All Forum Posts by: Ben Wilkins

@Hayden Wyker - I didn't go through all of your numbers - only the fact that maintenance, CapEx, and Vacancy are all super low in your calculations. 6% CapEx, 4% Vacancy, and 1.8% maintenance won't cut it. Key point for you here: don't cut your estimated percentages in order to make a deal look better.

Also, don't forget inspection in your upfront costs. I didn't see this in your estimated costs, so maybe you are completing the inspection yourself. Either way, I strongly, highly, emphatically suggest getting an inspection done for every property that you purchase.

Final thoughts: this is a bad deal with the numbers that you laid out. Increase income, or decrease expenses (usually done by improving the property or making a higher down payment)

@Scotland Ray Smith - I couldn't agree (much) more with @Matthew Baltzell on the following two points: "You create your own luck", and "The key is to just get started"

I'm a mechanical engineer by degree, manufacturing engineer in a paint shop by profession. Basically, I program robots that apply pinstripes to gas tanks and fenders... this isn't really a big skill for investors. Yes, I'm more analytical than most which I agree can be a benefit.

How I got started? A fellow co-worker started talking with me about real estate investing. He's the inspiration, while I'm the analyst. We did our research on BP and other sources for two months, then decided to just make a go for it. We chose to break out of the analysis paralysis.

So we scraped together the cash needed for our first duplex, which happened to be a pretty good investment. Ten months later, we are closing on a quad that is even better than the duplex in terms of returns.

"Just getting started" was the first step, which is sort of a redundant sentence. We decided to do it, so we did it.

As to how we got the quad... I still can't honestly tell you how that happened, and I chalk it up to creating our own luck. Through some seemingly random conversations, we found out about an investor who wanted to sell for a really good deal. 

My suggestions? Just get started - pull the trigger on a deal that makes sense. Learn whether or not you enjoy this sort of investing, and decide to continue or not. Second step: if you aren't already, start attending your local REIT meetings. Rubbing shoulders with other investors is a great way to learn, find deals, and find people who can help you find deals. Create your own luck by being proactive.

@Robert M. - you had me until the last sentence.

There's a good argument to be made for both strategies - it all comes down to personal goals and preferences. Mathematically, one option is slower growth (which you agree to). The other option is safer and slower.

In answer to what went wrong - a lot of people didn't expect a crash, so they didn't keep reserves saved to protect themselves or their investments. This is why a lot of investors on here (if not all) will say that you should save 8% (or more) as a vacancy savings, 10% for CapEx, and 10% for Maintenance. Could there be another crash? Yes. Will my mortgage payments or expenses change? No. Will my income change? Maybe - but people need to continue living, and I would guess that my rental rates will stay similar to what they are now. I have no data to back that up, so now I'll have to go do some research as to what rent rates did during the 2008 crash. I personally don't seem to recall a drop in my own rental payments that I was making at the time, but I wasn't really paying attention.

If I assume that rent rates will stay the same, then I'm fine even if I have debt on fixed interest. If nothing else, I'll end up purchasing more properties for cheap and will love it.

The key is to have reserves, and I recall reading that the issue in 2008 was that investors were grabbing hand-over-fist and didn't bother to keep reserves. Because of that, they lost a lot.

Neither approach makes you dumb at math. One approach makes a lot of sense mathematically speaking, while another makes a lot of sense for ease of mind if you're inclined that way. Neither approach makes someone an idiot - it's just that some seasoned investors feel strongly that missed opportunities are a waste.

@Chris Meunier - to clarify my math below, I'm assuming you're making $600 per month right now which comes out to $7200 / year. I wasn't sure whether to use that or $500 per month which would come out to your originally-stated $6000 per year, so I just picked one.

I'm also assuming that you're taking into account percentage expenses such as CapEx, maintenance savings, vacancy savings (I did see him mention "before any maintenance costs", @Dan H.)

The last thing that I will assume is that you're sitting at exactly 20% equity on a loan of $262,500 - the reason for this is that it'll take out any extra equity that you could possibly pull out of the current property. It also gives me the assumption that you have $52,500 currently invested.

Following these assumptions: 

$52,500 - total invested currently

$7200 - total annual income

$210,000 - total available cash

Option 1: put all $210,000 into your first property

$262,500 - total invested currently

$30,000 - total annual income

$0 - total available cash

In another 7 years, you could double your income to $60,000 if you save all of your rental income to reinvest. I'm going to assume that you won't leverage this property by refinancing or taking out a HELOC since you went through all of the trouble to pay off the debt in the first place.

Option 2: put all $210,000 into 4 more properties with similar cash flow as your first property (this comes out to exactly $52,500 * 4 = $210,000)

$262,500 - total invested currently

$36,000 - total annual income ($7200 * 5 properties)

$0 - total available cash

In another 5.8 years, you could double your income to $72,000 if you save all of your rental income to reinvest. If you leverage your 5 properties and refinance or HELOC, you could do this sooner.

The numbers above are snapshots of what you will have immediately. Cash flow is higher in option #2, at the cost of increased debt. Assuming fixed interest rates, this shouldn't bother you unless if you want to do speculative investing (will your properties appreciate or depreciate?)

I want both of my points to stand out, so I was liberal with my use of bold.

When investing in real estate, debt shouldn't bother you as long as it increases your cash flow. If you believe this, then Option 2 should be the logical conclusion. Smart investments, and allowing for proper vacancy savings etc will protect you from any "all-nighters trying to get a tenant because the mortgage is coming due". If you need to pull an all-nighter, and if you don't have one month of mortgage saved up in vacancy savings, you've been failing in your investments.

If your goal is to increase passive income in order to retire, then Option 2 will get you there fastest. Option 1 will still get you there, but it will be slower. You have to look at your own goals and decide how quickly you want to get there.

A long read - sorry for that. I wanted to at least give some maths to back my answer.

@Mike Ipsen - Harrisburg can have it's rough spots (as noted by @John R.). The area for this house isn't too terrible - I would feel comfortable driving down the street.

Some things to think about with long-distance investing:

• Are you planning to visit and get a feel for the market? How will you inspect the property?
• Do you have a ground team in that area who can help you? Realtor, manager, etc?
• Capex / Maintenance may be a little low for an estimate - you won't be able to fix anything yourself, so there's no way for you to save money there. Expect closer to 8%-10% for both in order to have a good margin.

I personally wouldn't have any issues with the location of the property, but only if you are either personally going to visit or if you have a team on the ground.

From a deal standpoint - this isn't a terrible deal, but it isn't a stellar deal either. Get some feet on the ground and do your homework for long distance investing!

@Kyle Koehn - without splitting out four separate water heaters, there isn't a way. At $300 per month, I would hope this includes the electric for the entire building which is what made me assume that the landlord pays for all electric.

Ignoring the electric for a minute: if you add 10% CapEx, 10% maintenance, and your vacancy, you're looking at negative cash flow even if you increase rent. I threw in the comment about splitting electric as a side option if you wanted to force appreciation on the property by decreasing your expenses.

@Pascual Torres - While you have the technical NOI, you're missing a lot of expenses.

What are you holding for vacancy? I usually use 8% of income, and never estimate lower than 5%

What are you holding for Maintenance and Capital Expenses (CapEx)? I usually estimate 10% of income for both of these items, or you'll end up spending out of pocket if anything goes wrong. Since this is the worst property on the block, I would guess that you will want to estimate 10% for both of these.

Putting these numbers in, I'm getting $181 per month cash flow, or $2177 annual.

Something to think about, but definitely include these numbers as "expenses". I would pass on this deal personally

@Kyle Koehn - Landlord paying electricity is already a turnoff for me for a quad. My next concern is 5% for maintenance and nothing for CapEx - I would have these numbers closer (or at) 10% each.

The only (quick) way to increase cash flow on this deal would be to decrease your mortgage. Since the seller needs cash for something immediate, I'm sure that he already has a set number in his head.

Even if you were to split the electricity to the tenants, I'm still not seeing a good deal on this property.

@Joe P. - I personally 100% agree with a safe margin for both CapEx and Maintenance, and (almost) always use 10% in my evaluations. Only a new construction or other extenuating factor would make me lower those values - I would rather have a hefty account set aside for big-ticket items than to pay for a new roof out of what I thought was my profit.

I would usually balk at paying heat, especially since some of my tenants like to keep their apartments at 90 degrees (not a joke actually - I just about had heat stroke when walking into a unit last month). 

You are correct about a clause in the lease - I put that in for water, stating that the landlord agrees to pay the water bill up to a certain amount and gives me the ability to charge for anything abnormal. I've never had to actually charge extra, but heating is a different story.

For a first investment, you have some fairly good numbers. Have a inspector walk through the property with you, and pull the trigger.

@AJ Angel - I'll have to agree with @Paul Choi that $70 per month is extremely low for insurance. I suggest calling around and getting some quotes, as I would expect closer to $200 per month (or more, depending on the location and condition of the property).

I would also be interested in the taxes, as $230 per month also seems low.

What about Sewer / Refuse?

With seller-financing, what will the amortization look like? Will there be a balloon payment that would require you to come up with the full payment within 5 years or something similar to that?

Lastly: 25% for repairs, vacancy, etc: please take another look at these numbers. I would set aside 10% for maintenance and 10% for CapEx - that leaves you with 5% for vacancy, but you're already 15% vacant at time of purchase. Why are the units vacant? What is the average vacancy from the previous owner over the last 5 years? Are any of the tenants on lease, and will you be keeping them?

Some things to think about, but this looks like it could still be a great deal.