All Forum Posts by: Jeff Tracy

Any time someone says that I need to trust them when I question their information, my immediate reaction is that they are trying to hide something. Your response should be that you trust, but verify.

After thinking about this for a moment I think I have a better solution. Why not just increase their rent to cover the additional wear and tear on the property and let them keep subletting the place? They are taking good care of the place and you are getting the amount of rent you had expected.

As soon as I posted the topic, my spreadsheet got jumbled.  Here is the text version:

Actual Expenses

Water       $75.00

Trash       $60.00

Heat        $361.00

Sewer         $60.00

Insurance     $150.00

Snow/Lawn      $100.00

Taxes      $200.00

Estimated Expenses

Vacancy     $210.00

Management      $200.00

Maint     $210.00

CapEx $210.00

Total Expenses     $1,836.00

Rents     $2,100.00

Monthly Cash     $264.00

Yearly     $3,168.00

I'm about to jump into my first real property and I want to know if I am overestimating expenses.  It's a 3 family for $70K and rents are generating $2100 per month.  The property needs about $20K worth of work.  I have all the current owners expenses (tenants pay their own electric), so I know those are accurate.  But, am I overestimating on the accrued expenses like vacancy, maintenance, ect?

Actual Expenses
Water	$75.00
Trash	$60.00
Heat/Gas	$361.00
Sewer	$60.00
Insurance	$150.00
Snow/Lawn	$100.00
Taxes	$200.00
Estimated Expenses
Vacancy	$210.00
Management	$200.00
Maint	$210.00
CapEx	$210.00
Total Expenses	$1,836.00
Rents	$2,100.00
Monthly Cash	$264.00
Yearly	$3,168.00

You may have noticed that there is no figure for financing or mortgage expenses. The down payment and rehab money would come out of pocket (about $27K) and the owner will carry the mortgage for a few years which would allow me the time to fix up the place a bit and refinance into a conventional 30 year. The ARV woudl be $130K. I would estimate the mortgage expense to be about $300 per month on a $65K-ish mortgage. If I'm correct on the accrued expenses, it's not really a deal worth doing so I need a little BP community help.

Thanks,

Jeff

I live in Peekskill and if you are looking for an area that's up and coming then I think you picked a good spot.  If you tell me which part of town it's in, I can tell you if it's a decent neighborhood or one you should stay away from.

Originally posted by @Corey Fick:

@Jeff Tracy If my math is correct, it looks like a cap rate of about 7%. It's not horrible, but not a great deal according to what experienced investors look for (10ish). You are also accounting for a 10% vacancy rate - have you looked at vacancy rates in your area and how that compares? I understand the need to be conservative too.

I would probably leverage my money and since it works with min. down, might as well go for it.

 Vacancy rates in the area are about 1/2, or 5%  As for the cap rate, if I bring up the rents to near market then the cap rate would be 9%.  Is it ok to look at it this way or am I trying to game the numbers a bit?

I left out the fact that I'm actually paying $160K for the property, but getting $10 from the seller for closing.  So, do I figure the cap rate using the $160K figure or the $170K that I'm borrowing?  

Originally posted by @Ahmad H.:

@Jeff Tracy

The numbers look good. I like that you included PM cost in the analysis but if you have the time to manage the property yourself you should, because then you can squeeze out a sizable cash flow and get valuable experience. 

As for your down payment dilemma, it really depends on the following:

1) Is it easy to find another property with the same cap rate?

If yes,

2) Can you deploy the 37k you have left to buy that property right way?

If no,

3)How long will it take you to replace the 13k that you spent to acquire the 1st one?

Keep in mind that with buying two you provide yourself with ability to earn more money by managing both yourself and diversifying your assets.

On the other hand I am not a fan of putting all the cash you have to buy one property so only do this if you have access to emergency funds. If you don't you should probably do FHA for 1st then keep cash reserves, save more, then buy a 2nd property.

It would probably take me about 4-5 months to replace the $13k I'm investing on this property.  There is another property around the corner from this one that I've had my eye on for some time and even went back and forth a few times with offers.  I don't think the seller is quite ready to let it go for what I think a reasonable price is, but I think he's going to be foreclosed on soon so he might be more willing now.  I'd like to use the extra funds to buy this other property as well, but I'm concerned about having to little equity in 2 properties and getting in over my head.

I'm about to sign a contract on a 4 family in upstate NY. The price is $170K and I'm using an FHA 203K with 3.5% down. Here is the math:

Rents	$37,200.00
Mortgage	$11,748.00
Vacancy	$3,720.00
Insurance	$1,500.00
Maintenance	$2,976.00
Taxes	$8,000.00
Management	$3,720.00
Capex	$3,720.00
Total Expenses	$35,384.00
Income - Expenses	$1,816.00
Monthly Cash Flow	$151.33

Am I missing anything?  Other than the fact that the monthly cash flow isn't that great?  The current rents are under market by about $75-$100.  I think I can clean up the place and bring up the rents to market level which should bring up the cash flow.

Here's where I need a little more advice. The place needs about $20K in repairs and deferred maintenance. I have almost enough cash ( I might have another month or 2 of saving to get it all) to up the down payment to 20% and pay for the repairs out of pocket. I think I can save a little on the repairs so I would need about $50k to close and do the repairs if I go the traditional route vs $13k out of pocket to go the 203K route. The net effect by going the traditional route would be to save about $350 per month on the mortgage and PMI.

Is it better to have the increased cash flow or save my current cash for the next deal?

About 6 months ago my mother in law passed away and we inherited her home outside of Atlanta.  We were lucky enough that her friend around the corner wants to buy the home, so we struck a deal with him and we close in about 2 weeks.  However, in the last 2 months we have received about 7 or 8 yellow letters so I want to share our experience and our reactions to receiving them.  Hopefully it will help some people out.

My wife finds the letters to be upsetting and likens it to buzzards trying to feed off a dead carcass. To be honest, some of the letters are just down right stupid. Like the guy who sent us a yellow letter that just said $BUY$ on it in giant letters written with a Sharpie. That one was not well received and several curse words were spoken before it was torn up and put in the trash. Others have been very generic and say something like, "we want to buy your house at.." followed by the address. The letters have a very scammy/sleazy feel to them and I don't think these investors are taking into account that they are contacting someone who just lost their mother. Had any of these people delivered the letter in person they probably would have been on the receiving end an expletive filled rant and probably a few punches. I'm sure everyone sending the letters have the best intentions and we are the ideal candidates; we inherited a house 1,000 miles away, we don't want it and we can't rent it (it's part of a HOA that caps the units that can be rented). This is the perfect business situation; motivated buyers and VERY motivated sellers. I can't speak for all sellers of inherited homes, but I'm sure we are in the majority of people who are looking at this as an emotional decision, not a business decision. This isn't so much looked at as an asset that needs to be disposed of, but rather one more severed link between her and mom.

We did receive 1 letter that was very honest.  The person explained that they learned we had inherited this property in Atlanta and that it may be difficult to deal with because we live in New York.  When we were ready they would be happy to speak to us about options to sell the property.  It was very specific to our situation, it was very sympathetic and understanding of a delicate situation and, most importantly, it didn't make my wife want to punch the sender in the face.  If we didn't have a buyer, this person may have been called.

The point to take away from this post is not the intention of the letter, but how the letter is received.  I can't speak for everyone, but we, especially my wife, were much more receptive to the yellow letter that was respectful of our situation and much less receptive to the more generic letters.  I'd be willing to bet that the people who are prospecting from probate lists are much more successful when they send specific, targeted letters rather than a letter that says "I want to buy your house".

I'm about to sign a contract on a 203K property in Kingston, NY and was hoping someone can point me in the direction of a contractor in the area.  4-Family building in need of some masonry work, painting and carpentry.  The work isn't that extensive, so I'll be going the streamline 203K route.