All Forum Posts by: Brandon Roof

I think a lot of it comes down to the ability to add value. Unless you are an activist investor that can throw billions behind something in order to advocate for change, when investing in a REIT, you are largely along for the ride. As you stated, it does have its perks as you don't have the headaches of being a landlord or working with a property manager, and if what you are looking for is truly passive, a REIT may be the way to go.

With a REIT though, outside of a dividend, you're relying solely on capital appreciation. With buy and hold, though it can be passive in nature, allows for so many levers to be pulled by the more active investor to force this appreciation and unlock even more earning potential.

If your main goal is for that purely passive, diversified play, REITs provide a great option, but if you are looking to maximize the return on your invested dollars, though possibly more risky, getting into the mix as a buy and hold investor provides for the opportunity to accomplish so much more.  

I'd let this one go.  You're only four years into the 10+ year life cycle you were hoping for and I don't see any reason why the next six would be smoother than the first four.  If you're looking at used cars again, I really like looking around my neighborhood for single-owner cars of retirees. I've always felt it provides a great mix of quality for a reasonable price.

Outside of that, I'd confer with coworkers regarding your commute.  You might not find one in Akron to carpool with, but maybe you can pair up with somebody along the way to keep down your gas consumption (and subsequent wear and tear, fluid changes, tires, etc.).

@Kristopher Lamy

Although there are times when I utilize basic formulas, percentages and calculators to quickly analyze a property (particularly for rentals), I'm more often looking at the properties individual qualities against those in the neighborhood and where I can add potential value. I recently found a 2 bed/1 bath home selling for less than other comparable homes in the area, and upon entering the home, learned that with a few thousand dollar investment that it can easily be transformed into a 4 bed/1.5 bath home. It has two rooms that simply need closets framed in and a second toilet in the basement lacking a vanity. With little work its bumped into a class selling for 30k-$70k more instantly making it a great flip or BRRRR candidate that would allow me to collect another $200-$300 in rent per month.

Another 2 bed/1 bath home had a huge master that was going unappreciated.  One wall transformed it into a 3 bed home.  Other big selling points on this one for me was that it had a simple roof (single peak, no valleys and a decent pitch) and only five windows yet managed to have amazing natural light thanks to a small footprint.  Maintenance and repair on this property will be significantly less than others with more intricate roofs and 2-3 times the number of windows.

Getting back to your initial inquiry, it's key to know your numbers.  Find out what the actual property taxes have been in recent years and build a relationship with an insurance broker that will be able to provide you actual quotes on the fly so you aren't left guessing.  I see so many people budget a percentage of the rent or forget to budget for them altogether, only to learn that they'll actually be 50%-100% higher than they thought.  Same goes for all expenses.  Learn as much as you can and leave as little as possible up for question.

Same goes for the other side of the equation.  When determining what rent will be many people input a number in order to make the deal work for them.  Even if they know that the current tenant pays $650 a month, they'll put $800, assuming they can get more without justifying it against comps in the area.  Just don't dig yourself into any hole you can't reasonably get yourself out of.

This deal is not a good candidate to BRRRR based on the information you've provided. Looking past that to its possibility as a rental, it's shaping up to not be a great option on that account either. The deal is insanely thin with your projected expenses, and those unfortunately have to go up, which will quickly put you in the red.

Vacancy, capex and repairs all have to go to around 8%, property management between 10%-12% and then you need to factor in lawn care expenses.

There are other variables that are question marks as well, such as the insurance and whether or not that is based on a quote or guess, the rent and whether that is based on the previous tenant or that is what you're hoping to get.  Any changes there could significantly impact the outcome.

Lastly, 4.25% interest rate isn't out of the question, but again, you want to make sure that is a rate you have locked in with somebody, as a first time investor may be staring down something in the 5%-6% range.  Your fees and closing cost projections are likely have to be increased as well.

Probably best to move on from this one and look elsewhere.  Don't be forced into an unfortunate scenario by a seller that claims there will be a lot of interest once they open it up to more people.  They are likely talking their own book.

Generally, the more you can bring to the table as an incentive to them may help.  Granted, some of the things I'm about to outline may not be very feasible for most:

- Bring a giant chunk of capital to their institution whether it be in the form of a business checking account or CD.  You may be able to work out terms on a six or 12 month CD to park $100k+.  Again, this is likely impossible for the average investor here, and even then are you willing to set that kind of money on the shelf that long in order to save a couple grand?

- Simply ask.  I would imagine they will be more inclined to provide you a favorable outcome if you have a longstanding relationship and have worked with them on several mortgages, loans and lines of credit over the years.

- Get figures from multiple providers.  If you don't like the fees from one lender, continue to look for another that can provide the same service for less, then return to the original lender and bring your other options to their attention in hopes to drive costs down.

This is unfortunately the type of question where the most common response is, "it depends".

Much of you decision should be based on your goals, both short and long term.  I for one like to find opportunities that are versatile and lend themselves to multiple exit strategies.

For example, I look for homes that are undervalued and require light rehab. In that case, it could easily become low involvement flip, a BRRRR rental or possibly even a rent-to-own option. I like when the numbers work for multiple strategies so I don't back myself into a corner.

Deciding which avenue I may pursue at any given time can be influenced by a number of things.  If I want the cash back now to put towards another property or I don't have the time to devote to a new tenant, I may opt to flip, but if there is rental demand for the type of property I just purchased, I may be more likely to go that route.  I usually go with what provides the greatest opportunity.

The more options a property provides, the better.

Well, I suppose there are aspects your can estimate from afar and others I wouldn't without viewing (or having somebody view) the property.

Specifically for the rehab, if this is an out-of-state investment, having somebody you know and trust in the area would certainly be beneficial.  A contractor or fellow investor that has worked on similar projects would be able to assist in estimating rehab costs.

Another part of the equation that could be done from anywhere would be to run comps in the area.  Let's say similar homes in the area that are updated are going for $160k-$200k, and you found a home listed at $80k and your rehab partner estimates costs coming in at $40k, then you're in great shape from that perspective.

You'll also want to know what you can charge for rent, which you again should be able to do by running comps online or calling around the area for prices on similar properties.

When it comes to ongoing expenses, you'll again want to work collectively with your partner.  The cost to install a furnace might be different in Montana than it is in Massachusetts.  Will the weather in the region impact this by need funds for snow removal or flood insurance?  There are numerous variables to take into consideration when analyzing any property.

Unfortunately, this is a pretty ugly deal as it currently stands.  This doesn't make matters any better but items such as vacancy, capex and repairs should all be increased a few percentage points higher, 8% being one I commonly see.  You'll also want to account for your exterior maintenance for lawn and landscaping.

If there are any common areas within the complex (i.e a shared entry, hallway with mailboxes, laundry room, etc.) you'll also need to factor in utility expenses for electric and likely gas.

Even without all the increases, the property is too much and/or the rents are too low in order to obtain a good return.  The cash flow is pretty atrocious as many investors would like to see at least $4,800 ($100/door) the first year, and in your scenario, you wouldn't see that until almost year 15.

Your cap rate and CoC ROI don't look bad, but they are likely artificially inflated by the financing structure you have laid out. Unless you have been quoted for an interest rate of 4% and a minimal down payment, you're more than likely going to be staring more at something in the 5%-6% range with 20%-25% down, which will completely kill the aforementioned metrics. In order to get that down payment, you may have to house hack it which then reduces you revenue by 25%.

I would start with checking the rent against comps in the area to see if there is any room to raise them.  If not, I'd simply move on, but if you can and/or the seller would be flexible on a lower price, it may warrant a second look.

If cash flow is your goal, this is not the property to accomplish it with.  Some of your expense categories may be too low as 3% vacancy is very unlikely, particularly since you'd already be starting with a vacant unit, and despite the fact that the units won't require much work, in the long run you could be looking at 15%-25% between repairs and capex, which you currently have allocated a combined 10%.  Bringing those three expense categories up to 8% each will knock a couple hundred off your monthly cash flow, and at $1,850 coming in per month it's just not worth it.  Not to mention you may want to include another 10%+ for property management.

Also, if you're in a position to obtain conventional financing, you should be able to get an interest rate at least 50-250 bp less than your line of credit.  Though nice for flipping, I wouldn't use it beyond acquiring the property as a cash buyer, potentially setting yourself apart from other offers.  I wouldn't want to be carrying that thing around for 15-30 years though.

This really depends on what you hope to accomplish.  If you want the best overall return on your investment in the long run, refinance or keep plowing money into the mortgage.  If you'd rather have a bit of a buffer for uncertain times, stay the course or make the occasional extra payment.