Should I or Should I not??

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Should I or Should I not??

Tabitha Rivera
Big Spring, TX · Member since 2016 · 7 posts · 1 vote

Hi, guys and gals, alike. I am new to this industry with learning still my number one agenda before taken most actions. I have seriously been interested in this for a while now and still trying to gain as much knowledge as I can before diving into something unaware. However, because there is always an exception, I have recently stumbled upon a really, really, and I use two reallys because its that good, deal. For the moderately experienced it would be a no brainer, and even for the beginner it would be a steal of a deal. I know it is a great opportunity but I still have reservations and would like help weighing the pros and cons so to speak.

I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI. With that being said I have a student loan that could use that money and my credit score is not good at all. I feel like this house could help my credit in that I know that the numbers could work in my favor.

I just don't know if as a beginner I'm getting in over my head or not being cautious enough. The down payment would take out my safety net but I am working and could build it back up in no time even taking into account a lack of resident.

What to do what to do. Maybe I am trying to dive the deep end before knowing how to tread water. Maybe I need to do more homework and pay some more dues before I bite off more than I can chew. Mixing analogies! Help BiggerPockets?? 

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Phil Bottfeld
Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
10y
Originally posted by @Account Closed:
Originally posted by @Tabitha Rivera:

I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI.

You really really don't know anything about cap rates.  Making an uninformed decision is probably not a good idea.

 Hi tabitha you are doing great, let me explain what a direct cap rate is.

Take the annual income of the property less all expenses (taxes, insurance, maintenance , commission...etc) do not include any debt related costs. Debt related costs included PMI, interest, principal payments etc. The net profit from your all your annual revenues and your expenses is called your net operating income or NOI.

Take your NOI and divide by the cost of the property. The % is your cap rate.

Feel free to message me if you have any questions.

Best of luck,

Phil

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  • Simon Shih
    Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
    10y

    Can you give some specifics? How much is the house? How much can you rent it out for? Does it need any work? Once you put the 25% down, do you have reserves for any issues if you are using it as a rental? 

    My personal strategy is to do research and then dive into real estate investing. But I do have a full time career that pays well and my risk is minimized because I am not reliant on real estate. One day I hope to be a full time investor but for now, it's a part time job for me.

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    Okay specifics is $40000 house I have 25% for the down payment. It is a move in ready 4 bed 2 bath home in an okay neighborhood, I could very easily get 600+ for rent. I am a full time nurse and have a decent income from that and minimal bills of my own minus the student loans and the basics. Even with vacancy I could afford the house. I just don't know if I should go all in just yet or study harder, research more, pay off loans, and then tap into the market, but I also don't want to pass up such a good deal.

    0Reply
  • Simon Shih
    Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
    10y

    Is the house worth 40K or is it worth more and you're getting it at a discount?

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    I'll most definitely get an inspection, to know more, but according to the given info it sold in 2013 for $84000. 

    That being said I live in a place where oil is gold and the boom comes and goes every decade or so. We are on the tale end of one now. So prices are dropping fast on real estate. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Tabitha Rivera:

    I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI.

    You really really don't know anything about cap rates.  Making an uninformed decision is probably not a good idea.

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    Thank you for the constructive criticism.  I knew I'd end up embarrassing myself with my lack of knowledge. Time to research more.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Tabitha Rivera:

    Thank you for the constructive criticism.  I knew I'd end up embarrassing myself with my lack of knowledge. Time to research more.

    Never be embarrassed by lack of knowledge.  Only be embarrassed if you fail to avail yourself of knowledge that is available. 

    0Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Tabitha Rivera:

    I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI.

    You really really don't know anything about cap rates.  Making an uninformed decision is probably not a good idea.

     Hi tabitha you are doing great, let me explain what a direct cap rate is.

    Take the annual income of the property less all expenses (taxes, insurance, maintenance , commission...etc) do not include any debt related costs. Debt related costs included PMI, interest, principal payments etc. The net profit from your all your annual revenues and your expenses is called your net operating income or NOI.

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    Feel free to message me if you have any questions.

    Best of luck,

    Phil

    2Reply
  • Account Closed
    Investor · Canton, GA · Member since 2015 · 88 posts · 63 votes
    10y

    @Tabitha Rivera Here are a number of thoughts to consider.

    1.  I'd recommend getting a good property manager to manage the home so you don't have to worry about it on a day to day basis.  A good PM will make sure it is always rented out and that you're aware of what needs to be done to keep it in top shape.  It brings a peace of mind to the investment.

    2.  If you hold onto your money and save up more, you have to consider this.  The interest rate on most savings accounts these days is pitiful compared to the monthly rental income you could be making on that one home.  If financial hardship occurs in your life, do you want a home that is generating income there to back you up or a savings account that will run dry if you can't find another job in a reasonable amount of time?  I wouldn't count on unemployment income either as that is usually not enough to pay the bills.

    3.  Among getting an inspection done, get an appraisal too.  Find out what he/she has to say about the value of the house to make sure you're paying what you should be.

    4.  Decide what you want out of the investment.  Do you want appreciation or cash flow?  I mostly go after cash flow houses, but there are others who prefer faster appreciation.  What is the home supposed to do for you in your life?  Help pay bills?  Free up your time?  Something else?  Answering this, will help define whether you should purchase the investment or not.  If you don't know why you're purchasing it, you probably shouldn't.

    0Reply
  • Simon Shih
    Investor · Houston, TX · Member since 2012 · 354 posts · 186 votes
    10y

    @Tabitha Rivera. Don't let negativity deter you. There are a lot of people on here that are negative. They tell you that you don't know anything and yet do not offer any education or help. I fond people like that aren't doing anything and haven't done anything. They feel the need to put you down so they feel better about themselves. 

    If you want to hold and rent, make sure you have your rental prices correct for your market. Make sure you have a little reserves for problems that arise. Make sure you take the time to put the right tenant in to your property. Do your research, but at some point, you will have to pull the trigger.

    My mindset is to go and do it. I've read the books, listened to the podcasts, and researched. Now it's time for me to do. Will I make mistakes? Of course, but I will learn from them and it will make me better. Do not be afraid to make mistakes. Everyone who has invested has made them. If they say they haven't, they are lying. Just do whatever you can to minimize your risk.

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Phil Bottfeld:
    Originally posted by @Account Closed:
    Originally posted by @Tabitha Rivera:

    I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI.

    You really really don't know anything about cap rates.  Making an uninformed decision is probably not a good idea.

     Hi tabitha you are doing great, let me explain what a direct cap rate is.

    Take the annual income of the property less all expenses (taxes, insurance, maintenance , commission...etc) do not include any debt related costs. Debt related costs included PMI, interest, principal payments etc. The net profit from your all your annual revenues and your expenses is called your net operating income or NOI.

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    Feel free to message me if you have any questions.

    Best of luck,

    Phil

    Phil, you are one of several CPA's here that do not understand cap rates. 1. By definition NOI only takes year one operating expenses into consideration.  You also consider vacancy and collection. 

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    0Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Phil Bottfeld:
    Originally posted by @Account Closed:
    Originally posted by @Tabitha Rivera:

    I found a house that I have a 25% down payment for, I know the market it is in and I know that it will have a very low vacancy rate, and a very good cap rate, even if economy changed I would have the capital to back up all PITI.

    You really really don't know anything about cap rates.  Making an uninformed decision is probably not a good idea.

     Hi tabitha you are doing great, let me explain what a direct cap rate is.

    Take the annual income of the property less all expenses (taxes, insurance, maintenance , commission...etc) do not include any debt related costs. Debt related costs included PMI, interest, principal payments etc. The net profit from your all your annual revenues and your expenses is called your net operating income or NOI.

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    Feel free to message me if you have any questions.

    Best of luck,

    Phil

    Phil, you are one of several CPA's here that do not understand cap rates. 1. By definition NOI only takes year one operating expenses into consideration.  You also consider vacancy and collection. 

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    NOI can be for any period of time, it does not have to be for just year 1. But I specifically said direct cap rate, direct cap rate is the forward 12 month NOI divided by cost. If you are referring to cap rate upon sale after holding the asset for x period of time you'd be referring to the terminal cap rate. I'm happy to continue to the lesson.

    Additionally I was generic with my response, and specifically used the acronym etc to highlight that other costs exists associated with operating costs. I agree with you in that those costs such as vacancy should be considered. 

    Operating expenses also differ across different geographies and different asset classes. For examaple on our 89,000 square office center in Denver, I have a lot of snow removal costs that I can't collect for because the tenants are all on gross leases instead of NNN, while I can't collect them in the form of recoverables they are still operating expenses and are still negatively impacting my NOI. However, we also have a 42,000 square foot fresh market anchored center but it does not have snow removal costs and the leases are all NNN which makes the NOI comparison vary across these two commercial deals.

    My point is simply this, I think it's important we keep a mood that fosters support and education versus harsh criticism.

    Mike drop.

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    10y

    A single home that costs $40K and rents for $600/mo can make money or lose money in any given year. $600/mo is $7200 per year. One bad tenant can cause $5K+in damages (ask me how I know :-)) . After mortgage and taxes, your net cash flow is pretty small to start with. On the other hand, you could have great tenants and make money. But its a gamble. I would pay the loans, build some wealth and then invest. If you invest in this class of property you need a portfolio, not just one home.

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    This was your statement,

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    This was my statement

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    Can you respond to this?

    0Reply
  • Dale Tucker
    Rental Property Investor · Cincinnati OH · Member since 2012 · 115 posts · 24 votes
    10y
    Hi. It's exciting to have what seems to be a great deal right in front of you. Sometimes though the reality is that you might not be ready to take it on or it might be too good to be true. As some of the other posters have responded so much of this one sounds like an "it depends" situation. Have you done much research on rentals and being a landlord in general? Brandon has some good books out and the podcasts are great too. Also you might run your numbers through the BG rental analysis tool. If it was me, unless I had some cash savings that would cover an unexpected event, I would probably pass if the numbers weren't clearly in my favor... Good luck!
    0Reply
  • Jonathan J. Miller
    Lender · Denver, CO · Member since 2015 · 275 posts · 35 votes
    10y
    We are here to coverage and help each other. Feel free to reach out if you need anything. ~J
    1Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y
    Originally posted by @Account Closed:

    This was your statement,

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    This was my statement

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    Can you respond to this?

    The actionable event is the cap rate, which in essence is acting in form of yield. NOI is your nominal yield amount, the cap rate essentially provides you a yield % on your investment which provides clarity for comparison to other real estate options or dividend paying stocks or interest bearing bonds or any other investment which provides some form of cash return outside of simply appreciation. Perhaps not all investment can be simply measured by comparing their "yields" but it's a starting point.

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    Thank you, everyone for your input. I thought I had done my math right but I'm sure some steps jumped away from me before I could take them into account. I do tend to get ahead of myself and put the cart before the horse. I'll probably pass on the house until I understand more, and have a decent cash reserve for casualties. I appreciate all the advice. Constructive or otherwise. 

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    Thank you, everyone for your input. I thought I had done my math right but I'm sure some steps jumped away from me before I could take them into account. I do tend to get ahead of myself and put the cart before the horse. I'll probably pass on the house until I understand more, and have a decent cash reserve for casualties. I appreciate all the advice. Constructive or otherwise

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Phil Bottfeld:
    Originally posted by @Account Closed:

    This was your statement,

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    This was my statement

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    Can you respond to this?

    The actionable event is the cap rate, which in essence is acting in form of yield. NOI is your nominal yield amount, the cap rate essentially provides you a yield % on your investment which provides clarity for comparison to other real estate options or dividend paying stocks or interest bearing bonds or any other investment which provides some form of cash return outside of simply appreciation. Perhaps not all investment can be simply measured by comparing their "yields" but it's a starting point.

    Nope! If you have purchased $50,000 NOI at 5% then you paid $1,000,000. Easy calculation. But you did your calculations backwards and TOO late. You should have determined the market cap rate. That's REALLY the only cap rate. So I determined that the current cap rate for this type of property in this location was 9% so I told @Tabitha Rivera that her offer should NOT be more than $556,000, saving her...well do the math.

    So in Tabitha and my market ALL comparable properties are 9% cap rates.....well, unless we want to grossly overpay like you did.

    See how doing it incorrectly impacts your bottom line?

    0Reply
  • Phil Bottfeld
    Certified Public Accountant (CPA) · COOPER CITY, FL · Member since 2015 · 126 posts · 36 votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Phil Bottfeld:
    Originally posted by @Account Closed:

    This was your statement,

    Take your NOI and divide by the cost of the property. The % is your cap rate.

    This was my statement

    But even if you calculate the NOI correctly dividing that number by what you pay for the property does not give you an actionable event. You are just calculating to be calculating, A waste of time.

    Can you respond to this?

    The actionable event is the cap rate, which in essence is acting in form of yield. NOI is your nominal yield amount, the cap rate essentially provides you a yield % on your investment which provides clarity for comparison to other real estate options or dividend paying stocks or interest bearing bonds or any other investment which provides some form of cash return outside of simply appreciation. Perhaps not all investment can be simply measured by comparing their "yields" but it's a starting point.

    Nope! If you have purchased $50,000 NOI at 5% then you paid $1,000,000. Easy calculation. But you did your calculations backwards and TOO late. You should have determined the market cap rate. That's REALLY the only cap rate. So I determined that the current cap rate for this type of property in this location was 9% so I told @Tabitha Rivera that her offer should NOT be more than $556,000, saving her...well do the math.

    So in Tabitha and my market ALL comparable properties are 9% cap rates.....well, unless we want to grossly overpay like you did.

    See how doing it incorrectly impacts your bottom line?

     Only commercial properties are bought and sold based on income (cap rate). A single family residence is mostly valued based on comparables. In tabitha's case, her subject property does not qualify as a commercial unit and therefore should not be valued based on income. 

    A single family residence in the same areas maybe generate two drastically different yields but that does not mean one is better than the other as appreciation, class of asset, and other qualitative measures should be considered.

    I think we should discontinue our dialogue. I respect your points of view but I don't think our ongoing discussion is helpful to others. Probably entertaining though.

    1Reply
  • Account Closed
    Investor · Cleveland, OH · Member since 2015 · 150 posts · 58 votes
    10y

    Tabitha,

    I have purchased and sold a few single family houses, closing another one this week. I am very similar to the point where I love learning and getting as much information as possible. I am going through a similar situation as you, I am looking to jump over to multi-units and apartment complexes and have been dragging my feet because I am unsure about what all comes with it.

    Having said that, I have found the best way to learn is pull the trigger and get into it. You still need to determine if the house is right for you and what kind of risk you are willing to take on but don't let the unknown keep you from investing. Reading, seminars, REIA's are all great but I personally believe the best way to learn is do it.

    Good Luck!

    Rob

    0Reply
  • Karyn T.
    Investor · Bellingham, WA · Member since 2013 · 210 posts · 138 votes
    10y

    Ok, everyone else has kinda skipped over this point but, how much do you have left on your student loans?  Will that $10K (25% of the $40K you said you had a downpayment for) pay off your loans?  Will the cash flow from the house be enough to cover at least the minimum payment of your student loans (so you can double down and pay them off faster, since you currently are paying at least the minimum).  Snowball those loans off!

    As one of the resident experts in all things student loans (for good or bad), I would tell you my initial thought is that if you don't have a TON of loans, then save a little longer, pay them off, and then your improved credit score, improved debt-to-income ratio, and overall cash flow, will ALL be better for investing.  Your job is solid, so your credit score will start jumping significantly once those loans disappear.

    If your student loan debt is BIG (like greater than $50K), then maybe this could be a vehicle to get you out of debt....but could also totally break you, if the economy sinks, you get a bad tenant, you have a big repair bill, etc.  Do you have another $5-10K in the bank for emergency funds for yourself and/or the house?  If not, I'd seriously consider what other options you have (can you sell anything to pay down debt?  Can you "house hack" with roommates in this new house? etc).  You don't want to be paying for unexpected repairs (whether for your car, or the house) with credit cards, if at all possible.

    Student loans are the freaking devil.  They are the only form of consumer debt that can not be bankrupted without losing life or limb, basically.  They can get you in BIG trouble, if you spread yourself too thin.

    I love that you're looking at real estate investing as a vehicle out though. :)
    Karyn

    0Reply
  • Tabitha Rivera
    OP
    Big Spring, TX · Member since 2016 · 7 posts · 1 vote
    10y

    Karyn  T you are right that I should just focus on my student loans, they are not more than 50000 but are significant enough to worry about. The 10000 will make a huge debt in them and greatly help my credit score. I should be focusing on that. Right now I'm paying off the $200 minimum with an additional  $400 towards the $18000 balance. At the same time my emergency fund is climbing by $500 a month. I could contribute more but I'm also focusing on my own house payments and doubling those to get ahead of the game. I think because the deal looked so promising I wanted to just jump right in but I should hold out a little longer until I get all my ducks in a row and then go from there. With this oil boom coming to a close where I live the opportunities to buy will just keep coming.

    Thank you all for your input.

    0Reply
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