All Forum Posts by: Amil D.

I have been playing with the 2% rule in a spreadsheet. What I came up with is what I call the net income as a percentage of cost basis. First, I include renovation costs and purchase cost as the cost basis. Then I do a quick analysis of expenses, real estate taxes, insurance, management, vacancies, repairs, inspections. Then you simply divide the net income by the rent. This gives me the net income as percentage of cost basis.

My spreadsheet also shows me the projected rehab costs, the cost basis, (which is the purchase price plus the rehab), cost basis as a percentage of AVR (like for the 70% rule), equity, (which is simply the after repair value minus the cost basis), and net income per month. Now I have a sheet that I can use to evaluate a property. 

Then have a sheet called comparisons that I link the metrics of the property evaluation sheets of the individual properties that I am considering and I have a metric that I can compare one property to another and see which one would perform better per dollar invested.

@Amil D. Pricing for market value is going to change based on the neighborhoods. You also have to understand that if you are in an area that is dominated by investment properties, your retail value is going to be based on its ability to produce and income, not what Johnny and Suzy are willing to pay for it.

I think that tougher neighborhoods should be handled by the locals. There are a lot of things that can go wrong and it's very difficult to babysit a property from afar. As @Zach Hoereth said earlier, you will live and die by your local team and the core of that will likely by your property manager. The problem is that even the best property manager cannot visit your property several times each month to ensure that there are not problems that you need to be aware of. I received a call from the neighbor of one of my personal rentals about 2 weeks ago complaining about my tenant having friends over who were parking on the grass and cooking out on the front lawn. They were being problematic and the police had to be called. Now the neighbors are mad at the tenant and it's likely to turn that tenant this year. He's been a good tenant overall, but he's young and has some questionable friends that like to hang around that tend to cause problems.

It's not an issue for me as I drive by the property every week or two to make sure that there's nothing unusual going on that I need to have the property manager address, but that's not something that you can do investing out of state. While I know that the numbers of turning a $30k home in to a $50k home sound enticing, but I would still recommend something that will likely expose you to a little less risk. Having a tough tenant pool to select from can make things challenging.

I find that my OOS investors do best in a $70k-$90k range. They have $10k-$15k tied up long-term, cash flow about 6-10% until their vacancy wipes out most of it, but the equitable appreciation is often 10%-30% annual ROI depending how the home is positioned. For this to happen though, you have to be somewhere with a retail sales market. The biggest possible upside is when a neighborhood is gentrified from an investment neighborhood to an neighborhood full of nice homes and homeowners. This happened in Fountain Square, briefly in Bates-Hendricks, and is about a year or two out from happening in St Claire Place/Brookside Park area. Unfortunately, crime has been compressed around Sherman Dr and it's slowing down the expansion as it moves East. For the most part, I prefer the West side to the East side, because the crime tends to be less violent.

Real estate is a long game and while you can try to flip tough homes for quick profits, I really recommend making a long-plan as well that allows for equity growth over time as it naturally compounds in to a nice nest egg over time.

 Hey Zach,

Awesome information!!!

Your numbers are based off experience and my numbers are based off my pie in the sky spreadsheets. That would explain it. Lol. I am a new investor.

it's great to hear a locals experience so that I can adjust my criteria to be a little more realistic.  yes I want to get properties below market value and set my criteria as such, but not to an unrealistic degree.  so rather than just looking at off-market deals let's just check out the market values. And then I can figure out what type of discount is reasonable. What do you think is a reasonable market value for:

- for rent-ready 2/1 C properties 

- for rent-ready 3/1 C properties 

- for rent-ready 3/2 B minus Properties

thanks

Amil

 Amil, how many current properties have you purchased with this criteria? Now I could be missing something because I have not been doing this for 50 years, so I can only speak from personal experience. I thought that I was picking up a home run 2/1 rent ready for 28k in 2017. (Rented for $650 & later sold for 48.5K) Later that year I purchased a few more 2/1s that needed a bit of cosmetic rehab that put me closer to the 35k mark. I turned around and was able to rent these for $650-700. (Also west side) These were on market deals that I happened to be at the right place at the right time. I was purchasing all of these cash and was not refinancing because most of the lenders that I had in my network would not touch anything under 50k or wanted to fee me to death.

That said, in 2018 I sold a few 2/1s for the 32-35k mark which needed another 5-7k to some clients of mine who were able to put section 8 tenants in place and get closer to $750. (Also on the west side) 

Just before the end of 2018 a partner and I picked up a 2/1 for 16k that is in pretty rough condition. The tenants have been there for over 10 years and pay $550/month. We have not touched the place since closing last December. This place will easily need another 15k in renovations to get it up to decent shape. Again, only speaking from experience, but not sure where you are developing this criteria. It is rare even for a local to find 2/1s in great condition and be all in at 15-20k let alone a 3/1 all in at 30-35k. If you do happen to find these kinds of properties and run out of money please call me because I will buy as many as possible, or if you'd like I sell you the one I bought for 16k in December for 35k.

Perhaps reach out to @ClayManship or @EvanManship :) 

Cheers,

Zach 

 Hey Amil,

Glad I could share some insight! I personally own mid size multi-family in tertiary markets about an hour outside of Indianapolis. In 2017, I was purchasing SFRs on the west side of Indianapolis in C/C- neighborhoods. I like the west side of Indy because I know it best from growing up around there. I was able to utilize my local market knowledge to get into deals that cash-flowed very well for me. I was purchasing 2/1s for buy & hold. As I noticed the market begin to jump up I sold everything and moved into multi-family. 

Keep in mind that locals often do not have the cost of PM and may have a network of direct contractors to perform maintenance & repair on their properties. Out of state investors usually have to lean on their PM to get these done hence the fees they pay therefore decreasing returns. My numbers will look a little different than yours because I am able to buy in my back yard if you will. 

Cheers,

Zach

As many have already touched on... you may be stretched to find a duplex in an A or B class neighborhood that will realize great returns. If you turn to the C/C- neighborhoods you will obviously see higher returns. That in mind, greater returns come with greater headaches. (higher turn over, more capex, etc.) 

The biggest problem that I see with folks who transition into the C/C- duplexes is that they are often older properties that do not have separate utilities, garages, lack bedroom/bath count. Be aware of this when analyzing deals. Although multi-family is sexy there is a lot of buzz around it right now. Careful to not buy into the hype if the deal doesn't make sense!  

Perhaps take a look at Speedway, Beech Grove, or even Greenwood if you are looking for a SFR that is A/B. These are predominately blue collar working class neighborhoods that tenants will stay for long periods of time. You will pay a higher premium, but will not get a 1920s product that has failing major mechanicals and other heaps of problems.

If it don't cash flow... let the grass grow!! Onto the next one! 

Let me know if I can be of any help! 

Cheers,

Zach