All Forum Posts by: Christopher Middleton

Thanks everyone for the help.

The reason I am selling and doing it over, is because most of my return comes from rehabbing the property. The cash flow is nice, but the longer I hold the property the lower my average annual ROI is because that initial value creation is stretching over a longer period of time.

The other reason is that after 4 to 5 years after a rehab, my properties tend to have a higher frequency of maintenance requests.

I am in the process of selling my 3 rental properties which will leave me about $100k in cash. I am very excited to be in this position, but I am on the fence about purchasing more single-family residents, or if I should start investing in apartments. 

I typically invest in slightly distressed single family homes, rehab them, then rent them for a couple of years.  To do that with 100k means I may be investing in 4 to 6 homes. That is a lot of work.  Or I could take that money and do the work one time and invest in a small apartment building? 

I would use a similar strategy on the apartment where I buy it slightly distressed, rehab it, and raise rents and lower vacancy to increase my equity.

I live in DFW and the single family market is white HOT. So I will have huge competition to get a good deal on a SFR.

WHAT WOULD YOU DO?

You can have $200/month positive cash flow from my calculation if things go well, you have great tenants, little vacancy, and little maintenance.  I can not recommend this deal unless there is some rehab you can do to raise the value of the duplex.

I do have one other concern about your post.  You say that you can purchase the propoerty for $205k with only $18k down.   That is less than 10% down.  How are you going to pull that off?  Every conventional loan I have ever taken required 20% on investment properties.  And duplexes I believe are 25% - 30% down.  Be sure your math is correct.  That is a large detail that you dont want to miss.  Im calculating your Cash-On-Cash-Return to be just over 3.5% when assuming 20% down.  Thats not worth investing in, exclusively.  The story may change if there is potential to raise the value of the property.

You also mentioned PMI? Again, see point above. PMI is for Loans with LTVs greater than 80% which is not possible on an investment propoerty. Are you planning to live in this duplex to get a lower downpayment and only rent one side? That changes the math if so.

What part of Arlington? How do you know vacancy rates are high?

Yes SFR's.

I thought this would be an interesting question for people to weigh in on:

For residential properties, do you prefer an HOA with a fair fee ($100/mo.) or would you prefer no HOA?

John,

What is your strategy with this deal? How long do you plan to hold this property?

IMO, you should hold this property as a long term cash flowing property. You need to read a few books on being a landlord. Things are never rainbows and butterflies, so don't get frustrated when it’s not perfect.

Assuming you do a good job screening tenants, and there are no huge problems found on the inspection, then this will be a good deal

CF = 1/2*Rent - P&I

P&I = 308.74 (assuming 5.5% IR and 30 year fixed)
Rent = 700*2 = 1,400 (low priced rent = choice of tenant, and less stress as a landlord)

CF = 1/2*(1400) - $308.74

CF = $391.26/mo.

IMO this is great CF considering how conservative this calculation is. Now lets see how good the CF is based on how much you will invest.

Cash-on-Cash Return = CF * 12 / Cash Invested

Cash Invested = Down Payment + Closing Costs + Repairs + Reserves (6 months PITI)

25% Down-payment = 18,125
Closing Costs (assume 5% of loan amt) = 2,719
Repairs (flooring and paint) = 10,000
Reserves (1% of sale price * 6 months) = 4,350

Cash Invested = 35,194

COCR = 391.26 * 12 / 35,194

COCR = 13.34%

This COCR is good not great. With 25% down and needed capital improvements, you will have problems getting a great COCR or ROI.

You need to shop around for a loan. I know you can get 80% LTV for a duplex (assuming you have a credit score over 680). The less you have to put down, the better you leverage your money. And remember to always have reserves. Alot of RE investors were wiped out after 2008 because they over leveraged and did not have cash reserves to protect their investment.

These are just a few metrics you can use to analyze an investment. There are a ton of topics on BP that detail good investment metrics to use when analyzing an investment.

Good Luck!

Correct me if I'm wrong, but for the two fourplexes you will need two seperate loans, and thus two closings. More initial cost. However, you can get a 80% LTV on a one to four unit multi-family and only a 75%LTV on a 5+ unit.

I haven't done the numbers, but it looks like you will pay the same amount of cash upfront regardless of which route you take. If you go the route of 2 fourplexes then more of your upfront cash will go to closing costs. If you go the route of the 8 unit apartment more of your upfront cash will go to equity.

I would say 8 unit apartment.

Thanks Patrick,

If you borrow the money against your cash value, are you charges an interest rate? If so, what is a typical rate?

Thanks for the information! I still have some more learning to do to completely understand this concept, but now I have a good direction to head in.