All Forum Posts by: Jason G.

@Fred Engh. Thank you Fred. I would be willing to sacrifice some cash flow. I could borrow from my IRA, but not enough. I have looked into a personal line of credit, that would push up my credit utilization and make my credit worse.

And very good point about using unused budget lines (vacancy, repairs, etc.) to pay down the debt and about the closing date.  I heard that somewhere else as well. 

I have heard from folks here and outside of BP and it seems that this is one of the better deals that I can get on the market right now - at least compared to what is on the MLS. I am seeing similar units for 250k and 300k on the MLS and they need a good amount of work.

In this property, there is one section 8 tenant and two other employed tenants in right now, and its possible I could make out well in the first year or two.  However, if I push repairs/maintenance and vacancy higher, the cash on cash return (when including 5% capex, 10% repairs, 10% property management, and 8% vacancy) only comes to 5%.  With a new rehab, it could work out much better, but I think the advice to be more conservative  given the area is a point well taken.   It's hard to pass this one by, but I will try to stay patient.  Still open to other thoughts and will post back with my final decision.  

@Moises Mari.  This is really helpful. There is a one bedroom and 2 two bedrooms.  Rents at 950, 1500, and 1450.  The Property is selling for 350k off market.  I was not aware about the rent control point.  That is really great to know. 

Regarding property management, if I move forward in Newark, I will definitely reach out to you.  I did not calculate the true costs of a property management company when taking into account those fees.  

What is a fair vacancy rate that we should use for that area of Newark, between Upper Clinton Hill and Westside Park?  And well noted about the flipper and tenants. Many people have told me, speaking from experience, about the extent to which I need to be careful.  I have seen work from this flipper while they were doing another property, and I know several people who brought with him, but I still need to be careful.  

And @Ray Reed, I didn't get the full details about what was done.  I know he replaces all electrical and plumbing on every one he does.  That's one thing I appreciated about his work.  He noted how these old houses weren't made, and he would rather make it all new than have people coming back to him.  But I will get more details.

In all, I have a fair amount of trust with this flipper, especially since I know several people who brought properties with him. My challenge is whether 350k is worth the risk I will take on for the neighborhood. Also, I want it to work for my investors - that's my biggest priority. I hear values will only go up in Newark, but on cash flow alone, they may not hit a 10% annual return if we do a joint venture through an LLC where they get 50% ownership for their 70-80k.

Just so others know, another piece of advice I received is to structure the deal where they get 50% ownership, we split the cash flow 50/50, as others have said, and on the sale, they get their initial investment, and then we split all profits 50/50. 

Thank you to all.  I am open to any other advice and will post when I finally make a decision.

@Ray Harrell thanks, Ray. I agree. The thinking behind this one was I wouldn’t get the cash flow, at least not in the beginnning, but I would be doing the deal mainly to get the experience.

@Ibrahim Hughes. Thank you for this point. I am looking in Newark as well, actually right around 350k for a fully rehabbed 3 unit that has rent of $3900. Has the market changed To where this price is justified now? If not, what is a more reasonable price?

Thank you @David Steinbok @Ryan P. Kotschedoff @Allan Szlafrok. I like the 50/50 split that you all are talking about, but there are a few reasons I didn’t take this route - probably because of my lack of knowledge. First, I was concerned that if they owned it and invested with an SDIRA, half of the property would not be eligible for depreciation. Is there a way where the bank loan is in my name and we get the full benefit of depreciation and still have a 50/50 split?

Also, I didn't think an investor would be interested in a 50/50 split because the cash on cash return on the 70k amounts to 6%. With the depreciation, equity, and appreciation, the ROI would amount to more, but the property is not in an area that will appreciate quickly. Therefore, I didn't think the split would be highly attractive, with lower returns and without much capital from me.

Also, I was trying to avoid having my family members on the loan and have them go through all of the additional paper work. Is there a way to do that?

I agree with your point, @Ryan P. Kotschedoff, about doing all of the work on a 50/50 split, and your point, @Allan Szlafrok, about negotiating.

I know investors who are mainly looking to partner on bigger deals, but it doesn’t hurt to run this one by them.

Risky and complicated for a first deal – should I do it?

Hi BP community. I am writing with my first post, and I am writing at a time when I sense all of the hard work put in is about to lead to my first deal, on this one or another in the near future. Below I have detailed the deal, my financing strategy, and my three questions. Any and all insight, feedback, and advice is welcome.

Potential deal

I am looking at an off market turnkey property in Newark near West Side Park. The property was fully rehabbed by an investor and the details are as follows:

• Tenants were recently placed in the three units on one-year leases with rent totally $3,950.
• With a 30 year mortgage, 20% down, I would be looking at 70k down payment, 10k in closing costs, and payments of $2,100 with mortgage, taxes and insurance (I can't house hack it).
• I budgeted for 8% for vacancy, 5% for repairs (lower end because just rehabbed), 10% for property management, $1500 per year for water, and $1,200 per year to set aside for CAP ex.
• With those numbers, which I think are on the conservative side with new leases with tenants that were carefully screened and a rehabbed property, cash flow comes to approximately $700 a month.

Financing Strategy

I am from Newark/Hillside area, so I know this property is not located in the best area of Newark, but I think the numbers are good, and having a good property manager would help. If this is a solid deal, than the question is how do I get the money when I don’t have 70k plus closing costs. BP podcasts with @Joshua Dorkin and @Brandon Turnerand, especially, @Matt Faircloth’s great book, Raising Private Capital, have really helped me to think creatively. Here is my strategy:

• Raise 70-80k from family members through their the use of a Self-Directed IRA and their retirement funds. (I know this process can take 30-45 days but I may be able to get the time with the investor)
• I can offer a 10% return on their investment with a 5-7 year hold period (after annual custodian fee – would technically be 9% on 30k investment), which would allow me to build my equity to 40% and cash them out with their 20% initial investment. The family members with whom I am speaking are in their 40’s and don’t pay attention to their retirement funds, like most people, so they are willing to get a higher return and just have me do the work.
• A 10% return on an 80k investment would come to $667 per month, which would be nearly my entire cash flow. That’s the risk. The upside is they get a higher return than they would in the market, and I would get my first property and benefit from depreciation, appreciation, and the equity build up, plus increasing rents over time.
• I don’t have much cash, but if any emergencies arise, I can take a loan from my retirement fund. Also, I would put aside every dollar that is not used for vacancy or repairs, plus the capex money.

Questions:

• 1.Are my budgeted numbers solid and is this a good deal?
• 2.Is the strategy to finance the property fair on all sides and worth the risk for the upside?
• 3.Should I raise the funds as an unsecured line (loan) from family members with a promissory note or as a loan backed with a proportional percentage of the mortgage?