All Forum Posts by: Hugo Castellanos

I am moving to Milwaukee soon and naturally started focusing on that market for my next few investments. I previously owned 3 properties in PA that I had gotten in the last couple of years. My strategy is primarily to buy and hold, but I wanted something else, something that would give me an edge to rent, but also not a lot of people were fighting over (meaning investors). So I started looking for the best school district I could afford until I found the three I liked best and then narrowed down to one.

Boy was I wrong! I not only started competing with other investors, but also with a large group of future home-owners trying to score a house in a great school district for their children, and precisely because they are not investors, they only have one worry, and that's that one specific house they put their eyes on, and they won't care to overpay or buy as is. In the end 10,000 dollars more in an offer can represent only  a thousand bucks more for them at the moment... or even only several hundred bucks! Their leverage is so much bigger than yours at 20-25% down for an investor... and this future home-owners just don't care, they just gotta have the school district!

All of this makes it for a very competitive and aggressive market, in which you have to know the market forwards and backwards in your sleep, because in such a market, you have to jump the gun on the property you like the day it comes out. This translates into making offers sometimes over ask because the other buyers will eat you alive at ask, or making offers without contingencies or choosing when not to give right to cure or having the advantage of a large sum for earnest money or a blitz closing (Thanks @Jason Dominski!) or any combination of the above will score you a deal or not!

I just bought 3 more houses in the last month and a half... and I was always sure I knew what I was doing... until I didn't anymore. I lost a couple of houses offering over ask, because somebody else offered a lot more over ask, I lost a house because I wrote an offer with a closing date too far out, I lost another one because I thought I had a couple of days to make the offer and so on. I think this is the most important part of what I want to transmit: just as important (or even more) as what houses you buy or the ones you lose, are the ones you will get stuck with and don't want to buy anymore! The ones where you were forced into a corner or will have the upper hand in negotiation, just depending on the way you wrote your offer and navigate through the appropriate steps of the process.

That's where I think a good broker's knowledge and experience will be the most helpful to you, when you have to navigate almost blindly through this maze at 10x your normal speed because of how competitive it is, when you feel you are stuck with 6k in earnest money in a house you didn't know some things about and your broker finds out for you that they have failed to disclose significant defects and he gets you out of it or when he helps you get a discount and a great deal or brings in his roofer in an hour and suggests you stay away! (Thanks @Michael Henry!)

In summary, know your market very, very well, and get someone reliable to help you navigate through each offer and situation individually. You just don't want someone to write an offer for you, you want someone to write the best possible offer for that specific deal!

@Alex Deacon@John Leavelle thanks so much for your replies!! I appreciate your comments. You guys are right, I have to keep analyzing and working hard to find good deals. After all, like they say, if this were easy, everybody would do it! And John, yes, I am staying away from that property, I also got the disclosures and there have been some structural issues and I am not ready for that. This one might be a money pit! Thanks again!! 

Thanks for reading, and I would appreciate your opinion on the following:

I have been reading and trying to make the best out of my understanding of multi-family units, but every time I come accross something I like and I analyze following the steps I have learned here, the analysis seems to completely different to what others seem to be finding and making deals on... Is this the real world where there are only a few deals available for some few lucky ones with connections or am I missing something?

Please look at this example:

Beautiful Mansion in PA, bedroom community for NJ and NY

ASKING 750000

Rents: TOTAL 88,800/yr

1,200, 600, 1,100, 900 for apartments

a vacant apartment for 1,600 and a vacant commercial space on first floor for 2000, both of which were occupied by the previous owner for years, so I don't really know where they got these last two numbers. because of this, I estimated to be more like 1,200 and 1,500, which would TOTAL 78000/yr more realistically I thought.

Expenses: TOTAL REPORTED BY OWNER: 30218

tax 16,450

insurance 4,818

water/sewer 4,470

gas 273

lawn/snow 3,897

trash 1,020

I ADDED 26,640

for 10% VACANCY, 10% MANAGEMENT, 10% CAPEX

TOTAL OPERATIVE EXPENSES: 56,858

NOI: 21,142 (31,942 if I use his 88,800 NET INCOME)

CAP RATE: 2.82%

MORTGAGE SERVICE: 51,588 with 20% down loan 600,000 at 6% for 20 years

Meaning I would have to pay out of pocket 20-30K per year just to cover the loan.

For the Mortgage service to match the NOI and be cash flow neutral the price would have to be 312,500 (or 468,750 using his proforma income).

I can provide more examples like this, but I think the point is made... I find this asking price to be so out of proportion with the calculations I have done, that it is not even funny. That's why I am questioning if this is the real world and there are just 1% of properties out there that are good to even start thinking to make deals on? Are these properties offered by brokers to a select few with tons of connections and years of experience? But then, who buys these other properties at these prices? Someone must buy them since all I find are these outrageous prices... or will they remain unsold for months and months until the sellers realize they have to drop the price down significantly? Or am I making mistakes in my calculations?

Thanks for your opinions!

BEWARE! In PA if you transfer a property from your name to the LLC, you will still have to pay like 2% of the property's value for the transfer!

I had no idea about this and created an LLC, but have read about this PA exception in several places including posts from people here that know a lot more than I do. I just caution you to do your research before you do. In some situations it might be worth to carry the 2% cost.

The other thing, I am not sure how recommendable it is to create an LLC in another state... as far as I know, you will still have to register in PA, so again, check with others that know more than I do, as I am fairly new at this, but these are things I have been looking up myself!

Good luck!

Hi Brent!

I am in the same boat... I have read a ton of books and honestly besides some concepts that I have learned I am missing the "HOW TO REALLY DO THIS" factor. I find a lot of books tell you "do this do that be creative don't give up look for leads everywhere" but I have found going from understanding a concept to actually being able to put it in practice and find those juicy deals is just not happening for me. 

As a background, I own three SFR's and am looking forward to grow or even switch to small/mid multifamily. I have some money in the bank to keep investing but just can't seem to breakthrough. I do work a lot and honestly don't have a network of people that move in the real estate world, so I feel I a, doing this solo.

As for now, I guess I will try to keep buying SFR's until I see the light.

In any case, I feel Brandon's book is pretty cool and gives the most info on how to really do it. I feel it's honest and helpful. A lot less of the "just wish for it and talk to lots of people and it will happen" I have read in many books.

Please do post if you find a good resource!

Thank @Brent Coombs!

Excuse my ignorance... what is BRRRR? I know I read it somewhere... buy, rehab... rent and resell? or something like that

Is this what you do?

Thanks again!

@Joel Florek

Thanks!! I thought I had read the whole thing... obviously not!

How can I PM you? Do I have to add you first? I would like to ask you a couple of questions if you don't mind!

Thanks again Joel, great story!

H

@Brent Coombs , thanks for your reply!

I think I didn't transmit my idea correctly. I am not boo-hooing about making more money and having to pay more tax. It would be like saying: "oh I don't want to make 200k a year in my job, I only want to make 100k so I pay less in taxes!"... that was truly not what I was saying... 

What I am saying is, the more mature your mortgage gets, the more money you have tied down to a single property to get more or less the same yearly return out of that property. So your money is working less efficiently for you! 

Let me use a real life example:

I just bought a townhouse for a $192k (value $200k) with $4k seller's assist for closing, with 25% down and 3.5% interest @15 yrs. Taxes are $3200 and insurance $400 (HOA takes care of external) and HOA 130$/month.

Mortgage $1030 (P&I)

T&I             $300      ==

HOA $130 \

                                           Total Expenses  = $595

Managem.  $83             /

Vac%Rep   $165     ==

---------------------

Total        $1625

Rent         $1650 => Cash Flow = $25 (I even think this would be taxable, but I omitted that)

1st yr:

ROI: $7731 (Principal paid+cash flow)/$50k (down payment and omitted closing)= 15.462%

ROE: is the same as ROI in the first year as the down payment and equity should be the same in my opinion (unless you take into account the under market value at which you bought, the appreciation for 1 yr and don't omit closing costs, but it still doesn't change the concept; I omitted all of these things for simplicity).

2nd year

ROI: $7997/$50k = 15.994%

ROE: $7997/($7731(1st yr)+$7997(2nd yr)+$50k (down))= 12.167%

7th year

ROI: $9466/$50k = 18.932%

ROE: $9466/$107913 = 8.772%

12th year

ROI: $11216/$50k = 22.4332%

ROE: $11216/$162468 = 6.903%

16th year (1 yr after mortgage paid in full)

ROI: ($12660-$4304 due in income tax)/$50k = 16.712%

ROE: ($12660-$4304 due in income tax)/$200k = 4.178%

As per my example you can see that, once you are close to paying the mortgage off, your ROE is significantly lower than it was before. In the beginning 50-70k of equity were making me 7-10k a year, in the latter years 120k plus were making me about the same a year and when you pay it all off, now you have no mortgage to pay, so all the money after expenses is taxable as part of your income tax as far as I understand (I could be wrong), which in my case is already 34%. 

So at the later years I am using a lot of money to make around 10k a year and after the mortgage is paid I am using all my equity to make even less, around 6k!! So this question is truly not about taxes, but about how to make my money work more and more efficiently for me. If I have to pay more taxes, so be it! as long as I am making more money, who cares?! 

One idea I had was, always refinancing so you keep a debt of around 40-10% on each property, and then refinance again, so all your properties are working at max capacity and somewhat "controlled risk", as opposed to tying all that money down, for so little a year and then having to pay a third in taxes out of it.

I hope this helps illustrate what I am asking in a better way... I am sorry for the length, I don't know how else to express it, but with numbers.

Thanks!!

PD: also thanks for your advice... I own a house already, I am under agreement for a second one, and I have an offer put on a third one... I am getting full into this, doing the best I can with the best of my knowledge... I need to work on the deal part still, I think I am still not buying "under market enough"!

Again, just a newbie here, but I have been reading a lot and watching a lot of videos and I have flight of ideas with all of this info coming in... I am also producing a ton of ideas and questions and I am curious to know what others think!

My question is in regards to continue to own the property even when the ROE (return on equity). In the beginning both ROI and ROE are great, but then, as the principal gets paid, a lot of your wealth is tied down to a house... and when it's completely paid off, not only is your wealth anchored to the property, but now you have to pay a 1/3 of the cash flow in taxes (before it was all going to equity assuming you break even with rent/expenses+mortgage). So, not only the ROE is a lot less... but also you are now losing a 1/3 of what you were making before in taxes!!

On the other hand, I could refinance and extract the equity this way, but I really don't want to always owe a variable percentage on ALL my properties at ALL times to extract the equity on all of them, as the risk is bigger for me in case I have too many vacants and because nobody will lend me more money if I owe money on everything I have...

How have you guys solved this problem? Is there a way around it? Or you just have to deal with this and accept the low ROE and increase in taxes down the road?

Thanks for your help!

I am of course a newbie, but... I am wondering, why do you even have a 401k?!?

coincidentially, I had this discussion with my friend last night and we ran some numbers with online 401k estimators (nobody knows what it's gonna do for real). I am 37 yo, I have no 401k (well, like 20k my employer has put in it, which I don't even count on).

If I started putting down 18k a year, by the time I retire at 65 (I am not planning on working that long!), I would have put in myself around 570k, my employer around 60k ad I would have around 1.6 mill (at 5% market increase per year), that I would have to take out year by year. At that poing, YOU DO PAY TAXES. I say this, because many of my colleagues (educated doctors) think you don't pay taxes at all and this is all free money. So if you want to live with around 6k a month of cash flow from your 401k, you would have to take out around 100k and pay 25% taxes... at 2016 rates!! I think it will be higher in the future, and also your money will for sure be less valuable. At this rate, you would eat up your 401k in around 13 yrs and a bit (as per my rookie calculations).

If you really want to do this, I would think a Roth 401k is a better option. You do pay taxes before you put it in, but then you put the money to work at market's expense and then all the interests and what you take out is tax-free. You can do some comparisons online too. However, I know you have some limitations as to enter a Roth 401k if you make over like 130k a year... there's a loophole to put 5k a year even if you make more, but I don't know much more about this or other limits.

I also calculated if you only buy 6 properties around 180k in value with 25% down (I estimated costs with closing and all to be around 60k and threw in another 20k for some repairs before renting or after) and you take loans for 15k and rent them for around 1.6k a month, taking into account expenses, I think you would have no cashflow, but at 15 years, you would generate 10.2k in rents, minus taxes, insurance and all that, I think it would be close to those 6k you would be living on at 65. Not only that, but in 28 yrs (when I am 65), I estimated the houses to be around 250k and the rents to have increase, but to be conservative, I didn't add this into the calc. So at 65 yrs, I could potentially own these same 6 houses (assuming I didn't do anything else), have a similar cashflow to what a 401k would give me, and would not eat it up in 13 yrs. On top of that I would still have over 500k from the rents from years 16 through 28 (that I most likely would invest in something else or in some more properties).

That's why I don't have a 401k! My financial advisor said: Don't put all your eggs in the same basket! And I think I am not... each property is a different basket to me... even if the housing market collapses again, that will mean more people need to rent from me! No need to sell!!

Please if anybody reads this and thinks I am completely wrong, let me know, as this is a lot of my strategy!

I hope this helps!