All Forum Posts by: Harry M.

@Matt Inman

Congratulations, Matt! This is particularly exciting to me, because it sounds like I'm right where you're at - I just completed my first rehab (for a rental), and my next is going to be my first flip. We're also aiming for a similar price/rehab cost/ARV range for that, if we can find it.

Could you share some of the details about what you plan to do for the rehab? Also the size of the property.

Good luck!

-Harry

I agree with Michaela. If you arrived at what you feel is an accurate ARV and it didn't work, then congratulations are in order for being level headed enough to get out. If you've been busting your tail searching for a property and finally have one under contract, it's really hard to let it go.

Hey Erik,

I think you have to extrapolate a bit in order to consider what you'd do with a similar deal in Dallas. Quads that rent for 450/unit are in really bad parts of town. But we're in a more expensive market, so I think a more apples to apples comparison may be a property that rents for 600/unit and costs about 80K. Maybe 100-120, given the amount of competition we are seeing. The typical cost around here for a quad that rents for 600/unit is 160-200K in a not-great-but-somewhat-unlikely-you'll-get-shot neighborhood. So if I saw a property like that for such a cheap price, I would be really cautious because it would probably need a great deal of work and/or be in a really bad neighborhood.

Personally, I'd rather get 12 or 14% return on a nice easy to manage SFH, than 23% (but is it going to be 23% when all is said and done...) on a difficult property. But everyone's situation is different. My challenge is finding some way to scale as I add properties while working a demanding day job. So I've got to stick to properties that are easier to manage and don't burn too much time, even if that means a bit less return. Also, everyone's attitude to risk is different.

-Harry

Hey Craig,

On the surface it looks like a good deal, but the X factor is the repairs - though you have a buffer due to it already being fully leased. Also, to second what Christopher said, get a copy of the leases. Also, I would ask for rent rolls to try get an idea of the tenant's payment history. Buying a property with tenants in place is a double edged sword. When it works out, it's awesome - you're up and running as soon as you close. When you inherit problem tenants, not so awesome. I bought my first two properties with tenants in place. Three sets of tenants in all, since my first was a duplex. My record of this working out is 1 for 3. The first tenant was great and she is still renting from me. The second were in the process of buying their own home when I got the property, so I lost them. The third were having a lot of problems, and I reluctantly had to evict them eventually.

Regarding monthly expenses - I'd estimate that 65-70% of your gross rent will go to expenses (including taxes and insurance, but not principal and interest). The 50% rule doesn't work for properties like this, because you are paying utilities, and because it is a quad (four of everything, and typical tenants are a bit rougher). That sounds like a lot, so here's how I got there:

Gross rent (yearly): 21,600

Vacancy: 2,160 (turnover is faster for quads, so you probably want to estimate 10%)

Insurance: 706

Taxes: 1635

Utilities: 3384

Repairs/Maintenance: 1620 (7.5%)

I usually guestimate 5%, which is ok for SFHs, or a duplex in good condition. But for a quad I think it's prudent to go higher.

CAPEX: 1620 (7.5%)

Reserves you save for things you have to buy rather than fixes - new roof eventually, AC, hot water heater, range, fridge (if you provide) etc. Again, this is pricier for a quad due to four of everything.

Management: 2160 (10%)

Leasing: 1237

Management companies typically charge 1/2 month rent for leasing, on top of the usual 10% for ongoing management. For a quad, definitely figure two vacancies per year, or three to be more conservative. Around here (I'm in DFW, so it may vary for you in OH), the typical length of tenancy for a SFH is about 2-2.5 years. Duplexes are more like 2. So I would figure 2 years as a best case scenario for a quad. If you say 18 months average, that equates to 2.75 vacancies per year.

Total Expenses: 14162 (65.6%)

Net Operating Income: 7438

Debt service (P&I): 3066 (I assumed 30 years at 5.5%, with 25% down)

Cash flow: 4371 (364/month).

Figuring 15000 for your down payment, and closing costs of around 4000, that's about a 23% return on your 19000 invested. But that's without accounting for initial repairs, which is the big unknown.

If you're lucky, you inherit some long term tenants that are really "dug in" (technical term for having been there 7-10 years and never planning to move). You may not quite get market rent, but a lot of that vacancy cost goes away. It's definitely possible to do better than the numbers above - you just don't want to count on it.

To condense everything above into my gut reaction - risky, definitely potential for headaches, but potentially profitable.

Hope this helps. Good luck!

-Harry

Hi Derrick, welcome to bigger pockets. Congratulations on finding your first possible deal.

Estimating rehab costs is probably the trickiest part. A lot of GCs will do a pre-purchase estimate for $100 or less. If you know any investors in the area, then definitely ask them for recommendations. If not, start asking friends and colleagues. Sooner or later, you'll end up talking to someone who has had significant work done on their house, or knows someone who has, and has a GC they can recommend.

Also, you have to figure out the typical level of finish for houses in the price range that the property will sell for, in order to get an idea of what a potential buyer would be looking to do. Browsing a good sampling of the current listings in the area/price range should help a lot with this.

I'd also recommend at least attempting to do your own estimate in parallel with this. It may be a ways off, but you'll learn a lot more when the GC does his estimate, and see the areas that you were off and things that you didn't account for.

I second what Matt said about J Scott's books on rehabbing and estimating repair costs. I own both and they are a great investment. I strongly recommend them.

Good luck!

-Harry

Nice! Congrats, James.

@Suzette Lowery

We just completed our first rehab, so I'm a rookie at this, but I'm happy to compare notes if it's helpful.

For flooring, we went to a builders surplus warehouse type store. Sometimes you can find really good deals. If you've been calling around for quotes for the install, ask the contractors you speak with if they could give you a recommendation. They will know a few places where you can get a good deal.

Regarding cost, the part I under-estimated for flooring was all the other stuff besides the floor - underlay, quarter round, transition pieces, and so on. None of these things are that expensive by themselves, but combined they can add a good 20-30% to your materials cost for flooring.

Good luck with your rehab!

-Harry

Seemed like a fairly well balanced article. When I clicked on it, I wasn't sure if I was going to get a bunch of blah, blah, about those mean old millionaire investors, but it seemed ok. I was pleased to see that investors role in helping to fix the aftermath of the foreclosure mess was referenced a couple of times in mentioning that a lot of those houses would otherwise be vacant.

The homeowners interviewed in the article seemed a bit "in-group-out-group-ish" about the renters. If some of the people nearby are strangers, well, the first thing you ask yourself is "have I done everything I can to make them not strangers?" More likely than not, you find out that people are people, and I think that's a better way of going about things than shunning them. I also wish they had interviewed some of the renters in the area too.

I was absolutely fascinated as a kid by the future possibilities of science (still am), so stuff like this is really interesting to me.

Realistically, though, I see it being a very slow adoption process once they are commercially available. Considering how many people are still "funny" (myself included) about cruise control, I imagine a lot of people being deeply uncomfortable with letting their car drive itself, and I see that being the case for some time. People will probably start using it on open highways at first, and gradually start using it more, but it's going to take time.

Jon brought up a very good point about what happens when there are the first accidents due to the new technology. It's a very big emotional jump to make from "that person wouldn't be dead if they hadn't had their car driving itself" to "statistically it's less likely to get in an accident [if this is even the case, at least initially]". One or two well publicized accidents, and it could really turn people off for years.

So I think it takes a good generation before leaving your car in auto-pilot most of the time becomes the norm - ie. enough time for the people who learned to drive after the technology was introduced to become the majority of "drivers".

I don't really see this as affecting whether one day people don't own cars. We have taxis now, and as an end-user there isn't really a big difference in whether there is a driver (other than hearing lots of sometimes really interesting stories).

For real estate, I see it contributing (along with video conferencing advances and a gradual acceptance of the idea of working from home) to a push out towards the suburbs. If people can use the time more productively, a longer commute will become less of a big deal to a lot of people.

@Chris Haas

It just means that the funds are already in place when the offer is made.

The main reason this is considered attractive is the lack of a financing contingency in the offer. Some properties need enough work that a bank (for a conventional mortgage) wouldn't approve the loan due to condition. There are other options for this such as a hard money loan, renovation loan, etc. A cash offer is often considered less risky to the seller. For example, the seller accepts an offer, takes it off the market, then 4 weeks into escrow, the buyers financing falls through. The seller has to relist the property and they have lost a month.

Another reason a cash offer can provide a competitive advantage is the ability to close quickly.

As a buyer, you're also looking at considerably less in closing costs, so that might be a secondary reason why someone would offer cash.

Hope this helps!

-Harry