New to BP... My situation in Cleveland Oh

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New to BP... My situation in Cleveland Oh

Account Closed
Cleveland, OH · Member since 2016 · 8 posts · 3 votes
Hello BP community, I have recently started listening to the BP podcast and lead me to this website. I have read a few posts and decided why not try my own in hope to find guidance and constructive criticism. I work for a power company full time straight out of high school and have been saving money every since to find my true passion. I try to take a safe rout over the risky financially. I recently purchased a cheap fixer upper duplex in the west side of Cleveland with cash. After renovating I now rent half and live in the other. I don't have a mortgage and collect $550 for rent. I later on purchased another duplex in Rocky River for $145,000 and collect $1,600/m with 23,000 down payment. In the forums that I have read I noticed percent rules that are used on here often that I never heard of. Basically I want to find out if the property in Rocky River fits the criteria that is used on BP. I would also like to know where I can read more about that so I can find all factors that contribute in finding my answer. My business plan is to use my extra money from my career and my rent from both properties to pay off my only mortgage and repeat with another turn key duplex. I will take all criticism kindly. I'm very green and want to get my feet wet. Bill Kriaris
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Dell Schlabach
Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes
10y

I would say your feet are already wet, up to your ankles at least.

I would say you have already done more that 70% of the people here. 

Don't pay too much attention to or get hung up with the % "rules" we have bought rehabbed and sold a few hundred properties in the past five years. I don't follow any of the % rules, never have never will. I look at how much money I want to make, if it fits my criteria I buy, if it doesn't I don't. 

Sounds to me like you are on a solid track, you make wise thoughtful decisions, stick with your plan and you will do better then most.

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  • Dell Schlabach
    Investor · Canton-Akron, OH · Member since 2012 · 917 posts · 477 votes
    10y

    I would say your feet are already wet, up to your ankles at least.

    I would say you have already done more that 70% of the people here. 

    Don't pay too much attention to or get hung up with the % "rules" we have bought rehabbed and sold a few hundred properties in the past five years. I don't follow any of the % rules, never have never will. I look at how much money I want to make, if it fits my criteria I buy, if it doesn't I don't. 

    Sounds to me like you are on a solid track, you make wise thoughtful decisions, stick with your plan and you will do better then most.

    1Reply
  • Michael Lam
    Real Estate Investor · San Jose, CA · Member since 2016 · 80 posts · 35 votes
    10y

    Hi @Account Closed

    1.  It's great you paid your homes in CASH.  However by buying home in CASH, it present some risk not many will think about.  One of the pillars of real estate investing is not using your your cash but leveraging other people capital.  Here is a risk not many people think about but still a risk.  Lets say you bought a home in CA for 100K cash.  You rented it out, and then in future the home gets destroyed by earthquake?  What happens to your equity?  It gets zapped out.  Meaning your "fire insurance" will not cover earthquake insurance.  Not many will consider buying Earthquake Insurance because its very costly.  But this is one of several examples of risk for letting your money get stuck in a home.   Another risk?, lets say you bought that 100K, and home dips down to 85K.  You just literally lost 15K of your own money.

    2.  The fact you have a stable job  (on paper you have steady income), you should leverage this.  I understand the strategies of buying home CASH.  But there should and I recommend a strategy to pull your cash out and move it into another home.  I understand the luring idea of not having a mortgage on a home, and the "cash flow".  But "cash flow" is not the only metric, same thing one of your rules I'm sure you've heard of is the 72 rule?  That isn't the only rule to follow.  To scale you have to manage risk and debt.  You want "good" debt.

    3.  When buying a home CASH, you bought equity.  You traded your cash for equity.  If you leverage (financed) the home, then let the renter build your equity.  Cash <> Equity.  They are not entirely the same.  If you understand this concept it'll make you see things differently.   

    4. Because you already have a home rented, you can put a mortgage on it in a strategic way so that 70% of your rental income will cover Debt of the mortgage. This yields a limited or ZERO hit on your DTI, while getting back some of your own cash. Use this cash to roll it into another home and repeat same process all while your DTI is not radically hit by these mortgages (there is a lot more detail to go over, but not in this post, I will be putting a blog on BP, on top 10 tips for investing shortly that will discuss this).

    5.  Remember, its okay to be greedy in accumulating in real estate.  As long as you can manage the risk,stress,joys of this business.  Having 5 homes vs 15 homes are financially different environments to be in.  Shoot higher, think 10x to get the 5x.

    Hope that helps!

    1Reply
  • Isaac RowePro Member
    Rental Property Investor · Cleveland, OH · Member since 2014 · 214 posts · 86 votes
    10y

    @Account Closed

    Welcome to BP!  I live in RR and if you bought a duplex at 145, you probably have 20k equity in it now.  Those aren't the best cashflowing investments but they are great longer term buys, in one of the best areas in Cleveland.  I wouldn't regret that buy for a second.

    Happy to get together for a coffee if you would like to connect!  Best of luck to you! 

    [email protected]440-822-8422
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  • Matthew King
    Apartment / Investment Broker · Cleveland, OH · Member since 2016 · 107 posts · 68 votes
    10y

    Welcome to BP! @Account Closed  Congrats on sticking to a solid financial plan that works for you.  Keep up the good investing! I'm happy to be a resource to you anytime, my expertise is in multi family properties 10-175+ units in the area. All the best!

    0Reply
  • Valerie Couch
    Turnkey Provider/Agent · Cleveland, OH · Member since 2015 · 167 posts · 37 votes
    10y

    Always great to see new Cleveland investors!  Welcome to the community @Account Closed! 

    0Reply
  • Joel Gabelman
    Cleveland, OH · Member since 2012 · 28 posts · 22 votes
    10y

    @Bill Kriasis

    Welcome to the community!

    Lots of good books to check out on financial metrics.]

    Some of my favorites:

    1) http://www.amazon.com/Investing-Duplexes-Triplexes...

    2) http://www.amazon.com/gp/product/0071603271/ref=pd...

    I'm sure there are other books too.

    I spent 10+ years in commercial and residential lending, and can tell you, there are many ways to skin a cat.  Leverage (or taking loans) CAN be a good thing.  I personally am a fan of leverage for the benefits (tax write-off of interest and ability to own more).

    Say you have $100k.  You can buy ONE house with the money, have no mortgage and rent out the place for say... $1k/mo.  Revenue is $12k/year, less taxes and insurance, maintance etc... leaves you with say... $9k/year.  9% cash-on-cash return is nice!  I haven't taken the depreciation out, and you have no mortgage so no tax write-off.

    Now if you can put 20% down on a home, given the above example, you can have 5 properties, each $100k value, and now you have $500k in assets with $100k in debt.

    Assuming $1k/mo for each property = $5k/mo = $60k/year less PITI (Principal, Interest, Taxes and Insurance). Throw in some expenses for management, reserves, etc... If taxes are $2k/year/home = $10k/year taxes. Using the above example, if you're making $9k/home BEFORE P&I (Principal and Interest from the mortgage), assume around $450/mo for borrowing $80k/home. Annually, this is $5,400/year/home. So PER HOME, your mortgage is $5,400/year + $3,000/year for taxes + extras (from above example) = $8,400 in total expense/house/year. $12,000 revenue less $8,400 = $3,600 income PER HOME, or $18,000 in income for all 5 homes (before depreciation and tax write-off of interest). This is 3.6% ROA ($18,000 / $500,000 is your Return on Assets). Your CASH-ON-CASH return is 18%!!! ($18,000 income / $100,000 equity). NICE! AND when the property appreciates, you get a pop, and when you increase rents, your return goes up, etc... The RISKS with leverage, are when you have tenant roll-over, a bad market, have personal issues (lost job, etc...), this increases your RISK/LOSSES as well as increases your potential gains.

    Over the years, different people I've worked with have different risk/reward tolerances.  There is no "cookie-cutter" answer to ALWAYS DO X.  There ARE some cookie cutter answers to NEVER TO X though!  

    To repeat what @Dell Schlabach said, you're ahead of 70% of most people having pulled the trigger.

    I'm in Cleveland as well, and would be happy to grab coffee as well if you're interested.

    Best,

    0Reply
  • Ryan Arth
    Developer · Cleveland / Akron, OH · Member since 2008 · 922 posts · 399 votes
    10y

    @Account Closed The bottom line answer to your question is, "It's your money". If you are achieving your goals, cash flow/ROI/peace of mind, then you are doing fine.

    Whether or not you are in line with the masses notion of what is deemed an acceptable rate of return or whatnot, is not always relevant. 

    Rules of thumb can be helpful when someone doesn't even know what direction to begin walking. Since you are already in motion, they can be helpful for reflection, but that doesn't necessarily mean you have to (or should) change what you are doing one iota. 

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