. T