All Forum Posts by: Christa S Rickard

@Daniel Dietz, you commented about the 20% down in your seller financing vs 40% for a commercial loan, that's exactly what I'm hoping to get with this. I haven't made the offer yet as I wasn't positive I could do seller financing, but the one unit will need some work and I don't want to use all my cash on the down payment. 

Thanks so much for responding!

Christa

I have a solo 401k that I set up last year. I'm currently looking to buy my first small multifamily this year. I focused on the Central Florida area, basically Western Tampa MSA over to the Space Coast. I found a property that looks interesting and it also says seller financing is available. I know all investors love to find seller financing as an option, but can I use seller financing if I'm using a solo 401k to purchase the property? I understand that solo 401K can only use a non-recourse loan and I have a list of several banks that specialize in 401k real estate investing. If I can structure the purchase agreement such that the seller financing is essentially non-recourse, meaning it can only take the property if something happens, will that satisfy the solo 401k loan requirements? And if so, how likely is it that the seller would consider that?

 Wow.

Seriously, I just had this epiphany as I read this. And it's stupid because I've read similar things before and, at the time, knew what they were saying because it made complete sense to me. I thought, 'well, yeah. Obviously.'  

But I didn't "get" it until just now as I read your post. And it's not something I haven't read/heard before, but this time - something clicked - tumblers fell into place and a door just cracked open. 

And I can't even put into words how stupid I feel right now.

Thank you, Sam. You posted exactly what I needed to hear, exactly when I needed to hear it.

 Are you able to find deals that meet 10% cash on cash, 15% irr over 10 years, Etc? That's the part that I'm struggling with. When I plug in the numbers to the BiggerPockets calculator, I'm lucky if I can get $100/unit/month cash flow and 8% cash on cash return and that's after I lower the list price by usually 30 or 40%. I just don't see how people are making these deals work financially.

I'm in a similar boat as other newbies here.  I'm analyzing deals, but they're all overpriced.  However, like Eric said,  I'm not embarrassed by my offers.  My goal is to educate myself and gain experience and that includes making offers and having them  say no.  I just make sure that I can justify my low offer by giving them my version of the financials. So if some of the expenses are low/missing from their numbers, I add/adjust their numbers to be more realistic and recalculate the sale price using my numbers. I then present my offer and explain my expense calculations so they can see how I arrived at my number. 

Most of the offers I've been making are between 30 and 40% of list price - but those are the only offers that make sense financially.

I have yet to close on a deal so I clearly have not been successful. But I'm still plugging away. A lot of people post that they've had to analyze a hundred deals before they close on one. I'm not even halfway to a hundred yet so I'm still expecting to close on one at some point in my future.

 Sam, I think you're correct regarding the unit per door calculation  as they also mention the price per unit is $66,000. 

I wasn't basing my decision of whether or not to make an offer because of lower cap rate. Rather understand why identical properties were listed with different cap rates. It appears that I'm still struggling to fully grasp what a cap rate is. I'm getting there though.

My criteria for an offer is based on cash flow as well as cash on cash return. I only use cap rate to calculate my offer price.

Hmm... I did not know that. They both are supposed to be in the same condition although I have not yet seen any inside pictures. 

When I was running the numbers, I saw that they did not include any capex in their expenses and their vacancy and property management was slightly low. By modifying those three variables ( increased Property Management to 10%, increased vacancy to 5%, and included 10% for capex) and using their cap rate, I'm coming in almost half of their list price. I wanted to make sure I understood why the properties are different cap rates before I finalize my numbers, so thanks for the help.

They will probably balk at my offer since it's so far below their asking price but that's the value based on the numbers. 

I'm still excited that I finally got an off-market lead but not so excited that I'm going to overpay.

I know there are a bunch of posts about cap rate and I've read quite a few. However, every time I think I understand, I'll see something in a listing that confuses me. 

My current interpretation is that a cap rate is set by the market - meaning it reflects what sellers are willing to pay for a property/return on investment. So in hot markets, cap rates will drop and sales prices go up because people are willing to pay more for a property. In 'cool' markets, the cap rates increase and sales prices drop because not many people are buying or they are holding out for better deals.   

If that is correct, then if I have 2 identical properties next to each other on the same street, in the same condition, shouldn't they be the same cap rate?

I received a small portfolio of off-market properties for review. The seller is in the process of doing some upgrades before listing them so I'm trying to make an offer before upgrades are finished. Given my luck thus far, I'm not holding my breath for success but I am hopeful.  

Two of the properties are 8 units each. Both properties are right beside each other on the same street. Both are pitched roofs with brick exterior. Both are fully rented. The leases in both units are below market by varying degrees - the annual gross rent on the one is about $3k more than the other. Also, the one has $1k more in property tax than the other. 

The seller sent separate financials for each property. Barring the taxes and rental income, all other fees are the same between the two. The list/sales price is also the same price for each property but they are using a 6.6% cap for the one and a 7.5% cap for the other. Shouldn't they both be either 6.6% or 7.5%? I think they are only changing the cap rates so that mathematically both properties keep the same sales price. However, that's not how cap rates work, is it? I thought they were the one thing that should be fairly constant between property types/location/quality so that you had a consistent way to determine value?

Thanks @Jacob Sampson. That's good advice. I'm also going to lower my offer a bit. We'll see what he says.

Thanks for the feedback, everyone. 

@Edward Liu and @Jacob Sampson, regarding the $200k increase so quickly, I was trying to show that increase after 5 years (I've never used the Bigger Pockets tool before so may have done something wrong). 

The property is currently self-managed and it appears poorly at that. Current expenses are only 30% of Gross Income and half of the tenants show late payments on the rent roll. Most of them also have at least 1 in the "late notice" column with several showing 5 late notices. I have yet to purchase my first property, but to my novice eyes, it looks like the current owner is letting tenants slide and not bothering to do anything about it. The rents are also well under market according to Rentometer (Avg rents are $795 and Median is $750). The current rents range from $500-$695, even though all units are 2 bed/1 bath. 

I think this could be a good neighborhood for me to invest. This particular area shows 3 consecutive years of pop growth, 3 consecutive years of HH income increases, and 3 consecutive years of unemployment decreases (currently at 2.5%). Neighborhood Scout has it listed as a "Blue Chip" neighborhood, which is its best ranking. So I'm feeling pretty safe with the area.

I am currently going based on the images I've seen in the portfolio, but the units look in good condition. Carpeting is a bit dirty/worn and would need to be replaced, preferably with LVP, but otherwise they look comparable to other units in the area. 

My thought was to purchase the property and, depending on the lease agreements, get all tenants up-to-date with rent or get them evicted and replaced with better tenants. I would have a property management company handle this part. If I can upgrade the flooring and some fresh paint, I should be able to rent them for the current median rent of $750, which is the reason for the huge jump in value. If I don't evict any tenants, and they make payments on time, then I'll have to increase rents gradually each year, which will reduce the immediate value.

So am I being overly optimistic in my thought process?