All Forum Posts by: Jacob Sampson

I feel like a negative Nelly.  All my responses seem to be negative.  Take this as just my opinion.

Here is how I would view the deal: correct me if I'm missing something.

maximum possible rent is about $3550

subtract 30% for vacancy and maintenance leaves $2485 for principle, interest, taxes, insurance, and your cash flow.  I don't see mortgage numbers for this property but I bet there isn't much left over after mortgage related expenses.

What do you think?

Sounds like an interesting opportunity.  I think the strength of the deal is the equity play (though you have a pretty significant limitation placed on you by the lien) rather than cash flow.  I really don't see much of any long term cash flow. 

If as you say those properties could go for $1250 a month and instead you rent them for $876, you are giving up  $374/month * 3 units = $1122/month * 12 = $13464/year * length of lien = $269,280 to get $155,000.  There are certainly a lot of other variables at play but on the face of it that doesn't seem very exciting.  It gets even worse if you move out and rent the 4th unit at below market value.

I think your long term maintenance expectation is low, as well.  Especially if you are paying for the labor.  To be safe I plan on 30% for vacancy and maintenance.  If a deal cash flows at that number then I feel pretty safe.

Also, I don't see principle payment listed anywhere so I assume you include that in your cash flow.  While principle CAN equal profit (if the property maintains it's value) it doesn't equal cash flow.  Cash flow is only the money you stick in your, literal, pocket.

While this deal may be profitable, it won't cash flow, long term.  You just need to decide if you are ok with that. 

I can't think of a compelling reason to chuck money into the wind like that. How are you establishing ARV or cost to remodel? Are you working with a local realtor? I would say if the deal is not significant enough for you to fly out and take a look, it aint worth the risk.

Also, I can all but guarantee, nobody is coming in from out of town to rent a home to attend Iola community college.  Everyone attending lives local or doing gen eds online.

Your better off finding someone to be your feet on the ground in a larger town, like mine.  Not sure if this is the right place for flips, though many people do them here, we are great for cash flow buy and hold.

I agree with the above stated opinions, there is no money in either deal.  Max of 60 X monthly rent (including fix-up), for me.  I suspect this is an unrealistic number for some markets, though.  I'm not very aware of your market.  That being said, if cash flow is what you seek, and it really should be, those numbers don't work.

I recognize that I'm ultra conservative and possibly lucky enough to live in a market where I can find buys with my conservative numbers, but here is my math.

I want 12% cash on cash ROI on a 15 year note allowing for 30% vacancy and maintenance. Finally, appreciation is icing on the cake, not a reason to make a purchase, IMO.

A couple of random thoughts.

IMO, one of the keys to success in real estate is being well capitalized.  I have been able to survive some difficult times by being that way.  That requires passing on deals that leave me not well capitalized.

It sounds like this is a pretty exciting opportunity, that worries me.  I rarely make good decisions when they are based on emotion.  If you have to stretch too much to make a deal work, it probably isn't that great a deal, at least for you.  E.G. If a property came on the market worth 10 million and they were asking 5 million, that is a fantastic deal! but I have not prepared myself to take advantage of that deal.  I lack the capitol to take advantage of it.  That would be disappointing but I would pass on it and stick with deals within the threshold I am prepared for. 

The goal may be to become prepared for that level of deal in the future.

Finally, it's ok to pass on deals.  Even if it would turn out OK they rarely turn out as well as we imagine they can.  There're always deals, no one deal is that important.

Man, I sound like a downer, I'm sorry.  

I wouldn't do that.  More often than not, they won't fix it or they will fix it improperly.

Needing to move in quickly is red flag 101 to me.  That situation rarely, if ever, works out well for me.  Assuming, you aren't in some insanely hot market where rentals are leasing up that fast.  I echo what has been said above, you want a vacancy far more than you want a bad tenant.

Very interesting situation.  Real estate is all about making the best decision you can with the (incomplete) data you have.  You know it can rent for what it is currently rented for, so you pay based on that number.  If, through your skills and abilities, you can get more rent in the future, great!  But don't pay up front for that possibility.  The possibility of future increases are your reward for the time and effort you have put into learning this business.

your best case scenario is $39k a year on a $700k investment.  That is about 5.6/5.7% return on equity.  I think you can do better.  I would sell.

I think you have received good advice.  Pay off loans and purchase a duplex.  One thing to be careful of, though, is justifying too large a purchase because it's an "investment" or because your tenants will be paying much of your mortgage payment, for you.  That may happen, and I hope it does, but it may not work that way 100% of the time.

Pick a reasonable duplex, ideally, one that you can afford to cover the entire mortgage, if needed.  This is your first step into this world, this is when you are most likely to make mistakes, so make them small mistakes.

When I purchased my first rental home (which I still own), I payed $28k for it.  The reasons for that were 1. it's all I could afford 2. if the Sh*t hit the fan I could afford the $150 mortgage payment.  3. If I was going to make a mistake I wanted it to be a small one.

Turns out that one wasnt a mistake.  I decided to make my mistakes on later purchases.

Good luck man, I hope you have much success.