All Forum Posts by: Brandon Roof

Unfortunately for you, your purchase does not void any preexisting agreement.  You are now just the owner of that agreement.  First thing you'll want to do is find the length of the agreement.  Your best case scenario would be that it's month-to-month, which means you'll be able to have them vacate the property in the near future.  If the lease is for a year, you'll either have to bite the bullet and wait for it to run it's course or offer them a buyout in hopes to draw them away from the property.  It would be a new take on cash for keys.

@Calvin Kennell

I would consider the property taxes to be exceptionally low, which is great, as is the fact that all utilities are separate, allowing you to bill those right back to the tenant.

Based on what you've provided regarding rents and your anticipated rehab budget, this property could have nice cashflow. I would have two main concerns that I think will help determine whether or not this will be a good deal.

The first would be determining what a realistic exit strategy would be. This house is 118 years old. I feel for every 10 years you hold it, the harder it becomes to sell it and you may see less or no appreciation compared to newer homes in the area. You could eventually have a very illiquid or dilapidated property.

The second would be the financing. With the significant amount of up front repairs this requires, in order to get a good return on your investment, pulling off a BRRRR-like refinance is the only way I see it happening. Otherwise, with 80k in repairs and a down payment, you could easily be into this deal for over 110k. With a good refinance, that number could drop to anywhere between 0k-40k, which would obviously be an improvement over 110k.

If you then feel comfortable with the age of the home and the ability to refinance, I would like to think you could conservatively cashflow $150/month/door when self-managed.

None of what I'm about to describe should be considered advice. It would be easy enough to do via options or equities. You're timing would have to be pretty impeccable though as you're going to get saddled with some serious dividends every quarter, not to mention possible capital appreciation in the meantime of any REIT. The better play may be to find companies tied to housing, with low or no dividends, that are currently victims of other factors, such as the threat of tariffs/trade war and how that alone would impact their bottom line. Unfortunately, a number of these companies are already well off their all-time highs, such as the home builders and fixture manufacturers such as Masco or Fortune Brands. Again though, I think this is likely a very dangerous play as well. A few months of good housing numbers or remedied trade talks and you could find yourself in a world of pain. Remember too that a recession is not necessarily synonymous with the bursting of a housing bubble. It just so happened to be the most catastrophic case coalescing a decade ago.

If you wanted to try to somewhat limit your risk, you could make a long/short trade where you are long a company or aspect of real estate you believe will remain strong (maybe industrial or cell tower REITs), paired with a short trade of commercial or residential REITs).  Again, none of this should be viewed as advice, but these may be some possible ways to accomplish what you are looking at.

Either that, or go watch The Big Short.

It appears that some of your expense projections are either low or unaccounted for.  One could argue that cap ex should be doubled and you currently lack a line item for repairs, which people often budget for the same amount at cap ex.  I'm almost positive that your property taxes are way to low.  You should easily be able to find what they have been in recent years within local government records or possibly realtor.com, zillow.com, etc.  I would imagine they will be 3x-10x more than what you currently have budgeted.  Though you may self manage the property, it is also good to include what it would cost you in case you were to ever move away from the property or no longer had the time to devote to it.  You want to make sure the numbers work for all circumstances.  You also have not factored in any vacancy into the equation.  Maybe you'll get lucky and it will be less than 5% long-term, maybe you won't and it will be north of 10%.  If this quadplex has any common areas, you could find yourself on the hook for some utilities, and if the units aren't sub-metered, you could be out thousands more as well.  You also may want to include expenses for a dumpster, landscaping and snow removal (if applicable given your weather).

Growth assumptions are likely skewing the numbers as well as you have expenses and appreciation as flat with income increasing 5% annually.  Maybe this will happen a year or two, but over the course of a decade or more I don't believe this would provide a likely scenario.  You also forgot to include a down payment within your calculations.

Once you take into account these additional expenses, I believe you will likely find yourself with a very low or negative cash flow, which would certainly make it a bad deal in the eyes of most investors.

Many of the expenses you've factored in feel like they need to be doubled or tripled, specifically vacancy, cap ex, repairs and management.  Given the size of the deal I'm guessing this is a larger multi-unit or a higher end vacation rental.  If it's the former, you'll likely have larger expenses for a dumpster, landscaping and snow removal which I don't believe have been accounted for.  There are also likely some common areas where you would be on the hook for some utilities, but this is just speculation on my part since we don't know the exact details of the property.  The financing for a deal of this size may be a little different from what you have projected.  It may come in the form of a loan that is less than 30 years and although a conventional home loan could likely get you an interest rate of 5% or less, if you obtained a commercial loan for this deal it could certainly be higher.

Based on this is doesn't look too good, but again, I may not have the entire picture.

Seller financing can obviously have some perks as it offers an alternative to those that may possibly not be able to obtain a loan for credit reasons or due to the size of the loan being too small that no bank with provide a mortgage.

Though it's not always the case, expect for the term of your agreement to be much shorter than a conventional loan.  You are unlikely to get a seller to agree to 30 year terms with a reasonable interest rate.  Expect something significantly more accelerated over the course of a few years.  If near term cash flow is the goal, it won't be met in this scenario.

You might occasionally be able to structure something more favorable than a mortgage as far as interest rate or repayment schedule, but I believe that will rarely be the case.  Large down payments and balloon payments are relatively common in seller financing as well.

It could be any number of reasons.  The following things I throw out may or may not be potential factors as I am unfamiliar with the home, location, local economy and demographics, but they can affect numerous scenarios.

As you stated, there are not too many house in the area like yours, which is typically a good thing to be able to set yourself apart.  My guess would be with a 5 bed/3.5 bath, the renter pool looking for that size of structure is significantly smaller than a 3 bed/1 or 2 bath, leading to potentially higher vacancy rates.  The same size of family that would fit in your home might try to make a 3 or 4 bed house work by doubling up children in bedrooms and they might be fine with a 2 bath home as opposed to 3.5.

It could also be affected by location.  How are education and employment opportunities here versus 30 minutes away.  You may be competing not only against similar houses in the area but surrounding communities.

What is your demographic makeup?  I personally live in an area that is going to see the number of senior citizens increase 97% by 2035, so a home like this in my area may not have the same demand as a 2 bed/1 bath home for someone who has grown children, is approaching retirement and looking to downsize to something more manageable.

Lastly, it could be price.  From the link you provided it appears that as early as this time last year it was advertised at $1,750/month.  Maybe that was under market rent, maybe not, but like many things in life it is only worth what somebody is willing to pay for it.

Again, I'm not saying any one of these things is the reason behind your vacancy.  It could be none of them and maybe you just need a few more outlets to market through in order to reach your potential tenant.  

You have a beautiful property and I hope you find yourself a great tenant soon!

This would be a terrible deal, unless you hate money. Even though you stated you aren't necessarily looking to make money on this investment, it would be even worse than your projections reflect. Your repair and management line items are way too low and will tack on thousands more. You also haven't budgeted for any insurance (unless that is included within another line item) and I'm hoping all your exterior maintenance is included with your HOA fees. Also, with this being a STR, there will be an immense amount of turnover which gets back to needing a much higher management fee and/or maintenance for constant cleanliness and upkeep.

I certainly hope that there are plenty of other properties that will help you fulfill your goals without being as detrimental to your finances.

I've recently received interest rates from a small, regional bank of 3.875% on a 15 year mortgage, so it might not be too far off, but from the debt service expense, it looks more like a 30 year, so this may require a second look.  To your point though, I've also encountered rates of 5.75% on a 30 year mortgage from larger lenders.

As for the deal itself, your property management may be a little low.  If you find 8%, that's great.  I see a lot more that ends up being north of 10% after their base fee plus 0.5-1 month's rent when filling a unit.

Some other expenses you may want to consider are landscaping, snow removal (if it applies to your area) and trash removal (if not included within property taxes).

You may also experience some growing pains in the near term.  If you believe you can increase rent, you may not be able to do it with all the current tenants, leading to some additional turnover and higher vacancy rates until the units are occupied again.

@Brook Boatman

I don't think you need a mentor. That is simply the fact in many markets right now you can't find a property that meets the common benchmarks we strive for.

The question for us becomes whether or not we are willing to accept less than optimal returns or if we remain disciplined to strike only deals that check all the boxes, even when it seems that they don't exist.