All Forum Posts by: Joel G.

Hello All,

I'm currently working on a deal where the seller (a not-for-profit) is looking to sell a multi-unit property; however, they would like to keep the current tenants (via a sale leaseback) until mid-2015. I have no issue with this; however, since I'm getting a conventional loan (assuming owner-occupant), I'd need to occupy the property within 60 days COE. 

I'm wondering what kind of additional avenues to purchasing this property I should be considering. I've already thought of "buying" one of the leases; however, I want to make sure I have some contingent plans. 

Maybe there is a way to structure the deal where I effectively purchase the property today, but move in once the lease terms are up? 

Any thoughts/ideas?

@John M. Great discussion! I've been in the same boat with my current situation (looking to put 5% down on a conventional loan). All of my analyses end up showing lower cash flow mainly due to the PMI. I've figured that I need to account for it as part of my expenses (similar to vacancy and property management allowances) and calculate my cash flow on this. I figure if I am able to have positive cash flow after accounting for the PMI, once I get 20% equity, I can refinance and I'll have an instant boost to my cash flow (who can complain with that).

The only bad part, as you have mentioned above, is the fact that you have this additional expense that you need to account for in each of your calculations, which makes it harder to find properties that cash flow.  

@Jack Martin Welcome to BP! I'm a new investor in the Phoenix area (have yet to make my first deal) and have found this site to be immensely helpful!

@Albert Bui Thanks for breaking it down - that makes a lot of sense. You are right when you think about the margin of error. Given the houses I've been looking at this is the difference between making something marginally acceptable and unacceptable, so its good to understand the "wiggle room" I have. 

@Hattie Dizmond Curious to know, if your ICC is ~7.5%, does that mean that is the minimum ROI (or cash on cash return) that a house needs to be in order for you to consider it? All around, I agree that an appropriate discount rate should be the ICC/Opportunity Cost, though someone like myself doesn't really have that - I guess I can consider my Roth 401(k) return as my personal hurdle rate.

@Roy N. I've been looking at cash flows from the following two perspectives: 

1 - Cash in, less cash out, less allowances (this includes P&I, taxes, all expenses, plus all allowances ~10% vacancy, 10% prop management, 5% repairs). 

2 - 50% rule - so NOI, compared to P&I.

i think in both of the scenarios above, the P&I component ends up being an indicator of cash flow (assuming that we aren't purchasing a property where the rents are nonexistant). Would you agree? 

Side question Roy, what kind of CAP reserves do you have? Are these the same as CapEx reserves?

@Albert Bui Interesting points - thank you! I'm paying for this property with my own funds, so Im wanting to make sure I'm not being too aggressive. My thought with assuming 0% down across all properties is that the P&I payment would be greater, therefore cash flow analysis would be more conservative. Once I actually put the 5% down, I'd have a lower actual P&I payment, and therfore, my cash flow would be more favorable. No other reason than to be conservative. In considering your first comment though, this should flow through my Cash on Cash and ROI calculations.

You are correct in assuming it is difficult to find conventional loans for a multifamily; however, I've found a lender who is able to do it (I'm also only looking for a 1-4 unit property, which is classified as residential in Arizona and if I live in one of the units, I get the benefit of qualifying for "primary residence"). 

@Albert Bui Not sure why the tag didn't work.

@Albert Bui You are correct I would be planning on being an owner occupant. I'm specifically looking for a multifamily, so I'd be living in one unit and rent out the rest. So when you do your calculations, do you assume 0% down? 

@Hattie Dizmond Good call on the  NPV  - Just curious what discount rate do you use? I'd personally assume 3% minimum (historical inflation rate +1)

I think you both make great points on the opportunity cost, more than anything I'm wondering how you account for the down payment amount in your analyses. Do you think it'd be a smart idea to just assume 0% down when performing all of your calculations (this way all of your analyses assume 100% financing)? 

Also, do you have any sort of tradeoff where you are willing to put in more money into a property in order to make it cash flow? 

Edit: Not sure if this is the correct forum, but I'm not sure how to move this to another forum, my apologies. 

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Hey All,

I've had a general question and I'd like to see what BP's thoughts are on it. 

I'm in the process of buying a property and am looking to get a conventional loan with 5% down. In analyzing the income/expenses, it becomes pretty obvious that if anyone increases their down payment, there is a "tipping point" where a property will begin to "cash flow", and eventually meet ever metric we all talk about (i.e. meets the 50% rule, cash flows $200/door, exceeds CAP and DSC, etc...). I'm interested in knowing how you all account for the down payment and cash you put in into your analysis? Do you calculate each of your metrics assuming 5%-20% down? Or do you automatically assume 0% down on all deals in order to have a decent comparison between properties?

I personally have been keeping the 5% down in my calculations use this to figure out the cash flow per door (assuming a property is 95% financed); however, I feel like I might be missing the mark on this. Thoughts? 

@Rocco Grossi Welcome to BP. I'm also a new investor and have found the information available here to be extremely valuable. Have you checked out the Ultimate Beginner's Guide (http://www.biggerpockets.com/real-estate-investing)? I'd also recommend you check out the podcasts. 

Based on your question, it seems like you are looking at properties between $200k and $250k (depending on interest rate and term of loan). A duplex in this range (at least in my market) would be tough to cash flow as people won't likely be paying nearly as much as you'd need to clear the 50% rule. 

The most obvious and easiest way to decrease your mortgage payment would be to 1) Decrease the purchase price of your home, 2) Put up more of a down payment (i.e. put 20% down instead of 5% down on a conventional loan. 

Purchasing in a higher rental market doesn't necessarily mean that you'll be able to cash flow, since cash flow is going to be a function of the purchase price of the house and the amount of cash (rents + additional income) that you'll be able to bring in. 

@Jesse Waters I'm still in the process of figuring it out :) I'm looking to buy my first property so I'm trying to leverage as many tools as I can. As far as I can tell, rentometer.com seems like a good indicator of rents, so long as you are smart with your search. What I do is find my property and input the number of bedrooms. I then go to the individual properties that are listed and do a google map search to see if the property "looks" similar. I then tailor what my expected rents would be based on this information.  Not the most scientific approach, but I feel like it shouldn't throw me off the mark too bad. 

I've recently realized that the best approach is to cruise through the neighborhoods, find "for rent" signs and call these up. I figure thats what a prospective tenant would do, so why shouldn't I. 

@Account Closed I just stumbled upon the following website  http://www.claritas.com/MyBestSegments/Default.jsp?ID=20&menuOption=ziplookup&pageName=ZIP%2BCode%2BLookup I think this could be valuable when determining the demographics of your potential renters.