All Forum Posts by: Evan Kraljic

Hey Justin! I think $7000 is a bit tight to get into the first property. It can definitely be done, and Brandon Turner has a book on investing with no or low money down that could help you. Also look into down payment assistance programs local to Minnesota. Mortgage lenders should be able to help you with that. 

For reference, I went 5% down on a property at 236k and rolled closing costs into the loan and still had to bring about 14k to closing after all other fees and escrow. I think your best bet would be getting a 0% interest loan to fund the down payment (google MN Start up Loan). 

But yeah, overall I would recommend getting the savings up. I definitely don't want to tell you not to buy a house with only 7k because I don't believe in limiting other people's potential to achieve their goals. With that being said, most people would advise having 3-6 months of your mortgage payments in cash reserves and also having cash will give you the ability to complete renovations and add additional equity to your home, should you choose to go that route. Some people will bootstrap it with as little cash as possible and 12 month no interest credit cards, I guess I'm a little too conservative for that but to each their own :)

No problem Cameron. Since you're already under contract I think it's a little late in the game to be changing financing but there is a 5% down conventional that can be used for 1st/2nd purchases. I had a similar scenario where my first duplex wouldn't have passed FHA inspection but I used the HomePossible 5% loan and that worked out great. Anyhow, don't want to give you buyer's remorse or anything but figured I'd mention it. If you are interested though, I could give you my loan officer who I used for that first purchase. Regardless, congrats on taking action and getting in the game. Starting at your age puts you way ahead of the game.

One other thing that isn't really applicable to how you evaluate this deal but figured I'd mention it nonetheless. Your cap rate is off. 

Cap rate is NOI/purchase price - where net operating income is all your revenue minus your operating costs, which includes all expenses EXCEPT principal and interest payments to the bank. This is a standard so that the financing used is not being taken into consideration with the cap rate - so the same building purchased with all cash or financed with FHA has the same cap rate.

So your cap rate here would be 

1750 (assuming 750 top unit rent) * 0.85 (subtracting 15% for your vacancy, capex, and maintenance) = $1487.50 minus prop taxes ($169), insurance (gonna say $80 here as a placeholder... doesn't really matter), sewer/water ($150) = $1088.5/month.

Now cap rate is based off yearly NOI, so multiply by 12 = 13,062. Divide by purchase price of 135k = 9.7 cap.

With all that being said, cap rate is essentially meaningless for properties 4 units or under since they are valued off their comps. You already had cash flow and ROI in your post which are what I focus on so just sticking with those should be good enough for small multifamily.

Good idea Adam... I've certainly thought about these a good amount but hadn't written or typed them out yet

1. Use my HELOC to fund a 25% down payment on a duplex with 12%+ COC return - ideally a value add deal with potential for 15%. (This one was in the works but looks like a purchase offer I had on an off market duplex is gonna fall apart due to major sewer/foundation issues during inspection - on to the next one!)

2. Once that duplex and my current homestead are fully rented, pay down HELOC at ~3k/month so I have access to the funds quicker for future purchases.

3. Help friends who've purchased home recently with their own remodeling and weekend warriors projects.

4. Post vaccine, take at least 2 weekend trips with friends and a week long hiking trip with family

5. Come fall once owner-occupied loan is available, purchase 3-4 unit property, ideally with potential to renovate 1 or multiple units.

6. Full DIY ikea cabinet and countertop install, if I find a kitchen where it makes sense.

7. Read 20 books, write 5 blogs. 

Seems like it could be an okay base hit, couple suggestions I'd make though. You said you're doing an owner occupied loan so I would take advantage of that by going with a 3.5 or 5% down payment to preserve as much capital as possible. 

3.5% interest is high for owner occupied. I got some quotes for 3.25% on an investment loan recently so I'd imagine you could get down to around 2.75%? Not sure so don't quote me on that, but I have some loan officers I could recommend if you want them. 

Insurance at 175 seems high, and also wouldn't that be included in the loan? I'm assuming it would because principal and interest for the loan you described is only 515. Sidenote: 435/mo in property taxes/insurance also sounds high for a 135k property but I don't know what taxes are like up in St. Cloud. 

I think 15-20% for vacancy/repairs/capex is reasonable. Any utilities? Down in the cities it's pretty common for owner to pay for garbage and water which runs ~$150/month for a duplex

Youtube and working with my dad. There's really no substitute for getting in the game and doing the work yourself (if that's what you want to do). I thought I'd be able to hire contractors for all the renovations but was naive as to how expensive that would actually be, so it ended up being a lot of DIY with some contractors for the major trade jobs. 

For youtube I'd recommend Jeff from Home Renovision DIY... I've fallen asleep to many of his videos after a long day of renovations lol. As to how you get into the game, that all depends on the risk you're willing to take and how big a project you want to take on. I would highly recommend house hacking or a live in flip scenario where you can qualify for a low down payment 30 year fixed loan which you can get insanely low interest rates on right now. Millennial Investor Focus Group on Facebook is home to tons of investors and some contractors in the twin cities so it can be helpful to post questions there as well. 

Try setting up custom searches on Redfin or another site with description words like "fixer upper", "handyman special", "value add", "unfinished", and stuff like that. With all the old houses in the twin cities there should be no shortage of properties that could use a facelift, but make sure it fits the criteria of where you'd want to live, if there's a decent ROI on your renovations (after repair value comps), etc.

Hope that helps - there's so many ways you can go right now but the main focus should be finding that first property. Good luck!!

I'm actually not 100% sure on raising rents. I thought I heard earlier in the year that you cannot, but I don't see that listed in the executive order anywhere. Hopefully someone else can chime in to answer that part of your question.

Yeah I would say a getting a contractor out there to see what it would cost is a good first move. If it's a load bearing wall you will want to talk to a structural engineer because that complicates things. If you know which direction the floor joists are running (check basement or attic if unfinished?), and the wall you're removing is perpendicular to the joists, then it is load bearing and you'll have a tough time. 

But yeah, other than that it'd probably be good to have a GC check it out just for a ballpark because he'll know an estimate for reframing, sheetrocking, mud/tape/prime/paint, and retrimming the baseboards/door if applicable. And moving electrical or any ducting if present on that wall. GCs will be expensive so not saying you should necessarily go with said bid, but it'll give you an idea then you can determine if you want to DIY some/all of it. If it isn't a load bearing wall and you don't have to move any mechanical/electrical I'd say that's a really good project because you're learning bits and pieces of a lot of trades, but it's only 1 wall so nothing too crazy.

First off, there's almost no scenario I can see possible where you can convert a 1 bedroom unit to a 2 bedroom while they are living there. 

Now, there's also some very important contextual information missing here as well. What are the lease situations with the tenant? If they are on a fixed term lease, you can't do anything until the lease is up. If they are on a month to month lease, DURING NORMAL TIMES you could give them a notice that you are terminating the lease. I believe in Minnesota the minimum notice is one month and a day, but some leases specify more. Also before you do this you'd want to check the landlord tenant handbook and not just take some stranger on the internet's word for it, but that kind of goes without saying. During COVID times, you cannot terminate a tenant's lease unless it's mutually agreed upon. All the power is in their court, so I wouldn't piss them off by saying you're going to terminate the lease until it's within your power to do so.

2nd: You said they are 1 bedroom units at 900 square feet, but how easy is the bedroom conversion going to be? Is there an extra room that meets all bedroom code requirements (70+ sq ft, minimum dimension 7 ft, 2 electrical outlets, egress window, heat source) where all you have to do is frame up a door and voila, there's your 2 bedroom? If so that is awesome, but that's not normally the case and you need to make sure all your bases are covered and that it actually make sense! Sure you could convert a dining room to a living room, but do you need to frame in a new hallway since it's branching between the living room and kitchen, and now the room is only 7 ft wide and the layout is kinda off-putting? Might still make sense for a rental, but these are just things to think about. 

Same thing goes for the utilities, you cannot bill these to your tenant until you start a new lease, unless you both agree to terminate the lease so you can charge them more which they'd never agree to. 

Sorry, I don't mean to sound like I'm going in on you here and I see it's your first post. I just want you to be strategic with these renovations. I like your mindset on trying to add bedrooms because that is definitely a great way to add value in any market. And a quick filter is to look at square footage and see if there could be another bedroom. But there's a lot more to think about with code, load bearing walls, etc. that if there isn't already a spare room framed in that just isn't being used as a bedroom currently, it's not as easy as Brandon Turner would lead you to believe. 

I'm not sure there is a conclusive answer because I don't think there is a flat rate for the whole county, but hennepin county has a website where you can look up any property's tax info for 2020 and what is coming for 2021. Here's the link. For what it's worth I have a duplex in south Mpls that is 1.62%, but that's based on assessed value which can vary wildly from purchase price. 

More often that not, the property tax is included is the listing info and is correct so just throw that in your spreadsheet. If you're thinking about putting an offer in I'd recommend double checking on the website to ensure there isn't a massive tax hike coming in the next year.

Piggybacking off of @Bruce Runn comment here, I went with a 5% down conventional loan for my first property which was beneficial for a few reasons. 

1) Property I was buying likely wouldn't have passed the FHA inspection.

2) FHA loans have to be refinanced out of to remove PMI, whereas conventional comes off at ~78-80% LTV, so you'd need to get another appraisal and/or enough loan paydown then notify lender to remove it.

3) And most importantly, it isn't too difficult to buy a first property with 5% conv and 2nd with 3.5% FHA, but it is really tricky to do the reverse order. One thing with conventional, or at least the homepossible loan I went with is the income limit is lower than FHA, I think around high 70k to low 80k which is based off of avg. median income in the location you're buying. And the debt to income is more strict as well. So where this becomes a problem is, you can get one property to work under the DTI requirement for conventional if you aren't already disqualified from your W2 income, but to get two properties to work you will likely need to use some rental income to qualify for it, which will now probably put you over the limit unless you're buying really cheap properties.

I don't know the #s off the top of my head (loan officer should though) but I imagine in the twin cities market to finance two properties with low down payment loans and an income under ~80k you'd need to be buying two duplexes that are each in the 150-200k range, which are only in parts of North Mpls and East. St Paul nowadays. 

This is all just my limited understanding so I'd be curious if Bruce or a loan officer knows of any other ways to make this work. Multiple FHA loans would work too but it will be difficult to get to the necessary equity to refi out within a year, unless you're doing a fairly significant renovation and get some natural appreciation to boot.

Start with your goals and work your way backwards. If you're looking for strictly cash flow, North Mpls and East St. Paul are the way to go. The reason why you can get better cash flow there is because they are generally seen as a riskier investment, ie: higher crime rates, less resources so worse schools/amenities, less businesses, etc. If you're looking for appreciation I wouldn't consider these neighborhoods because 3-4% YOY growth will only do so much on a 200k property. Granted I wouldn't bank on appreciation, especially not on a first property and with the general economic uncertainty right now but I digress...

I have no knowledge on the wholesaling question but one piece of advice is that it's difficult to get good responses on general questions. Which I know is difficult when starting out, because it's like drinking from a firehose with all the information out there. But if you're clear on what you want with a property (single family vs. duplex, turnkey vs. fixer upper, A/B/C class neighborhood, proximity to ______?), that will help you in the long run. 

A more specific recommendation would be to get a pre-approval from a lender so you know what price of property you could qualify for. And speaking with a real estate agent who deals with investors because they will be able to answer these questions much better than I could. @Adam Tafel is a good one who is on these forums semi-regularly.