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Updated about 9 years ago, 11/29/2015
New to this and appreciate ANY input!
I have the opportunity to buy income properties from a company called Strongbrook. I have come across BiggerPockets (thank goodness) and have read a forum on Strongbrook that has made me wary. I too have had some really good advice here on BiggerPockets. This being one of them (to post here) from Joshua Dorkin.
These are just some of the examples that Strongbrook provided at my request. I live in Oregon and these properties are in Indiana and Tennessee. They recommend these areas because RE prices are low but rents are average. They have provided 5 yrs of Income/Expenses. I will include second year, as that is the lowest income year. All taxes seem unbelievably low to me & sq footage very small. You'll find at the bottom of each a "*(…)" that I have added for discrepancies as compared to property 1Assumptions
Downpayment 20%
Closing Costs 5%
Interest Rate 5.125%
Property Mgmt Fee 8%
Vacancy/Repairs 14%
Annual Rent Increase 5%
#1 E Stop11 Road, Indianapolis, 46227 Purchase Price 79,900Down Payment 15,980
Est Closing $ 3,995
Coordination Fee 3,500
Total Out of Pocket 23,475
PM Setup/Misc 2,500
Yr Built 1984
SqFt 1174
Beds/Baths 3/1.5
Mo. Rent 950.00
Mo. Principal 348.04
Mo. Taxes 54.97
Mo. Insurance 41.67
PITI monthly 444.67
Income/Expenses (Year)
Gross rent 11,970.00
Taxes 679.39
Insurance 500.00
Property Mgmt 957.60
Vacancy/Repairs 1675.80
Net Operating Income 8157.21
Net Mo. Cash Flow 333.38
#2 Milwaukee Ct, Indianapolis 46217
Purchase Price 79,900
Down Payment 15,980
Est Closing $ 3,995
Coordination Fee 3,500
Total Out of Pocket 23,475
PM Setup/Misc 2,500
Yr Built 1983
SqFt 1080
Beds/Baths 3/1.5
Mo. Rent 950.00
Mo. Principal 348.04
Mo. Taxes 25.00
Mo. Insurance 41.67
PITI monthly 414.70
Income/Expenses (Year)
Gross rent 11,970.00
Taxes 309.00
Insurance 500.00
Property Mgmt 957.60
Vacancy/Repairs 1675.80
Net Operating Income 8527.60
Net Mo. Cash Flow 363.35
*(this has lower taxes, yet higher operating income than #1 with higher Net mo. cash flow)
#3 Ginger Snap Cove, Memphis 38125
Purchase Price 145,000
Down Payment 29,000
Est Closing $ 7,250
Coordination Fee 3,500
Total Out of Pocket 39,750
PM Setup/Misc 2,500
Yr Built 1993
SqFt 2253
Beds/Baths 4/2.5
Mo. Rent 1300.00
Mo. Principal 631.60
Mo. Taxes 111.00
Mo. Insurance 60.00
PITI monthly 802.60
Income/Expenses (Year)
Gross rent 16,380.00
Taxes 1398.60
Insurance 720.00
Property Mgmt 1310.40
Vacancy/Repairs 1310.40
Net Operating Income 11,640.60
Net Mo. Cash Flow 344.00
*(error in that prop mgmt & vacancy/repairs are =, also that
vacancy/repairs on this property are just 8%)
#4 Vestry Place, Indianapolis 46237
Purchase Price 87,900
Down Payment 17,580
Est Closing $ 4,395
Coordination Fee 3,500
Total Out of Pocket 25,475
PM Setup/Misc 2,500
Yr Built 1998
SqFt 1038
Beds/Baths 3/2
Mo. Rent 975.00
Mo. Principal 382.88
Mo. Taxes 50.00
Mo. Insurance 41.67
PITI monthly 474.55
Income/Expenses (Year)
Gross rent 12,285.00
Taxes 618.00
HOA 132.00
Insurance 500.00
Property Mgmt 982.80
Vacancy/Repairs 1474.20
Net Operating Income 8578.00
Net Mo. Cash Flow 333.45
*(Vacany/Repairs 12%)
#5 Lauren Dr, Bartlett, TN 38133
Purchase Price 140,000
Down Payment 28,000
Est Closing $ 7,000
Coordination Fee 3,500
Total Out of Pocket 38,500
PM Setup/Misc 2,500
Yr Built 1997
SqFt 1562
Beds/Baths 3/2
Mo. Rent 1300.00
Mo. Principal 609.83
Mo. Taxes 149.42
Mo. Insurance 60.00
PITI monthly 819.24
Income/Expenses (Year)
Gross rent 16,380.00
Taxe 1,182.65
Insurance 720.00
Property Mgmt 1310.40
Vacancy/Repairs 1310.40
Net Operating Income 11,156.55
Net Mo. Cash Flow 327.36
*(again error in that mgmt is same as vacancy/repairs-hmmm, same mistake twice is worrisome, also vacancy/repairs are just 8%)
#6 Millers Glen Way, Memphis 38125
Purchase Price 105,000
Down Payment 21,000
Est Closing $ 5,250
Coordination Fee 3,500
Total Out of Pocket 29,750
PM Setup/Misc 2,500
Yr Built 2004
SqFt 1348
Beds/Baths 3/2
Mo. Rent 1050.00
Mo. Principal 457.37
Mo. Taxes 80.83
Mo. Insurance 50.00
PITI monthly 588.20
Income/Expenses (Year)
Gross rent 13,230.00
Taxes 999.10
Insurance 600.00
Property Mgmt 1058.40
Vacancy/Repairs 1058.40
Net Operating Income 9514.10
Net Mo. Cash Flow 337.90
*(AGIAN same error in that mgmt is same as vacancy/repairs- same mistake three times is really not so great, also vacancy/repairs are just 8% again)
If you've taken the time to get through all this, I can not thank you enough!
@Timothy Nelson those numbers look about right, except for the purchase price is on the higher side and the closing costs is very high [I'm sure this is a profit center for the seller].
If you are looking seriously at Indiana, let me know & I can point you the right direction.
Wow. Call me crazy - but they have a disclaimer saying they don't offer investment advice on their website? Are these guys registered with the SEC? That website looks like a massive securities offering that should be registered. I'm not a financial planner, but I've done deals that require filing with the SEC to pool funds aggregating investors. If they have "clients", they are either a real estate brokerage or an investment firm, and I have no clue exactly what they are from that website. I would stay far, far, away from that without extensive legal scrutiny into the operation. I'm not going to slam them because I don't know them, but I have serious reservations about my initial impressions. I'm open to someone enlightening me if they know something I don't and can explain how selling houses that way is legal.
Tennessee has a great tax site that is good for checking tax balances, tax appraisals, and comparing areas. http://www.assessment.state.tn.us/ It allows searching by owner name. It works best by just street name.
@Timothy Nelson I'd agree with @Shawn Holsapple closing costs should be around 2-3% max. Also, what is there coordination fee entail? Is that them just putting the deal together? Also, is the PM Setup the fee for managing the property or just for them setting up you into their system? I'm always leery of misc fees that aren't explained. I typically charge around $1k-2k for coordinating a deal for an out of state investor. That includes getting the offer accepted and coordinating rehab if need be. I don't know about Indianapolis, but management runs between 10-15% with our company hovering at 12% of gross rents collected.
Make sure you get those 2 fees explained because if that's just for them putting the deal together they are getting $6k. Pretty good payday for selling a house and setup in their system/misc.
I will vouch that at least in Allen County and Shawn can probably tell you about Indianapolis we have some of the lowest taxes. I bought a house 3 weeks ago that they taxes are $212/year. That's less than half a month's rent. Not too bad.
@Timothy Nelson I think you have good reason to be wary. @Joshua Dorkin is right that those property taxes are way too low. I do a lot of business in Indy and I know those taxes aren't right. Marion County tax rate is 1% off assessed value for owner occupied and 2% for investor owned. Plus, owner occupants are eligible for homestead exemptions which significantly lower Stop 11 that Joshua mentioned. I sold it. If it's the same property, the real property taxes are $157/mth not $54/mth. I'm also scratching my head wondering what a $2500 PM set up fee is. A simple Google search on them reveals enough that would make me run away. If you want some advice on Indianapolis, feel free to contact me.
@Timothy Nelson the low taxes may be due to the fact they are quoting the current rate with owner occupants utilizing homestead & other tax credits. This happens a lot. The best thing is to go to the county website and look up the accessed value. As investors in Indiana, we pay 2% of that accessed value.
Here's a link to Marion County [Indianapolis].
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Hey @Mike D'Arrigo - I'm thinking you meant to mention someone else -- I never cited the taxes, as I'm unfamiliar with the area.
@Timothy Nelson - My only advice was to post the numbers to get some feedback; it seems like the response so far should be helpful. I'm guessing you'll get more over time . . .
I was just going off what @Timothy Nelson posted. "All taxes seem unbelievably low to me & sq footage very small. You'll find at the bottom of each a "*(…)" that I have added for discrepancies as compared to property 1". In any case, those property taxes ARE way to low. I would love it if they weren't!
Timothy the fact they are using 5% as an annual rent increase should give you concern.
Most areas are 3% annual increases and sometimes you do not even get that. The property needs to make sense going in without any rental increases yearly. That needs to be gravy if it happens and not the benchmark for what makes a property investable.
Also the expenses are low. On number 6 Millers Glen if you take 9,514.10/ gross rent 13,230 you only get 28% total annual expenses. You do not even know if the rents show are accurate or inflated for that market. Look up the 50% expense guide on here. I do see people paying crazy prices in many markets but those are either spec plays or they are simply overpaying for a property based on wild assumptions that create a high probability they will have a loser of a property.
Example they are stating gross rent on number 6 is 1,050 month. What if you have to give first months rent free to get a 1 year lease??
1,050 X 11 months = 11,550 / 12 = 962.50 effective rent.
All I will say about this is the writing is on the wall. Numbers do not lie. The fact that various things are given for each property along with a disclaimer should give you pause.
Not speaking of this company at all but turn key companies tend to under estimate repairs and inflate income levels starting today and in the future to paint a rosy picture of how a property will perform. A prudent investor needs to evaluate the other way in a worse case scenario and if the deal still makes sense you might have a winner on your hands. It's much easier to sell inflated DEALS to inexperienced investors. You will pay more for turn key properties with less equity because the turnkey company is doing all the work presenting the offer to you with systems in place. The numbers STILL have to make sense though.
Another thing to watch out for is companies can use terms like fully rehabbed etc. and when you look at it they put carpet and paint in and all the mechanicals, bathrooms, kitchens, roofs is all old. They skin with the cheap items and call new but the crushing expensive items on future cash flow they leave in place.
Hope it helps. I expect any company selling to have a disclaimer but the numbers still need to be there.
- Joel Owens
- Podcast Guest on Show #47
As others have commented, some of the numbers look suspect. Maintenance and capital reserves look low. For instance, if a house is 16 years old most likely it has the original roof. If it has a 30 year life you have 14 years left. A $7,000 roof divided by 14 is $500 per year and that is just one component.
I would also like to be able to raise my rent by 5% per year. I don't even figure any increase in my calculations.
I don't know if closing costs are high or not. They certainly are if you are paying cash. If it includes the cost of getting a loan it may not be. I am assuming the $3,500 is the company's fee/profit. The problem is that they probably have profit hidden in the other numbers.
I have found that so called turn-key properties always seem to need $1,000 to $3,000 to actually get them rent ready. I require the sellers to fix those issues.
Part of your due diligence is to re run the financials using your numbers. Only buy if it makes sense then.
Good Luck.
Bill
@Timothy Nelson
@Shawn Holsapple & @Adam Gerig
Indiana and the Midwest itself have really weird real estate niches compared to the rest of the country (so compared to what everyone else is used to up to a few years ago).
I get upwards of 30% ROI on a couple of my rentals, low taxes, etc.
PLEASE check with someone in your network within the potential area before giving away your dollar regardless of the reputation of the company!
"Coordination fee"? Is that a fee you pay them? That already makes me suspicious. Plus assuming a 5% rent increase each year is something I would never do in a million years. I think that is a very uneducated practice.
I don't know who Strongbook is and have never heard of them, but I'd be wary for sure. There are plenty of good companies out there who will help you with no "coordination fee" (and seriously, $3500 is a really high "coordination fee" even if someone is going to charge one) and give you properties to look at with much more realistic numbers.
100% agree with @Ali Boone our company doesn't charge you to coordinate picking up a rental. Since we are a real estate company as well if you find something you like on the MLS we get a commission split from the listing broker anyways. I'd call and ask what the fees actually are. If they have a good reason(which I can't fathom one) then possibly consider it, but if they aren't helpful or give you the run around start running!
As I've mentioned in another post:
My limited knowledge (to this point) is that Strongbrook is the re-branding of a previous company by Kris Krohn called REIC. They are based out of Utah.
I went to one of their meeting a few years back only to discover that they were selling very expensive subscriptions to be a member with them. I tried asking a lot of questions but couldn't seem to get specific answers, only general promises of what a membership could/would provide. (It seemed that I couldn't get answers to my questions unless I joined first.)
The people "working" with them seemed to all be on a referral-based commission of some kind because I found NO objectivity, and there was always a push to join.
There was nothing that they "offered" that I couldn't do for myself, or get elsewhere for less or free. After doing a limited amount of research on them, I concluded that they were making a lot of money on the front end, and commissions or referral fees on the back end.
Bottom line is I found their marketing 'machine' to be great, but their value proposition to be lacking. I couldn't see justifying their membership fees which range between $6,000 to $12,500 at the time.
Wow! I am truly more than grateful for everyone's time. Truly appreciate the time taken out of your days to help this novice. I think I need to take some time, more research and more questions about all this. Just to clarify something about why I was/am looking specifically in Indiana and Tennessee. Strongbrook purchases and then sells homes to clients in three 'hot' markets. These being Las Vegas, Phoenix and Orlando. I was told that these markets offer the greatest potential for gaining equity quickly while still returning some modest monthly profits as rentals before ultimately selling. The two markets (Indianapolis and Memphis) offer the investor who is looking to maximize monthly income as opposed to building quick equity. The reasoning being that home prices in Indy/Memphis are low, but rents are about average, thus maximizing the monthly profit from rents. I live in Portland, Oregon and I know that purchasing a property here to make a monthly profit is not going to work within my financial means (as home prices are relatively high). This is basically what I had been looking at. I am selling a home in Oro Valley, AZ that my realtor believes should sell for about 250k. I have no mortgage but I do have a home equity loan that will need to be paid off. The balance on that is around 23k Through Strongbrook the plan was to buy 4 properties with an average total out-of-pocket cost of 120k. As above properties show I could do that. Let's say I were to buy 4 properties similar to the first 4 on the list. My total out-of -pocket for those four would be approx 113k. The monthly income on those 4 would total $1375. That is factoring in taxes, vacancies, repairs etc (i.e. everything). Now that seems like a huge increase for me as currently I rent the AZ property for $1195/mo. I pay $50/mo to Fidelity which covers plumbing/appliance/HVAC repairs/replacement. I also pay $50/mo insurance, $205/mo taxes, $300/mo village HOA, $24/mo community HOA, $75/mo home equity and finally $144/mo property management. This totals $798/mo. $1195-$798=$397/mo income. So according to Strongbrook I could earn an additional $978/mo by purchasing 4 properties through them. Now, not only does that appear to be remotely truthful, I do not know what geographical area would be best and so on and so on… Bottom line is thanks again for all of your professional input!!!!
After reading above I meant to say an average of 30k out-of -pocket per property. 120k total.
@Timothy Nelson for $120k you could buy 3-4 properties outright with no mortgages here and they should cash flow much more than the $1300/month. Houses in that range in Fort Wayne will bring between $550-650/month rent. Also, there are several banks in our close proximatey that would loan on those properties after 1 year of rents. So essentially you could get back about 70% on each property of what they value the property at. If you are buying a property they value at $40k and you bought for $30k you'd only have to come up with $2k (which you should have from a year's worth of rents) get you money back, get long-term financing in place, and do it over again. Now that may not be your strategy. If you are strictly looking at cash-flow just keep them and put aside some of the "extra" every month until you have enough to purchase another free and clear.
Just an idea not sure what your particular strategy is, but just had an investor out of California do that very thing. Bought 2 properties and he's going to be looking at financing here in the next year after a cash purchase to do it over again.
Yes, it is me again. As has been explained the 50/50 rule is rent minus 50%. This gives me my maintenance costs on a property. But this does not include PITI. If I purchase a property for 140k with 20% down, the PITI (assuming 5.125% interest) might be $850. If I rent the property for $1300/mo the 50/50 rule says $1300-$650=my income on the property. Then I subtract the PITI of $850 which leaves me $200 in the hole each month. If I were to buy a 30k property with cash and was able to rent it at $500/mo that puts me at $500-$250=my income. As there is no PITI my income really is $250/mo. So, it is preferable to buy a cheaper property for cash as opposed to financing a more expensive property?
Originally posted by @Timothy Nelson:
From my understanding, the 50% Rule is that 50% of your gross income rents will be put towards operating expenses including vacancies , repairs, taxes, Insurance, etc. Then subtract your mortgage-P&I and you get your cash flow.
If you bought a property for cash, you wouldn't have principle or interest but still have insurance and taxes so it would be less than $250.
So it is sounding like I should not sell my current rental to finance my desire for more income properties. My current rental provides me with $552 profit every month. This includes absolutely everything. It just seems to me that replacing this one property to gain other properties is never going to increase my profit.
Wondering, did you ever move forward with this company Strongbrook? If so, how are things working out?
