All Forum Posts by: Jordan Grimstad

@Susan Grinde Hi Susan, here are my thoughts:

• What's a good CoCR?
  • This depends on your other opportunities for investment and your risk tolerance. For example, I've seen 12% CoCR as a particular target number that some investors go by (see below). You can go with a lower or higher rate of return as long as you feel like you're being adequately compensated for the risk you're taking, the time that it takes you to find the deal, and for the opportunities you're forgoing.
  • See minimum acceptable rate of return, which includes the line: "Most companies use a 12% hurdle rate, which is based on the fact that the S&P 500 typically yields returns somewhere between 8% and 11% (annualized). Companies operating in industries with more volatile markets might use a slightly higher rate in order to offset risk and attract investors."
• Anything else you should be looking at?
  • I think it's important to evaluate some of the qualitative characteristics of the property to ensure its long term viability as an income stream (i.e. is it in a good school district, low crime, near a corporate campus, etc. etc.). No one characteristic (or missing characteristic) is a dealbreaker as far as an investment goes - it just needs to be factored into the risk you wish to take on and the return you're expecting.
• Other thoughts
  • Without seeing your calculations or assumptions, it's hard to say if you're overestimating/underestimating expenses - can you share your thoughts?
  • What are your expectations on when you'll see the return? Unless you've found an insane deal, I'd be surprised if you were seeing a positive cashflow net of all operating expenses while you were living in one of the units - at best, you're probably looking to cover your mortgage + some, but will still need to pay some out of pocket for maintenance and taxes. In other words, you will be living cheaply while you live in the house, but you won't be pocketing positive cashflow (again...unless you found an insane deal).
  • How confident are you that you can secure the rents you're quoting?

@Brantley Shattuck Couple questions that might help clarify:

• What's your risk tolerance?
• Do you want to invest local or are you willing to invest outside your immediate geographic region?
• Is the $30k in savings all theoretically usable for investing, or is some portion of it earmarked for rainy day/other investing?
• Any particular niche that attracts you?

@Jay Lohn Gotcha - definitely understood. Two thoughts/follow up questions for you - 1) Could a property management firm help provide buffer some of the challenges, or would most of the challenges flow through to an owner? 2) To what extent would a property owner be exposed to legal liability of crime that occurs on the property? 

Reason I'm so curious about these neighborhoods is the sheer volume of foreclosed properties (and dearth of investor demand) would seem to point to a potential opportunity if a property could be bought for, say, $20k (Zillow shows tons of sold houses in these areas at this price!), fixed up for $1-5k, and rented for $900/mo (this rental rate might not be totally right, but checking a few sources seem to indicate it's a possibility for a 2/1 house in these neighborhoods). Even if you set aside 75% of gross rents for operating expenses + debt service + legal outlay, you're still seeing >45% CoCR with a 25% down mortgage (~$2700/year in cashflow vs. $6k-$11k in initial investment).

Is that optimistic logic? Completely understood that this is a higher volatility investment than buying a nice 3/1 in Richfield/SLP/Bloomington and it would require the investor to be aggressive in bank negotiations, tolerate longer vacancies and/or higher maintenance/legal expenses, but the potential return seems to cover the additional risk.

As an aside - I don't disagree with you about the potential risks at all, just trying to identify some potentially creative niches in the market.

Does anyone here have experience with buy & hold rental properties in higher-crime neighborhoods with depressed property values? In particular, I'm curious to know if there's a particular set of circumstances or mitigation strategies that could make the increased risks (vacancy, credit, property crime/damage, etc.) worth it. 

Thinking about my local market, the local real estate & job markets are quite strong, crime rates are fairly low, but parts of the city (just like any other city) have higher crime and depressed property values. Assuming that property values in these parts of the city never hit $0 (i.e. it never becomes a Superfund site), what kind of cap rates would one need to see to consider investing in these areas?

@Joe Villeneuve Valid points! Perhaps a different question - let's say you have 10 properties in different areas in town that could theoretically fit into your portfolio, and you can find a purchase price that hits your ROI in each case, do you make an offer on all 10? Or do you only make offers when you think that there's a ~10% chance it'll get accepted?

For example, I've seen a property listed for $250k (and will likely go for $250k, since the area is retail buyer heavy) that would need to be sold for $170k to hit my target CoCR - do I throw the offer out there in the very-outside chance that the seller will bite, or do I not even waste the time? If the target purchase price was $225k, does that change your likelihood of placing the offer?

@Kenneth Reimer Got it - all makes sense. I've heard that dual agency poses some risks - do you feel like agents are generally pretty balanced when this comes into play or is it something that the buyer would need to actively look out for on their end?

@Chinmay J. These questions are in the context of a buy & hold rental strategy (in particular, looking at places that are move-in ready but with some opportunity to build equity). Worth calling out that I'm asking this as I'm in the process of looking to buy my primary residence (which needs to fulfill some personal characteristics but also needs to fulfill investment characteristics), so I'm willing to accept a thinner CoCR to slightly improve my likelihood of acceptance. Otherwise, if I was in no rush and was purely aiming for max CoCR, calibrating my offers to hit 1/10 chance of acceptance seems like a good target.

@Christopher Phillips Thanks! In your experience, how frequently are offers made without the inspection contingency? That play in particular seems dangerous for a newbie, but workable for a more experienced investor.

Hi folks,

Anyone here have experience in buy + hold rental properties in Folwell, Near North, Payne-Phalen, South of Maryland, or other higher-crime areas? In particular, I'm curious to know what expenses (insurance, security systems, etc.) would be required to mitigate the risk of property crimes.

I'm fairly familiar with typical strategies that make offers more competitive, aside from increasing the offer amount (increased earnest money, decreased inspection time, fewer contingencies, etc.). 

However, in competitive markets, it seems evident that most offers will offer standard/healthy earnest money, normal-to-fast closing times, 1-2 contingencies (inspection + financing), etc. as table stakes, and the deciding factor seems to be the top-line value of the offer. That is to say, I'm skeptical that adjusting any of these factors would help push, say, a $200k offer over the top of a $210k offer, even if the $210k offer has "standard" offer terms and the $200k offer has shorter inspection times and a few extra percentage points of earnest money.

Couple of questions:

• Is this pessimistic of me? Do small tweaks in these terms really close a gap? 
• Is there any way to consistently win in a multi-offer situation other than making the highest bid (and, thereby, accepting a leaner CoCR than every other bidder)?
• What if you're bidding against non-investors (i.e. folks who are willing to pay more to have a nice house, and don't care about investment characteristics)?
• Is it a bad thing if you're consistently getting offers accepted? Based on some of my reading it seems like getting an offer accepted should be a rare occurrence.

@Jim Shepard To that point - would you then take out a 30 year loan and pay down the mortgage as if you're paying off a 15 year loan? In that case, you have the flexibility of dropping back to the payments of a 30 while still tracking towards being free & clear by year 15. Any unique benefits to a 15 year loan vs. the 30?