All Forum Posts by: Sam LLoyd

first thing first.  Don't believe anything a seller says without verifying it.  A seller is going to minimize expenses, exaggerate rents.... you need to do your own market analysis to find what rent is.... go on Craigslist or whatever is used in your area.... find 20 of the closest comps, and then figure that your subject property is below average.... don't forget to take into consideration the condition, the type of building, pets/no pets, location, length of lease... etc... this is something that will come easier with more experience, but I wouldn't take an 'average rent' from a website because there are too many factors.  I've also seen landlords put crummy tenants in so that they can ask a little more. 

Next, regarding the previous sale price.... we don't have those websites where I am, but I'd be real hesitant to use sale numbers since the deal isn't recorded... maybe it sold for more because there was owner financeing.  Maybe it sold for less because the buyer had to throw out bad tenants... too many things you don't know.  Look at what similar buildings sold for in the last 6 months, take that with a grain of salt because of the reasons I just stated, and then figure out what a building is worth.

When I'm looking at a building (and I'm looking at small multis right now), there are four things I look for, and in this order:

ROI. It doesn't matter if the seller is making a killing. If the price you can get it for gives you a good return on your money, then this is good.... I wan't 10% Cash on Cash, but I'll settle for more or less depending on other factors.

CAP rate. This is just a place to start. It's more effective the bigger the deal. However, with small multis, this is a flexible number to shoot for because it can be greatly affected by how well you manage tenants, or manage your manager. Look up on BP how to work CAP rates.

Money/Unit. Since I self-manage, I want $200 cash flow per unit. This is very hard to find in my area with the leverage I'm using, but it's a starting point. I'll go lower if my ROI is higher.

Opportunity to expand. I'm looking forward to the future: the last 4plex I bought has room for another 4plex on the lot and it is in a great location. When I feel confidant about the market... maybe 2 years from now, maybe 10.... I can build up that property and get a ton more out of it. Like all the other factors, I can be flexible about this if ROI and/or cash/unit are high enough.

I hope these thoughts help... let me know if you have any more specific questions.

Ok, there are a couple things I don't know based on your post.  The first thing that jumps out at me is the good cash flow.  If you're into a property for 40%, you should have great cash flow or it's  not a good deal.  By great, I mean 10% return on your investment.   So, house is 100k, you're into it for 40%, you should be getting $330/month... or more.  Any deal makes money (almost) with bigger down payment.... so, evaluate if this is a good deal.

The only reason I would buy a property all cash is if this helped me get the property.  If you had a seller that was in a hurry, or the property didn't qualify for financing because the windows were too small or something... then I would jump in with cash to get the deal going.  If you can finance the property, I would finance as much as possible as long as interest rates are under 7% or so.  That's because I want to buy more property.  If your goal is to just have a couple stress-free properties, then maybe it is better to go in with all cash.

Sounds like you need to sit down, write out your goals, and then figure out the order to do all these things to get there.  Here are some thoughts though.

Get to a bank and see what you can borrow before worrying about what to do with it... if you can't get the USDA Loan, can't refinance, can't do some of those other things, that will help show you what to do.  So be patient and finish that application process.

2nd.... if you are selling to a fiance, this is not an arms length transaction, and you may run into problems getting money from a bank.... which brings up the question of can she qualify for this loan?

Lastly... I would think long and hard about taking out a loan for your business.  If there's any way you can get the business going without taking on debt, do that.  With a residence, you know you can always rent it.... for that matter, you can always find a manager and contractors if that's what's needed.  For a business, that's different.  You take out money for the business.... you have to work to pay it back, or have a business that makes enough money that you can hire employees to do the work and pay it back... in my opinion taking debt on a business... especially this much, is a big risk/commitment, and does not work with your idea of being financially free in 6 years.

I hope these thoughts help.

My thought is to find someone you are friends with.  I know several situations where friends moved in to share the rent.  You should still write down an agreement and expectations, but it's not a lease.... so they don't have rights to the property...

I'm going to assume that you still owe close to 250.  My advice is to keep it if it cash flows.  I'd say that if the tenant is paying utilities, it's in good condition, and there are no big expenses like HOAs... that there's probably enough cash flow to make it worth keeping.  If you sell it... and you get 315, by the time you pay commission, closing costs, and satisfy the loan, you'll only be taking 20 or thirty off the table to play with.  Meanwhile, you are taking advantage of the super low interest rates to have a tenant eventually buy you a quarter million dollar asset.

That's my thought, but if you're not making enough cash flow, dump the thing.  Unless the price has gone up much since you bought it, you probably don't have enough capital gains to worry about the 1031... Most of the tax savings are going to be eaten up in exchange fees, making it not worth the extra headache.  Of course, you'd have to run the specific scenario past an accountant to verify this guess.

For me, I'd want enough cash flow to put aside $100/month, and pay myself $200/month to manage it.  And, that's a minimum.

Ok, I wasn't sure from your post if the 128 rehab price included the purchase price or not.  If the 128 is in addition to the 75, that puts you at 203.  Based on working in real estate in general, and the one flip I did, the margin is not there.  If you get the 290, this is exactly 70% rule.  It's only safe to count on the lower number of 250, especially since your house might not be 'as normal' as others.  So, that would put your max purchase/rehab at 175... less the cost of purchase, that puts your rehab budget at 100k.  However, there is no margin for error in this.  I would take the contractor's bid of 128 and add 10%.... say 140, which would mean you have to purchase the house for 35k to keep under the 70% rule.  Looking only at the numbers, this does not jump out at me as a good deal.

As far as the home's value, you might run into problems getting it to appraise for 110 right after you buy it.  The bank is going to want to see a justification for the value going from 75k up to 110.  The biggest determiner of value is what people are willing to pay, and it will be obvious that you paid 75.  If you wait 6months or a year, you'll be able to tell the bank believably that the value rose over time, or you affected changes that raised the value.  Also, in my experience, getting an appraisal after you start working on it will probably throw up red flags for the lender.  The appraiser will value things as unfinished or unsafe.  For example, at least in my area, if there is no flooring, the appraiser is going to say the building is in a state of construction... which is not financeable.  In my experience, the only chance of getting conventional financing is if you get it financed before you start tearing into things.

I'm not trying to put a damper on things, just pointing out some of the obstacles to be overcome.  Remember to have more than one exit strategy.  I hope these thoughts help.

Ok, a friend of mine, who is a landlord has just gone through some terrible times with bedbugs and tenants, so it's hard for me to flip-flop my mindset on the bedbugs issue to tenant is right and landlord is wrong.  However, from what you say, it sounds like it is the other way, and your landlord is sleazy and dragging things out so that he can keep the whole deposit.  If that is the case... then you'll have no choice but to take him to court, or write off the money to a learning experience and move on.  If there is no written lease, things get tricky, and it does come back to who took pictures and has 'proof' of anything.  I would advise sitting down and trying to write a journal of every interaction you have had with the landlord to date, and update it as things move forward.  This will help you not to forget any details, and keep your story consistent for the judge.

In my lease, if the house is unsafe, the landlord is responsible for providing housing until it is.  So, that would mean the landlord is responsible to covering your rent for October, as well as returning your deposit if there are no damages and it is a refundable deposit.  However, again, without a written lease, it is a big mess.  While verbal agreements are binding to some degree, the only way that you can prove that you have an agreement is if you have receipts for the months you paid.  Receipt of payment is usually proof that there is an agreement, and then you can go to the judge and hope that he/she likes your story.  And yes, proof that there were bed bugs is very important.  If you don't have proof, you might not get anywhere.

I'm sorry to hear about another ugly situation.

This option jumps out at me.  Make that cash offer.. tie up the deal... this will go fast and with less problems.  Once you have it, since you're sure you qualify for financing, immediately get a refinance rolling.... Finance it for 75% of purchase price..... so you put in 80, borrow 60 back out.... use that to finish the house... with a budget back up to 140 for fixing and any overages.

The way I would do it (which might not be available to you), would be to purchase it with cash, then use interest deferred credit cards to finish it quickly and get it on the market... but this is not the best option for everyone.

One caution:  Be very careful using sqft for the value.  Unless you're comparing it to houses with finished attics, using a sqft value for an abnormal house could get you in trouble.  Even if it appraises at 250 because of the sqft... anybody with a 250 budget is probably going to lean towards a house with a normal floor plan, and you'll have to lower your price.

Ok, these are general answers since I don't know the statutes in your area.  It sounds like there is a major communication issue going (not uncommon, sorry to say.)  So, here are my comments.

1st.. without a signed lease agreement everything is up in the air.  You should never have given a deposit without something in writing explaining where and how it would be returned or not returned.  The other side of that coin is that the land lord should not have either.. and it will probably end up with your word against theirs in a small claims court if you can't come to an agreement.

2nd, you can't expect a deposit back if you haven't given the keys back... that's silly... just like it's silly for a landlord not to address bedbugs... if it's a problem that was there before you moved in.

Here is the best recourse I can think of based on what you've said.  Meet with the landlord and sign an agreement saying what deposit will be returned upon meeting what conditions (in this case the keys).  

It sounds like there's more to this, and that if you haven't been paying him for over a month... and keeping the keys, that there won't be much left of the deposit.  

It sounds like a very frustrating situation, but unfortunately, that's all I can think of without knowing more.

Of course, with those numbers, it's a great deal for a flip.  I have a couple questions though that might help.  do you have the cash to do everything... plus a good 10-20% reserve?  Using hard money or even private money might make this a very bad deal.... you'd have to factor that in.  Rehab loan?  If you can make this work, great.  In my experience, these loans are harder to pull off than you might thing unless you are going to owner occupy.  

Now, the biggest part.... who's going to do the work?  I'm sure you've heard of investors having trouble finding contractors.... do you have one you can trust?  I would get one contractor to look over the place and give you a decent quote.... then take that scope of work and have a second and third contractor look at it so that the quotes cover the same work.  If you're doing the work yourself, then have fun.... just remember to have a proper reserve fund.