All Forum Posts by: Edward Liu

Even after you sign the deal, based on inspection report, you can ask for price discounts - using inspection report as basis. 

- Your numbers for tax and insurance should be based on future real numbers, not based on what current owner is paying.  

- If 11 units, then normally owner pays for water.  If so, $300 per month for 11 units seems low

- You can not get conventional loan for this, so you numbers need to be based on commercial loan.  Normally over 20 years rather than 30 years.  Your cash flow will be less

How many unit is this?

On initial glance, your estimates maybe off.  But need # of units to better identify problem areas.  For one, your property tax is extremely low for $1.1M purchase, similar for insurance cost.  Your repair cost after purchase is only $5k, again very low.  

Go into each unit and see how 'clean' each is in addition to condition.  It will give you some idea of tenant base.  Drive around the neighborhood, see type of people standing around, type of cars parked or driven by neighbors.  If the building has parking lot, look for how many cars are parked during the day.  If parking empty, higher chance people who stay there have real jobs. 

Try US Bank.  I have done many commercial loans through them around the country where I can not find suitable local bank. 

It is hard to time the market, similar to invest in stocks.  Best thing is continue to invest during market up and down.  There is money to be made no matter what type of market conditions.  Maybe do more deals in what you think is the down market.  Key for me is holding enough reserve to ride through the bumps.

Get the loan that requires least cash (if interest rate is similar) - due to inflation, money today is worth less in the future.

- Does owner pay utilities, especially water?  

- Maintenance cost is likely low.  

- How is the location?  If not so good, likely need to assume higher vacancy.  Might even need to add in economical vacancy.  

- Look at crime rate for the location - if at center of some really dark red area, then walk away from it.

- How long has it been listed on the market?  If more than 60 days and at this type of return, usually it means there is more to the numbers.  

- Your current number shows it is selling at 12 CAP. This type of deal is not uncommon in not so good locations. For warzone areas, you should be able to find 30+ CAP deals.

Fire the CPA and get one that is more knowledgeable.  Likely the only thing you can not deduct from that bank account is the principle portion of the mortgage.  Even if you have profit, likely majority will be cancelled by depreciation.  My wife is a partner in the CPA firm - this should be basic knowledge for any accountant.  If your accountant works in her firm, I am sure person is long gone.

Unless you are already retired, this is a very bad idea.  By pulling money out of 401k, you incur huge tax bill.  Every dollar you pull out is counted as your income (on top of your regular income).  Depends on how much you pull out, you could owe IRS 40% of $$ you pull out.   Without earning a cent from the real estate investment, your return is already negative 40%.

You might consider borrowing against 401k, but interest rate is high vs normal loans.

I should not mention the property manager's political views, but what I can say is he definitely only hire people who legally work, issues 1099 to them, contractors all have many years of experience, and end results are good quality:  

This building is 5 min walk to a hospital and we had first nurse tenant about 18 months ago with 1st rehab.  Now 4 out of 4 rehab are filled by nurses through word of mouth.  For this 5th unit, it is already rented (no advertising) before we even start the rehab (another nurse).  She does not need to see the finished unit, given she has seen how other units' finish.  To me, this is good enough for quality of work.

You need to negotiate hard with contractors on labor cost.  For example, my PM stick to it that flooring labor will be no more than $1 per sq ft - not counting material.  When we first started rehab in that buildings, contractors proposed $1.75, $1.35, etc.  We would not budge.  In some cities, you need to pay a little higher, but should not be $2 per sq ft.   You can change the flooring material cost, but labor cost should not double if your material cost doubles.   I keep history of all the major jobs done on my properties, thus start have better ideas of what each type of job can cost.  It does not mean I will always get the best price, but if close enough, I will take it.

Another way to think about labor cost is how many days does contractor use to finish the flooring or paint or the bathroom.  Go track it.  What is their daily income based on the price you pay?  If they earn more daily than you, likely you are over paying the labor cost.