All Forum Posts by: Benjamin Aaker

The market is going to dictate what the typical percentage of purchase price you can reasonably get per month. In the multifamily space we talk about cap rates, which are somewhat similar in idea. You are just getting an idea for how much you have to put in (if paid all cash) in order to get a certain monthly rent. The 2% rule doesn't take into account any expenses you have and the demand for your area, so certain areas of the country will have different returns and it wouldn't be prudent to apply a rule everywhere.

You are also talking about Single Family Residences. These are usually purchased by residential homeowners, with different likes and needs from investors. They are much more numerous so they will sway the market. If their demand goes up, then the prices go up and your percentage return goes down.

Figure out your expenses for a typical property, the average rents in the area, and work from there to find how much you can reasonably pay for a property. Do this enough times and you will find how much you can pay for properties in your area. This percentage will be your x% rule. You then use that to quickly weed out properties before doing more diligence on them. Remember, just because it passes a rule such as this doesn't mean it is a great deal, it just means you can devote more energy to evaluating it further. 

We are aggressively helping our tenants get financial support, something we haven't done in the past. We have had success in getting people on assistance, usually lump sums every 3 months. It's a headache but with the eviction moratorium I think it's the next best option. When those sources get depleted is when we will have the real problem. Now that the moratorium is extended to Jan 31, the new administration will be in and I expect we will see a big extension. You need to prepare for the long haul.

Great idea to use other people's money. Just be careful on buying that dream home. It's easy to get a bunch of fancy upgrades and wind up spending all that money you would have invested on the monthly payments. Could you put off the home for a year or two? It'll do wonders for your investing.

Congratulations!  Have you considered not cashing out at year 1 and waiting a little longer? The mortgage will stay lower.

Hello Ty and welcome to BP!

First thing I'd recommend is to get a handle on your plans over the next year or two. You said you will be moving and it would be good to know how far. If you are staying in driving distance it will be easier to manage. If you are set on purchasing be sure to include in your analysis cost of management. You should find a few property managers in your town and discuss their fees so you can use this to underwrite your deal.

Sounds like you should take some time to decide whether you want to flip a house or get into multifamily. I'm a multifamily guy but they can be a big thing to get into with your first deal. If you are flipping your first house, you should budget 9-12 months to get it done as it always takes longer (and costs more) than you think when starting out. There is a lot to learn.

Decide how much you will be willing to put down and that will help you to decide a property size. To echo Andrew you should interview a few bankers and discuss. You will find that having a good banker is an asset. There are ways to do it with no money down but the risk is higher in my opinion.

Find a great agent to represent you, such as those who take the time to post on BP. Not all agents are the same; most are looking to sell you a house at retail prices. You want one who deals with investors. Take your time to find the best one for you. Good luck and happy investing. We are here to help.

@Jay Hinrichs - Excellent point: Those investors who have planned ahead and kept reserve accounts have little to fear over the short term. I'm certainly not predicting receiving all my rents in May and June but will be able to cover for low economic occupancy. Those who haven't planned ahead well will be looking to government stimuli for help. Those who haven't planned at all will be looking to sell. The rest of us should be looking to buy.

By the way, greetings from Sioux Falls, #3 outbreak site in the nation right now. Those who keep their eye on the long game will do fine. Stay healthy and stay the course!

My main concern is for commercial properties, especially those doing retail. I have a few apartment buildings and April has been status quo for rents. May might be different but hopefully there is enough government stimulus for tenants by then. There is not much for retail and service businesses yet. Further, the government is essentially telling people to not go out and shop, which continues harm to these businesses (while helping the public health). If you are in the market for a commercial property you should take a hard look at how long you think people will be staying home. If we are able to 'flatten the curve' that will be great for hospitals and health, but to flatten it means to lengthen it, too. People will be staying in longer and businesses will continue to suffer.

On the multifamily side, people will still need places to live. I think that the government eye will be on helping the individual tenants for the foreseeable future. I think those able to weather a few months of decreased rents will be in a position to buy multifamily at a discount. In fact, I put in an LOI on a 16 unit today.

There are a fair amount of investors who are willing to put in a larger portion of their cash into the deal. As an example, try doing the calculator again, but bring 75% cash (the bank loan is 25%) and you will see that your cash on cash goes positive. It's positive because your monthly debt service goes way down. It is small because you have that large denominator (the cash you had to put in). The lower the cash you have to invest, the higher the return is (as long as you get a return).

The debt service eats up a very large chunk of your monthly gross revenue. Not always a bad thing if you are doing the long play and looking to take a loss on paper for depreciation. Also not a bad thing if you don't have a lot of money to bring into the deal. Back to your question: investors with a large amount of capitol will look at the deal differently from you and are able to pay more. At this phase of the market everybody with money but not always sense is looking for a place to invest. Real Estate looks great right now. Prices go up and the great deals are harder to find. Keep looking, though and you will find them.

I recommend Derek Simonson at First National Bank of Sioux Falls. Send me a PM if you would like the contact information.

Congratulations on getting far enough to evaluate a deal and having the guts to post it! Not every deal is going to be great and that is what BP is here for.

Notice how your Cash on Cash return is negative up until year 5? That means you will be losing money for the first five years. It's also unlikely that you will be able to get a 30 year term on a commercial property. These are generally 20 years and you will need to refinance somewhere in the middle like at 5 years. Your debt service will be higher and this will push down your returns further. If you have the money to 'subsidize' it and you are in it for the long haul, then you will likely have an income producing property. The problem is that it will stunt your real estate growth because you won't have the money to invest in other properties.