All Forum Posts by: Jordan Grimstad

@Timothy Woodland Questions I have:

• How are you planning to finance the project?
• How confident are you on project costs? Have you done this kind of thing before?
• How long will it take the project to get completed? What are the risks of timeline slippage with a MFP vs. a SFP?
• What's your investment horizon? Different types of investments will be more or less profitable than other types over different horizons due to different up front costs.

Here's my thinking - you can structure the analysis as if it was an extra-large buy, renovate, and rent project (except the "renovation" step is a new build) and just use a DCF analysis.

First, figure out up-front costs: initial payment on land + initial payments on the new construction + holding costs (each of these must be discounted to present value for an apples-to-apples comparison). Then, you can just use a standard cashflow calculation to estimate cashflow after the project is completed (with expenses estimated in the standard way), again discounted to present value.

Whichever project has the greatest net present value is the more profitable venture. 

Thanks Clayton & Kyle!

@Kyle Mccaw 100% noted & agreed on the "be part of the solution not the problem" - my hope/idea was to help stabilize neighborhoods that might be seeing waves of foreclosures and maintain homes that people will love - and feel safe - living in.

Three questions on this:

1) What kind of bargaining power might one have with a bank that is holding on to dozens of foreclosed homes in these neighborhoods? Doing some research, it looks like some of these homes have been in foreclosure/are unoccupied for months or years, and the homes that are on the market aren't moving.

2) How might operating expenses on these properties differ compared to similar properties in B-class neighborhoods? I'm assuming maintenance budget could go as high as 30-40% of gross rents - reasonable?

3) What kind of cap rates do investors typically hope for to offset the additional risks/volatility?

I made a classic newbie/lazy mistake - I got a preapproval letter from one highly recommended mortgage broker, but then neglected to shop around. Now I'm out of the 14-day grace period during which multiple pulls won't hit my credit score.

I think I already know the answer to this question, but wanted to confirm - is it worth it to fire it up again, take the second credit pull and shop around for the next 14 days? For reference, my credit is in a good spot, and the first offer was acceptable (i.e., I don't think it'd be a terrible mistake to move forward with it, but I might be able to knock 0.1-0.2% off the rate). Even if I don't end up saving money vs. the original offer, probably doesn't hurt to "practice" being aggressive in finding competitive financing...

@Nick Vehr That seems fine - I'd consider pushing it to 20% if you can identify any concrete expenditures (water heater, furnace, roof, etc.) or if it's an older building, but otherwise that should be a fine estimate from what I can tell.

@Susan Grinde Whether or not it's a good investment depends on your goals/intentions with the property. If you intend to move out in 2 years and rent the portion you were living in out to another tenant, you'd likely want to evaluate the property as if you weren't living in it at all and make sure that it was hitting the returns you were looking for. That is - being able to cover the mortgage with someone else's money is great, it doesn't automatically mean that the cashflow on the property is hitting the rates to make it a great investment. 

In contrast, if this was your forever home and being an owner-occupant was the plan in perpetuity, there are still clearly better or worse deals you could make. Since you're not making money on the cashflow, you will need to look to make money on some other piece (appreciation, tax benefits, or loan amortization; betting on appreciation is a gamble, and tax benefits aren't really a moneymaking vehicle [more just a money saving vehicle], so you're pretty much just left with trying to amortize the biggest loan possible).

Does that all make sense?

@Chuong Pham

1. Will this be an issue with the city when i start renovation due to the property being zone for commercial?

• I think you'll get the safest answer if you contact the city (or a local real estate lawyer) directly - better to flag the situation  ahead of time rather than try to unwind it down the road.

2. The property does not have a separate address can i just put a individual mail box for each unit?

• Maybe I'm risk averse, but again this is probably a situation best addressed by the city or the post office since it likely depends on local and federal laws.

3. How do i handle the utility expense split?

• Not sure I follow - are you trying to have the tenants pay the companies directly for water/electric? If so, you'll probably need to split the meters (i.e. have one meter per unit); otherwise, you could bake the cost of utilities into rent, but that might make it hard to get the units rented out and doesn't guarantee that you'll cover the costs of utilities. 

@Eli Alfaro Hi Eli, if you're not already familiar, I'd recommend you take a look at this fairly detailed blog post on how to calculate cash flow on a rental property. From there, it's a matter of calculating what your likely rents & expenses are on the property in question and plugging the values into your cash flow/cash on cash return calculations, and deciding if the return justifies the price of the property. If the return doesn't justify the price, feel free to come in at a price that gives you the return you're looking for. Good luck!

@Eli Alfaro Hi Eli, if you're not already familiar, I'd recommend you take a look at this fairly detailed blog post on how to calculate cash flow on a rental property. From there, it's a matter of calculating what your likely rents & expenses are on the property in question and plugging the values into your cash flow/cash on cash return calculations, and deciding if the return justifies the price of the property. If the return doesn't justify the price, feel free to come in at a price that gives you the return you're looking for. Good luck!

@Nick Vehr Do tenants cover trash, sewer, gas, and electric bills? Aside from those things, tough to spot anything you might be missing (at least, until the property gets inspected).

Approximately what % of gross rents are you allocating to capex and maintenance?

@Arturo Picaso No definitive answer on which approach is "best" - I'd say it's investor & market dependent. Here's a good blog post detailing pros and cons of each approach. Good luck!