All Forum Posts by: Jordan Grimstad

@Thomas S.  "You do not waste time asking for credits you simply lower your offer to compensate for the repair costs." 

Why is a lower offer inherently more desirable than an equivalent "higher price with credit offset" offer? For example, from a seller's perspective, getting $200k and providing $10k worth of repair credits associated with specific repairs has the same net impact to their bottom line as getting $190k; and, from a buyer's side, paying a financed $190k means you still have to cough up $10k cash immediately to execute repairs, whereas paying a financed $200k and getting $10k in credits means you get to amortize the upfront cost of repairs over the term of the loan and only needing to set aside $2k in additional cash immediately to offset the additional loan principle. Seems like it could be an easier pill to swallow on both sides to propose credits rather than putting down a straight up 'firm and final,' but let me know what I'm missing.

@Brendan L. Negotiation tactics are seller/market/property dependent. Why is the seller selling? Are they trying to get out from it quickly or can they take their time? Is the seller an investor themselves? Are they the type that would prefer to deal with things in writing or are in-person discussions more likely to be effective? I'd probably talk it over with your realtor/a mentor or possibly start a separate thread to source people's thoughts on this one.

Regarding the NPV & DCF calculations, the pages might be a bit complex but the idea is generally pretty simple - if I tell you I'll give you $100 a year from now or $x today, what would x need to be such that you were indifferent between the two offers? 

More broadly, DCF helps you get an 'apples to apples' perspective on projects that have differently-sized cashflows at different times. For example, if you have one project with a large upfront investment and larger periodic payoffs and another project with a smaller upfront investment and smaller periodic payoffs, one answer to which project you should choose depends on the sum of the present values (the "x" in the $100 vs. $x comment above) of the cashflows of each of the projects - this present value is dependent on the length of time you're investing and your expected yearly return, as a discount rate (although there are a couple of different ways to select an appropriate discount rate, that piece can be researched).

Agreed with @Matthew Paul - I think your options to make the situation work better than it currently is working are:

1. Negotiate with the seller to get a credit that offsets the value of repairs, although you almost certainly won't be able to get a credit for "nice to have" repairs
2. Partner with someone to take on the initial $35k project costs and give them a slice of the cashflows (or whatever arrangement is mutually fair)
3. Evaluate the cash on cash ROI if you hold on any non-essential improvements up front, and perhaps make them 5/10/15 years down the road. Or, change the nature of the upgrades to less premium options (if this is possible), and evaluate the cashflow under those conditions.

Evaluate the NPV of the different projects using a DCF analysis. Ultimately, I think that you have to compare all the possible ways of executing the project using cash on cash return or NPV (I would prefer NPV for the complexity of this particular situation), and be disciplined enough to walk away if the numbers don't make sense.

Couple of questions/thoughts on my end:

1. Given that you're looking to minimize risk, what kind of returns are you expecting/hoping to generate via a real estate investment? How does this compare to expected risk/return in, say, a total stock market fund? 
2. What kind of investing are you trying to get involved with? Do you want to be involved in the buying/selling/renting of homes/properties directly, or do you want to be more hands-off? If it's the latter, you're probably better off finding a publicly-traded REIT or something like that.
3. Building on both #1 and #2, what amount of work are you looking to put in? If you're looking to find an investment with lower risk and higher return than a market investment, you'll likely need to put in a great deal of work unless you have the inside track via connections etc.

Hi, and welcome! Couple of thoughts on my end:

"1) This summer I'll be making a decent amount of money at my internship. Should I start saving this money for my first deal or use it to start paying off my college debt?"

Not sure if you're asking it in this way, but I don't think it's an either/or - you can (and probably should) do a mix of both. My personal opinion would be to lean towards paying down the loan debt more aggressively - I'm not terribly risk-averse myself, but if your first deal goes sideways, you'll be dealing with both a student loan issue and a real estate issue, so I'd personally look to stabilize my student loan situation before taking on additional risk. "Stabilize" and "additional risk" here are highly variable terms - if your honest assessment is that your loan situation is in a good spot, and your first real estate deal is less risky (due to price, quality of the deal, quality of your mentors, etc.), then I think you should push forward.

"2) What's the best way to pick a niche (wholesale, buy and hold, flip)? How much does it depend on the area you live in? What other factors should I look at before diving deep into one niche?"

Again, personal opinion on my end, but my priorities when thinking about a niche:

• What engages my interest the most? (Realistically, I don't think anyone can trick themselves into fully committing themselves to something they're not interested in, particularly if it's not their primary source of income.)
• Financially, do I want a steady income stream (rentals, for example) or something more "event" oriented (flips, wholesale)?
• From a level-of-involvement perspective, what kind of time and energy can I invest?

I'd say chat with a few people in your area that are involved in the industry, and sit/think for a while about what matters to you. I'd be surprised if a niche doesn't find it's way to the top of your thoughts, and you can press on from there.

How many years left on the 15 year loan?

If you're looking for a pure math answer, plug in the expected cashflows for each approach into the NPV calculation, and select the answer that has a higher net present value. I would also include the NPV calculation associated with selling the house immediately, for completeness but also to evaluate what the additional risk associated with each strategy is expected to return vs. the very short term play. In all likelihood you'll have a higher NPV from renting in perpetuity but worth checking out depending on where you think the market might be headed.

Say I have a SFP that rents at market rent for $x/month, and I find a multi-family property where the units/amenities are otherwise equivalent to the SFP (same bed/bath, location, finishings, parking spots, etc.). Is there a reliable rule-of-thumb that relates the SFP rent to the likely market rent for the units in the multi-family? 

Phrased another way - is there a reliable way to determine the price of privacy offered by a SFP and decrement this price as privacy decreases?

@Daniel OKeefe Based on the responses in this discussion, it looks like an appraiser would use a combination of appraisal approaches to determine the value. That said, I'm not certain if the promise of better market rents (vs. what it's currently actually renting for) is good enough to influence the appraiser's valuation. You might need to actually prove that people are willing to rent the units at the higher value by actually getting them rented at that higher value.

@Juan Banda Are you using a HELOC to get money to finance your first RE investment? Or is it just a mechanism to give you more money to work with?

You're increasing your exposure to the real estate market by using a HELOC to finance an RE investment (beyond the exposure you have if you just have your primary residence + an RE investment) - if you're stable enough to add the risk, that's fine, but if a huge portion of your investable assets are exposed to the real estate market then that could be a massive issue in the case of a market downturn.

@Carlos Mezquita 

Re: closing costs - aside from asking your realtor, mortgage broker, etc., there are a number of resources online that can give you ballpark figures.

Re: estimating rehab budget - no easy answer to this one either aside from getting in touch with a couple contractors/handymen/plumbers/electricians in the area and asking for quotes on generic stuff you'd be likely to work on. Aside from that, I'd strongly recommend The Book on Estimating Rehab Costs - it's not a super exciting read, but it's easy to skim through and get a sense of things. It'll be nearly impossible to get a straightforward answer on this since there really isn't such a thing as boilerplate - what are the specifics of your area? What types of properties are you buying? How much does material/labor cost in your area? The best chance you'd have to get the answer without the hard work (at least, not the hard work I've already mentioned) would be to link up with a house flipper in your area and have them mentor you on how they estimate rehab costs.

@Michael Mathis Sure, paying the mortgage down early improves debt-to-income ratio (which might make future loans more favorable, all else being equal [although I'd advise talking to a mortgage broker to confirm this]), but wouldn't just *keeping* the rental income net of operating expenses/debt service allow you to save $ towards your next down payment? Absent any concrete numbers/unless I'm misunderstanding, it sounds like you're giving away money now to pay down a loan in order to get it back later when you refinance at 0% return. I'd suggest keeping the cashflows and investing them somewhere where you're getting a fair return (stock market, another property, etc.).

Let me know if I mischaracterized your situation.