All Forum Posts by: Bob Hines

I have yet to find a decent wholesaler in St. Louis. Most that I have come across are investors themselves that "wholesale" the stuff they don't want. Then they mark it up for a profit level higher than the person that takes all the risk and does the actual rehab can make. I'm glad you made it through this and will still be able to cash flow. Good luck on the next one!

It looks like you're talking about the two family on Grand. To start out with, you don't want to take on a project this large for your first time. This size of project, irregardless of the numbers, is only for experienced rehabbers. But let's walk through it for a learning process. For any rehab, you need to know what you could sell for. Top range for two families in that area are probably $130k. Many can be had for less though. Further south on Grand near Carondelet Park or further north by the shopping district/TGP and you could sell for more but the location is in the middle "meh" area of South Grand. Lots of two families in the area and there is no neighborhood premium to help for top dollar resale if you converted to a single family. It's also on Grand so traffic is a concern for potential buyers/renters. With all of this, I'd say $130k is top end if you're looking to sell. If you're looking for cash flow, Buy something in the $80k-$100k range in the area and do cosmetics instead of this much work. Assuming $130k is the actual After Repair Value (ARV), you want to be all-in for about 70% of that, or $91k. 30% or $40k might seem like a HUGE profit, but you're going to have 6% agent commission to sell at retail (8k), closing costs and potential concessions at sale (at least 1k on this one), minimum of 20% taxes on the profit depending on your tax bracket (minimum $6k). That leaves about $25k of profit on your out of pocket of $90k. But do you have $90k of cash to invest? If you're going to have to borrow it, there will be interest and potential lender costs as well. There will also be utility costs along the way for electricity, gas, water, sewer and trash. All of these costs have little to do with swinging a hammer. So the net profit never comes close to the gross profit we aim for.

Now that we know the ARV and that we can be all in on this project for around $90k, is that possible? Purchase cost of $29k leaves $60k for rehab. Can you rehab this for $60k? I find that hard to believe. Like above, I think this rehab is going to be in the $100k range. Completely rebuilt roof, floors, joists, windows, brickwork..all those are big expenses that add little value to a house (habitability in this house would be a BIG improvement but you know what I mean). Then there are two kitchens and bathrooms that are bigger expenses but at least they add value. It looks trashed so wiring and plumbing is probably missing. If there is some remaining, due to the age it could be out of code and need to be re-done since you're rehabbing. Not knowing specifics, I'm not sure you could get this property for free and still make money rehabbing it. Look at photo 36/46. See the brick sagging below the window? How much other brickwork needs to be done? That can be very expensive for virtually zero monetary payoff. None of the photos really look great, but that is the one where I check out even if I wanted to take on a large project. Then look at 39/46. Is that looking down into the basement with standing water? There are no pictures of the basement so it very well could be. Just how much water damage and mold is there? If there are boilers down there, they most likely are no longer operational. I'm completely out now.

But what happens if you do put all of this money in to rehab it, what do you have? Look at picture 14/46. That's what the bathrooms are. See the dark marks on the wall? That's where the sink was. Now look at the space. You could brush your teeth at the sink and take a dump at the same time. Very time efficient but not desirable. Now go back to 12/46, see the radiator there? Notice how close it is to where the tub should be? That's terrible! Tenants are going to get burned during the winter as I'm not sure even a normal sized person can walk normally through there without brushing the radiator. Then think about if kids are there! Better have some real good liability insurance. So what do you do? Do you reconfigure the layout at even additional costs? Do you remove the radiators and install forced air heat and incur all of the costs of adding duct work? Or do you sink all of this money into a property and still have an undesirable layout? What kind of tenants do undesirable layouts bring? When we first got married we looked at an apartment behind Ted Drewes-a great area-that my shoulders brushed the walls of the bathroom and I'm not a large guy. We didn't get that apartment with that being a big factor. What will happen if you have the same thing but in just an "ok" neighborhood? If this property in this shape was located in Soulard or Shaw or a couple of other neighborhoods, people would be fighting each other to pay $80k-90k. But they would also be selling it for $300k+. If I had a choice between receiving this property for free and a kick to the head, I would choose the kick to the head because the pain won't last as long as this property would. 

If you want to rehab, you definitely want to start with some singles instead of swinging for the fences. Buy something, put in $10k-$20k and make $10k-$20k while learning lots. Leave room financially to learn from the mistakes you will make-because you WILL make mistakes. Our first rehab we purchased from a friend of a friend. They didn't want to "waste" money on an agent. We probably made as much money after rehabbing the house as we could have if we would have bought it off-market and then done nothing but list it with an agent. But we did learn quite a bit during that rehab so the extra time, cost and effort was worth it. Or do a live in rehab where you're living in it while learning and you will at least have lived there if you don't make money. If you want cash flow, buy something with good bones and add value to it. I would much rather spend $20k on a kitchen and bath than $20k on tuck pointing or a roof. Good luck and anchors away!

Here's the property I was referencing: 5027 South Grand

I'm rehabbing in 63111 right now. Not as extensive of a rehab as the one you describe is though. The first thing that I did was security. 2x4 braces on the back and basement doors, security cameras that have a blinking light so people can see them, fix the fence to temporarily be without a gate, secured air conditioner, secured garage door, curtains on windows etc. It's a pain in the butt to walk around the block when I park in back because the front is the only way inside but it's worth it to know that everything will still be there when I get back and that people won't trash the place to set me back.

You're not going to find cash flow numbers in those neighborhoods. You're competing with other owner occupants wanting to do the same thing, rehabbers, and those looking to convert 2 families into singles and 4 families into townhomes. Maybe if you do direct marketing you would be able to find one someday but not through any 'normal' route. Those areas offer appreciation and a different type of renter-for good and bad. My agent often talks about investors of 2s/4s in areas like you mentioned (and out west in the Hampton area) as just wanting to have it pay for itself and then at retirement they have a completely paid off building. They don't focus on cash flow as much as the area so they pay more for them than those looking for cash flow. If you want cash flow, you're going to have to go to areas where everyone is competing based on investment return. 

If you want those areas you mentioned, you're probably going to have to change your investing strategy. What about live in flips where you rehab it while you live in it and then sell in tax-free after 2 years? No tenants to deal with. But no monthly income either.

Are you looking for a "forever" househack? If you're just looking for a way to finance rentals by living in them for a year before moving on to the next, does it really need to be on the level of the neighborhoods you listed? Could you "rough it" for a year in a lower class but still safe neighborhood in order to find the cash flowing properties?

There are several areas off of Kingshighway that offer lots of 2s and 4s that are a mix of a solid area that could work for you and have ok cash flow. Not as "cool" as the areas you listed but that's reflected in the price and cash flow. 

Stocks are an investment. Real Estate is a business. Yes with $100k of cash, you **could** leverage that up and buy a lot of doors in St. Louis. But do you want to jump in and deal with that many tenants from the very beginning? Starting with a single duplex or possible fourplex is best for you to get your feet wet. Just 1 or 3 tenants in one location to start with. You could still do the 5% down loan and keep the rest of the cash on the side. Or 20% down to avoid PMI and you will still have plenty of reserves. I've never leveraged myself up to the max and I've enjoyed that. I just recently converted a 2 bedroom unit to 3 bedroom. The project was finished August 15 so I listed it for rent. WOW! The tenants that were looking from the 15th-25th were absolute junk. One that applied seemed nice but had 8 prior evictions! If I was leveraged to the max and facing large mortgage payments Sept 1, there would have been more pressure to get somebody in and paying rent. Since my mortgages are small compared to my total rent roll, I'm in a position where it still stings to lose rent, but I now have much stronger tenants moving in than anything I saw at the middle/end of August.

For getting a handle on debt, real estate is all about the numbers. Get familiar with the 50% rule: 50% of rent will go to expenses. Of the remaining 50%, subtract out your financing (PI only as TI goes in the expense portion) and any remaining is your cash flow. Once you have a property where the numbers work, your expenses, vacancy, reserves, mortgage and a little something for you, is all taken care of and the amount of debt doesn't even really matter any more as the property is paying it off for you. St. Louis is a lower cost city so you can get into good properties that provide a good income without millions of dollars of debt. 

As for your net worth, if you do real estate correctly, your net worth should increase from the cash flow, equity pay down by the tenants paying the mortgage and a potential for appreciation-which can be market increases or forced through rehab/renovation/increased cash flow. Your $20k down payment on a property is still a part your net worth, just in a different form instead of cash: Your assets increase by the $200k property, decrease by the $20k down payment and your liabilities increase by $180k by the mortgage amount. +$180k assets -$180k liabilities = $0 change in net worth. All of your numbers are now bigger but your net worth is exactly the same. Except now you own an asset that will provide an income so it helps your net worth grow in the future.

There's nothing wrong with not wanting to be 100% pedal to the metal real estate. There are lots of us that are somewhere in the middle making a nice go of it at our own pace. 

By paying extra, or even the regular principal portion of your payment, on the loan you are essentially investing your cash at "insanely low interest". On the investment aspect, you would probably be better off paying as little off as possible and putting the rest into the stock market. Then in 10 years time, take a look at your stock account and then judge if you want to kill off your loans or not. You are also allowed to change your mind. Pay some extra and invest some. Think stocks are high? Pay extra. Stocks are cheap? Invest it all. Locking in a higher 10 year payment takes away some of that flexibility. Don't forget that the inflation hedge of a 30 year fixed rate loan also has value.

As for accessing your equity, you can only access 70%-80% of it and then pay higher interest rates on that. Versus being able to access all of an outside account. Plus liquidity of an outside account is much better than equity.

Usually the math works out to take out as long of a loan as possible and pay zero extra. But there are psychological aspects of debt that may make it worthwhile for some to ignore the math and go with the debt free feeling. You just have to decide how much you are willing to pay for that feeling.

For us, we will FIRE with several 30 year mortgages on auto pay for the minimum payment amount. 

Good luck. I would be interested in a 1 year follow up.

It could be. Benton Park is a solid neighborhood. Even true Benton Park West has good areas. But some people extend what I think of as Benton Park West into some questionable areas in order to make the property sound better than what it really is. 

My generic, know no specifics about the property advice for 63118 is: "63118 is where out of state investors go to die." So do your homework and trust no seller.

First off, water and sewer bills are from separate entities in St. Louis City & County. You're learning why you never have the tenants pay the sewer bill. Irregardless of what a lease says, MSD will take the owner to collections and file a lien against the property. The sewer can't be shut off to deny future service so it attaches to the property. Water you can have billed to tenants because if they don't pay the water gets turned off and they go after whoever's name is on the bill. But if the water gets turned off, you'll get a notice of condemnation because without water service, the house is uninhabitable. You will then have a few days to get the water back on-either you or the tenant will have to pay-and if anyone is still living there after the deadline and the water is not back on, you as the owner will have a code violation and a court date. If the tenants move out, you won't be able to re-rent to new tenants while the property is still condemned, so the water will have to get turned back on first. That's why it's customary to have landlords pay for water & sewer here. If you're in the city of St. Louis, there is a combined trash and water bill so trash is included as well. Some do pass these charges on to tenants, but you're finding out why many don't. 

I enjoy when out of state investors come in and tell the locals how much smarter they are and show them how to do it. 

I look forward to following your progress. 

I've used Zillow to list for years and have been pleased. I just had a vacancy and saw that they implemented this. I chose not to use it because it seemed to be just a background check and doesn't verify employment, income or prior landlords. I wouldn't mind accessing the information if a prospective tenant has already paid for one but I would hate to have a prospect pay for it for me to turn around and require a comprehensive check. Or that I would then have to start tracking down the information that isn't included.