All Forum Posts by: Max Householder

I heard a story on another podcast (Rental Property Owner & Real Estate Investor Podcast, IIRC) about a guy who basically reverse-engineered the books for a property he wanted to buy in order to present it to the bank and show that it was making money, even if the existing tax docs didn't show it. The seller had poor records or something weird where the income on the Schedule E didn't work for the bank. Granted, he had a lender willing to listen and think outside the box.

It depends on your goals. Do you want passive income to travel the world? Do you want to scale up to a multi-million dollar real estate portfolio? Or is it something in between? There is an opportunity cost to having paid off rentals (100% equity), but there is also peace of mind.

Chad Carson, who has been on the BP Podcast and writes on the BP blog, has a strategy he calls the debt snowball plan which sounds more or less like what you're suggesting.

Basically, you save enough to put down payments on 2-3 mortgages for rentals and then use all the income from the properties (after expenses and debt service) and all the savings from your day job to pay them off as fast as possible, one at a time. Every one you pay off will speed up the process of paying off the others.

Then you lever up 2-3 more and do the same thing even faster since you're now using the income from the 3 free-and-clear properties, the 3 levered properties, and your job. Rinse and repeat until you have enough passive income to quit your job. Debt Snowball Plan

The agent may be used to selling move-in ready single family homes to owner-occupants where an offer $40k under ask would be pretty uncommon. Agents who don't sell a lot of MFR can be stumped by someone valuing the property based on income and factoring in deferred maintenance and CapEx.

Stick to your numbers and if they won't counter then move on. Maybe hit them with the same offer or an even lower one in another 6 months.

I've heard plenty of people say if the seller isn't insulted by your initial offer then it was too high, so well done!

Welcome to BP and St. Louis REI! My wife and I just closed on our first property in November so we're very new to the game as well. I would check out one of the local meetups. That's where we met our agent and got the ball rolling last summer. You've already got a 'house' in your name, so you're off to a good start!

There will always be other deals. Don't let FOMO divert your focus from the great deal you're already working on. A bird in hand and all that

Find a PM with whom you can align goals, i.e. they make money when you make money, they make more when you make more. If you don't like leasing fees or a percentage of rent, work out a bonus structure for keeping vacancy under a certain threshold across your portfolio or escalating bonuses for tenants that renew multiple times. A good business owner is going to work with you to find a payment structure that you're comfortable with and it still fair to them. If their fee structure is set in stone, just find someone more flexible.

I'm with @Joe Villeneuve. Worrying over a percentage point or two of PM fees is a dime holding up a dollar. If you do your numbers right, the tenants are paying for the PM to take all of that hassle off your plate so you can focus on activities that pay far more per hour than you're paying your PM. 

Great additional context @Logan Turner. It all depends on your goals, @Lane Pate. If you want passive cash flow for income, it might not be the perfect deal, but if you want to make a couple bucks and wait on appreciation and debt paydown, it could be a good deal. I agree that expenses as a % of revenue will vary greatly depending on the property class. Based on your numbers, average rents are < $500/month so IMO you should err on the side of being conservative/cautious because that's not a lot of gross revenue/unit to back you up.

From reading the report, it appears the metrics used were simply median income and median home price. Obviously this doesn't take into account many aspects of either the cost of living or the ongoing costs of owning property. I think the focus was on affordability of purchasing the property itself which appears to be pretty well unattainable in most major metros around the globe.

The biggest takeaway for me is that the study pretty conclusively shows that less government intervention in the housing market leads to more affordable housing options. Unfortunately, I think a lot of people believe it's the other way around....

Your expenses will generally run about 50% of your gross income. If the monthly income is $3940 then your expenses should be around $1970/month not counting the mortgage. So you'd be at $1970 of net income minus your $2070 mortgage is -$100 per month. Not even close to your estimate.

Many people estimate the following:

5-10% for vacancy ($197-394)

8-10% for management ($315-394)

10-15% for repairs ($394-591)

10% for CapEx ($394)

Just right there you're at $1300-1773/month in expenses. 

You should be able to get a firm quote for insurance, but at least figure $70-100/month. Taxes you should not have to estimate, you can get the amount paid last year from the county. If it's around 1% of the property value then you're looking at $328/month.

So all told you're at $1698-2201/month in expenses, pretty much the right range for the 50% rule.

This isn't to say these properties are bad or couldn't be a good deal, but you'll either need to reduce the price or figure out how you can increase the income immediately after purchase.

I came across this really interesting study on worldwide housing affordability.

"The 13th Annual Demographia International Housing Affordability Survey covers 406 metropolitan housing markets (metropolitan areas) in nine countries (Australia, Canada, China, Ireland, Japan, New Zealand, Singapore, the United Kingdom and the United States) for the third quarter of 2016. A total of 92 major metropolitan markets (housing markets) --- with more than 1,000,000 population --- are included."

"The Demographia International Housing Affordability Survey rates middle-income housing affordability using the “Median Multiple,” which is the median house price divided by the median household income"

"There are 11 affordable major housing markets in 2016, all in the United States. Rochester is the most affordable, with a Median Multiple of 2.5, followed by Buffalo (2.6), Cincinnati (2.7), Cleveland (2.7), Pittsburgh (2.7), Oklahoma City (2.9), St. Louis (2.9) and four at 3.0, Detroit, Grand Rapids, Indianapolis and Kansas City."

There is a nice chart on page 13 of the study (page 23 of the PDF).

"The affordable markets are generally characterized by more liberal land use regulation, which is associated with greater housing affordability."

http://www.demographia.com/dhi.pdf