All Forum Posts by: Max Householder

Hey George! I agree with everything Megan said. It's tough finding deals on the MLS that will work on paper. We bought our first property last fall after looking for a couple months and seeing a few dozen properties in person while running the numbers on many, many more. We would like to buy a 2nd deal in 2017, but so far I've gone to look at maybe 8 or 10 in the last 6 months. Granted, I learned a lot last year to up my screening process and ignore a lot more listings than I did before, but still there just aren't many listings that come close enough to my numbers to warrant further research. Things should slow down once school starts in the fall, so perhaps a few of the stragglers on the MLS will be more willing to negotiate.

The best property I've seen this year that I ran the numbers on, went to see, and just barely passed on making an offer....was the one @Megan Greathouse bought! lol It's slim pickings to say the least. 

If you're looking for single-family, forget about it. I know several people who are buying and/or selling in St. Louis this summer and it's pretty crazy out there! You'll definitely need an off-market deal for b&h or flipping SFR from what I've seen.

Looking at neighborhood scout, I didn't see the information you pasted, but a high vacancy rate seems like a red flag to me, especially if you plan to raise rents for most/all of your value-add strategy. I'm confused by how they get their numbers. Median price is 70% lower than all Michigan neighborhoods, but rents are 70% higher? If rent is so high, then why aren't property values up? I also came across the job numbers and 25% of the employment in Rochester is in manufacturing. Considering decades of decline in US manufacturing, this doesn't seem to bode well for future growth.

Thomas S. puts it more bluntly than I have, but he's right. This seems like a bum deal for cash flow based on the information at hand. I also didn't emphasize in my previous post, but that analysis shows you breaking even as being the best-case scenario, i.e. no maintenance or vacancy. In reality, you'd very likely lose money every year you owned this property.

Continue to do your diligence, but I'd make sure you know exactly how & when you can get out of the contract and jump ship if the information you gather doesn't improve dramatically.

1% rule is definitely possible. I'm in St. Louis and our first property was a 4-family purchased last fall for $182,000 all in cost (purchase price + closing costs). Rents are $550x4 plus $50 for the garage. 2250/182000 = 1.2%

We found it on the MLS, but it took several months of looking and running the numbers on dozens of properties. Being a 4-unit helps immensely. I can't remember the last time I ran the math on a duplex in my area that met the 1% rule except in C- or D areas. I can't imagine trying to make the numbers work in a hot market like Denver. That said, within a 90-minute drive of most parts of the country I imagine there are areas where you can find 1% deals or better more easily. or you just might have to hunt for off-market deals instead of relying on the MLS.

Even here if you go outside St. Louis 15 minutes there are a ton of semi-rural areas where you can find 1-2% deals all day, but you just have to learn what works in that market and it's probably very different from what I'm looking for in the city.

"All real estate is local" is pretty much the best mantra you can live by regarding this stuff.

Figure 50% of gross revenue goes to cover expenses, so your taxes, insurance, vacancy, property management (either paying a manager or "paying yourself" if you self-manage), maintenance & repair, and capex should cost around $625/month. Don't count your P&I or PMI in this number.

$1250 gross rent

Taxes & insurance: $150

10% management: $125

10% maintenance & repairs: $125

5% capex and 5% for vacancy: $125

Total expenses: $525

So probably tack on another $100/month for misc. expenses to get to 50%. $40/month for insurance seems low to me, I would double that as an estimate or call around for some actual quotes. Also factor in paying for water, sewer, trash pickup, lawn care, and utilities during vacancies. The extra insurance estimate and those misc. expenses should easily be $100/month.

Now you have:

The house hack scenario:

monthly income : 625

monthly expenses for the rented half: -312.50 (50%)

P&I (your mortgage): -569.32

PMI: -50

cash flow: -306.82

Cash on cash return: 0%

Full rental scenario:

monthly income: 1250

monthly expenses: -625

P&I: -569.32

PMI: -50

cash flow: 5.68

COC return: (5.68x12)/((109900*0.035)+3000) = 68.16/6846.50 = 1%

If your goal is to house hack and shave off some living expenses, it's not a terrible deal. $300 for your "rent" isn't bad and is less than half of what you're currently renting for. However, as an investment, you'll probably just break even after all expenses and capex is paid. This might be fine if it's in an appreciating area and you still get the pluses of principal paydown and some tax benefits, but this probably won't generate a ton of passive cash flow. It depends on your goals whether this is acceptable or not.

Also consider that I put down very conservative estimates, so your cash flow would probably be a little higher with some good luck. You could also refinance out in a few years when your equity has improved to 20-25% and eliminate the PMI which would put some money back in your pocket each month. My goal is to show how to run a full analysis factoring in every single expense and then seeing what the picture looks like from there.

Agreed on running the numbers as a standalone investment, i.e. you not living there. If they make sense on paper that way, then you'll know if/when you move out you probably won't have to chip in every month to cover your basic costs. You won't cover your whole expenses while you live there, but like Jordan said, $200/month in living expenses is fantastic and doesn't even factor in writing expenses off your taxes, principal paydown, etc.

Your estimates for expenses seem a little low. Looks like a nice property, but your expenses only add up to ~40% (don't count your P&I as an expense). Most people use the 50% "rule" for how much revenue will get eaten up by expenses. I usually try to end up with an estimate between 50-60% expenses and if it still works for me at that point, I know I should be able to sleep well at night. It doesn't really matter where you allot your estimates to, so just bump a couple of them up 5%.

Call a couple of management companies and see what they really charge. Factor in leasing fees. If a company only charges say 8%, but they take one month's rent as a leasing fee, that 1 month out of 24 payments (2 units x 12 months) is 4% right there. If the other unit is vacant, I'd run the numbers at 15% for management in year one and see if you can live with it. That % should go down over time if you can get long-term tenants, but factor that in.

How did you determine rent? $650/month seems comparable for a 2-bedroom here (St. Louis), but I don't know the Lubbock market. $110,000 for $1300 income is a pretty decent deal and beats the 1% rule so kudos there, but make sure you can actually hit that number. If you just got it from the listing, don't believe it. You'll see listings all the time that are like "below market!" "could easily raise rents!". Yeah? Then why didn't the current owner do it? Check Craigslist or Rentometer.com to get an idea of a good estimate.

For a first time running the numbers, it looks pretty good! I feel like most of the first ones I ran the numbers on were so deep in the red I thought I'd never find one that made sense.

Going by the 1% "rule", $1450 in rent ($725x2) would mean a purchase price of $145,000. If you could raise the rent $50 then you'd be at 1% of $155,000 so you're not way off, but is raising the rents realistic? You mentioned upping the current tenant $75 to $800 and then $25/year. Does the local rental market support that? Is there population growth? New employers? A lack of housing options vs. new construction going in? What are the adjacent duplexes renting for?

So after you move out, you'll be getting $1450 in rent with a $1200 payment. I'm assuming that is PITI (includes taxes & insurance). So your cash flow is $250 before accounting for vacancy, management, and maintenance/capex. If you plan to manage yourself and it's a new construction in good condition and your rents are competitive in a market with good demand for these types of rentals, then your expenses on those items could be very small, but it still doesn't leave much room for error. Even if you get zero maintenance calls, that's $3,000 cash flow per year.

$3,000 would cover:

one A/C or

one water heater or

six appliances or

one bath remodel or

half a kitchen remodel or

one-third of a roof replacement

If you look at a 10-year timeline, even if you manage it yourself, have zero vacancy, and zero maintenance calls, you'll just be breaking even after you cover the listed Capex items out of cash flow. Does this align with your goals?

If you want a place to live with a little side income from the other tenant to help pay your mortgage, that's totally fine. If you want it to just break even over 30 years so you own it free and clear and the tenants paid the mortgage, that's fine too. If you're going to add value with a remodel and then up the rents to the high end of the market and then refinance to lower your payment, that could be an option. If you're looking for passive income though, then this doesn't seem like a deal at all because there won't be much if any income after expenses and capex, let alone water, sewer, trash pickup, lawn care. It all adds up.

Anyways, every property can be a deal at the right price and for the right set of goals, but it seems from your post like you might just be looking at the potential gross revenue and your mortgage payment as the only two inputs for whether this is a cash-flowing deal or not which could be a mistake depending on your goals with the property, especially if raising the rent is the only option for value-add, unless for some reason $725 for this property is way, way under market.

Hey @Matt Guignon, I also live and invest in St. Louis. My wife and I have one 4-family that we've owned about 6 months and we're looking for more. South City St. Louis is a great place to invest. There are a ton of small multifamily as well some larger but still small commercial properties. 

As far as college towns, I would pick your market very carefully. The air is going to come out of the so-called "Student Loan bubble" over the next 5-10 years and IMO higher education will look drastically different in the near future as people realize that the value of the majority of college degrees has been drastically eroded and they finally quit borrowing to the hilt in order to get one. Education will move online and eventually people will start to move back to the trades as a lot of white collar jobs get automated away.

The best universities will survive, but not with the seemingly never-ending growth of the last decade or so that's been largely fueled by cheap money from the government. People focus on students not being able to pay their loans as the bubble "popping" but many college towns have overbuilt dorms, apartments, condos, restaurants, commercial strips, etc. because enrollment has been growth by leaps and bounds every year and every student has a pocket full of low-interest money backed by the government. When the colleges contract, all those ancillary jobs will go with it and some of the smaller liberal arts colleges might go belly-up altogether. One-horse "college towns" could be in trouble when the biggest employer shrinks by 10-20-50% or goes away completely. Make sure the college you invest near is part of a metro area with more than just the one major employer. Look at Mizzou, they have a lot of research facilities, a law school, engineering school, etc. so even if their liberal arts programs contract, you still have an anchor there. Columbia has several hospitals, more than one college, Shelter Insurance HQ, and a number of large medical-related employers. Yet, even at a diversified college like MU, enrollment has plummeted the last 2 years, they had to mothball dorms, cut staff, and you look around town they're still building like crazy. This will not end well for many investors there.

Anyways, long-winded word of caution. I think the "college towns are great places for rentals!" mantra is not as universal as it has been over the last 10-15 years. 

St. Louis is far from a homogeneous market. It's block to block in most neighborhoods so be sure to get input from someone familiar with that city, neighborhood, and street.

Ferguson is in St. Louis County which is separate from the city. This has pros and cons. I've seen folks on here say they do well renting SFR in that area and others who avoid it.

Ferguson had a fair amount of negative press nationally a couple years back. Google the Mike Brown shooting if you're unfamiliar. Might not matter renting one property, but know the stigma may affect appreciation for a long, long time.

Welcome to the site! I live in South City, my wife & I own one 4-family, and are looking for more. Ours is in 63109, so not really one of the "hot" areas and we still saw a 10% property tax increase for 2016 and will have a subsequent 13% increase for 2017. Be sure to factor that into what you see listed on the assessor's website, especially if the property has been rehabbed. I assume you can probably call and ask for the 2017 assessment if you want an exact number. I've run the numbers on plenty of properties that only worked on paper because the property taxes were so low. A double-digit or even 50-100% tax increase could ruin your cash flow and there's not much you can do to offset it.

Along Gustine and Meramec there isn't too bad, but it definitely gets sketchier as you move east toward Grand. You will need an experienced PM to be successful in that area so tread carefully. Heed Bob's advice about the Bermuda triangle between Grand/Gravois/Chippewa and just don't go there. It's not like you're going to get shot or anything, but it's just a gross few blocks IMO. Lots of trash and neglected properties.

Stay north of Gravois toward Tower Grove Park or head west of the R/R tracks that cut through that part of town and check out Bevo. Cherokee Street to the east is extremely block-to-block, but there are good areas with more upside.