All Forum Posts by: Paul C.

@Andrew Postell that's good advice. I'll give it a try and report back.  You are correct that it is not in a high cost county, so $424,100 is the conforming limit.  Thanks 

Does anyone know of a lender who will do Jumbo Investor mortgages (> $424,100) with 20% to 30% down.  I've checked several large lenders and they require 40% down.  I'm specifically asking for Nevada, but any leads would be appreciated.  Thanks!

@Curtis Waters @John Leavelle @Andrew Johnson

Thanks for your replies.  You all bring up some great points.  As far as expense estimates, I took a look at what I've been averaging across my single family portfolio over the past 3 years which was around $150/unit per month.  A decent amount of that comes from the repairs that happen when the houses turnover.  So I may go months without any repairs, but then all of a sudden a paint job and new carpet will take that average up.

On the CapEx front, I listed out the major components and expected lifetimes and came up with my estimate. The issue is there's three of everything (HVACs, water heaters, etc.) except the roof. So while $300 seems high, I think it's appropriate. Also, the cost of items like HVACs and water heaters are not any cheaper on a lower rent unit so those "fixed" costs tend to be a high percentage of the rent.

Anyway, you all have given me some good points to consider and I very much appreciate it.

Hi BP Community, I have a triplex under contract that I'd like your help in analyzing.  I have experience with single family homes, but none with multifamily.

The contract price is 215k.  Rent between the three units is $2,100.  I've estimated the following expenses:

Management             (210)       Assumes 10%

Vacancy                     (126)       Assumes 6%

Property Taxes           (175) 

Lawn Maintenance     (100) 

Repairs                       (360) 

Water                          (200) 

Insurance                    (150) 

CapEx Reserve (300) Does this seem reasonable?

Total Expenses         (1,627)

NOI 473 2.64% cap rate

It's pretty clear that as is, this property is terrible from a cash flow perspective.  The reason I'm still considering it is (1) I think rents are below market and (2) it's in a part of Charlotte that is close to uptown and likely to appreciate above average as Charlotte continues to grow.  Several surveys rank Charlotte as one of the fastest growing cities in America.

My plan would be to raise rents to $800 / month and install meters so that the tenants pay for their own water. That would be a $500 / month swing in NOI and get the cap rate to 5.00%. However, it also means each tenant on average would pay $167 more than they are accustomed to which could mean a lot of turnover initially. (On average, the tenants have been there 5 years and the landlord has not increased rents in line with market rates.)

The second part of the plan is to renovate the units as tenants vacate with new kitchens, baths, flooring, etc for about 15k per unit.  This should make the units among the most attractive in the area and I believe I could then raise rents to at least 900 / month per unit.  The cap rate only improves to around 5.30% given the 45k in renovations, but I believe having fully renovated units will let me capture any rent / price increases in the area more successfully if the area does indeed experience a rapid boom.

While I do not like to count on appreciation when I buy, at a 5+% cap rate, the property is paying for itself and so any price appreciation would be a bonus.  I do wonder whether a triplex is the best way to capitalize on price appreciation, though, as I would be limited to selling to other investors and not owner occupants.

Are my repair and CapEx assumptions too high? I tend to be very conservative in my modeling, but want to be reasonable so I don't pass on a good deal unnecessarily.

Lots of people talk about how duplexes and triplexes cash flow better, but based on my modeling, I am not seeing that.  Rents are not any higher, but expenses are ($200 for utilities + $100 for lawn maintenance).  Am I missing something?

Sorry for the wall of text and many thanks in advance!

 Good question, I'd be interested in hearing the answer too.

Originally posted by @Dion DePaoli:

An interesting contrast to some of my points if I may, to the OP, @Paul C. 

It would be presumable that you dislike prefs of 8% or 10% as to not forsake the opportunity to earn more than that.  So what do you think keeps you content?  

Total Return of 12% or 15%?   
 

Actually, I do not think 8% to 10% is unattractive.  I just wanted to understand the full spectrum of risk/reward possible when investing in note funds.  Whether 8-10% is attractive would depend on how likely it is that the manager would be able to pay the preferred, which I'm still trying to quantify -- hence my latest question on what the expected gross return for the asset class is.

The main reason I wanted to evaluate funds with a split is because based on what I've seen, you're taking the same amount of risk whether you're just getting a preferred or a preferred with a split.  All else equal, you should take the split.

For example, if we consider a fund where the manager says, I'll either give you a 10% preferred or a 10% preferred and 50% split, why would you ever just take the 10% preferred?  There would be no scenario where you'd be better off.

If he underperforms, you absorb all of the shortfall.  If he outperforms, you get none of the upside.

You seem to be very knowledgeable about the subject.  I'd love to talk with you more offline if you're open to that.

Originally posted by @Sean M.:

It's a weird thing about note funds that they seem to get away with paying really low returns relative to profits.

 Sean M., thanks for your comment.  In your experience, what kind of annual returns can a notes fund generate?  I know it will depend on their specific niche, but what would you say is a typical range?

Thanks

Heather Morgan It's definitely worth it, but try to think about the long-term. $4,500 / year may not seem like a lot, but what about when you have 10 of them, or more? And consider what those numbers will look like once you have the homes paid off? Do things right and I bet you'll be very happy in 10 or 20 years.

I don't have a mentor for you, but I do have another way for you to look at this.

To get $5,000 / month net, you basically need $6,000 / month gross or $72,000 year of gross profits.

Using a buy and hold strategy, I've found that I can get 7% yield on my unlevered real estate investments in single family homes.  This will be area dependent, but 7% seems consistent with what large institutional investors are targeting too so I'm comfortable with that assumption.

So then the question becomes, how long will it take you to own about $1 million of real estate free and clear?

Maximize the difference between your income and expenses, invest your savings and assume you can grow it at 7%.  How long will it take you to hit $1 million?  It's simple math that will let you see what's necessary and if it's possible.

Buy and hold is just one approach (the one I'm using) and I'm sure others will point out other ways of getting a higher return than 7%.  But I think you can use 7% as a conservative and realistic return.

Came across this story just now.  Very sad and a reminder to be careful when dealing with evictions.

http://www.housingwire.com/articles/32235-homeowners-murdered-while-taking-possession-of-detroit-foreclosure