All Forum Posts by: Andrew Johnson

Zillow, Trulia, etc. all have some information about listing prices, sales prices, etc. along with their analytics around what will happen over the next 12 months.  However, I don't know if anyone has ever looked back to see how accurate it is and when you start talking about enclaves and neighborhoods I doubt anything is going to be reliable.  

I would look at this deal from the perspective of "Would I do the deal without being able to finance the 20% downpayment?"  If the answer is yes, then the 20% financing (while still cash-flowing) is even better.  If it's not, then you might be overpaying for the property.  You did mention "the numbers aren't great" so the seller may be in the position is either taking 20% less for the property(s) or financing the 20% downpayment.  

Let's assume everything does always go perfect with a property (it never does) and you don't have unexpected expenses (which you will), that cash-flow is something you could be saving to put into another deal down the road.  If you're making $500 per month vs. losing $500 per month it's a $1K swing that could seed (or accelerate) you next property purchase.  It takes quite a bit of appreciation (on a constant basis) to compete with positive vs. negative cash-flow.  Granted, it gets more complicated when you're talking about getting taxed at ordinary income rates, etc. but to oversimplify a cash-flow positive property gives you 1.) reserves for the unexpected and 2.) potential seed money for your next acquisition.

From what I found investing around in the suburbs around Little Rock is that you won't get the huge swings that you'll find in CA (where I live), TX, FL, etc.  Those markets climb higher during the highs and crash harder during the lows.  Not to mention for $90K you won't even be able to get a studio condo in California, the market is just a different and not a great analogue for practicality.  Property tax vs. some locations (like Texas) can also be advantageous if you're trying to see if things will pencil out on a buy-and-hold strategy.  

If we're talking buy-and-hold I think I'd be more concerned about adjustable rate loans potentially resetting than a downturn (in equity).  Especially with community banks, a lot of multi-family loans are 5-year ARMs with a balloon payment.  If that 5 years ends in the next 24 months and the Fed raises rates 3+ times you could be looking at another point in interest.  While it doesn't sound like much if the property is highly leveraged you could easily go from cash-flow positive to cash-flow negative.  Not to mention if the appraised value goes down you could really be in trouble.  That being said you'd probably have to have interest rates rise without an associated increase in rents and tack on a lending institution that doesn't want to refinance.  

I think you'd run into a couple of challenges:

1. Odds are they would start to pad the 2017 budget (or worse, increases expenses in the near-term to justify a higher budget in subsequent years) so they could hit their goals.

2. If there are unexpected expenses early in the year and it becomes apparent they won't hit their NOI goal then getting their attention/focus for the remainder of the year might be more challenging. I wouldn't argue that's the right thing to do, but it might be reality.

3. There's an inevitable emphasis on cheap repairs, maintenance, etc. or just plain deferring addressing things that need attention this year so that they can put them into next years budget (and raise the budget accordingly).  

That being said, there could be a middle ground where you have a 10% management fee with a potential 4% bonus if they hit NOI goals. If they perform, they do better than their proposal. If they don't perform, it's still a market-rate deal (part-time on-site manager aside).

Personally, when I'm investing in out-of-state properties I usually speak to a community bank about insurance recommendations (and financing if that's needed).  They usually have a solid take on the companies most likely to want to insure your particular property.  Like @Gerald Grinter mentioned, age can be a huge factor.  I've found their recommendations cheaper (for the same coverage) that going through and getting quotes from places like Farmers.  Also, for any multi-family property proposals I'm always looking for an income replacement portion to the insurance.

For what ever it's worth, I always have the moment of panic 24 hours later after I've under contract. I always have this bad feeling that I must be the sucker that overpaid, that the seller would have come down, that there's something I didn't know, that if the property was a great they would have never sold it, etc. For some investors I think that feeling is inevitable.

My coping mechanism (for lack of a better phrase) is to rerun all of the number again from the start. If it all looks good, pencils out, stress tests, etc. then I know I'm good to go. Then it's about planning and dealing with whatever comes up in the inspection.

As for your specific questions, you might consider a vetting a property management company for the first year.  It would cost you (obviously) but they generally have standard forms for leases, can easily do background checks, know where to advertise for tenants locally, and local contractors where there's a relationship.