All Forum Posts by: Dan H.

Quote from @Cameron Miller:

Quote from @Dan H.:

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Thank you Dan. This property is in lansing, MI. I property tax upon me taking over is hard to estimate but I think it will be around 5-6k/yr. This would be a house hack so sometimes the numbers won't work as well. And yeah the cashflow of 200$ likely would be eaten up by any Capex but considering this is an off market deal and a place to live and start investing . I wonder if it would still make senses

 Lansing has far worse historical appreciation than grand Rapids.  https://www.neighborhoodscout.com/mi/lansing/real-estate

If both units at $1200 (so after the house hack), the unit has $250/month before all expenses not included in the PITI. This implies the property is many hundreds a month negative. My rough estimate is $800/month. To get here you have to raise the rent $200 on the existing tenant. The $200/month increase would not by itself be of concern but you want to raise an existing tenant to full market rent when market rent are units that have been flipped. There is a good chance the tenant chooses to rent a unit that has been flipped and you have the cost of the unit flip and the loss of income associated with the vacancy.

It is a tough time to enter RE. Two recent studies show that in virtually every large city it is initially cheaper to rent than to owner occupy (OO). Note that investors have costs that the OO does not have including PM and vacancy. In addition, in some markets OO pay lower property tax than RE investor.

What you are proposing to purchase is a negative cash flow property, with poor rent growth and poor appreciation.  I can say with confidence that in the short term you are financially better off to continue renting.

Do conservative, thorough, and accurate underwriting.  Use the long term appreciation of 2.5% or less (remember conservative).  I am confident your underwriting will show that in the near term you are better off financially renting.

this will change if interest rates drop significantly or if property prices drop without an associated drop in rents  To be blunt, I think both are unlikely.  You will need to look for a killer deal for the numbers to work.  This likely means off market listings.

Good luck

I appear to be in the minority, but I claim you do not have enough allocated for maintenance/cap ex. You have less than $1200/month for 5 units or $240/month per unit. This is too low. Also just because items are new, does not mean you do not estimate their monthly cost.

My next comment is that this seems like a big take down for a newbie. I am used to most RE investors starting with something a bit less complex like a traditional duplex and work up to a mixed use 5 unit.

I include PM fees even when self managing.  Is your time free?  If not, then include compensation.

It is my belief at that rent point per unit, the property is cash flow negative when properly allocating for sustained expenses.  Furthermore, the rent growth appears to be poor.

In addition at that price point, the historical appreciation seems poor and below inflation

Lets say your numbers are accurate (which I believe they are far too aggressive), do you really want to own.manage 5 units for $250.month or $50/unit. 

This deal is missing margin for any issues, produces poor (likely negative) cash flow, and has poor appreciation outlook.  For me to consider such a purchase, it would need to have a killer value add.

I had a purchase once that the insurance over 2 years went from reasonable to $6k (it got his by hurricanes in consecutive years - Gulf Shores).  my underwriting depicted good cash flow, but after the insurance increases my cash flow was significantly worse than I had forecast.  It was not the end of the world, because I did not invest on thin margins.  I still had positive cash flow but far worse than I had forecast,

I recommend you keep looking.

Good luck

Quote from @Cameron Miller:

Duplex opportunity

I am from michigan and take home about 4k per month after taxes, 401k,insurance etc as a RN which ive been for 2 years. I have been wanting to buy a house for the past 5 years and never pulled the trigger. I currently rent and am very frugal , no debt, drive a used car, have a roth ira etc

I have an opportunity to get a 1980 4 bed 4 bath ranch duplex ,full basement , one car garage per side,, new roof, original mechanicals duplex from a family member off market in a solid B to B+ area/country setting 1.5 miles outside of east side of city of 150k people. This side of town is mainly B to A- neighborhood. The duplex is on a road of duplex and single family all in the 220-320k range.

Purchase price is about 280k

I would put 20% down so loan for 224k

Taxes are about 5k / year

Insurance is 2800 / yr escrow or 2500 in full

Mortgage rate 7% credit score 760+

Mortgage is $ 2150 ish. +/- 50$

Current rents are 1000 per side which they say is low because it's paid off for my family member

They say market rent is easily 1200 per side

I would likely inherit a tenant on one side at 1000/mo , older retired single guy

So if I house hacking and pay 1200 and raise their side to 1200 it's would cash flow about 150$ not including maintenance so. Basically for the first 2-4 years barely any profit , to squeeze more cashflow would have to pay down mortgage ,refinance 5 years later. be super frugal , raise rent slowly and hopefully not loose this tenant by raising their rent. Part of me wants to do this so bad but the numbers in this market are so tight and it only makes the 1% rule after my down payment. Basically any cashflow is for maintenance for about 5 years .

Any thoughts from experienced landlords? If I could put down more money obviously that would decrease mortgage but I need some left over for closing etc

 I cannot believe that some people with thousands up up votes think this could be a good opportunity.

Here are some thoughts/comments:

- At current rate and those rent points, 1% is large cash flow negative at high LTV.

- market rent is ~$2400/month but PITI is $2150. This leaves $250 for maintenance/cap ex, vacancy, PM (include it even if self managing because your time it worth something), book keeping, asset protection, misc. The $250 would not even cover the sustaining maintenance/cap ex on a single unit.

- The rent growth as reflect by the rent has not been great.

- The appreciation in that market is pretty good and exceeds inflation.  This seems likely to be the primary source of return.  https://www.neighborhoodscout.com/mi/grand-rapids/real-estat...

- raising rent to market rent has risk.  The unit is likely not in the same condition as units that have been unit flipped.  The longer the tenant has been in the unit, the further the unit is from being rent ready.  One month of vacany at $1K can cover 5 months of the $200.month rent difference.  Add in the cost of a unit flip and it could easily take over a year to recover the costs associated with the unit flip and the vacancy.

- I do not know how you derived your property tax estimate, but it is common for it to increase upon a property transfer.  Make sure your property tax estimate is accurate/

Good luck

Quote from @Chris Barrett:

Hey Dan, what do you underwrite for cap ex/repairs? I underwrite 10% cap ex, 10% property management, then subtract insurance, P&I, then taxes. Personally I management my own properties, so they sit at around a 25% expenses + P&I. 

I don't know much about the OPs situation or locale, but I would guess it would make a couple hundred bucks a month? It's not a great buy, I wouldn't do it unless it was in an area where the renovations make it a homerun. 

Using a percentage of rent is not a good way to allocate maintenance/cap ex.  I recognize many calculators (including the BP calculator) represents maintenance/cap ex as a percentage.  I believe this is a disservice.  I will show by some examples why using a percentage is not a correct approach:

- 2/1, 650' bathroom in mission beach rents for $5k/month.  4/2 in Escondido rents for $3400/month, 1400'.  These are 2 units in my portfolio and I will say the Mission Beach is 5 homes from the boardwalk and that 2/1 on the boardwalk rents at over $6.5k/month.  Which property will have the higher maintenance/cap ex?  The cheaper rent property due to size and double the bathroom count is expected to have the higher maintenance/cap ex.
- 3/2 in class A area rents for $6k month, 3/2 in same city class D rents for $2.5K.  Which do you think will have higher maintenance/cap ex?  Clearly in general the class D will have the higher maintenance/cap ex.

What I recommend is every RE investor populate a spreadsheet with current replacement costs and expected average life span in months for every item on the property to determine the expected monthly maintenance/cap ex.  I used to do this for each acquisition, but have only done one in recent years (because it was a condo (I have no condos in our portfolio) in a new market (Emerald Coast)).  Because I have done many in my market, I have a decent estimate for my market.  My last underwriting was a 4/3/1, 3200' and I used $600/month for maintenance/cap ex.  What I know is every time I do one of these in a new area I am shocked at the sustaining maintenance/cap ex.

My market has a more expensive hot water heaters (low NOX) than most markets (versus most parts are the same cost in all markets).  My contractor (not handyman) water heater replacement is $1600 (which is cheaper than most will get in my market).  If I use expected life of 10 years (reality is I get a little longer than this on average but I also have some costs like pilot light starting or a part replacement) is $13.34/month maintenance/cap ex on a water heater.  

The total costs of all items adds up.  Many years ago, my smaller attached units had $300/month allocated, but this is too low now for my market.  Around 2 years ago I did a condo with no exterior costs (the exterior costs were in the HOA fee) and calculated around $300 for a moderate size condo (3 bedroom).  I took input from the RE agent we were using in that market on expected costs (because some costs are market specific such as our expensive water heaters).

I think you do this and you will find 10% is far too low for a sustaining maintenance/cap ex in most markets (exception for high rent markets).  You can attempt to sell with deferred cap ex, but you may need to sell at a price that reflects the deferred cap ex.

Good luck

@Jennifer Roussel

Your correct.  The comps should be closed sales if there are closed sales that are appropriate comps.

In addition, the comps should be as similar as possible.  Ideally this means same Bedroom and bathroom count and within a couple hundred feet.

The comps your real estate agent provided seem to be poor and likely warrant getting a different Real Estate agent.

Good luck

Quote from @Ryan Brown:

Quote from @Dan H.:

does the section 8 case worker know there is only one person living in the 2 BR unit?  I suspect he is getting more rent assistance than is appropriate for a single person.  The case worker may handle getting rid of this tenant for you.

If you are going to be a property manager, you need to know the applicable laws.  You will not always be able to request assistance on BP as some items need to be dealt with immediately.  Either hire a professional PM or put in the time/effort to be a competent PM.  This means learn the relevant laws.   A professional PM should charge to evict a tenant that they did not place, but it can potentially save you mistakes and they may have access to an experienced eviction attorney if it is necessary.  If you handle this without a professional PM, get referrals for a good eviction attorney and let them use the expertise.

Good luck

Hey Dan, thanks!

I assume section 8 knows that because when I uploaded the new lease it only had her name on it…actually, section 8 might be unaware that it’s only one name on the lease for a 2bedroom apartment. What exactly does BP stand for? Right now, my primary focus is finding an attorney that can walk me through this process

Sorry BP = Bigger Pockets (this site).  Their annual conference is BPCon for short.

I do not think section 8 typically will supplement a 2 BR for a single person.  If you are getting government subsidized, you should not be subsidized a spare bedroom.

Good luck

Quote from @Chris Barrett:

Without knowing more, I'd say not to do an ADU.

However, if both the price and the rents are distressed due to the condition of the property and you could do renovations and get both rents and value up that may be worth it. With current price and rents you'd definitely make money, but is it a money pit with terrible tenants currently? 

> With current price and rents you'd definitely make mone

How do you figure this? At that rent point, the 50% rule is aggressive meaning sustaining expenses will be more than 50% or the rent.  

Using 50% rule which is too aggressive at rents below $1k/unit at 80% LTV:

$2600 * 0.5 - 1296 (P&i at 6.625%, 30 year)  = $4/month total (all 3 units)

Why do I state 50% rule will be too aggressive at that low rent?  It is because maintenance/cap ex is more a function of the property features than the rent.  Sustaining maintenance/cap ex on a 3 unit property will exceed $900/month (average $300/unit).  a detailed underwriting will depict far worse than $4/month total profit due to the maintenance/cap ex. 

This property is cash flow negative at purchase.  In addition rent growth does not show a path to change that because the rent growth historically has not exceeded appreciation by enough to provide a viable path.  The property requires a good/great value add to be a profitable investment (ideally one that can raise rents 50% or more) or interest rates to fall significantly.

best wishes

Minut over noise aware.  If you message me, I can email you a comparison that I did but the comparison did not take me long as Minut has more features at a better price.  Minut will book a virtual meeting with one of their represntatives if you want and provided us a coupon for doing the virtual meeting.

Schlage or Kaba smart locks.  Avoid Kwikset as they eat batteries if hooked to wifi and fail too often.  Kwikset batteries are fine if not hooked to WIFI, but then you get no notice that the batteries are low.

Price labs is very popular, but I have no experience with the competition.

Good luck

Quote from @Jay Hinrichs:

Quote from @James Wise:

Quote from @Steve K.:

@Jay Hinrichs Ohio, Columbus, Cleveland @Jim K. @James Wise 

 I don't invest in things I don't understand and I don't invest in things that I can't control. For those reasons, I've never got into Crypto so I got no friggin clue.

LOL me too.. my son in law is always telling me  to buy it though.  And I have some clients in Baltimore that were telling me to buy some when it got down to 15k a few years ago.. But I also had a client the year before get hosed with it.. going form 60k she paid and selling at 20k.  I remember when it was 1 dollar and I do kick myself for not taking 1k and buying a thousand of them :) Even though I did not understand it then and done really now..  will stick to renting my money out to others for a fee that seems to have worked for me by and large for decades along with rehabbing or building new construction.. But like crypto can crash real estate was/is not immune from falling either.. we got hammered in 09 to 2011. 

My then 16 or 17 year old son in 2019 or 2020 purchased a child amount on BitCoin.  It is up over 20x, but he only purchased I believe it was $200 or $250 (this purchased a fraction of one Bitcoin - bitcoin was already worth quite a bit).  It was a pretty large investment for him at that time.  Certainly not going to make him wealthy, but it did teach the value of investing better than I ever could.

@Marc Hardy

I know nothing about your market, but here are some general thoughts:

- rent of $2600 is very low for 3 units and a total of 7 BR.  Not sure of the breakdown but 3/1 for $1K and each 2/1 at $800 makes sense.  this price point indicates that the rents have not kept up with CPI.

- Valuation of $253K indicates that valuation has not kept up with inflation.

- At that rent point, this property is cash negative when properly allocating for sustained expenses when financed at a high LTV.

- 3 units have much higher maintenance/cap ex than one unit (not as high as 3 times the maintenance/cap ex but maybe 2.5 times.

- ADUs are not valued the same as the square footage of the primary units. Search BP for ADU appraisals. In my high cost RE market ADUs are typically valued no higher than $100K.

- With unit costs as low as $85k on the subject property, what is the value adding an ADU. It will likely cost more than $85K (or at least close) and you will lose the garage and are not acquiring any land for that cost.

Again I do not know that market but with negative cash flow, rent growth below inflation, and appreciation below inflation I suspect you need a killer value add for this to be worth the effort. Adding an ADU is not that killer value add. Is there another value add?

Good luck