Lower expectations or find a new strategy?

Question

I've been looking for my next deal for over a year. I live in a mid-size growing city in a LCOL area. House prices are notoriously low here. I don't know if its the inflated market, more people discovering our little gem and causing higher demand for MFR or what I'm doing wrong, but I can't find a deal where the numbers work.

Found what I thought was a great next buy. Duplex conversion, list price $165k, minimal updates needed. But when I crunch the numbers the returns are SOOOO low. Net income of $12,250. After mortgage payments, I'm left with somewhere between $4700 and $5600/year. I just can't wrap my head around going through the hassle for that little payback but I also don't have the funds to scale up and get something larger - maybe another fourplex if I found a great deal (I've been looking! none so far) but I want enough units/profit that I can hand over the day to day management, and settling for something with an 8% cap feels counterproductive toward that goal.

What other ways can I make my money work? Maybe I need to branch out to other parts of my state that aren't seeing as much growth in hopes of finding better returns? Frustrated and feeling stuck. Help!!

Ashly B. · Answer

Thanks for the response. I absolutely would be interested in larger unit properties but they feel out of reach. I'm lost when it comes to finding partners or investors. Commercial lenders I've talked to still want 25% down just like a traditional lender on a 1-4 unit. I have about $40k to spend up front and that simply isn't enough to get me into a 5+ unit property even in a LCOL area.

I have a 4 plex currently. It's a cash cow and I'm going to own it forever. It was a great find as purchased and after some rehab the returns are unreal. I've already conceded that I will not find something as great; however, what I'd like to do is smartly leverage the equity I've built and investing in "what I can afford" by traditional lending standards doesn't seem like a good use of the money. I just had it appraised and it came back at $220k, and I owe $95 on the traditional mortgage. I've been pre-approved by a commercial lender for a cash out refi and now I can't decide how to spend it. How do I get into bigger deals when I don't have partners/investors to work with? Good reading/resources or strategies I should be looking into?

As for your question about current strategy and timeline, I have some very specific goals around my timeline for leaving my corporate job. I have no desire to grow for the sake of growing - its about hitting a number to replace my current income and getting out of the rat race at which point in time I'll enjoy "retirement" in the sense of working on passion projects and not for a paycheck. 8 years is my target, I currently have 4 doors and I'd like to add 6-10 more.... although my door count was based on the returns I'm seeing on my fourplex - I might need 20 if each property is only going to net me $4k/mo :/

Daniel Reyes · Answer

Hi Ashly,

Thank you for posting! I admire your persistence as the real estate market is very competitive across the nation today. Very encouraging to read!

I am curious to see your underwriting on this deal, as your financing and business plan for the asset will of course result in your figures and your cap rate. What is your investment strategy and hold period? (Value-add, reposition, 5, 7, 10 years)

In general, I would err on the side of caution when you are underwriting 4 unit properties and below (quad/duplex, etc.). With regard to the general market, these are treated like single family homes, so I would be concerned with making assumptions on value appreciation. You may be only looking at cash flow, so this is open to discuss. I believe before anyone can provide you with valuable insight here, we need to understand more about the deal, strategy and capital structure.

Might I suggest considering multifamily investing (5+ units)? You might find yourself more interested in this from an investment standpoint :).

I look forward to your follow up. All the best.

Daniel Reyes

David Pere · Answer

$5600 a year isn't terrible for the amount of money down that would require...but not amazing. lowering criteria isn't necessarily the answer, but there are other markets, or perhaps more off-market deals?