All Forum Posts by: Jake Hartnett

@Brandon Ingegneri You could have a very simple business if you just had 10 houses that were all paid off cashflowing $600/month each ($1200/house with 50% expenses). If they were each worth $100,000 you would be getting 7.2% return on equity on your $1,000,000 portfolio, and an annual cashflow of $72,000. Not a bad simple business.

Now if you took that $1,000,000 in equity and spread it across 33 properties with 70% LTV the payment on each one would be about $350, so the cash flow would be $250/house or $99000 annually for a cash on cash return on equity of 9.9%. You are also paying down over $1,150 of principal every year per house, for a total of at least $38,000. So theoretically you can buy another house every year just with the equity build up and increase your net worth by an additional $4150 per year.

The question is, would it be worth it to you to manage 23 more houses for an additional $65,000 per year? Manage 10 paid off houses for $72,000 or manage 33 houses with mortgages for $137,000?

There is no right answer but for me its leverage all the way. Plus, when you own outright you give up the very valuable mortgage interest deduction.

A few common strategies:

Find a partner. Maybe you put down 10% and they put down 20% and you split it 50/50.

BRRRR. Buy with hard money, fix it up and refinance so you have little or no money in it.

Seller financing. The seller carries a 20% second with a 1-2 year balloon, or finances 80-100% with or without a balloon.

If its a home run deal someone will finance it.

Generally you will find the best deals if there is a problem with the property, or a problem with the seller. If there is no problem they can list it and get full market price. You might be able to wholesale a rehabbed property to a buy and hold investor if the numbers work. Run the numbers as a buy and hold deal, if they are good you might be able to do something with it.

You can use Zillow or Trulia for Comps. You can also run it as a buy and hold by finding average rents on rentometer and craigslist, and subtracting expenses. You will have to dig to come up with good estimates on expenses in your area. Here are some major expenses you can't forget about:

Taxes, Insurance, Management, CapX, Maintenance, Vacancy, Sewer/Water, Utilities, Lawn, Licenses/Permits.

You will have to know what kind of returns investors are looking for: 20% cash on cash? $200/door? Etc. Reach out to people in your area and ask what types of returns they are looking for.

Good Luck

I have been reworking my Maintenance and Repair and my CapX numbers a couple different ways and I keep getting approximately the same numbers.

My typical unit I am looking at is a 1000 sf 2/1 duplex or 4-plex with hardwood floors in a C-B neighborhood renting for $1000-$1200 built in 1890-1970, yes, quite a range.

I added up big ticket items like roof, water heater, new kitchen, etc and divided by life expectancy and came to $1000/unit/year, so I'm assuming $1200/unit/year with a buffer. I am also adding $300/unit/year for maintenance and repairs. This comes out to about 10% of rents assuming a $1200/month/unit.

Am I in the ballpark?

What numbers are you using?

I have been reworking my Maintenance and Repair and my CapX numbers a couple different ways and I keep getting approximately the same numbers.

My typical unit I am looking at is a 1000 sf 2/1 duplex or 4-plex with hardwood floors in a C neighborhood built in 1890-1970, yes, quite a range.

I added up big ticket items like roof, water heater, new kitchen, etc and divided by life expectancy and came to $1000/unit/year, so I'm assuming $1200/unit/year with a buffer. I am also adding $300/unit/year for maintenance and repairs. This comes out to about 10% of rents assuming a $1200/month/unit.

Am I in the ballpark?

What numbers are you using?

I don't think an appraisal does you any good before the property is rehabbed. The value of the property is based on the ARV minus the cost to rehab (including holding costs, profit, and a buffer). Focus on those two numbers to find your current value to you. It doesn't matter what other people are buying distressed properties for, and I don't think that number will tell you what you need to know.

Ask your agent for comps of the home after it is rehabbed and talk to contractors about the cost to rehab, or use something like the book on estimating rehab costs to get a ball park.

Timeline will depend on the extent of the rehab and the reason you think its a good deal. If its a large multifamily that has a lot of problem tenants it might take a long time to get bad tenants out with evictions etc. You might be holding it for a year or two on your initial financing as you turn over units and update units. If its an SFR that is empty it might just be a couple weeks.

Give us some details.

The Minneapolis rental market is really strong right now. Values are high and rents are high, and vacancies are rock bottom. Building is probably a better investment than buying right now, and there is construction everywhere. Of course, its hard to find anyone to do any work right now. I work in the trades and everyone is booked. My cabinet shop is booked out for two years.

It looks like you aren't accounting for CapX. Your $40/month reserve is $480/year. If a new roof costs $12,000 and lasts 25 years you have to reserve the entire $480 just for your roof expense. You will be amazed at all of the little and big expenses that come up. This deal looks very thin to me.

I recently added up the cost/life expectancy of major expenses and come up with $1000/unit per year. Furnace, water heater, appliances, roof, floors, updating the kitchen and bathroom every 20 years.

On top of that I have water bill, trash, lawn, rental license, etc.

I've only had my duplex for 4 months and already I have replaced a fridge, a dryer, spent $20 on pest control, I had a small electrical issue, a backed up sewer line, put in screens on the basement windows, replumbed a leaky shower faucet, and the AC doesn't hardly work, so that is going to be another $100 minimum. That all covers your $123 annual allowance for repairs and capX, and these are just little things.

Proceed with caution.

Everyone says real estate is a tax haven, but I'm wondering exactly what people mean when they say that. In my analysis I see real estate income taxed at a lower rate than my W2 income, but not decreasing my overall tax burden. Am I calculating this correctly?

Example:

$200,000 duplex renting for $2200/month=$26400 annual income

$50,000 down

5% interest - $9660 debt service, $7440 is interest

$9000 deductible expenses (R&M, CapX, Management, Taxes)

$160,000 Value of Improvements / 27.5 years = $5820 depreciation per year

So my taxable income from this property is:

Taxable income = Gross income - deductible expenses - interest expense - depreciation

$26,400 - $9000 - $7440 - $5820 = $4140 taxable income

If I'm in a 32% tax bracket (state and federal) I will pay $1325 in additional taxes. This is only a 5% rate on my $26,400 gross income, which is very low, but it isn't decreasing my overall tax burden.

Am I thinking about this correctly?

I would talk to lenders first. It will be hard to analyze deals if you don't know what the terms of your financing are going to be.