What are you willing to accept on a buy-and-hold deal?

Question

Hi BP’ers,

I really need to purchase some rental properties but am having trouble establishing my best offer.  I’m shooting for financed deals that will get me at least 10% cash-on-cash return with $100-$200 in monthly cash flow.  So I was wondering what other investors are willing to accept when trying to “buy it right” to ensure they make their money when they buy.  Will you give me some input please?

After reading books like the “Millionaire Real Estate Investor” by Gary Keller, and “HOLD”, by Steve Chader, Jennice Doty, Jim & Linda McKissack, the general train of thought seems to be buy the property with no less than a 10% below retail to achieve instant equity.

I’ve been experimenting with some scenarios to see what my best offer might be on a deal.  To keep things very simple, I’m assuming the following:

• Structure: SFR
• Asking price: $111,111
• Desired COCR: 10%
• Gross Rent: $1,000/month
• Financing terms– preferred is 70% LTV over 15 years

In the example below (btw...I'm using a modified version of @Brandon Turner 's 4-Square concept), I plugged in getting the property at a 10% discount and the preferred terms and can only achieve $55/month in cash flow with 2.05% COCR.

If I plug in terms of 80% LYV over 30 years I can get a lot closer.

If I plug in my preferred terms, and calculate my best offer, I can only pay $75,408 which is 67% of the asking price.

John Leavelle · Answer

Howdy @Gary Michalske

I have not read the books you have referred to.  However, it seems to me it will be difficult meeting your criteria for CCR with 70% LTV and 15 year financing with properties that require little to no rehab needs.

I think you might be able to achieve your goals easier if you use the BRRRR strategy.  You already have experience with Flips so just incorporate that into your strategy.  Buy distressed properties with cash or HML/PML, at much more than 10% discount, Rehab them to force appreciation, increase the rent, then refinance (70% LTV/15 Year’s) to get all or most of your cash back.  You can leave some in to adjust the cash flow you receive if you want.  Your CCR can be infinite.

Just a thought.

Gary Michalske · Answer

Yes, @Derek Kirkwood.  Following the plan I read about in "HOLD", that's what the McKissack's did.  They acquired 20 properties in five years.  I would like to find a way to acquire the properties for my plan much quicker though.  I need to sit down and set up my model to see just how to accomplish that.  Since I am paid enough in my W2 job to have excess income to allocate to investing, I should be able to come up with a way to acquire them before the five years are up.

Derek Kirkwood · Answer

@Gary Michalske Thanks for the book recommendations.

You hit the nail on the head, to maximize CoCR you want the largest LTV over the longest term.

When you say buy-and-hold how long are you thinking?  I assume the 5 year plan you mentioned was acquisition phase, not the total hold term.

Gary Michalske · Answer

Thanks Cara.  You are correct.  I went back to CRSData and exported all properties that had sold between $100k - $125k in my city for the past 6 months and found the average tax to be $876 with the Median being $889.  Using the average took my monthly tax expense down to $73/month.  That will give me $80/month cash flow and 2.95 COCR if I buy at $100k and a best offer of $77,355 (70% of asking) with a cash flow of $209 and a COCR of 9.99%.  I just don't think getting a property at 70% of asking is going to be easy.  But then again, Michael Quarles claims to get houses at $0.65 on the dollar exercising his Wholetail business model.

After getting serious with real estate investing this year, I'm now ready to create my 5-yr plan.  I own one rental, did three wholetail flips in Texas, have three new builds going on with Devan McClish right now that should sell Q1 of 2018, one completed local flip and one flip in Gatlinburg TN that is under contact that is scheduled to close on 1/5/18.

But now I have to get very serious with buy-and-hold and I need a plan to do so.  I like the McKissack's starting model to achieve $20K in monthly passive income.  They focused on properties in their hometown in attractive, stable neighborhoods for at least 10% below market value that created a cash flow of at least $200 a month from day one.  They put 20% down on a 15-year notes and used all the cash flow to pay down the debt.  This sounds very realistic to me.

Cara Lonsdale · Answer

Your property management fee seems to be eating alot of the profit you seek.  Also, your monthly taxes seem high for that price point, but that could be because I am not in your area.  Is that an accurate number for the property in your area?

You have stumbled onto some great reading.  Of course, I may be a little biased as I have been with Keller Williams for over 20 years, and just love the innovation of Gary Keller (Founder of KW).  I know Steve Chader (he is from AZ), and admire his business model.  His property management company has really taken off!  The McKissacks are great recruiters, and receive some of the highest profitshare checks in our company.  They are expert team builders and great people.  All of the people you mention go beyond "author".  They have personal proven results of success.  So, concepts you get from their books are tried and true.  Glad to see someone else who appreciates the resources provided within their books.

What are you willing to accept on a buy-and-hold deal?

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