All Forum Posts by: Trevis Kelley

I have found another deal that is a bit outside of my comfort zone for two reasons:  1.  It is outside of the market I know.  2.  It is one price for two properties.  I will break down the numbers now:

1 SFH renting at $700/mo. 1 4 unit multi-family renting at a combined $1850/mo. Total income is $2550. Properties are in the same general area. They are located in Kansas City, MO. Seller is asking $85,000 for both and is not willing to take less or finance.

Calculated expenditures are as follows (some as stated by seller, some confirmed):

Mortgage (80%):  $448.77/mo for 20 years at 5%.  (calculated by me)

Taxes:  $116/mo (confirmed)

Insurance:  $54/mo (stated by seller)

Water/Sewer:  $200/mo (stated by seller)

Seller gave some estimates of maintenance and vacancy that seemed low, so I replaced all other expenditures with 10% of rents to be safe, as shown below:

Repairs:  $255/mo

Management:  $255/mo

CapEx: $255/mo

Vacancy:  $255/mo

Total expenses:  $1390/mo

Total cashflow:  $711.23/mo

I have talked to the seller and the only thing he worried about is getting the $85,000, not financing, and taxes.  He is willing to work with me on other terms to make the deal happen.  He is selling due to divorce.

I still need to talk to banks to find out how to structure the deal in order to get a mortgage that makes sense.  The down payment will be gifted to me from my father, with no expectation of return (other than that I better take good care of him when he becomes elderly).

A couple of areas of concern:  I have been talking to realtors and property managers to get an idea of the neighborhood.  Most have told me that the area is low-middle income and it is not a bad neighborhood.  So, I pretty much have to trust that, right?  Are there other ways of investigating from afar?  I plan to take a 1-day trip there (I am 3 hours from KC) to look at the property and the area, but that may not tell me everything I need to know either.

One of the properties (the multi-family) is listed with an agent now.  Is that going to cause any problems making this deal happen?  Anything we can do to alleviate those problems?

Another issue I see is that while the combined price is high enough for a mortgage, when you split that price between two places, neither becomes something most banks will loan on.  Will that be an issue?  Should I pay a lot for one property and much less for the other?  How can this deal be structured to make it work in that regard?

I think this is a great deal and would really like to see it go through.  I think this one will work as long as the banks will be willing to loan.  The pictures of the places make them look nice and well maintained, but I won't know until I have seen it in-person and had property inspection.

Thank you so much for taking a look at yet another deal.  Hopefully this will be the last one for a couple of years while I build funds to buy the next place.

@Mike D'Arrigo @Trevor Ewen @Robert G. @Dmitri L. @Aaron Montague @Roy N. @JT Spangler @Account Closed 

Update:  Seller will not do anything to finance the property at all, and I don't think I will find a partner.  As far as I am concerned, this deal is dead (unless seller changes his mind later on).  I have found another one that looks much more promising, but would be outside of my comfort.  However, I am working it anyway, and will have it posted here in the deal analysis in a bit.  My understanding of what to have ready when posting a deal analysis is getting better as I go along, and so I am getting closer to having the knowledge to find deals I can actually close on.

@Mike D'Arrigo 

If I raised rents in the place, that would appreciate it, right?  That would pay off the seller after about a year of holding.  However, since that is not my only strategy, my calculations on the loan would be as follows:

100% Seller Financing (I know that's a dream idea):

2059/mo @ 5%

Cashflow from property: $637.60 (I would be PM during that time).

If I apply all cashflow to the loan, then I come up with 80% equity in just over 3 years.  At that point, I can refi into a 20 year loan and pay the seller back.  Once I have done that, I am looking at $1049/mo in cashflow (or $600/mo if I use a PM) until I pay off the mortgage as the new monthly payment would be $1647.25.

Of course, I don't think that the seller would go for that and would want probably at least 10-20K into the deal, if he's going to do it at all.  That said, I am still debating whether or not it's worth the effort.  I am beginning to side with you, that it may not be a good deal for me.  I would need to think about that.

@Mike D'Arrigo @Trevor Ewen @Dmitri L. @Aaron Montague @Roy N. @JT Spangler @Account Closed 

I have talked to pretty much all the banks that do commercial lending.  They want me to bring 20% to the table that is not financed.  They said I can get it through a partnership, a gift, cash, or pulling out equity.  No other ways are acceptable.  So, I now have to think about where to go to get those dollars, or if this deal is dead in the water.  I may try to get the seller to finance, but he did not seem interested in it at all.  Maybe if I can in, raise rents, and then refi, I could get his money back to him in about a year or so.  If not, then I would have to wait until I get about 3 years in before I would be able to pay the balance back to him.  I would have to think long and hard about an offer like that, and how best to present it.  So, it will be interesting.  I welcome all advice.

I also wanted to send another big thank you for the advice you have already given.  It has been invaluable.

Thanks for the heads up on that.  I guess I will just pitch what I want and see what happens.  I am definitely not going in thinking that the bank will jump at this, but I won't know what I can accomplish until I try it.

I am going bank shopping tomorrow.  I am going to present the numbers with the seller financing and see what they tell me.  If bank after bank doesn't like it, I won't pursue it further (I am planning on shopping many banks tomorrow).  I am thinking that I can call around to find portfolio lenders first, as then I will have an established relationship by the time I need those kinds of loans.

@JT Spangler 

That is one thing I am thinking about.  The property already has a live-in maintenance guy and they provide services at a good discount, so there is that as well.  I used to work as a hotel maintenance person, so I am familiar with doing smaller repairs.  Some I cannot do even though I have the knowledge due to disability.  However, some I can still do and have done on my own house and my parent's rentals.

If it makes sense for me to do the repair, then I will.  If not, I have a maintenance guy on-site, which I don't really know how good he is until I start working with him.  I saw some repairs during the tour that I thought maybe he might have done.  If they were done by him, they seemed to be done well.  Again, this is mostly speculation at this point, and won't be confirmed until I have worked with the guy for a while.

@Dmitri L. 

It's 3 years.  That's how long before I could pay off the down payment and cashflow.  In the mean time, though, I have to survive all kinds of potential hazards that could destroy equity, cause major headaches, or even (gulp) bankrupt me.  I also have to worry about errors in my estimates, unseen maintenance problems, and other such issues.  Once I have some significant cash reserves, these things become less scary.  Here is what I am looking at saving, if I never spend a dime on maintenance (which won't happen):

400/mo in maintenance, 200/mo in CapEx, and $440/mo in PM fees (which I will be doing myself for at least the first 3 years. So, I could be socking away $1040/mo. That gives me $37, 440 over 3 years. That sounds like a lot, but one fire, roof replacement need due to water leak, etc could easily eat that away. And again, that's doing zero repairs during that time, which just won't happen. So, I have to balance how much of a risk this is, and how much I am willing to take for what I am getting.

@Aaron Montague 

I think that's how I'm going to look at things, at least from a valuation standpoint. Just figure out what is a good price to pay for cashflow. My problem is that I cannot get $100/door for no money down. My market just won't support it. I can't do the traditional way of acquiring properties as I don't have the resources. So, I am going to end up on the lower end starting out. I am still learning a lot and should learn even more as I talk to the banks. I will also be chatting with insurance agents if I have the time. It would be great to get that diamond in the rough, but I think there are not enough of those to build a business off of. If I was buying for less than 75% LTV, then I could cashflow most anything around here (but maybe still not at $100/door).

My dad's thinking on this:  Get the property and pay what's shown above for 3 years.  Then, refi and take enough out to pay the down payment.  Then the property cashflows.  In another 3 years I have enough equity to get another property (if I just blow the cashflow instead of saving it).  I can then build like this.  My plan would be to research other markets while owning/managing this place and branch out from there.  I wish I felt comfortable enough to move to another market right away, but I am not.

I have been continuing to look at what's out there (did some driving for dollars today), but I continue to see nothing that would come close to cashflowing. I know for sure that for SFH, I would have to find something priced WAY below market value to get good cashflow. I am not as sure about how to get a good solid value for MF units.

Here are some properties from my area just so you know what I am looking at.  I have been checking things out for about 6 months and this is the best stuff I have seen (some of it has sold already).  My dad also said this is one of the best deals he has seen in about seven years of looking.  Take that for what it's worth.

SFH, 3 bd 2 ba: $189,000

Current rent at $1450/mo

50% expenses:  $675/mo   100% Financing:  $1130/mo

Duplex, 3bd 2 ba each:  $237,000

Total rent at $2250/mo

50% expenses:  $1125/mo    100% Financing:  $1418/mo

Duplex, needs about $35,000 of work (very rough estimate), in dying town:  $24,500

Total rent would most likely be $900/mo

50% expenses:  $400/mo  100% financing:  $545/mo (mortgage, down payment, and rehab loan)

http://kspropertyads.rapmls.com/scripts/mgrqispi.d...

The list goes on like that. The 100% financing is killing cashflows. I need to build up some money quick to buy at a better LTV for more cashflow. The one I am thinking about buying looks like this:

10 unit, 1 bd 1 ba each:  $302,000

Total rent at $4400/mo

50% expenses:  $2200/mo  100% financing:  $1970/mo

Can you see how that might look better in this situation?  Remember, the ones above are some of the best I found in the last 6 months (I kept analysis spreadsheets on them).  So, I kind of feel like this is the best I might get.  If I don't jump now, I probably never will.  I know I have only been on BP for a short time, but I have been looking for a while.  There is definitely not much out there.

Perhaps I should just move to Dallas.  At least I have family there that may be able to help me figure out which properties are good and which are not.

@JT Spangler 

The reason I am looking at a multi-family IS minimizing risk.  If I have to do one of those things, there is more cash coming in.  Also, there is still enough money to pay the mortgage if one of the units is empty.  That isn't the case with single family and all the things you mentioned applies to those as well (although it would only take one of them to happen to be really problematic in that situation).  Part of the reason it's not cashflowing is that I'm getting in for no money.  After mortgage 2 is paid off, it does cashflow, though not very much.

My whole market is tight, and I will probably be cashflow negative wherever I go in that market.  So to get into real estate, I have to either go outside my market or accept tight margins.

Also, I wouldn't be putting money into the place every month to cover expenses, I just wouldn't be putting as much away for those bad luck months (my problem is that CapEx is low, and my dad didn't have anything in there for property management - which I would be doing myself). It could break me if it happens early, but that is where my dad is backing me at. He has reserves that would allow him to put money down if I haven't built the cash reserves to deal with it. He is saying that I will build equity much faster with this property than without, and therefore I should at least look at it. It's not appreciation he's looking at, it's others paying for my equity that interests him. It also interests me, but the cashflow interests me more. I am willing to give up cashflow short term to get the property for no money down.

There are 10 units in the place, 2 are rented for $500, 6 are $425, and 2 are at $385.  The 2 that are rented for $500 could be rented at $550 and still be below market ($600).  The 6 that are at $425 could be rented at $525 easy ($575), and 1 of the 2 $385 apartments could be $525 as well.  The other one would be marketable at $400 (that would be about right, but it is an economy apartment, which is less desirable in my market.  Rents could be $5175/mo and still be easily rentable.  That being said, I need to buy based on what they currently are, not what I expect them to be.

The price of the building is based on both. You need to have comps to keep track of what the market is doing, and the gross rents to be sure of profitability. There are 2 ways to do this: by the CAP rate and by GRM. I have found the CAP rate method to be able to be manipulated based on who's interests are at hand (mostly due to what the definition of NOI is and the secrecy of what normal CAP rates are in your market). I have found the GRM method to be somewhat more accurate, but it still involves finding comps to see what the average GRM is and then trying to figure out if the property is a good value based on that. You still have to know what your comps are either way. Someone with more experience can correct me if I am wrong, but this is the way I currently understand it.

The bank will tell me if the price is way off, I am sure.  I am more concerned about getting cashflow.  I might be able to refi if I raise rents, but I would be looking to tackle that down the line (a year or so).  That may aid in cashflowing quicker, but again, I need to buy based on what is there now.

I am interested in this place because it is so well maintained. All sorts of things are updated that would allow me to spend less on maintenance and be less concerned about needing CapEx money right away. The margins are tight, but the maintenance that has been done helps ease those a bit. I won't know for sure until I get a good inspector in there, but everything I saw told me that it is a solid property.

It could be that I am wrong.  And, at that point, I would have to put a little money in each month until I could get the place sold.  I know what the rental rates are, so I could raise those to help bring the value up to interest another investor to buy and pay everything off with the proceeds.  Then I would be able to get out without financial ruin, and have learned from the experience so I can do it better next time.  That is what I see as worst case scenario.

All of that said, I do need some more time to think about it.  Even though it sounds like I am fully ready to jump at this, I am mostly playing devil's advocate as I am still on the fence about it.  I have learned a lot from you guys, thank you.  I am just trying to see what other con arguments I can get so that I look at it from all perspectives.