All Forum Posts by: Kevin S.

@Adam L. 

1) you can't be afraid to raise rents to market rate (assuming you're city/state doesn't cap rent increases), each year your expenses on the property are going to adjust for inflation so your rent should too. However if they have a full year left on the lease you can't make any changes for 12 months, which means that any opportunity to increase rent is offset by 12 months of loses from lower rent. 

2) It may be close to a corporate park, but are there a bunch of other rental options near there too? It sounds to me like you are just guessing at vacancy. If you don't have any true data to back that up then I question whether you can rely on that. Call some local property managers or try to connect with other local investors and see if they can weigh in on vacancy.

3) This is just me personally, but I don't invest based on what I think the property value will be. To quote you "so maybe property value will rise and rise and rise" yes sometimes you get lucky and this happens, but not always. Basically this is you speculating, whereas rental income is a known number and can be counted on (assuming you account for vacancy). 

4) Like I said, I model at 100% because I want to know what return I would get when I spend as little money as possible (basically just closing costs). The 80/20 rule is based on banks typically requiring somewhere between 20-25% downpayments on a mortgage for an investment property. If I were buying an investment property with a mortgage I would do two models, one at 100% to know what my return is with little money invested, and one at whatever my true downpayment is to find out my actual return (knowing that the difference between the two is me just basically buying cash flow).

@Adam L. When I evaluate something like this, I evaluate it as if I was financing 100% (outside of closing costs) of it because that shows you how much money you would make with basically very little cash in the deal. The thought process is that if it doesn't cash flow positively at 100% financed, then all you are doing with your cash downpayment (or full cash payment) is buying cash flow. I threw your numbers and a few assumptions into a spreadsheet to get the following:

Purchase Price: $145k @ 4.5% 30 yr mortgage - $735.21 per month mortgage payment

Closing Costs: $5k

Monthly income: $1,150

Monthly taxes: $308.33 ($3700/12)

Monthly insurance: $115 (Not knowing your area I totally guessed on this, you might call around and get some quotes so you can estimate this correctly)

Vacancy 8% of monthly rent: $92 (I use 8% because 1/12 = 8.33%, so you basically would save up 1 month's rent each year)

Repairs and Maintenance 5% of rent: $57.50

Capital Expenditures 10% of rent: $115.00

Management Fees 10% of rent: $115.00 (even if you plan to self-manage the property, it's still a good idea to estimate this, one day you may need to hire one, plus is accounts for the cost of your efforts)

The net result is negative cash flow of ($388.04). If everything remains the same but you pay 100% cash for the property you end up cash flowing positive $346.65 per month, BUT your cash on cash return on investment (total annual cash flow of 346.65 x 12 = $4,159.8 / $150k of cash spent) is only 2.77% which is not a good return on your investment. Heck, you can put your cash in an Ally Bank account and make 2.10% on it with it just sitting there. 

Overall this would be a pass for me, but maybe there's an upside I'm not seeing. Maybe you can get the price down or raise rents, but I wouldn't necessarily count on that. Good luck!

@Allen Nida I'm assuming from "roommate rent" that you would plan to live there? If so, then based on the numbers you've run (which aren't really correct, more on that later), then you are "paying" $70/month to live in one side of the duplex. I'm going to assume this is way less than you'd be paying in rent or on a mortgage anywhere else, so you have to take that into account.

As for your numbers, first of all 1990 was 29 years ago, so yes there will be CapX. I'd suggest accounting for at least 10% of the total rent for CapX each month. Additionally, you didn't factor in Repairs (at least 5%), Vacancy (8%) or Management (10%, you should factor this in even if you plan to self-manage). You also calculated your numbers based on 1 unit rented, and 1 unit with a roommate, however when evaluating an investment property you should look at it as if both sides were fully rented out, i.e. total monthly rent = $1,950 ($975 x 2, assuming both sides can rent for the same). 

So yes, based on the 1% rule this property is overpriced. Have you looked at rents in the area though? Is there the potential to raise rent? If so that might be a mitigating factor on the price, however the market seems to be pretty hot on multifamilies right now, so many of them are just plain overpriced. Investing is a numbers game, and you're probably going to have to run numbers on a ton of properties before you find one that actually makes sense from an investing prospective. Good luck!

@John H. Hill Jr. I can't speak to the HELOC side, but I can speak about the 401k. First off, if you haven't already, please make sure to verify your 401k plan allows loans. Some plans do, some don't.

To me, the upside of using your 401k is that any interest you pay on the loan, you pay to yourself versus paying it to a bank for a HELOC.

However unless it's being used to purchase a principal residence (which this does not sound like) then the time limit on the loans is limited to a 5 year loan (10 years if it's a principal residence). Additionally, you are only allowed to withdraw up to whatever your plan limits the loan to, but most often this is the lesser of 50% of your vested balance OR $50k. Some plans also limit the type of money you can take a loan on, so you may be able to take a loan on money you've contributed, but not on Employer Match money. 

Overall it can be a good option, but there are definitely things to consider and check out. Good luck!

@Michael Boyle I would tread carefully, if at all, doing something like this. You've basically just stated that you are wanting to buy it with the express intent of it not being your primary residence which is pretty much the number 1 requirement of an FHA loan (and you did so using a profile with your full name listed). If caught you'll potentially be charged with mortgage fraud, why put yourself at risk doing so?

@Aathavan Raviraj the only way I would put a inherited tenant on a 12 month lease is if they went through all the normal screening and met my rental requirements. If you feel that they won't meet your rental requirements, then leave them month-to-month (but get them to sign your own lease as a month-to-month, don't leave them under the old lease), it's much easier to get them out of the place if you eventually need to. 

As to the daughter acting as a guarantor, would you normally allow this for someone applying if the unit was vacant? If not then my opinion would be to not do it for them, you want to try and be as consistent as possible regarding rental requirements.

@Elijah Miller I've used FHA loans twice before, and in my opinion the inspectors used by banks for FHA loans seem to be hit or miss as far as what they will or won't call you on. The first time, the inspector was especially nit-picky, the second time I think the inspector was there for a grand total of 8 minutes and noted no issues. The biggest thing to look out for is wood-rot on the exterior. If you truly believe that the garage is going to be a deal-breaker for the FHA loan, why not see if the seller is willing to fix it and add those costs into the purchase price, so that it's fixed before you purchase the place? I know @Robert Higdon mentioned 203k loans, however I'd be leary of this option because this is a fairly complex, time intensive, paperwork strewn option (search BP for post's by other on their experiences with 2032k loans) and do you really want to go through all of that for 2-6k of work that needs to be done?

@Shaye Mora I'm with the others on here who have pointed out that you should NOT do this because it is illegal, regardless of whether you will get caught or not. Besides the possibility of getting caught and the bank calling the entire loan due, do you really want to have a professional reputation as someone who will break laws and/or his signed word (you signed a mortgage contract stating you would live there as an owner occupant for at least one year) just because it's more convenient to? To me it's not worth it and you just need to suck it up and live there until the 1-year mark has passed.

@Ryan Schuler yeah I agree with @Patricia Steiner, wait until you get an application before really worrying about this. I can't count the number of times I've heard some variation of "I love the place, will fill this application out and get it back to you ASAP" only to never hear from them again. As for the 3x rent question, I typically consider the entire "household's" income when dealing with this. If you are concerned about one sister suddenly leaving and the other remaining one not being able to afford the rent, then just increase the security deposit (assuming the meet all your other rental requirements).

@Brian Feeny you've underestimated your expenses by not accounting for Vacancy (8% of rents), CapX (10% or rents), R&M (5% of rents), and Management (10% of rents). The percentages I provided are what I and, based off what I've seen on BP, a lot of others use when setting aside money for future expenses. Even if you self-manage and ignore the management %, that's still 23% of your monthly rent, or $460. In other words you'd only cashflow $40/month.