All Forum Posts by: Andrew Johnson

@Kevin Guo Odds are most of the BP world will disagree with me but I don't think there's anything wrong with buying something that's <8% (stress tested) in terms of a cap rate.  My caveat is that when I've done it it's been for a fairly new build so I'm exchanging a lower cap rate today for pushing out any major cap-ex expenses (new roof, HVAC, kitchen guts, etc.)  For others here it's worthwhile to do the value-add rehabs and they will get a better return.  I like knowing that I won't likely have to spend a dime on roofing until my son is well out of college.  

@Brian Ellis My advice would be to stress test your assumptions.  What if renovations cost 20% more?  What if they take 20% longer?  What if rentometer.com is off by 20%?  Will property taxes be higher if it's reassessed post-renovations?  What if your tenant moves?  Will a new tenants want to come in while you're doing a renovation?  Stress test your numbers and see if the property (assuming you didn't occupy it) cash-flows, what the cap rate is then, etc.  If you can show your father (and brother) that even if this isn't a home run that your "downside" is that it's a single, I think you'll find them to be more receptive.

@Todd Jackson I don't think I've ever made a purchase and not had (more than one) the moment of "They accepted? <Insert curse word here> I must have overpaid!" "Why didn't someone else by this before me?" "If it was a great property, why did the owners sell in the first place?"  What I end up doing is rerunning the numbers again and again and again.  Odds are you did miss something.  Odds are that "something" won't be the end of the world.  Odds are you'll be calling your Army buddy to drive by the property (more than he/she would like) to check on it.  For whatever it's worth, better to be overly diligent than overly confident.  

@Chris Gorman The answer is...maybe...

I wouldn't (right now) invest in a market that's driven by appreciation over cash-flow. Then again if I look back on this in 20 years I'll probably kick myself. You should probably consider what would happen on the financing angle if you use something like a 5 year fixed ARM to purchase a multi-family property. If rents don't rise but interest rates do (less likely but possible) you could find yourself going from cash-flow positive to cash-flow negative in short order if you're high leveraged. It's pretty easy to look at how the numbers would be if you have a 4.5 rate and it jumps to 6% and identify where the breaking point resets.

Alternatively, if (to randomly make up numbers) you buy a 4-plex for $400K that cash-flows $20K per year and you wait 4 years hoping for the market to drop you've lost $80K in cash-flow.  Not to mention a portion of that cash-flow is immune from taxes thanks to depreciation.  If you think market will correct (read: drop) by 10% over the next 4 years you have one answer, if you think the market will drop by 50% over the next 4 years you have another.  Then again if you think the market will drop 50% you should probably sell everything you have...

Paul Idziak There's no exact rule, it depends on the bank. I've done after 2 weeks but generally hear that 6 months or 12 months of "seasoning" is that the bank/financing companies will want to see.

I had my best luck growing through the community bank I used for financing. They were able to shop and get a great quote for me that I went with and now I'm looking to have them help to quote my other properties (all multifamily). I also have separate umbrella policy as a "just in case" measure.

@Keeya WangJones  I don't own anything in Encinitas (or anywhere in California for that matter) as my focus is cap-rate/cash-flow rather than looking for appreciation.  Frankly, if I had the DNA/mindset/fortitude/etc. to buy for appreciation I'd be better off buying here and holding for the next 20 years.  But that's really not what lets me sleep at night.  I buy multifamily properties in Arkansas.  They cash-flow better and don't get the large swings in appreciation/depreciation that California does.  Anyway, long answer to a short question!

@Hilary Hageman Also keep in mind that my "un-sellability" perspective with SFRs is more rooted in my California experience.  Seeing friends buy a house for $800K (granted not for cash-flow), see the value drop to $500K, their "teaser" interest rate expire, and all of a sudden their choices are:

1.) Have the property foreclosed on and destroy their credit for 7 years.

2.) Be in a cash-flow negative situation on a monthly basis after the interest rate is raised.

3.) Come out of pocket because they're both upside down in the property and they now have to incur selling costs, realtor fees, etc.

Most people I know went cash-flow negative until the market came back.  Even when they sold at what was a profit on paper, that didn't take into account the cash-flow negative situation they were in for years.  Here's to hoping it was a once in a lifetime challenge for many ;-)
 

Short answer? No, I wouldn't overpay. I've "overpaid" when it comes to buying at a (slightly) lower cap rate but that's with a T12 in a multifamily showing consistent low vacancy, quick re-rental, and current leases. That's been combined with it being a recent build so I know I have a lot of life left in the HVAC, kitchen, roof, etc. So I'm paying a premium as an offset to rehab costs, near-term cap-ex and a consistent rental history. From what it looks like you have a SFR with a tenant that's likely overpaying because they are a frat. Question: Is the frat paying market rate? If they don't renew are you going to get another frat that will pay? Will a family pay that monthly rent? Is some of the $20K in updates that are needed do to increased wear and tear associated with a frat? More questions than answers, I know, but maybe that helps. And if you're using conventional financing (or want to refinance at some point) what happens when the appraiser comes around...

I love cash-flow but playing devils advocate having appreciation and equity build up is great if at some point you want less hassle (properties) in your life. And if you're on something other than a fixed-rate mortgage and rates increased you could find your great situation isn't so great and if property depreciates it could cost you money to get out of it. So you can definitely run scenarios where a lack of equity reduces options and increases risk.