All Forum Posts by: Brandon Roof

You may unfortunately end up being in for more than $14k from the start.  You currently have 15% as a downpayment on a 30 year mortgage, but for an investment property many lenders will likely require 25%, or 20% on a 15 year.  This would actually increase the cash flow you're looking for but harm some of the other metrics we look at to determine the viability of a deal.

Cap ex and repairs may still be a combined 5%-15% too low and you also have to take into account lawn and snow expenses you'll have to address throughout the year, unless you put this back on the tenant, which can be dangerous from a liability standpoint but it certainly isn't uncommon.

The biggest thing that kills this deal however is that there is no management expense factored in as you did in your last.  Even if you plan to self manage, should something come up where you no longer want to or you head to a warmer climate when you do retire, the deal will instantly flip from potentially cash flowing to being underwater.

Unless you can get the price down to under $45k, it's likely not worth it.

Two additional things you have to take into account:

How will that $50,000 would perform if you didn't take it from your 401k.  This will depend on the type of investments you have it in currently.  If it's in equities or mutual funds and the market goes up, then it hurts the case for taking a loan even more.  If the market goes down or has a very timely pullback, then you may look like a genius.  If you are in money market or low-yield bonds then this consideration may not be as relevant.  The takeaway here is that it could be a very unpredictable variable.

Secondly, when you do take out a loan against your 401k, does your employer allow you to continue to make contributions (in addition to what you are paying back every paycheck), and if so, will they continue to match said contributions.  Many larger employers don't and this would be a significant strike against using your 401k.

A few things that I takeaway form the analysis:

- I'm not sure if you've already locked in your mortgage rate.  If not, a 30 year at 4% may be difficult to find and obtain.  A 15 year 4% may be feasible, but if you are looking for 30, I would plan for something between 4.5% - 5.75% depending on the lender.

- Despite having good, established tenants, I would expect vacancy to be higher in the long run.  Many people use 5% while others like to account for one vacant month a year, which puts you in the 8 % - 9% range.

- Even though capex and repairs should remain low for now, this report shows a 30 year projection.  You will likely need to bump those items to at least 7% each, if not higher if you'd like to create an additional buffer.

- Your grown assumptions are probably a little too optimistic.  Expenses at 2% and property value at 3% should be within a percentage point or two of being accurate, but income at 5% will be difficult to pull off unless you have a sizable increase or two at some point, which may be feasible as you mentioned this may be below market rent.  Without a large jump, I think it's going to be very difficult to retain a $700 tenant when there rent will be pushing $900 in five years and $1,150 in 10.  Short of them being promoted or changing careers, they will definitely be moving.

If you take any of these changes into account, I'm guessing the deal will look significantly less attractive.  That being said, I'm not very familiar with the Toledo market so that doesn't necessarily mean it will become a bad deal, though I'd like to think there would be something better than this in your area.

@Osama Mayassi

There unfortunately aren't any perfect locations, but being near good schools always seems to be a positive driver for reliable income.  Where a property is in relation to major amenities such as shopping, dining, recreation and entertainment, and the ease of travel to these locations can certainly affect your property.

Another major thing I look at as well is what the employment outlook is like in the area.  Is it dependent on any one industry or is it diversified?  Do I want to invest in a small town where almost every resident works at the local coal mine?  To speak of your point regarding the past, we saw what happened during the last recession to a communities reliant upon the auto industry.  Huge corporations were over-leveraged and Rustbelt cities got put through the wringer because their employment is so concentrated on autos, auto components or even the shipping of these items.

There are also overarching trends to be mindful of.  Where are people flocking to and for what purpose?  You have some warmer and tax-friendlier states that already have, or are about to have a significant number of retirees pouring into their communities.  You have other demographics flocking to hubs with greater economic expansion.

You might even find that some areas have recently experienced a fallout or are still on the comeback trail from the last major recession.  Just read through some of the discussion involving areas like Detroit in the forums.  Some view them as toxic while others see a goldmine.  Remember that recessions can occur on many scales in any number of communities, it doesn't always have to be the country at large, though that's the context in which we usually discuss it.

Hi Osama!  This topic, unfortunately, does not draw friendly and informative discussion.  It's one that's been addressed in countless posts that are generally ripe with criticism.  Valuations may feel high, the cycle may feel stretched, but in the end, it all comes down to the work we do when first buying a property.

We want to buy in areas that will remain as robust as possible, regardless of the climate, and buying them at a price that makes sense within our calculations.  If you are concerned that the property you are about to buy may not be immune to a recession, factor it in then by dropping the rent you expect to receive per month or ratchet up the vacancy.  Build in your protection then, not when the storm is directly overhead.

Trying to time market cycles will likely be a fruitless endeavor.  Sometimes you'll buy at the top, other times at the bottom.  If we could, every investor would be filthy rich.  Bumps in the road are part of the experience.  If we pull off to the side and wait it out, we will likely never catch up to those that forged ahead.

Some will inevitably leverage themselves too much or invest in properties more susceptible to pain, but as long as we develop sound criteria, it shouldn't matter if the next recession is tomorrow or 10 years from now.

This certainly isn't as crazy as it looked on the surface, so nice job finding something renting well below market.  You have a number of surrounding townhouses and apartments currently listed for $1,200-$1,600, so your $1,400 falls right at the midpoint.  I usually prefer to run my numbers at the $1,200 you suggested though.  You can always try for $1,400 and if nobody bites you have a safety net where you can cut rent and still hit your numbers.  Also, there was another $100/month in other income.  Not sure what that would be as I doubt you'd have coin laundry in these units, so unless the $100 is a sure thing in your mind, I'd nix it.

It may be tough to get the property down to $240k.  Unless the seller is motivated, another buyer could step in at any point before the price drops to around $260k, which is where your target price becomes more reasonable.

Looking a little more at the finer details, I would increase the property management percentage. Again, I'm not familiar with the area, but you are likely that these expense run between 8%-12%.  Many with charge 10% plus 1/2 of the first month's rent.  I know of others that charge a flat $99/unit, which it close to your 7%, but they'll also take the entire first month's rent.  You can check around to get more concrete figures, but I'd bump it to at least 10%.

I'd also up vacancy a little. Planning for a month of vacancy may be the way to go, which puts it to 8.33% or you can bump it to 9%-10% if you prefer round numbers.

Between repairs and cap ex, you'll want at least a few more percentage points between them.  They currently combine for 12%, many others like to see at least 15%.  I personally like to itemize my expenses, and depending on the size and age of home, this number can balloon to 25% between repairs and cap ex.  Whatever you decide upon, you want to find a number you are comfortable with so when a large, unexpected expense comes along you can shrug it off.

I can't speak to the water and sewer, but you may be able to have the realtor speak with the current owner to get some actual figures, or you might be lucky enough that these are on separate meters.  Being a slightly newer construction that appears to be built specific as a duplex, they probably are and you can ship this expense right back to the tenants.  Insurance is another one I unfortunately can't provide any insight on.

Some other expenses you may need to factor in are landscaping and snow removal, or you can just lump this in with an elevated "repairs" line item.  Either way, just don't forget about it.

I ran the numbers I've outlined above and got what essentially becomes a break-even proposition.  Zero cash flow but a decent overall return if the property maintains its value and you were to sell 30 years from now.  Not an ideal scenario.  However, if you're able to get your target price and get $1,400/month per unit, you'll be in great shape.

The key is that you'll have to remain disciplined as the purchase price is key.  It may be worth $300k and you may be tempted to pick it up at $270k after months of waiting, but you will be doing yourself a great disservice.  If the number never gets there, don't fall in love with it and simply move on.

If you'd like to get the ball rolling, I'd suggesting trying to locate the owner or contacting their realtor to express how much you like their property but can't afford it at the current price.  Provide them contact information and let them know to contact you should the price ever decrease.  If you wanted to be a little more direct, you could also get your realtor to verbally float your $240k to the other side just to gauge their response and proceed accordingly.  If they say they aren't budging from their number, then you can move on now, and if they say they are going to wait and see what else comes in, you might have a shot down the line.  Just make sure they know $240k is your best and final offer so neither sides time will get wasted with back and forth negotiations.

Most of the expenses you've allocated are slightly low to reasonable, but the things that really concern me are the ARV and anticipated rental income. Maybe you've found a gem that was way under-priced, picking up a $300k property for $240k, but that seems very unlikely. I also hope you feel confident with your rent expectations. Listing currently says units are going for $950/month, which may or may not be under market as I am unfamiliar with the location, but to go from $950 to $1,400/month doesn't seem achievable. I can't imagine the previous owner undercharging by almost 50%. I would pump the brakes here and maybe reconsider some of your numbers.

I would take into consideration the interest rate on the debt versus the return I anticipate on a new property and also whether the new property's cash flow will help accelerate debt pay down.  In order to go from 2 units to 12 you'll likely need a fair amount of leverage, which may take you out of your comfort zone, carrying the student debt plus hundreds of thousands more in mortgages.

I think the plan you've laid out sounds solid, picking up another property and paying down debt.  I don't know whether it gets you to your 12 units/FIRE but it seems like it would position you well for future growth without compromising you financially.

A couple things to consider:

- If it's allowed by the city or HOA within the type of residence you are renting.

- If so, it's up to you to determine the risk/reward, and should you decide to proceed, making sure to so according by obtaining pet fees and pet rents in order to cover damages and additional wear and tear you will likely incur.

1. Date contact is being filled out

2. Buyer's name

3. Seller's name

4. Seller's address

5. Address of property being lease optioned

6. Number of months

7. A date agreed upon between buyer and seller

8. A date when taking the date in blank #7 and adding the number of months from blank #6.