All Forum Posts by: Andrew Johnson

Another way to frame the question would be: "Why would someone who can afford to buy a home choose to rent?"  I know there's a lot of chat about millennials being a sharing/renting generation but I'll put that aside.  There are huge numbers of people employed by somewhat transitory industries (think: oil and gas, people that want to move up in retail, etc.).  They make good money, could afford to buy a home, but if they are going to move frequently it just doesn't make sense to buy.  If you think rent on the coasts is expensive try buying a house for $750K and selling it 2 years later.  Unless you've had solid appreciation you could easily be out $60K when it comes to paying realtor commissions, some share of closing costs, etc.  In those 2 years almost nothing has gone towards your mortgage principal and you've had to come to the table with a chunk of money for property taxes each year.  Mortgage interest write-offs aside, just those selling costs pay more than a few months of rent.  Regardless of home price, the same issues are there just at a different scale.  

@James Hong Arkansas (certain parts) have been a good market for me.  It's definitely city-by-city and in some cases street-by-street but it can definitely work.  I used to hear about Dallas/Austin but with their property taxes and appreciation in the past few years I haven't found anything I was even close to pulling the trigger on (others have).  As @Jeff Wallenius mentions, pro-formas can fly out in the window if you have a bad PM/operator.  Being in Mountain View you probably won't be onsite much so a PM you can rely on will be essential. 

@Adam Percento Even if they owe $35K it doesn't mean the deal is dead.  Every month has costs associated with the property so an owner might be able to eat $5K to get out from under a mortgage payment, property taxes, insurance, etc.  I've had one deal where I paid less than what was owed but it wasn't for that reason, it was because they wanted out of that property to build on a piece of land they had acquired.  While they may have had to eat a loss at my purchase price, it freed up their capital to develop their new asset which will hopefully made a good deal more money for them (creating a win-win).  Maybe what was more relevant to me was getting the price that I thought made sense.  That have given a huge profit or a huge loss for the seller, neither of which impacted what I thought the property was worth to me, at the moment I was ready to purchase.

Agree with @Diane G., it's to get a premium price for the property.  Basically, it's because someone who can't qualify with conventional financing is willing to pay more than the cohort of buyers that can conventionally finance the property are willing to pay.  That's not to say there isn't a win-win to be had for both sides of the deal but it's best to go in with your eyes wide open: investors who can quality to finance conventionally are choosing the pass on the deal at the current price.

@Joshua Zajac Just food for thought but if you're going to do the majority of renovations yourself and it's a 3 hour round trip, how will that impact your ability to get renovations done in a timely manner?  Assuming it's unoccupied during that period there's definitely a cost associated with that.  Not to mention if you're not in the area, want to manage the property yourself, and your tenant has a garbage disposal that breaks...it's a heck of a round trip.  Maybe the business partner can do some of this but is that something he/she is up for?  

Overall, I'd try to remain a little more objective and do a deal if the deal makes sense.  You don't want to get emotional about proving anything to yourself about doing this.  Talking yourself into the wrong deal just to prove you can do it is likely recipe for disaster.  If you haven't started inquiring about properties and running pro-formas yourself, I'd start doing that.  If nothing else you'll start to get to know the area, learn what $30K vs. $60K gets you, and noting can replace getting to know a local (small) market on a street-by-street level.

Devil's advocate, you might want to run the numbers factoring in costs for a property manager.  Right now you have the ability to do it along with family help but if you want to travel when you're older, the family moves, etc. you'll like either have to (or want to) engage a property manager.  Granted, it's a more "conservative" approach but I think if you're planning for retirement it's better to be conservative than aggressive.  

And, as others have said, you might consider building up cash reserves (rather than just relying on rental income) for major capital expenses like roofing.  You can also take the strategy of staggering the age of the properties that you buy so that those big expenses are scattered __ years apart.  

I'll leave the age old question of "what to do in 27.5 years" for others to answer...

I'd say to continue to save your money and vet at many potential deals as you can.  The last thing you want to do is get into the wrong deal because you think you have to invest $10,000.  From what you're saying about your schedule it doesn't sound like you'd have the ability to take on a value-add property or can house have outside of your area.  My advice would be to look at potential deals and just keep cranking through pro-formas (do them yourself) and who knows when the right deal will show up.  As time goes on (and you save more) the number of properties you qualify for will go up.  One thing that you do have to factor in (and most people don't) is that you do need to have some kind of reserve for unexpected repair needs.  So it's not just about what can you qualify for, it's about what you can qualify for with the cushion for the unexpected.  

@Garrette Becker One thing to consider when looking at out-of-state purchases in the expense associated with travel to both view properties as well as check-up on them.  If you have a nest egg of $25K to start and it takes 2-3 trips to find a suitable property at $2K a trip (not that hard to do) you could end up spending 20% of your investment budget just on looking for a property.  Maybe others will recommend buying without seeing a property but I sure won't.  Not to mention that if your experience is mine you'll find properties that pencil out well, look good in pictures, but when you put your feet on the ground you start to realize the area isn't great, condition is worse that you think, that roof doesn't look quite as nice as in the pictures, etc.  However, if you have friends or family in those local markets that don't mind driving by addresses you give them it can really help.  You wouldn't really look for a "yes" but rather a "hell no!" As @Mike D'Arrigo already mentioned, street level matters.

All of that said, I own 3 multifamily properties (ranging from 4 to 27 units) in Arkansas that are cash-flowing well. 

Just wanted to throw a thought out there but the markets that you're looking at seem to be scattered across the US (not a bad thing).  But what a lot of people don't take into account is travel costs and travel time to both look at properties as well as check in on them from time to time.  Throw in a round trip plane ticket, hotel, rental car, food, etc. and it doesn't take long before a short trip can cost you $2K if you're going back east.  Juxtapose that against a market like Utah where you might be able to wrangle a day trip if you had a realtor that was on the ball.  Personally, I've bought multi-family properties in the south because of their ability to cash-flow better.  It has taken multiple trips (and still does take periodic trips) but I factored that into my planning in the first place.  I know I'm not going to have the appreciation potential of Denver, Seattle, California, etc. but crashes don't hit as hard when the peaks aren't as high.  

One of things that I looked at was for agents that were representing the kind of properties that I was interested in purchasing (multi-family).  It was a pretty easy to start to determine who I wanted to engage with inside of the first 5 minutes of a conversation.  Either they had documentation with rent rolls, expenses, etc. for the trailing years or they didn't.  I still don't know how an agent could list a multi-family property without the requisite information (or even a "best guess") but it happens, a lot.  

When it comes to issues others have brought up (i.e. neighborhoods) I found my best advocate was the property manager that I was using.  Granted it was after I had purchased my first multi-family property but she was very honest about "I COULD manage those properties for you but I can't say that I'd WANT to manage them."  When you have someone transparent enough to turn away business it's a huge advantage if you're working remotely.  Regardless, I don't think I'd ever take an agents advice in lieu of driving around the area myself, looking at crime stats, school districts, etc.