All Forum Posts by: Tim Johnson

Since the inspection of the property is usually contracted by the prospective buyer, the buyer can decide what the inspection should include. In our area pools are rare, so an inspection of the pool and pool system may require another "specialist" to come in and check it out. As long as an inspection contingency is part of the purchase and sale agreement, a full inspection with full due diligence is usually allowed - within the time frame agreed upon, and within the limits (if any are stated) of the PSA.

Keep both of them, but DEFINITELY move into a third  (and new to both of you) home. Fresh starts all around are both fun and will make financial sense as well. Congratulations!

Is your cash flow calculation based on proforma rent? (the $2,300 / month figure). 

As far as the other three calculations you mention - it's a bit hard for us to know the condition of the building... and the vacancy rates in that community... but 24% for a total is certainly not unrealistic. In my initial calculations I'll often use 10% vacancy and 5% for each of capex and maintenance (total 10%) until I get more details.

Every investment prop involves a stool with three legs: income, expenses, and finances.

Although every valuation or method of calculating ROI has its place... I would argue that most investors will favor a calculation that includes as many of those stool legs as possible.

Some of my clients even like to use "price per square feet" or "price per unit" when looking at properties - but of course these methods don't consider income, expenses, OR financing. Gross Multiplier often shows up in an MLS listing - but it doesn't consider either expenses or financing.

Cap Rate is a great number and very helpful - especially for quickly comparing multiple properties on an even plane (apples for apples, oranges for oranges....) It can do this because it takes out that complicated variable of financing. But its very strength is also its biggest weakness.

And that's why so many investors use cash on cash as a helpful tool in their ROI toolkit - a simple calculation that takes into account income, expenses, and financing....

But hey, to each their own..... that's the beauty of this investment world -  so many possibilities and ways of thinking. Cheers....

If you've already factored in "every possible variable" and you're sure of your numbers, there's really nothing any of us can help you with. What a "decent return" means is completely different for each person and situation. What are your own criteria?

@Jimmy Alexander Fair enough... lots to consider. My point was simply that if the "fair market value" is really at the numbers you have stated, then it appears to be a sound investment, even if there is a bit of time... or a few "extra tasks" in getting to that great cash flow spot.

@Jimmy Alexander Everything in your post and the answer to your questions depends on one thing: what's the rental market like in that community?  

"But with fair market rents of $950 and $900 for these units it would cashflow $518/month with a 16.58%CoCROI" 

Your use of the term "fair market rents" assumes that the market can handle those numbers.... if so, it sounds like a sound investment....  If the market is softer than that, then you're back to "finding sweet spots...." and "wondering how to keep your present tenants".... which one is it?

@Sheratanairy Flores - the part of "your picture" that's a bit hard to see.... is the amount of your present resources. If you have enough to proceed with a multifamily purchase in order to house-hack.... then purchasing a condo and waiting for a couple of years can seem like an unnecessary delay. If, on the other hand, you're feeling the pinch of "no margin" in a tight market, you might want to consider a condo purchase. With good appreciation, a couple of years could give you a leg-up on that multifamily purchase. Even with smaller appreciation you would see some equity growth on the pay-down of your loan, rather than spending it all on rent.... as an agent in western Washington I have given the same advice to a few buyers who were struggling with the competitive market, but realizing they were sick of paying rent....

@Ali Aldhanhani - Hi and welcome Ali....  

1 - On a standard real estate investing calculator "vacancy" is expressed as a percentage rate and is understood as a "negative income - or expense" - and helps you be realistic about the amount of rental income that you can expect from that unit during the year. It's always good to figure in some vacancy - periods when you'll have continuing expenses but no income on that unit. The IRS defines "vacancy expenses" as the costs of managing, conserving or maintaining the property while it's vacant...  but that definition has to do with the tax implications of a vacant rental unit.

2 - are you referring to how an actual rental rate gets decided? This will be determined by normal market supply and demand - and researched through property managers, or various online tools that all seek to understand comparable units for rent in any given neighborhood.

3 - there is no "right" way to calculate return on investment (roi) - it varies with the property type and your investing goals. Here are some ROI calculations that are often used:

a. Cap Rate (capitalization rate) - this is your net operating income divided by the purchase cost (helpful in quickly comparing multiple properties - but does not include any financing, assumes a cash purchase)

b. Cash on Cash - this is your cash flow divided by the initial cash invested (downpayment, repairs, closing costs, etc.) 

c. Other annual ROI calculations may include such factors as principal reduction, appreciation, as well as tax savings. For example: Cash Flow + Principle Reduction + Tax Savings + Appreciation                                                                                                                           Cash Invested

Some markets will yield poor cash flow but excellent appreciation.... or vice versa. 

Sorry it can get a bit technical - hope this helps.....

@Evan Higashiyama - didn't mean to sound flippant in that last post... I know it's never as easy as that. I personally try to avoid cash-out refinancing.... since you've got good income, why not do the first two steps I recommended and then give yourself a bit of time? If your projected rental numbers are accurate, you'll have the opportunity to have good cash flow and combine that with some frugal living and bam! - you'll have the reserves for that next project in short order.