All Forum Posts by: Jesse Chunn

As a casual observer of this saga, I am happy that you declined. I hope you don't lose the deal, but they don't want to lose the deal either. The only other option I would have offered would be if they pay full market rent and sign a waver against any lawsuits.

I have recently had quotes at 5.25%.

@Liz Conyers

Hi Liz,

I live in South Arlington and I am pretty much at the same point as you in the process of real estate investing. Would love to meet up for coffee or lunch some time and talk about the area and goals and opportunities and building a team and ideas and...

Analyze dozens of properties of all shapes and sizes within your $ range. Bite the bullet and get a pro membership on BP and use the analysis tool on as many properties as you can find that look interesting to YOU. You will begin to learn what to look for, and things like NOI and cap rate will begin to make sense and jump out at you. Find a deal you like, and come back here and post the details and ask for feedback. If nobody crushes you with negative comments, just go for it. The number one thing that will stop you is YOU. Just do it. Jump in, make an offer, don't be afraid to negotiate hard, be willing to walk away at a predefined number or if you discover problems that scare you, and if you get it, figure it out. Lots of people are on here doing it, so how hard could it be? :)

Not having much experience myself (but a dedicated student of the art), take this for what its worth. Based on what you have said so far, it looks like you might have around $80k in equity. What would you be able to do with that in the stock market? Let's say 6% annually, or $4,800 a year. You are currently making $100 per month, or $1,200 per year. If you raise the rent by $100 you are at $2,400 per year. For me personally, anything less than 10% annual return on a real estate investment feels like too much work for too little money, especially when you consider that the stock market requires practically zero effort to maintain.

I would consider selling the property and looking for better deals. With $80k you could easily do 2 or may be 3 more deals with better returns and easily beat $4,800 annually, and probably hit $8,000 annually if you are diligent about your deal selections. That would put you at 10% returns, not counting amortization and appreciation.

I hope that sparks some creative thinking.

@Account Closed

I am as much a newbie as you are (if not more so) but I'll give it a shot (any pros that want to correct me please feel free). Based on a cap rate of 12% (ask him for the exact numbers he is using to come up with that), the NOI is approximately $145,000. Cap Rate = NOI / Market value ($1.2m). NOI (net operating income) = revenue - expenses (not including taxes and mortgage). So I arrive at a rough NOI of $145,000 since 145,000 / 1.2m = 12%.

The income range you provided is, I presume, the difference between all units with a single occupant at $875 per month ($13,125 for 15 units) up to an average of 4 occupants per unit at $1415 per month ($21,225 for 15 units). I would ask for a "rent roll" which is a list of the current rent being charged for each unit. That will tell you 1) what the "real" mix is based on current occupancy and 2) what the current vacancies are and 3) what your actual income is likely to be.

If we assume, for the sake of argument, that the "average" rent is $1,100 per month (2-3 people per unit), actual income would be $16,500 minus vacancy rate of let's say 3%, which would put you around $16,000 per month, or $192,000 income per year.

If you subtract the NOI from gross income (192,000-145,000) you have expenses at $47,000 per year before mortgage and taxes.

By jumping over to the Zillow mortgage calculator and plugging in $1.2m price with $350k down on a 30 year mortgage at 5% interest, the monthly payment (with taxes and insurance) is estimated at $5,830, or $69,960 per year. I have no idea if those terms work for your seller, so your mileage may vary, but I'll use those numbers for the next calculations.

Now, if you subtract your mortgage payments from your NOI, you have 145,000 - 69,960 = $75,040 in net annual cash flow, or a 21% annual return. Your down payment could be paid back in full in about 5-6 years or you could pay it back as a percentage of net cash flow over a longer term depending on where you get it from and how much you want to keep for yourself in the early years.

Now, two things to keep in mind...

First, I may have royally screwed something up in my calculations. I have not actually done any of this with real money. I did it all by hand based on memory and I certainly may have gotten something wrong or left something out. I've been studying the analysis process and the main reason I am even replying to your post is because I enjoy the practice (and hope I can help you out in the process).

Second, there are a number of assumptions that you really, really, really need to verify. I may have been too optimistic in my assumptions. You probably want to see some tax returns, leases, etc... to make sure everything is on the up and up, especially on the expense side.

Bottom line, consider this as nothing more than an effort to help you think this thing through. I hope someone with more experience will review my post and confirm or deny my math, and I hope this helps to at least get you on the right track.

It would seem to me that for someone that is willing to do some traveling when necessary, long distance investing would be much easier (and worthwhile) with apartment complexes than with SF homes. Assuming, as I do, that a large apartment complex will need a management staff, once things are "up and running" you shouldn't need to be there on a daily basis. I'm sure, like with anything, you need to check things out in person from time to time, but generally speaking it should run like a business. How many of us have worked somewhere where the boss live in another state and you may rarely or even never see him/her? I know I have.

I bring this up because in my career I have found that my willingness to relocate has allowed me to remove geographic restrictions from my job searches, which has in turn allowed me to make more than double what people with similar qualifications (but a requirement to stay in a certain city) have earned.

In the case of real estate investing, I can see how it would be true that by searching a broader area for deals, you would be able to find deals better suited to your goals.

If you have gone to the trouble of reading this whole post (I know it is a bit long) I would love to hear thoughts or experience on the differences between long distance investing with large multi-units versus smaller multies or single family homes.

@David Faulkner

Brilliant. I hadn't thought of that, but it makes total sense. Use cash where cash creates the biggest advantage. Simply brilliant.

@Jake Hartnett

You are going to get plenty of advice from people far more experience than me, but I will add my two cents... If you are in a town of 4000 people, you probably don't see lots of deals. Assuming you can find decent, stable tenants that don't have you busy worrying with them, I would say this is a better investment than a bank account or an index fund, by far. By double. Of course, it is on you to do your homework (which you are obviously doing) but if you don't see many deals and want to get into the game in your area, at some point you have to hold your nose and jump. And yes, you should do everything you can to get that price down. I once offered 250k on a 350k on a longshot and got it for 270k. Sold it two years later in a rush (after 30k improvements) for 340k after one week on the market! Good luck.

Like another person that posted, I have no real experience to speak of, but I have been doing my research. Something you might consider instead of a partner is to spend some time looking for an amazing property management company in an area that has lots of the kinds of deals you are looking for, like Fort Worth, TX, for example. If you have the money to get it kicked off, a good PM company will do most of the footwork for you, including wholesaling (finding good deals in the area), hiring contractors to do rehab (at a good rate since they do lots of business), marketing, filling, and managing your property. If I were you (literally, if I were in your situation) I would pick an area (or two) and start calling property management companies and tell them what you have in mind. You might be surprised. Sometimes the hardest part is just making the call. Your situation is not rare. I have nothing against partners, but why not just pay for what you need, rather than split everything with someone and still probably wind up paying everyone else on top of that. I hope that sparked some ideas.