All Forum Posts by: James C.

Erik,

Your price assumes that NOI = GI, so I would take that into consideration...

My numbers are below.

Note: When scanning a property I force 10% of and 10% on my invested funds, and look for a positive net cash flow number. If it looks ok, then I can do a more in-depth analysis. I'm always revising my scan process, and am open to suggestions. As you can see, for me,  this is essentially a break even proposition based on my scan.

Hope that this helps,

Jim

APOD:

Jeremy,

I would look at it more closely, if you can RUBS the building, maybe... 

A few yellow flags for me:

1) You aren't paying yourself enough (<5% of GI), and you should be at LEAST 8% GI, which is about what hiring a PM would cost, it might even go to 10% for a 6 unit.

2) Actual payment of loan: At $235,000, 5.25%, 30yr am. gets me about $1,300/mo, so for 12 months, about $15,600. NOI of $28,000 - $15,600 for PI leaves about $12,400 NCF.

If you can only get shorter am period (5.25%/20 y) you get $8,800NCF, or if you have to go to 8% (30y) you get $7,300NCF... Also, keep in mind, most of the commercial loans with good rates start at 500k, so the mortgage payments is a crucial metric for this deal.

3) Reserves... suggested 10% vacancy, and 10% maintenance, which works out to about $5700/yr each, or $11,400. If you continue to pay all the expenses (at the 5.25%/30y morgage), and then put reserves in, your NCF goes to $1,000., if you can RUBS the building... then you get $7725 back (2100 water, 4500 gas, 500 garbage, 625 electric), and you are now at $8,725NCF per year... of course the RUBS costs as well.

I would look at this deal more closely, and make sure you have your financing nailed down, along with a strategy for increasing the income of the building, as well as some worst case scenarios.

Good Luck!

Jim

Hozona, 

+1 for the above advice.  I would look at it that you have a "forced" family business partnership.  Think about how the other side deals with Thanksgiving and how you feel about the other family members you are in business with. That will tell you alot about the direction to go. Having an attorney draft a partnership agreement could make things easier. 

From your side, I would be laying all my cards on the table, and if it goes south, at least you can say you were up front and honest. If the family relationship is going to be damaged by going into business,  it's really not worth any amount of money (IMO).

The second thing is a mother/daughter apartment us usually not supposed to be rented to anyone other than a  direct relative of the owner or renter of the main house. This may create an issue down the road unless it's allowed under code,  you get a variance,  or create a legal unit. Whatever you do, (sub)meter the other unit.

I'd get some advice on that before moving forward.  A good real estate lawyer would be worth the 1hr fee (maybe a free 1/2 hour consultation). A Real Estate agent, property manager, appraiser or mortgage person could help with a reference. 

Good luck! 

Jim

Laura,

I  have never had to submeter a building. Like most things it would be chasing down a couple of quotes and deciding if it's worth it. I like to have each of my Tennants responsible for their own utilities.  I'd get in touch with a couple  RUBS companies and see what you come up with. Check into what an electrical contractor/plumber  would chatge as well.

Good that the comps are over 1335. Now it's just a matter of running the numbers and deciding what you think is best for your plans. You might want to put together a written business plan for your REI to keep you on track.

Finally,  the refinance idea is a great one.. especially if you can loose MI. I would see if I could make friends with an appraiser and run the idea by them to get their opinion. 

Keep up the good work and keep learning! 

Jim

Donnell,

This is going to be long and dense... so grab your favorite beverage.

Thank you, I think ;)

First things first: 10K is enough to start, especially if you can be creative. More is obviously better. Your professionals on your team are successful when you are successful. Find folks that understand that, are scrupulously honest with you (even to the point of painful), and are people you want to spend time with. If you do this right, you could be spending substantial amounts of time and money with them. You don't have to outright like them, but you should not be questioning working with them. Essentially, find folks in the 3d world like those in the virtual world (e.g. BP). 

Next Steps:

1) Get your personal finances in order, on solid footing. Some folks indicate you should have no debt going into REI, some say have an aggressive plan in place to reduce it to zero in a short time frame. I get both points, but you need to decide. Wander over to the "Afford Anything" blog (Disclosure: I get nothing for the plug) or your favorite finance/life hacking website/blog/podcast, and research, research, research. (Disclosure: I am NOT a financial planner... I am just passing along what I observe)

2) Have some level of monthly expenses set aside in case something happens. Most folks I run across indicate 6 months of living expenses in ready cash. This is money that you do not use for anything but your personal living reserves... Your investable cash is over and above this figure. Also, this cash should not be used for reserves for a building... it's ok to show it for mortgage purposes as you can access it in an ABSOLUTE emergency, but you should build at least 6 months (or more) of reserves for your building once you have it. (Disclosure: I am NOT a financial planner... I am just passing along what I observe)

3) While you are doing 1 & 2... make a business plan... "Donnell Durden will create an LLC in Connecticut, called Durden Properties LLC., that will invest in 4 unit properties in New Haven CT that...." This will get refined along the way, so it should be a "living" document. Begin to get your supports together as you are working on the plan...

Most folks starting out can't buy property without a mortgage... so that is logically your starting point. Sit down with a few mortgage folks ... ask if you can bring coffee or some snacks or make it a lunch meeting. that $5 - $15 can go a long way. It doesn't (or shouldn't) cost anything... ask your prepared questions (remember who, what, where, why, when and most importantly HOW), lay out your financials, get their opinions, ideas etc. Ask for references to good real estate agents, builders, HML, REIC's (join one of these), etc.

Once I had my agent in place, then I would begin to request that I get to see properties that make sense for your plan (you have screened them, refined the screening and they look doable). During all this read, ask questions, revise your plan as necessary, and keep researching (including BP), and adding professionals to your list, each one brings a new facet to your business. Example, if you find a good construction person, now you can do a fixer deal, without a good construction person, no fixer deals are possible (Unless you have the talent to do that work). 

You don't know what you don't know at this point. No question is too stupid, except the one you don't ask. That one you don't ask, it could cost thousands... 

With all that said... use the opportunity in front of you as a real live example to get yourself started... build your knowledge base first... if you haven't seen the property, go see it. There is no substitute for an inspection. The agent showing you the property doesn't have to be "the one" for your team. See if you can get the actual numbers for the property (you need to research what those are called, and what you should have). 

Take pictures, video, whatever you need to do to keep that property in your mind... use it as a reference, a point of beginning. Use it as an example deal... run the numbers 47 ways. Run what if scenarios on it. Most importantly, figure out how to work the numbers, what happens to my CAP rate if I pay all cash, no cash, 50% cash. What happens if I can raise the rents 50/month, lower expenses 3%. What happens If I get my money at 12% and 3 points, or 3% and 0 points... where does the property need to price to make those combinations work? Any deal is doable, it's just the price that makes it doable. The seller might not like the price... oh well, next.

Get involved, Join a REIC, shadow an investor, Mortgage person, Real Estate agent. Spend a weekend building a Habitat for Humanity house, attend auctions (I hear Investors sometimes hang out at these), go to a closing. Use these as ways of gathering information about real estate. 

One last thing... do not under any circumstances get into analysis paralysis. Find the deal that fits your model (double and triple check your model) that you have created after doing your research and pull the trigger.

If you have any more questions, or some of this is unclear (I'm sure it is), let me know. Actually, I get more out of this... it helps me to refine my ideas/plans and strategies, so, thank you for the opportunity.

Jim

Donnell,

First things first, you need to figure out the ARV (After Repaired Value) and the monthly rents, and see if that whole thing makes sense, financially. I can't see a way forward (except below) unless the ARV is MAX 60% or so of the acquisition + rehab costs AND it cash flows. If you use standard financing (it won't qualify), and HML/Private money or Partner will want a KILLER deal to make it work; read 60% of ARV and DSC > 1.5, plus at least 20% cash in the deal. 

Options:

See if the property is a FNMA Homepath property, and explore that option (I've never used it, so I can't comment about it). I would also get prequalified for a 203K Loan (acquisition + rehab costs). it's about a 5-6% all in loan on the total balance. You have to use a contractor, but this sounds like a first deal, so best to have the support. You might be able to get FNMA to pay some of the closing costs/Points etc. You could combine this with a first time homebuyer program in CT to help out. This only works if you are going to owner occupy.

Do some estimates for your numbers 94,900 + 50,000 = 144,900 (call it 145,000). Currently, FHA 203K money is about 4.3%, so that makes your monthly payment (30yr/fixed) on 145,000 = about $720. Rule of thumb in war zone is 2%, so $145,000 * 0.02% = $2898 rents per month. Use something like Rentometer to determine rents, find out taxes, set aside 10-15% for vacancy, and 7-10% for repairs (it's going to be newly rehabbed), and see where the numbers lead you. Do this analysis before going forward. If you've never done it... it can take a bit to get it going... but find a good analysis spreadsheet (APOD), and work through the numbers.

If the analysis works out, then put it under contract (For FNMA, I think a Real Estate agent has to submit the contract, but check that out too!) with inspections and financing contingencies. Then go from there... have your inspections, bring in your contractor and property management professionals (you do have those, right? If not get them NOW!, Make sure they are GOOD!). TIP: Make friends with an actual appraiser, and run the deal by them for their opinion, buy a coffee or lunch for them... its' SUPER CHEAP insurance. Get all your numbers and rework the calculations with a fine point pencil. Run them by BP or a few investor friends. If the numbers work for your business plan, go forward. If not, find another deal. 

You might also consider having your team (Real estate agent/appraiser/lawyer/LLC/finance person/property manager/construction) in place before moving forward. It might mean you miss this deal, but at least you are better positioned and more knowledgeable for the next one.

Good Luck, let us know how it goes!

Jim

Laura,

First thing, Congratulations! Second thing: relax you are doing ok...

DFW 2 units at $213,000 are tough to cash flow... rule of thumb you need minimum 1% of the value... so you need 2130 per month (minimum target).

When you are doing your numbers, make sure that you are separating out PITI and utilities, mixing the two makes it tough to see where your money is going.

Right now your cashflow looks like this:

Mortgage =1625

Back unit = 795

Main House = -1625 + 795 (Back unit) + 550 (roommate) = - 280 

Utilities bill = -325 + 100 (Back unit) + 168 (Roommate average) = 57

Analysis for you (personally)

Your contribution to mortgage = 280

Your contribution to the utilities = 57

Total out of pocket for you = 337 (280+57) NOT INCLUDING CAPEX.

The #1 thing I would do is (sub) meter the back unit, and quickly. This will allow you to rent out the front unit independently of the back, which will make your life easier. The #2 thing (do 1 & 2 together, NOW!) is to find out how much you can get for the main house. As long as you get more than 830 for the main house, you are above break even, and to meet the minimum of the 1% rule you need to rent it for (2130 - 795) = 1335. 

Assuming you can get 830 to1335 for the main house, an idea might be to create a business partnership (don't include this house) with your roommate. Pool your resources to find a good cash flowing 4 unit in DFW. See if you can find one with a breakeven of 75% of the cashflow, i.e. the whole thing is paid for by the other three units. If you can accomplish that (TOUGH IN A HOT MARKET LIKE DFW), you and your roommate can live in a 2/1 or 2/2 apartment in the building for "free". If you pay yourselves "rent" then you can use those funds to build a down payment to the next building faster. 

In general, the more apartments you have in the building, the easier it is to hack for no money out of your pocket, and positive cash flow. If you are worried about big buildings, don't be, just educate yourself, and pay a GOOD property manager to teach you until you learn the ropes. Make sure the building cash flows to include the management fee. You might want to wander over to "Afford Anything", Paula Pant's blog (I get nothing for the plug), for more on designing your life.

Good Luck!

Jim

Brandon, 

Typically, taxes are not included in the payment, it's P&I only.  It also depends on what gets negotiated. Terms of an Owner Financed Deal (OFD) vary a lot. Most of the time I have seen them an owner has one of two main reasons for offering financing; either they want their price, or they are utilizing a tax avoidance strategy on the sale of the property . 

In OFD,  you should try to figure out why the owner wants to finance. Once you know that, it will dictate your strategy. Always make sure the numbers work for your business, and have multiple exits. Seller financing can be good, but it's not a substitute for a viable deal.

Good luck,

Jim

I occasionally see "opportunities" to purchase real estate at stupid low prices $500, $1000 or even $1. They are always junk, in depressed areas, with marginal hopes for appreciation. Even if you were able to get them habitable, the rent cashflow makes little to no sense, mostly due to economic vacancy. In reality, the only economic value is the land, and even that, it's a peanuts play. The only bright side is that the investment of time and capital is minimal.

How do you evaluate those sorts of deals? When do they make sense? is there a good short/long term strategy? 

Thank you,

Jim

Samuel,

+1 for Ronald's advice. Where you hang your license can make a big difference. If your DB/agency or an agent in your office handles a lot of BPO/REO then it makes things much easier. If not, you're in for some work.

Go visit REO properties (you need to do this to know your market anyway, and you might find a deal to buy), find out who does property preservation work. Their number is usually on the paper in the window. Call them, tell them what you want to do, and ask for their contact name, number and what institution owns the property (you do have a database set up, right?). Talk to the lawyers in town that do foreclosure work, tell them what you want to do, ask for names, numbers and companies.

Finally, your appraisers, find out if they are doing any work for REO/foreclosures, and see if you can get names/numbers. BTW you should have a couple of appraisers in your pocket. FInd out who their #1, #2 and #3 clients (Mortgage Brokers/Bankers). Then go see those Brokers/Bankers, take them out to lunch or coffee. Ask for buyer referrals, BPO/REO names and numbers. Let them know as you get listings and buyers you will send that business their way. When marketing your listed REO property, make sure there are some examples of possible financing/payments from your Bankers/Brokers in the house, and available for your buyers.

After that, it's smile, dial and service. You might want to become a full service REO person (Preservation/Repair/Management). Once you start in the BPO/REO business, this is also a good place to start to understand the NPN business. It's asking lots of questions about how that process works.

I would suggest that this is a sideline business (don't neglect the regular listing/selling business) at least until you get it up and running.

Good luck!

Jim