Originally posted by @James Hamling:
@Conner Malrose I am super confused by this purchase, as MN REI specialist/ investor/ rei agent.
First item, the COC is "garbage". Now, that said, Lakeville isn't a COC play at this time in market, it's about equitable appreciation with good operational numbers. But when going at that play, it's all about leverage and all-cash slit's ones throat on the leverage, especially since you have maximal tax exposure on an already poor performing COC property, making COC even worse. On equitable appreciation plays, use the cheap leveraged funds, take the write off for what is, on paper, an annual net loss, and with the same cash your in control of $1m vs $2ook in appreciating assets. Not to mention with write-off's vs tax burden.
Next, I'd STRONGLY suggest mixing that portfolio for diversification with some good COC properties (MUST meet 1% rule MINIMUM). By mixing COC and E.Appreciation deals, the tax write-off enhances net profits on the COC properties, and you have a game plan in place for either tapping equity gains or liquidating to take gains (generally with 1031).
But going all cash.... at poor COC..... no leverage use..... I just don't get it, it's really not a good utilization of the capital, market or available strategies. I applaud getting "into the game" but you could and should be setup far far better than this. It's not just about all the profits (current and future) your leaving on the table but it's also about risk mitigation via appropriately structured portfolio. 10 properties netting $100mnth is 10X "safer" than 1 property netting $1k, the numbers may seem the same but it's about diversification and the law of averages. Now add on a property is appreciating at 5% annually. If you can do 1 all cash or 10 via leverage, just run the numbers, they are not even close. So via leverage you get far better returns AND more security. Hence, my confusion why you'd be traveling the significantly lessor, more risky path????
To clarify, I havnt been on bigger pockets in awhile so I actually purchased the place in december of 2019 but just didnt update BP till now. In regards to cash on cash return the numbers are below:
$1700 rent
-$200 HOA
-$200 Property Taxes
-$ 200 Maintenance, tenant turnover, etc.. (to most this seems like low estimate but i own 4 similar similar townhomes accumulated over 6-7 years and have partners with the same set up so im confident in this number!)
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$1,100 cash flow a month x 12 = $13,200 a year
$13,200 a year / $185,000 = 7.1% ROI
I would NOT consider 7.1% ROI very good and out of all my properties this is worst performing cash flow wise. I would have to disagree though that more leverage means more security. In fact with buying all cash I am as close to risk free as you can get cause I have no mortgage, no loans, no investors to pay off, etc... With that said the main reason I purchased this property was because it was around 20-25k below market rate at the time and as of today that same property would probably sell for $220,000+ even though I have no intention of selling. Furthermore, to address why all my deals have been townhomes and all cash.
1. When first getting into real estate I was in the military and unable to manage the property myself as I was deployed every year and traveling alot for training.
2. My "investors/ partners" are actually just family and my mentor had recommended townhome as easy first step into real estate investing and since its easy to manage and was safe and they already managed similar property it made it easy to ask for the initial investment needed.
3. I knew I wanted to be in the MN market because I grew up here and would rather have my first few places be in a market I know really really well.
4. The plan since my first purchase was and still remains to manage these properties myself until I have to many and need to hire a property manager. Also since I moved back to MN in march due to covid I have been managing these myself.
5. When first starting I wanted to be risk free and hence purchased safe properties with no complicated paperwork or loan origination fees, etc.. associated with getting a mortgage. Plus I was 23 when purchasing first place and while ive always been good at saving and investing I only had a little more then a year of credit established.
6. When first purchasing townhomes the ROI was great even when paying all cash. I didnt know how good the deals were at the time but my first place I bought for $120,000 and it rented for $1400 and with lower HOA, Taxes etc.. was cash flowing $1000 a month (10% ROI) + appreciation. Today I still own that same place and it rents for $1500/month and would sell for roughly $190,000+
With that said I would agree that diversification and adding some leverage is a smart way to go. Hence, why I logged back into BP after not checking in for awhile because for my next deal I will likely be looking for investors or taking out a loan. Im now looking to find properties such as SFR flips or duplex,triplex,quadplex etc... that I could rent out in twin cities and surrounding area's but also need work. Essentially I would like to live on site while fixing up the place and have no problem putting in alot of hours. The only issue is im having hard time finding places that are well prices or come close to the 1% rule. Everything seems priced high and not much value add for work that needs to be done. Additionally, I am not as familiar with twin cities so looking to find people who know the area better and maybe have experience in the area.
If you know anyone who can help please let me know :)
