Finally a 4 Unit near me! What do I do???

Question

James C. · Answer

Donnell,

This is going to be long and dense... so grab your favorite beverage.

Thank you, I think ;)

First things first: 10K is enough to start, especially if you can be creative. More is obviously better. Your professionals on your team are successful when you are successful. Find folks that understand that, are scrupulously honest with you (even to the point of painful), and are people you want to spend time with. If you do this right, you could be spending substantial amounts of time and money with them. You don't have to outright like them, but you should not be questioning working with them. Essentially, find folks in the 3d world like those in the virtual world (e.g. BP).

Next Steps:

1) Get your personal finances in order, on solid footing. Some folks indicate you should have no debt going into REI, some say have an aggressive plan in place to reduce it to zero in a short time frame. I get both points, but you need to decide. Wander over to the "Afford Anything" blog (Disclosure: I get nothing for the plug) or your favorite finance/life hacking website/blog/podcast, and research, research, research. (Disclosure: I am NOT a financial planner... I am just passing along what I observe)

2) Have some level of monthly expenses set aside in case something happens. Most folks I run across indicate 6 months of living expenses in ready cash. This is money that you do not use for anything but your personal living reserves... Your investable cash is over and above this figure. Also, this cash should not be used for reserves for a building... it's ok to show it for mortgage purposes as you can access it in an ABSOLUTE emergency, but you should build at least 6 months (or more) of reserves for your building once you have it. (Disclosure: I am NOT a financial planner... I am just passing along what I observe)

3) While you are doing 1 & 2... make a business plan... "Donnell Durden will create an LLC in Connecticut, called Durden Properties LLC., that will invest in 4 unit properties in New Haven CT that...." This will get refined along the way, so it should be a "living" document. Begin to get your supports together as you are working on the plan...

Most folks starting out can't buy property without a mortgage... so that is logically your starting point. Sit down with a few mortgage folks ... ask if you can bring coffee or some snacks or make it a lunch meeting. that $5 - $15 can go a long way. It doesn't (or shouldn't) cost anything... ask your prepared questions (remember who, what, where, why, when and most importantly HOW), lay out your financials, get their opinions, ideas etc. Ask for references to good real estate agents, builders, HML, REIC's (join one of these), etc.

Once I had my agent in place, then I would begin to request that I get to see properties that make sense for your plan (you have screened them, refined the screening and they look doable). During all this read, ask questions, revise your plan as necessary, and keep researching (including BP), and adding professionals to your list, each one brings a new facet to your business. Example, if you find a good construction person, now you can do a fixer deal, without a good construction person, no fixer deals are possible (Unless you have the talent to do that work).

You don't know what you don't know at this point. No question is too stupid, except the one you don't ask. That one you don't ask, it could cost thousands...

With all that said... use the opportunity in front of you as a real live example to get yourself started... build your knowledge base first... if you haven't seen the property, go see it. There is no substitute for an inspection. The agent showing you the property doesn't have to be "the one" for your team. See if you can get the actual numbers for the property (you need to research what those are called, and what you should have).

Take pictures, video, whatever you need to do to keep that property in your mind... use it as a reference, a point of beginning. Use it as an example deal... run the numbers 47 ways. Run what if scenarios on it. Most importantly, figure out how to work the numbers, what happens to my CAP rate if I pay all cash, no cash, 50% cash. What happens if I can raise the rents 50/month, lower expenses 3%. What happens If I get my money at 12% and 3 points, or 3% and 0 points... where does the property need to price to make those combinations work? Any deal is doable, it's just the price that makes it doable. The seller might not like the price... oh well, next.

Get involved, Join a REIC, shadow an investor, Mortgage person, Real Estate agent. Spend a weekend building a Habitat for Humanity house, attend auctions (I hear Investors sometimes hang out at these), go to a closing. Use these as ways of gathering information about real estate.

One last thing... do not under any circumstances get into analysis paralysis. Find the deal that fits your model (double and triple check your model) that you have created after doing your research and pull the trigger.

If you have any more questions, or some of this is unclear (I'm sure it is), let me know. Actually, I get more out of this... it helps me to refine my ideas/plans and strategies, so, thank you for the opportunity.

Jim

James C. · Answer

Donnell,

First things first, you need to figure out the ARV (After Repaired Value) and the monthly rents, and see if that whole thing makes sense, financially. I can't see a way forward (except below) unless the ARV is MAX 60% or so of the acquisition + rehab costs AND it cash flows. If you use standard financing (it won't qualify), and HML/Private money or Partner will want a KILLER deal to make it work; read 60% of ARV and DSC > 1.5, plus at least 20% cash in the deal.

Options:

See if the property is a FNMA Homepath property, and explore that option (I've never used it, so I can't comment about it). I would also get prequalified for a 203K Loan (acquisition + rehab costs). it's about a 5-6% all in loan on the total balance. You have to use a contractor, but this sounds like a first deal, so best to have the support. You might be able to get FNMA to pay some of the closing costs/Points etc. You could combine this with a first time homebuyer program in CT to help out. This only works if you are going to owner occupy.

Do some estimates for your numbers 94,900 + 50,000 = 144,900 (call it 145,000). Currently, FHA 203K money is about 4.3%, so that makes your monthly payment (30yr/fixed) on 145,000 = about $720. Rule of thumb in war zone is 2%, so $145,000 * 0.02% = $2898 rents per month. Use something like Rentometer to determine rents, find out taxes, set aside 10-15% for vacancy, and 7-10% for repairs (it's going to be newly rehabbed), and see where the numbers lead you. Do this analysis before going forward. If you've never done it... it can take a bit to get it going... but find a good analysis spreadsheet (APOD), and work through the numbers.

If the analysis works out, then put it under contract (For FNMA, I think a Real Estate agent has to submit the contract, but check that out too!) with inspections and financing contingencies. Then go from there... have your inspections, bring in your contractor and property management professionals (you do have those, right? If not get them NOW!, Make sure they are GOOD!). TIP: Make friends with an actual appraiser, and run the deal by them for their opinion, buy a coffee or lunch for them... its' SUPER CHEAP insurance. Get all your numbers and rework the calculations with a fine point pencil. Run them by BP or a few investor friends. If the numbers work for your business plan, go forward. If not, find another deal.

You might also consider having your team (Real estate agent/appraiser/lawyer/LLC/finance person/property manager/construction) in place before moving forward. It might mean you miss this deal, but at least you are better positioned and more knowledgeable for the next one.

Good Luck, let us know how it goes!

Jim

Upen Patel · Answer

@Arianne L. Thank you for the mention.

@Donnell Durden If the property needs rehab then you will have to go the FHA 203(k) route, which means the units can't be rented right away. So you would need to have enough income to carry ALL your debt. $20K income wouldn't do it for a $150K mortgage, that's assuming you don't have any other debt.

Arianne L. · Answer

Call a lender and get pre-approved for an FHA loan. @Upen Patel can help you with that. You will need a preapproval to submit your offer

Find a realtor in your area and submit your offer.

John Leavelle · Answer

Howdy @Donnell Durden

It appears to me you will need to use creative financing to get you started.  Since you currently do not have the income to support any kind of bank loan.  Try to use Seller Financing if possible.   Everything is negotiable. Deposit, term length, interest, payments, and restrictions.  It is much easier to work out a deal where you both win.  Later after you have renovated and stabilized the property you can refinance out if you need to.

Otherwise you will need to find a Hard/Private Money Lender to start the ball rolling.

On a side note.  House hacking and BRRRR are two separate strategies.  It would be difficult to recover 100% of your cash after house hacking.  The reason is BRRRR considers 4 things as part of cash investment basis.  Deposit, Rehab costs, Closing costs, and Holding costs.  Holding costs is where house hacking can cause problems.  If you have negative cash flow the whole time you live in the property, then, that negative goes towards your holding costs.  So you can see your total cash invested could add up.  When you do the Cash out Refinancing you may get a percentage back, but, probably not 100%.  But, something is better than nothing.

Andrew Johnson · Answer

@Donnell Durden Whether or not you can actually do the deal I would contact the realtor and ask for a T12.  It can't hurt and would at least allow you to know what it tangible rents for in it's current condition (if anything, assuming it's occupied, etc.).  You'd also need figure out what you think the other units would rent for post-renovation.  As for renovations, you can look at pictures and scratch some numbers on the back of a napkin but I've only been "pleasantly surprised" once when I've toured a property regarding condition.  It's usually worse that it looks online, sometimes a little, sometimes a lot.  From the subsequent posts it looks like financing likely wouldn't come through without the heavy creativity.  That being said, I'd take the chance to at least practice with a T12.  And if creativity does come to fruition you'll have a head start on trying to figure out the numbers that would make the deal work for you and whatever person/institution is backing you financially.

Sean Moore · Answer

Donnell call Steve Jones at Kaerus property group and talk to him I think he would be able to help you out.

Finally a 4 Unit near me! What do I do???

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