first deal fourplex questions

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first deal fourplex questions

Kenneth Williams
San Antonio, TX · Member since 2017 · 179 posts · 71 votes

So I'm currently in the process of purchasing my first deal! A fourplex here in San Antonio for $108K (Owner wants of the rental game). My intentions are to perform the Brrr strategy so I will also be borrowing an additional $12K for light based cosmetic rehab to each unit. Bringing my HML to a total of $120K. The property is fully occupied and grossing $2400 per month. Current owner pays water and each tenant pays their own electrical. After visiting the property and talking with two of the tenants I would probably classify the property as being "C" or just very low income area. From what I've been reading on the forum there is a difference between the two. All in all I'm fine with the area. I grew up in similar environments so I get it. I work full time for Uncle Sam so I will definitely need property management. With that being said a few things I'm unsure about...

My HML will be dependent on the appraisal next week. I need the ARV to come in around $170K. The wholesaler insist that the property would easily come in around $190K. Thing is there aren't any other multi family properties in the area to compare it to. How will this decision be made? Will the cash flow be taking in to account? I looked the property up on AgentPro247 and its accessed around $80K which seems extremely low in my opinion.

I think the current tenants are on a year long lease. How does one go about doing a small cosmetic rehab (paint walls and cabinets, new vinyl floors) if the tenants are still occupying the unit?

From what the tenants told me the current owner has been somewhat of a friend to them. Accepting cash payments monthly. These are not exactly the type of folks who I imagine have a checking account at the local credit union. No judgement but what are my options here? Is there some alternative being used for individuals in these types of neighborhoods who have bank accounts?

In the back of the fourplex there is what appears to be a mini storage house. One of the tenants mentioned how they have to travel extremely far on the bus for the closest laundry mat. Would it be worth it to put some sort of laundry system on site? What would be the best route to go? Coin machines? Purchase a couple of scratch and dent units and a flat fee of $50 to the rents? Or just leave well enough alone?

What type of Insurance do I need to be looking at getting?

Obviously I am gonna want out of my hard money loan asap. I spoke with Navy Federal Credit Union and they said there is no seasoning period for refinancing (although the young lady didn't seem to be all that knowledgable). So essentially I could start the pre approval processes now for the Refi and maybe only have carry the HML for a month or so?

Once the Refi is complete at what point can I tap into the equity? Cash out Refi is a no go in Texas from what I understand, so I would be applying for a HELOC.

What contingencies should be included in the contract offer?

Thanks in advance!

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Federico Gutierrez
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
9y

This is your first deal and you want to go at it all alone? I do not want to be in your shoes as I see so many red flags.

Firstly, you buying this from a wholesaler? Are there leases in place that you have seen? IF there are no other comps around I don't foresee how you're going to get a loan. It will go off the income and expenses balance sheet and I'm pretty sure the landlord is running the property are a lose. So best of luck. 

You don't fix up anything while tenants are in the property unless it's to do with safety or maintenance presentation. Cosmetic you wait until they move out. 

I wish I could give you more advise but I don't want to write a novel. I do think you maybe taking on more than you think without the resources at arms length to assist you. I also hope you have reserves when SH$t hits the fan cause it will. 

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  • Federico Gutierrez
    Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
    9y

    This is your first deal and you want to go at it all alone? I do not want to be in your shoes as I see so many red flags.

    Firstly, you buying this from a wholesaler? Are there leases in place that you have seen? IF there are no other comps around I don't foresee how you're going to get a loan. It will go off the income and expenses balance sheet and I'm pretty sure the landlord is running the property are a lose. So best of luck. 

    You don't fix up anything while tenants are in the property unless it's to do with safety or maintenance presentation. Cosmetic you wait until they move out. 

    I wish I could give you more advise but I don't want to write a novel. I do think you maybe taking on more than you think without the resources at arms length to assist you. I also hope you have reserves when SH$t hits the fan cause it will. 

    2Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Federico Gutierrez Thanks for the reply although I must say I am confused by your post. To answer a few of your questions. Yes,  I have no problem purchasing a property on my own. With that said I have met a more than few people on the forum and in my Local area who are willing to provide guidance if need be. Maybe it's the soldier in me but I would rather lose and learn than sit and wait on someone else to hold my hand. 

    I am buying the property from the owner, the wholesaler brokered the deal. 

    No, I have not  seen the leases. Which is why I stated "I THINK the current tenants are on a year long lease". I'm sure once I submit my official offer Tuesday that this along with other docs will be provided. 

    From my understanding when calculating multifamily comps it's  common to push the distance out a little further while also taking into consideration the cash flow of the property. Are you saying that since there are no other multifamily properties in the immediate area that the loan will be denied? 

    I'm also curious as to what "Red Flags" you're sniffing out? You seem pretty confident that Sh$t will be hitting the fan, I would love to here more. Thanks again

    3Reply
  • Federico Gutierrez
    Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
    9y

    So starting from the bottom and part of it is based on experience from my personal investments and what I have assisted investors with. Sh$t always breaks, sometimes its foreseeable other times its just not. Recently for me, new tenant moves into my apartment. Fridge and range break down, thats $800 I had to spend to get new ones. Previous tenant had lived there two years no issues. It was just unforeseeable. What happens if you get a massive water and sewer bill? I had two water tanks just start leaking once, I didn't notice this straight away because I'm not in the basements but when it was $200 over the usual amount I sent my GC all around the building to detect where the leak was.

    If there are no comps then they will be looking at the leases and balance sheets to see how the asset has been preforming. For that reason get your hands on all that prior to paying money for an appraisal, don't think the HML is not going to pass that fee onto you. So double check yourself prior to spending $400+

    Good that you have resources on your side as you will need them.  One red flag is the landlord being friends with the tenants and accepting cash payments. Just smells to me the balance sheets are going to look poorly.

    1Reply
  • Jake Walroth
    Investor · Cincinnati, OH · Member since 2016 · 208 posts · 157 votes
    9y
    Kenneth Williams I'm with you... get started now, there will be hiccups along he way no matter what investment you make. I'm also the ready fire aim type. So long as you get books - make sure the tenants are paying and you aren't just getting a pro-forma. If rents are $2400/mo and you're paying $120,000- thats 2%er. That's a solid metric- now I don't know the neighborhood, but that's a solid # from a cash flow perspective typically. As far as comps go, if there aren't any in there area then I think a bank might look more toward its performance, even though it isn't a commercial property, I know appraisers can still take the income generated into account when valuing a property. Cheers and best of luck.
    1Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Jake Walroth You hit the nail on the head!  "there will be hiccups along the way no matter what investment you make". I'm not waiting on Brandon Turner to walk through the door and spoon feed me a deal lol. It's a good deal. Not because I say so but because the numbers do. 

    Good to know that appraisers will consider the  generated income when valuing the property. Thanks Jake!

    2Reply
  • Matt M.
    San Antonio, TX · Member since 2015 · 26 posts · 3 votes
    9y
    Just an FYI, I have cashed out refi in San Antonio multiple times. You shouldn't have any problems doing that. The trick in Texas is that the loan will always be considered a home equity loan to the bank from there on out. Doesn't really mean much to you though as you will be able to pull cash out of it whenever there is enough equity in the property.
    2Reply
  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    9y

    This is too risky a business that I think you should consider a single family home in a better area.  Too many unknowns.  Most property managers will not want to deal with the complexity and you are there alone w/o a handyman.

    You want headaches and problems this is a good candidate. You know you are buying the property close to the peak.

    Good luck.

    2Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Federico Gutierrez For me personally, The things that you mentioned that needed to be replaced or fixed are just the cost of doing business or "additional skin in the game". I'm not gonna by a 89 Buick and not expect to replace some things along the way. What if get a massive water and sewer bill? I guess I'll have to adjust accordingly. Brother you are definitely a Pessimist. This property was built in 1970 I'm assuming along the way some components  that will give out and thats fine I'm okay with that. Either way Thanks again for your input.

    4Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Sam Shueh Thanks for the reply! Surely in what I think is the 7th or 8th largest city in the U.S there is bound to be at least one management company that will mange this property. It's not Compton. It's still San Antonio. 

    @Brian Phelt You interested?

    1Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Matt M. Thanks for info! PM sent.

    0Reply
  • Isiah Ferguson
    Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes
    9y

    Experience is the best teacher. I think you should go for it. In REI, everyone situation and circumstances vary. There's no right way of doing things. If you feel comfortable and the numbers are right for you, go for it. Also when it come to comps, you can compare each unit individually too what on the market and what sold. If a unit is a 2/1 then compare, that unit too a 2/1 that's on the market or sold etc etc. Goodluck and the main thing is getting started.

    2Reply
  • Brian PheltPro Member
    Real Estate Broker · San Antonio, TX · Member since 2016 · 234 posts · 85 votes
    9y

    Kenneth,

    I am sending you a PM now.  Thanks for thinking of me.

    1Reply
  • Ty L.
    Investor · Northern Virginia · Member since 2017 · 159 posts · 59 votes
    9y

    It looks like you've put some thought into this deal. As long as you do your analysis, run the numbers conservatively, and account for the issues, it may be worth it.  A key would be using the experienced investors to assist your analysis if you've not already done so.  If it is a good deal, the financing should be available.  I wish you well and keep us updated on your progress. 

    2Reply
  • Andrew M.
    Rental Property Investor · San Diego, CA · Member since 2016 · 73 posts · 55 votes
    9y
    @Kenneth Williams nice job on all of the research with your first property. You can only do so much due diligence before jumping into action! The metrics sound great. I just went through feasibility on a property similar to this and ended up backing out because of the scope of work and sellers bottom price. Red flags I see: -'Friendly' landlords, cash payments -Not having seen leases (although it sounds like that's soon to come' -Wholesaler brokering a deal for such a low price tag, worth 'at least' $190K with only $12K in rehab? Best of luck!
    1Reply
  • Andrew M.
    Rental Property Investor · San Diego, CA · Member since 2016 · 73 posts · 55 votes
    9y
    Also, when a different entity or different person from you has a first lien on the property, you can refinance without seasoning.
    0Reply
  • Mike Hottinga
    Lake Havasu City, AZ · Member since 2017 · 58 posts · 23 votes
    9y

    I have a roommate that delivers pizza and  the majority of his income is cash from tips. I just have him go to the bank and deposit it into my account. 1. I have prof of transaction/payment and 2 I don't have to deal with going to the bank, he does. Cash is ok if dealt with correctly, it just raises a red flag that they may not have enough credit to open a bank account. Just look into that issue further.

    As for making the storage shed a laundry room, it could work. You could always do the service that takes 50% of the money earned to maintenance and provide the machines and the other 50% goes to you. Extra income with no headache. You would then just need to look into the cost of fixing up/readying the shed. It could be an amenity to keep better tenants around.

    0Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Isiah Ferguson You're right theres no teacher like experience. I'm looking forward to the "process" and whether I succeed or fail I won't be broken. I had no idea the units could be looked individually for comparables. Thanks for the insight !

    @Ty L. Yea I've definitely thought long and hard about this one. I've weighed the pro's and the cons and for me and where I am right now in my real estate investing journey, this is the right move. I think I will definitely take your advice and lean on the more seasoned investors I know to re examine the numbers and make sure I'm not missing anything. Thanks

    0Reply
  • Kenneth Williams
    OP
    San Antonio, TX · Member since 2017 · 179 posts · 71 votes
    9y

    @Andrew M. Thanks for taking time out and replying!

    We definitely share the same concerns. I think where we differ is I expect there to be these types of concerns in a "C" class property. You have an old school owner/investor who over the years has taking a liking to his tenants and developed a soft spot for those individuals. I definitely DON'T plan on picking up where he left off but to each his own. 

    The leases, the expense sheet etc. should be in my hand tomorrow if not tonight, from what I've been told. I haven't submitted my earnest money yet due to everything being closed for the holiday but once I have..rest assured I had better receive  the above documents in a timely manner or I'm out.

    From my understanding the wholesaler found this investor through a mail campaign he did a short time a ago. This investor has around 29 properties in and around the San Antonio area and wants out of the rental game. The original asking price was $118K we did a little negotiating and got it down to $108K. The wholesaler originally stated that the rehab estimate would be between $3-7K per unit. I had the privilege of walking through one of the units last week and based off MY assessment of  that particular unit I came up with $12K for four but I won't know for sure until I see the other three. The one I walked through didn't need much of anything. Furthermore I have no desire to provide individuals who are currently paying $600 per month in rent with granite countertops and hard wood floors. This is a very blue collar area of town. I plan on keeping it that way lol.

    1Reply
  • Sonia Spangenberg
    Manassas, VA · Member since 2013 · 60 posts · 24 votes
    9y

    Kenneth, sounds like you're still early in the process so don't let the naysayers scare you off of further due diligence. You've been given good lists of the red flags so dig deeper in those areas.  Sounds like you already have that figured out.  

    Because there aren't many other small MF comps in the area the seller's financial records will be even more critical. Hope the cash payments will be verifiable, (checking account records and quality of bookkeeping). Don't be afraid to re-adjust the offer price if the seller can't verify the income to suit the HML. Don't be afraid to walk away if the due diligence reveals major flaws in the story, but also don't hesitate to make a lower offer price to make the (actual ARV) numbers work before you do walk away, if that's the case. I love the BP rental calculator for figuring out the price that does make a deal work. I love how Brandon teaches how to work backwards from the asking price to get to an offer price that works, using the calculator. Watch his webinar. Even if you do end up having to walk away if the numbers don't pan out, it's not a failure. It's actually a success because you didn't buy a bad deal! The biggest thing that will help you achieve long term success is the ability to walk away based on the numbers, not how many properties you acquire. The most important process in REI is the due diligence, so do it as an exercise even if the deal looks iffy. It's not time loss but a learning/practice activity. The more you do it the more efficient you become at it.

    Are you actively involved in a local REIA? If so, getting additional feedback from someone who is a vetted investor and knows the area, (once you have your contract with an inspection clause) it will help you make sure you are asking all the right questions.

    Wishing you success.  

    2Reply
  • Scott MacDonald
    Specialist · Austin, TX · Member since 2017 · 134 posts · 75 votes
    9y

    I just wanted to chip in and applaud your attitude Kenneth. Like yourself I am in a similar position acquiring my first few rental properties and its a scary experience. So many "what if's" and uncertainties with a large investment. I do like your analogy to cars. I bought a 20 year old truck knowing there would be issues with it. In fact that was part of the fun, I wanted to learn more about engines and how to maintain them, within 6 months I had a failed cylinder head and had to strip the engine down to the bones and rebuild it. I actually enjoyed the process and because I went into that purchase expecting problems I wasn't annoyed in the slightest. So good luck to you on your first property and I hope you learn a few (not too painful) lessons.

    If you don't mind me asking, how did you get in contact with your wholesaler? 

    1Reply
  • Andri Artayudianto
    Newark, NJ · Member since 2014 · 79 posts · 12 votes
    9y

    I almost close on my second deal. Still as scared as the first deal. Especially after losing about $30k on a bad business deal last year (not related to real estate). I buy out of state, so everything is long distance. Also trying to manage them myself. My mom freaked out after I told her I bought a duplex in a different state. But I know I have 3 options: blow my money on toys, vacations or lottery, put my money under my pillow or learn to invest and possibly grow it. I chose the latter. If I lose some money, unlike buying toys, at least I learnt something. I realize you can only listen & learn for so long, one day you will have to jump in. And for me it's time. 

    As far as payments. I think want to use 2 options: my back account and Cozy.co

    Best of luck to you!

    2Reply
  • Joseph Caster
    Salesville, AR · Member since 2017 · 9 posts · 1 vote
    9y
    Awesome find Kenneth!! It sounds like you've done your homework and you're ready! Good luck! And Hoo raw!! 👍🏻
    0Reply
  • Joanne Szewc
    Real Estate Investor · San Antonio, TX · Member since 2014 · 26 posts · 9 votes
    9y
    Speak to your lender to find out how they will handle the comps. There are severals ways to get to a number but it all depends on how they do it. Agentpro247: I never used this so not sure the quality or validity of the data. Rehabs during tenancy: if rehabbing, the goal is assumed to raise rent, the current tenants may be opposed to it as they may not like the raised rent in future. My preference is to update units after tenant moves out. And then move in a new tenant at a raised rent rate. In essence one doesn't give existing tenant more then what they are paying for. Although, there are ways to go about doing updates to internals with tenant in however that would have to be worked out with tenant, as it would impose on them. Cash payments: had recently gone thru similar situation with a 6 plex. First month, I collected the cash, second month I notified that rent should be in check, cashier check or money order only. In collecting checks, i saw what bank they used and suggested online payments, and to others who don't do online stuff, I provided info on direct deposit into my account. Works well for most part, I still run into one that prefers for me to pick up. Laundry: that maybe a hassle, it depends costs to structure with plumbing, electricity, security, metering of. Insurance: property coverage, some business aspects for loss of income and such. Many insurance agents that work with investors would be worth speaking to to understand all options. Best wishes on your new Venture! Everything requires effort , enjoy the experience.
    2Reply
  • Brad Taylor
    Investor · Gallatin, TN · Member since 2015 · 30 posts · 7 votes
    9y

    Sounds like a great deal, Kenneth. I agree with the red flags already mentioned, and would follow-up on those. Also, I would be prepared to lose a tenant or two in the process. As long as you are good with that, jump on it.

    0Reply
  • Account Closed
    Property Manager · San Antonio, TX · Member since 2013 · 37 posts · 14 votes
    9y
    Hopefully, everything turned out good for you this past week.
    0Reply
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