All Forum Posts by: Gary Parilis

Records of the previous owner is a good idea if you can get it. Otherwise, it's just a matter of experience. If you have a general idea what percentage is typical with other properties in a particular market, that's a reasonable place to start, but then you still have to adjust for the condition of the property (and other attributes such as how many bathrooms). A general rule of thumb I was once given by an agent (in a market where buildings tend to be 100 years old) is $1300 for SFH, $2300 for duplex, $3050 for triplex, $3800 for 4-plex, and $750 for each add'l unit -- annually. Personally, I think these are high, but I start by thinking about these numbers and then adjust downward according to the condition and thinking about of what things might go wrong, or what things have already been replaced or repaired. There's no simple answer, but just using a blanket percentage will result in the wrong number more often than not.

First, congratulations on your success by being creative where nobody else could see a good deal at approximately asking price. What a great accomplishment!

I often see people using a percentage of the gross rents as an estimate for repairs & maintenance. That doesn't make sense to me. Better to just estimate a dollar figure. If you have two similar properties and one has higher rents than the other, is there a difference in repair costs? In fact, the more you've updated a property, the more you collect and the less is left to repair. If you buy a property in barely rentable condition and charge $600 rent, then you update it significantly and then charge $800 rent, should your estimate for repair costs increase or decrease? Or for that matter, should repairs be the same percentage of rent in Seattle as in Michigan? I don't have a good number to tell you to estimate (it depends on the condition, how may things can go wrongs etc.), but it shouldn't be a percentage of the rent. 

Personal preference. Personally, not having to deal with the additional bills is worth giving up some liquidity. I have a more-than-FT job and managing all these extra bills on multiple properties? No thanks.

You have to decide what your priority is.

Why do you need an LLC in the first place? Why not just do it all in your personal names, as owners and borrowers?

@Matthew Amabile Have you done the calculations for your monthly cash flow with the assumptions you've made? Let's say you spend $25k on rehab. Now your acquisition cost is $110k for a property worth $150k-$160k. You should be able to get a mortgage for around $110k or more. Good! If you're getting all or nearly all of your cash out, the main concern is that your subsequent cash flow is positive. Subtract from the rent all your expenses:

Mortgage payment, taxes + insurance (expensive in NJ, even in P-burg), repairs/maint/capex, a percentage for vacancy. If that number is positive (by enough that you won't get hosed if you are a little off), then this looks like a great deal, assuming all your numbers are correct. If your rent is $1500 (eventually) on a property where you'll borrow based on $150k, you're right at the 1% rule, so your cash flow should probably be positive, but not necessarily, esp. in NJ.

Two things:

First, if the ARV is $150k, how are you borrowing $130k? Can you get a $87k loan? Of course, even a 75% loan would give you back almost your $115k. So it look great either way.

More important... Remember it's not just about cash flow on a spreadsheet. Consider the area. Often the places that look awesome on paper are places you don't want to own... Where you'll have high turnover, with headaches and legal expenses for evictions, and related repairs. Just make sure to do your homework on the neighborhood.

8.4% CoC return is decent. Whether that's enough for you depends on your strategy, what's available in the market, etc. A few quick things:

1. I'm not very familiar with this particular tool... I can't tell what you're assuming for closing costs and initial repairs/rehab. Does that show up somewhere?

2. I see you're using 5% for property mgmt. 8-10% is more typical. Do you actually have a manager that will charge you 5%? I see you're an agent, so maybe you have access to a discount. :-)

3. Are you accounting for leasing fee? Initially, and whenever you have to replace a tenant, the PM will typically charge either one month or a half a month. I usually include the vacancy % times one month (or half a month) rent as a monthly expense.

4. 4.8% interest rate seems high, but it depends on the type of loan. It's a pretty specific number, so I assume you have a quote.

@Megan Brooks, yup... I included the link to that article somewhere above. :-)

@Matthew M. Super helpful. Thank you.

@Matthew M. One more... How exactly do you do this? Do you need to place the funds in escrow or something? How do you determine the amount? Do you just estimate it? What happens if you estimate high? Thanks!