Feeling overwhelmed

[David S.]

I am a new investor, but seriously dedicated to improving my financial position through real estate investing. I will be buying a property this year, and was aiming for something before June - but I have hit a bit of analysis paralysis, and generally feeling overwhelmed. I'm just not sure what path to take. I think small multi-families are the best idea for me, and I plan to self manage. I've read three RE books in the past 3 weeks, and working on another. Trying to cram as much info as I can into my head, while also spending time researching market prices on properties, rents, and people to work with.

I've got a few properties I've been considering, but just don't know what to do. 

There's a duplex in a maybe B- neighborhood. 3/1,2/1, with $2k in rent selling for $135. Thinking motivated sellers, as they dropped the price 4 times since November. But it is owned by an investment LLC, so not sure why they're selling.

Another close by is same BR and bth, $2050 rents and $115 asking. It was sold in 2013 for...I think $135, then relisted 6 months later for $150. After a walkthrough it looks ok, but has uneven floors, which makes me wary of structural issues. Had an offer fall through already, though don't know why.  Would be great cap rate though.

There's another that I love the house, but not sure on the deal. REO, $110. It's been on market a long time, and dropped from $179. Gorgeous house, large triplex. Needs work obviously - lots of cosmetics, maybe some minor water damage and work on the radiator system. Looks like walls were torn open in each bath to get to the water pipes, but don't know why. Figure I could get $2500+ in rent, but the holding costs could kill me - plus, would need to find a private money lender for financing, because I could not cover downpayment, holding costs, and rehab costs - and no conventional loan will cover a non-owner occupied prop. Could be a great house with great cash flow, but for my 1st investment seems like a huge amount of effort - including making sure the city is happy that it's livable when done.

Then just on Friday two duplexes went on the MLS 2 miles from my house - instead of 20 like the others. Cap rates are way lower. $1850 rent for $167 asking. I think those rents are low for the market, thinking maybe $1975-2050, but not seeing many rental comps available nearby. It would be really nice to have something 5 minutes away instead of 30 minutes(or more if traffic or construction). But not seeing the deal there without lower prices and higher rent. Comps for the sale price show it being pretty accurate - $154 on the low end a year ago, $171 a few months ago, and $165 in January.

Then the last - five plex 30+ minutes away. This would be a stretch, but seems like a good deal. $325, owner is offering financing with 10% down, claiming NOI of 31k and 9.6% cap rate.

I'm also seeing cap rates for the others no better than 8-8.5%, and most lower, like 5%. Maybe I'm over estimating some costs - budgeting for $6200/year for maintenance and CapEx.

Trying to wrap my head around home prices, rent prices, and just all the different deals I could attempt is frustrating me. I also have so much to learn about landlording - local laws requiring classes, etc. 

[Adam Johnson]

@David S. - I am going to be frank, but don't let my comments discourage you.  I had similar advice given to me several times before I finally got it through my thick skull.  I don't know your area, or property values versus income in your area.  None of your deals sound good enough to me, especially for your first buy.  You want your first deal to be a solid base hit.

Deal 1 - price drops don't mean it is now a good deal, it means it was way overpriced to begin with

Deal 2 - I don't see how it will cash flow after servicing debt.  Uneven floors don't HAVE to be a big deal depending on your rental market.  Worth an inspection before buying but I don't see money in this deal so I wouldn't waste the time on it.

Deal 3 - You love the house, in your words, so walk away.  I bought a historic property (3-unit) several years ago that I fell in love with.  Rehabbed it and it turned out beautiful.  It was the worst investment I have ever made in my life and lost my shirt on it.  I ran the project on emotion, was very proud of the work I did, but it was a HORRIBLE waste of time and money.  Invest because the numbers are gorgeous, not because the property is gorgeous.

Deals 4 & 5 - Again, I don't see cash flow on these.

Now for the agent, you are in business to make money, not friends.  If you aren't comfortable with the agent, find a new one.  With that said, an agent brings you possibilities, it is up to you to determine if they make sense or not.

Now that I have spun you around, let me offer some advice that I was given.  Don't rush to pound a square peg into a round hole.  I appreciate your motivation, keep going and don't give up.  Keep learning.  Pencil out a number of deals to see if the numbers work, it will help you fine tune your buys so that when you do finally find the right deal, it will be a solid base hit.  I have bought several properties at a heavy discount from wannabe investors that didn't run numbers right when they bought.

Important numbers to include in your analysis - Property management (even if self-performed, you may want to hire somebody later AND your time managing still  has value), vacancy factor, rent-loss factor (not everybody will pay what they should), reserves for maintenance, normal maintenance and apartment turnover, any landlord utility costs, taxes, insurance, garbage, legal and accounting.

Never, ever "talk" yourself into a deal.  Trust your gut.  Also, trust your numbers, especially the first analysis you run.  For example, you look at a property (on paper or in person) and decide to run numbers on it.  The first time you run the numbers in your spreadsheet, you don't know for sure whether the deal works yet, so you are most likely using REAL numbers.  Once you are done with the first run-through, it either works, or it doesn't work.  If it doesn't work, you are wise to stop and say "NEXT".  A common mistake is to try to massage numbers to figure out how it MIGHT work so that you can rush into a deal just to say you did it.  Don't do this.  You are better off waiting on the sidelines for the solid deal versus talking yourself into a mediocre or even worse, bad deal.  Numbers don't lie and they have no emotion.  Trust them implicitly.

Somebody else quoted find 100 deals, etc. etc and hope to close on one.  That is probably pretty accurate.  You will find that you look at EVERYTHING.  You will also find that almost all of it is junk as far as an investment goes.  If this was easy, everybody would be doing it.  Be persistent and be ready to act when you know you have a solid deal.  Don't rush to do a deal simply to be able to call yourself an investor.  Otherwise, before long, you will find that you are a broke investor.  Investments put money in your pocket, they don't take money out of your pocket.

Never be afraid to ask questions either.  The only stupid question is the one that never was asked.  Stay with it, you will get there.  Be patient and persistent.

Best of luck, happy investing!