All Forum Posts by: Joseph Hennis

Nope. You can't. We had appraisers come in to our real estate office and explain this to the whole office, that things have changed... Only to have the old school RE agents just disregard any of said advice, and continue to advise their clients to prefer the conventional loan over an FHA.

This is some myth that agents tend to have stuck in their heads right now. It used to be VA were the strictest, then FHA, then conventional. But current FHA appraisals are no different than a conventional loan. I can not tell the difference between the two. They both can come back with conditions and do so at the same frequency.

That said, agents still have this stuck in their heads from years past and will advise clients to take a conventional loan over an FHA even though it makes little difference.

There is one area where there might be some difference, and that is time to close. Cash is fastest, then conventional, then FHA and VA. But, I have had FHA's close faster than cash deals... Really just depends on the deal.

Now that bit about the 203k... Seems unlikely... That's for a fixer, and is a bear of a loan type to work with. I can't see that being ahead of an FHA for any reason...

I live in California and am not afraid to invest out of state. There are tons of great places all over the country. I have 3 properties in ogden UT, 2 in fairfield/suisun. Expanding soon. One place I have my eye on right now is Joliet IL. I spend quite a bit of time researching a place before I jump in. Other good places: Texas has a bunch, fort worth and houston outskirts, florida I've seen a few good places, alabama, the Carolinas, Tennessee, Kansas City Missouri.

First I go on the web and find good deals. I try to figure out how much something will rent for. I divide rent/mo by purchase price to get the rent to price ratio. (1% is the rule of thumb but some places can be 2-3%. I've not purchased anything that great yet 1.4% is my best so far... As a comparison... The 550k deal with 1k/mo x4 in rents is 0.72%. That type of deal isn't even on my radar. It's not worth it and those are a dime a dozen.) Then, I dive a little further... city data.com has all kinds of info on a city. I pay particular interest to population growth, wages, job sector diversity, and crime. 

Then next step is the phone. I start calling property managers in the area, ask about rents, management fees, taxes, who pays water in the area, ask about other customary expenses in the area, what are vacancies like in the area, if they are also a realtor and if they have a contractor they use. I call contractors and ask about prices for various materials in the area. If I have a potential deal, I will ask property managers about that property in particular. I don't know how many times I have been steered clear of a potential pitfall by property managers. Sometimes its the property, sometimes it is the area (if your property manager wont go there, you shouldnt buy there, well, unless you are into that type of thing...). If it's an MFR with tenants already, I call the housing authority to find out what kinds of complaints there have been. Oh, also, another thing to ask property managers is if they have any pocket listings. Tell them you want to know if there are any pocket listings as soon as they have them.

You can call other realtors too, but they don't have the same vested interest that a property manager would, so just remember they are trying to sell you a property whether or not it's a good deal.

I've never even seen my properties in Utah... lol... maybe one of these days....

There is no process that can completely eliminate the risk of that happening. There will always be some risk. We work to reduce and manage the risk, not eliminate risk. If you've cleaned it up and put it back on the market, that's good management.

Also don't be afraid to go outside your area. I am in california, and IMHO california doesn't make a great place for rental investing. I invest out of state too, in Utah. I haven't even seen those properties myself, but I don't care what they look like as long as I keep collecting rents! One of these days I am gonna go visit Utah on a vacation and check them out. Hawaii first though, lol. I have looked at so many places, many of them really great, across the country. Texas, kansas MO, Tennessee, florida, georgia, Illinois. Just what I can come up with out of my head but there are so many good places.

Some tips for buying out of state: Find a good property manager and use them to be your real estate agent for the purchase. The property manager has a vested interest in your property (he/she has to rent it out and manage it!) and will steer you clear of bad deals. Many of them have their own contractors too that are ready to repair your rental.

That doesn't absolve you of due diligence though. Have an inspector prepare a detailed report. Use contractors to estimate repair costs. Call the local housing authority to find complaints against the property. Many rental properties get complaints, that is to be expected, but if you get the complaint: sewage keeps backing up, multiple times by different tenants, you know there is a problem and the owner wants to dump it on you. Get an estimate of that work and ask for a reduction in price based on that. These are just some basic tips. Due diligence is a huge topic. It would be a good usage of your time to google it and read through articles on it.

@Kenny Oliver BRRRR. In fact, I can show you how to buy 100 fourplexes with 200k cash with BRRR. Here it is. Buy a fourplex cash. Renovate the fourplex. Rent out the fourplex. Refinance the fourplex. Repeat times 100. Done.

Of course. Nothing is that simple, but that's the strategy. Let's talk a little about the different phases. Buy: Here is the rule of thumb; buy a property at 70% ARV (After repair value). This can be done several ways. Occasionally, you may find MLS properties (or other retail websites) listed at 70% ARV, though they are generally listed higher and you need to negotiate the price down. Other sources could be pocket listings, wholesalers, REOs, etc. Too many to list. Now the 70% ARV rule of thumb is just a number to get you in the door, if it's close to that start looking deeper. Figure out the actual costs to repair and see if it matches your 70% ARV figure. Also, you need to be able to figure out what the ARV is. Make friends with some realtors and ask for a BPO (broker price opinion), use zillow, and even better, go to realtor.com and click Sold, then look for duplicate properties in the same area, same sq ft, etc, that recently sold. This is really the most important phase. There is an old saying "You make money when you buy, not when you sell." Way more can be said about this phase... but this is the jist of it.

Repair: Make repairs that lowers your maintenance costs and raises rents.

Rent: So again, here is a rule of thumb, and you should be looking at this rule of thumb during the buy phase. Rule of thumb: Rent should be at least 1% per month of purchase price. But here we need to modify it a bit: Rent should be at least 1% of planned refinanced amount. If you are planning to refinance at 80% LTV then that amount is 80% of ARV. Also this is just a rule of thumb to get ya in the door. You should carefully examine the numbers for cash flow. Numbers to include: management fees, Cap Ex, repairs, debt service. Does it have laundry machines? Is owner paying water customary in the area? Tax rate in the area (this can be wildly different in some states, counties, and cities)?

Refinance: So consider your cash flow before going too high on LTV, but remember after you refinance and buy another property with the capital, you can use that property's rent money to help cover the previous property's debt service too. The idea here is to pull out what you put in, recovering your capital. The reason why this is even possible is the value added by the renovations. Also, consider seasoning requirements. Most banks make you wait 6 months to refinance, though I hear there are banks who are investor friendly that can wave this requirement.

Repeat.

It seems complicated and honestly we could talk for hours about each one of these subjects, but the concept is really quite simple. Here's an example to give you an idea of how it works.

Buy a property at 100k that the ARV is 250k. Make 100k in repairs. Rent it out. After repair rent is 2k/mo. That's 1% of the 200k loan. Refinance at 80% LTV, 200k loan on 250k value property. Now you have your money back and can do it again.

There are deals out there better than this one, but there are far, far more that are worse than this one. Just run your numbers and find an investment that works for your goals.

One thing to consider, you refinance, and YES THE PAYMENT GOES UP... HOWEVER, (just wanted to emphasize this) if you are following the "repeat" part of it, you will soon have new cash flow coming in to pay against the higher mortgage... For instance...

75k purchase, 25k repairs. ARV is 135k, rent at 500/mo. refinance at 100k, Now your payment is $500/mo, which is negative cash flowing. buy another property, same deal.. You now have 2 properties 1k/mo in rent, with only one payment of $500/mo.

I used poorly cash flowing properties on purpose as an example. You should shoot for better deals.

Thanks everyone for your help so far! This has been great! I wish I had found BP sooner!

@Brandon Hicks This is the question that plagues me, LOL. I keep thinking that too... and try to explain that to my wife, only to be rebuffed. I would not be happy with them as rentals with their current value. A 1031 does make good sense.

An opposing thought: the more properties I own, when the market goes up, the more appreciation I take part in. In that way, more seems better... But maybe I am not looking at that right. I have 1.2mil in value now, if I 1031 into 1.5mil in value, that's more value to be effected by the appreciation. The downside to that maybe is that the value is all in one property, as opposed to spread out over multiple (all eggs in one basket kind of situation).

A possible solution to this is trading up each property individually. Maybe to four plexes.

@Andy D. I definitely need to put my equity to use. Something I was thinking... You know, even if I refinance and have a larger loan payment, the rents from the new property I buy should cover that (considering I buy appropriately of course).

For example $500k/mo more in debt service due to refi, but buy a property at $1k/mo more in rent with no loan.

In this scenario, overall the portfolio grows and overall cash flow could grow.