All Forum Posts by: Sam LLoyd

Oh yes, lots of thoughts... First thing, I have no ida about your market.  Average homes where I live go for 250k, a decent multi unit will run 60-100k/unit... So I paid 370 for a 4plex last year.

The first thing you need to realize is where you are at in your schooling.  You don't have to pay someone for this... you can throw money at real estate to learn the hard way and read books from the library like I did, but most of your questions can be answered by hard learning, and then on the job training.  Yes, buying a fixer from a wholesaler has tons of risk, and will likely lead to trouble, since you don't have experience doing this.  To someone who does this every day, it's just a job that they understand.  For example, ask me to start a website, a car lot, or a coffee shop, and it would be daunting... ask to estimate repair costs on a run down duplex, and it's something I do every day.  So... if you want into this field, educate yourself.  Of course, the best education is experience, so at some point you have to jump in.

The next thing is if real estate can actually make money in your area. It may not. If you're looking at a SFR that cost $250k, and the rent would be in the $1,800/month range, this is a bad investment. There will be almost no cash flow if you have it leveraged, and that's if you manage it yourself. If you put more down, you'll have cash flow, but your returns would be lower than if you put it into an index fund in the market.... bad deal for right now. However, I think there are not that many markets where you can just buy a house and sit back to cash the fatty checks. Most of the time, you have to bring value to the deal by either finding a great deal, being able to rehab the property, or taking on something bigger like a 4plex. so, to make money in Real estate, you'll probably have to learn one of these approaches. Myself, I'm shooting for the multi-unit advantage.

Lastly, is the big picture.  Are you trying to quit your job next year?  Do you want to keep your career and have real estate as a buffer against inflation?  Do you want to live the rest of your life on a yacht in the Caribbean?  These all influence what you're going to do.  If you just want a retirement buffer, putting all cash down and hiring a manager is a simple way, but so are stocks.  If you want to replace your income over the next ten years, you're going to have to hustle, and probably learn about rehabbing and/or multis... and do well at it.  If you want to be the next Trump.... get advice from him, not me.

If that was in my area, I'd look at the price of the land, add 10k if the roof is good, and start there.  It really does make the project harder, starting in after someone else.  If you are on city water/sewer, or have a functioning well/septic, that's worth another chunk, but that will depend on what those items go for in your area.

@Katie Levey

I'm in Alaska... not too familiar with your area... hopefully someone else here will chime in.  I met my mortgage broker at a real estate investors meeting... so try to find groups like that where you can ask around locally.

I'm sure you've heard the phrase about having your money work for you.  It does not work for you in a bank, other then proving you have reserve funds when you're trying to borrow money.  You need to learn how to get your money working, and there are many ways to do this.  Real estate can be one of the best ways to get your money working, and there are many ways to do this within the world of real estate.  Find one, learn about it, and then put your money to work.  Or you can learn about commodities, funds, or even friends and relatives that need money to start businesses

In my opinion, real estate is the best place for your money, but I've been learning about it for quite a few years.

Couple comments: First, I'll wait for a tax guy to way in on the accuracy of your deductions and depreciation, since that's a huge part of your monthly ROI calculation.

I think the rest of your numbers look reasonable if you do a lot of work yourself and manage yourself... and do a good job.  That being said, even though a good manager puts very little time into managing, it is still a commitment, and will tie you down.  I like to calculate for management using 10%, and then pay that money to myself.  So, in this case, if you had to hire management for some reason, you'd be in a negative cash flow.  If you do realize those tax advantages, you'll still be positive at the end of the year though.

Equity does not give you a return until you sell or refinance, both of which have costs. So, if you're anticipating selling the house in 10 years, and want to know what your IRR is, you have to figure the cost of selling and bringing the building up to the buyers standards... 10% should be a good number unless you've let maintenance slide. So, that would knock your returns down a bit in the end, but not that far.

Those are my first thoughts.  If you're fine going with a 10 year plan, and don't mind managing and living in that area... looks good.  I personally am looking for monthly cash flow because I hope to move into investing/managing full time, so this would not work for me.  The returns are very similar to my first house... which I managed for 8 years, then refinanced and put the equity towards a 4-plex that does bring me in a bit of cash every month.

Are you sure you didn't drop a zero?  40k for a 4-plex tells me buyer beware.... even in a market where market rent is $550.  I have personal experience with a building like this.  You buy cheap, your income is low... you make money.  Then the roof needs replacing.  The roof is going to cost the same regardless how much money the place makes.  I hope that makes sense.

That being said.... if you are sure of you ability to manage the place or find managers that you can stay on top of... there's nothing wrong with going for an affordable 4plex.

The biggest thing is work on defining several very important numbers..... the repair cost is important, the cost of management and vacancy is key, and lastly, the ongoing cost of maintenance and putting aside for big repairs.  You get those numbers nailed down... rock and roll, and don't let any naysayers stop you.

If these properties are in the homepath program, you might be able to find really affordable rehab financing.  the fact that they are Fannie Mae properties tells you that they are most likely financeable, so that's a plus.

HELOC... I tried to do this several times and had DTI issues as well. I ended up doing a refinance to get at the equity since my mortgage broker calculates DTI differently than the bank where I was trying to get the HELOC. A HELOC is the best for what you're doing, but if you can't get one, it's a moot point.

You'll find that lenders can value your DTI two different ways... one is to add the income and add the debt to your balance, in which case a rental will negatively affect your DTI unless that property has a DTI of less than 40% (or better, since the lender will use it's own vacancy rate.) If this is the case, yes, you will max out quickly, like I did.

The other way is to find a lender that looks at a property, and only adds the profit to your income side.... so a single family house makes $300/month after all expenses.... it doesn't matter how much you pay for the house... it improves your DTI.

So, finding a lender or mortgage broker that looks at your finances the right way is key.  After that, it's just a matter of finding enough money not only for the down payment, but also for the reserves that the lender will require.... For example... I'm trying to finance a 4plex right now, which will be my 5th property.  The down payment is 25%, but because of my other rentals that I need reserves for, I have to have 45k in the bank in addition to the 25%.

The terms, down payment and reserves, change as you get more conventional loans, and then they max out at 10.  However, things are always changing, so go build relationships with some lenders that understand what you want to do... be successful at it, and keep plugging away.

@Account Closed I knew I'd have trouble getting that across.  I have several friends/relatives that would like me to manage for them, as well as my own properties.  I'm not interested in working with a brokerage or getting my own license, so the only way I can manage other people's properties would be to have an interest in the property... at least, that's how I read the statutes.

For the most part, the properties managed would be my own... in which case I want to manage them through the LLC to separate finances from personal.

There should be a poll on bigger pockets. "Who here rents out their first SFR, and doesn't really make that much money on it?"

My first SFR is a little better situated... after refinancing down to 4.5, and after taking into account maintenance reserves, it makes a couple hundred/month... on a good day. I know I should sell it, but... the money's already invested. However, everything these people have said is true. Here's a simple way I look at the numbers.

You have 40k in the house.  You know Vanguard could give you 5%... minimum, you need to make $160/month, since that is your opportunity cost of not having it in Vanguard.  We already heard from everyone else how you probably have a negative cash flow.... so you're not even close with this investement.... so sell, pay off, or refinance.

Refinance.... You can't get rates lower, and you'll have to figure out loan costs, etc... I probably shouldn't have refinanced mine.

Pay off:  $240k with a $1,300/month return?  That's a 6.5% return.... paying off would be better than Vanguard.... if you really had a $1,300/month return.  If, instead, you needed  to put %7 or %8 away each month for a maintenance reserve... and you paid yourself 10% to manage it, plus a 4% vacancy rate (that's a bare minimum in my book.)  This would all drop your income down to $850/month, which is only 4.2%, and makes Vanguard a better investment.

There are benfits to real estate other than cash flow, such as interest deduction, principal paydown, depreciation, inflation proofing... but many of these go away or are minimized when the property is paid off.

So yeah... sell it if you can.  If it were me, I'd use the $240k as a down payment for a 26plex I'm looking at with management in place.  It should throw off between 2k and 3k/month... which is in the 10% range... and it would have significant leverage to take advantage of rent increases or appreciation in the future.

Ok, so here's what I want to do, so you guys can tell me why it's a bad idea.

I plan to have my LLC sign a master lease with the owner of the property. The lease will be 90% of the net income less expenses. This will do two things for me. It will allow me to separate my personal finances (when it's my own property) from the business finances better, as well as not causing any questions with the banks about who owns what when I'm applying for new loans and such. It will also allow me to manage properties for other people through my LLC which will have an interest in the property, and thus will be allowed to manage it without being a real estate brokerage.

So... What am I missing. I know I'll loose the liability protection aspect of the LLC since the property will still be owned in my own name, but right now I'm more worried about doing things legally and in such a way that I'll pay the least taxes.

Thanks for any advice