All Forum Posts by: James Orr

@Joseph Weisenbloom... you had mentioned that fully rehabbed properties are going for $200K to $325K... that's a really wide range.

If it is on the lower end of that and you'd need to pay real estate commissions when selling that's a much harder decision than toward the top end of that range.

For example, if your costs of sale are 7% (which I don't know if that is normal in your market or not) and a sale price of $200K that's $14K in cost of sale plus whatever you need to put into the property to sell it. If it's $20K in repairs, then you might net $61K over what you paid.

At $30K in repairs, you would still net $51K , right? $40K in repairs, $41K? I don't do much rehab anymore, but I don't like having my ratio of repairs to profit be that high personally. Not sure how you feel about that.

I am assuming your $125K cash offer doesn't have the same 7% costs of sale, but is it worth the extra work and risk to earn $61K then $20K from the cash sale? For me, probably.

If you're toward the $325K price, I think this decision becomes MUCH easier for me.

I'm curious what is causing you to hesitate with waiting? Are you afraid of a market correction? Of fines from it being an illegal duplex? Doing the rehab work? Coming up with the rehab money? Interest rate risk for owner occupant buyer if you wait? Something else?

Hi @Alfie Park... I have a question about your statement:

"I understand townhouse/condos are more of cash flow plays (vs. appreciation) so wanted to get in at lower price to be cash flow positive"

Is that true in your market?

I hear people that say that about my market in Northern Colorado and the actual data does not necessarily suggest that to be true.

For example, here's a chart showing the price per square foot of detached houses compared to the price for attached houses over 20 years. As you can see, in our market appreciation on detached and attached seems to be more in sync... in fact we've seen more appreciation in attached properties lately in Fort Collins, CO.

Similar numbers for another city near us, Loveland, CO:

And finally, here's Greeley, CO:

It may not matter with what you're trying to do, but perhaps, someone with actual data in your market can verify that assumption before you invest based on that premise.

I'd also be curious if our market is the exception to that rule or if our market is normal in this regard.

@Eric D. I hope you don't mind, but I made some significant assumptions about your situation and put it into my real estate portfolio analysis software to see what it looks like with you for 3 scenarios:

1. Don't pay off any mortgages

2. Pay off highest interest rates first (investment properties then primary)

3. Pay off lowest interest rates first (primary then investment properties)

In all cases above, I made a bunch of assumptions:

• You had about $1,000 per month to put toward paying off loan balances (and that went up by about 3% per year)
• If you did pay off a property, you had that extra amount to apply toward paying off the next property.
• For the net wort calculations, I assumed property values and rents were going up at 3% per year

Based on my calculator and my assumptions, if you don't pay off the mortgages, over 40 years your net worth from these 3 properties and the cash in your bank would be about $7.58 million.

If you pay off the lowest interest rates first, you'll have $8.02 million. If you pay off the highest interest rates first, you'll have $8.06 million.

One could argue that you should take the $1,000 per month that we're applying toward mortgages and invest it in something else (maybe the stock market) to do a more fair comparison for the for the "Do Not Pay Off Mortgages" scenario. If your stock market number exceeds the interest rate numbers that will probably do the best.

Probably the most interesting chart is the True Cash Flow(TM) chart for the three scenarios. I've shown that below.

In the case where you do not pay off mortgages faster than normal, I assumed ALL three of your properties started their mortgages this month so they all paid off in the same month. I suspect this is NOT the case.

Here is a chart showing your "bank account" balance for the three scenarios. In the ones you're paying off the mortgages the balances hover at zero until you've paid off all three houses because I assume you take all your extra cash and pay off loans. With the other scenario, you're putting aside the $1,000 extra from your income and any additional cash flow from the rentals as cash flows improve over time.

I did not model the impact of tax deductions from the mortgage expenses.

Does that help at all?

As @Caleb Heimsoth mentioned if you are a veteran and/or have VA benefits you can get a VA loan which is nothing down. You can use the VA loan to buy a single family home, duplex, triplex or fourplex if you're moving into the house or one of the units (for the multi-family).

Lenders... please correct me if I am wrong, but I don't think you can do mutli-family with USDA loans. They are loans for more rural areas and I thought were restricted to single family homes only. In my area in Northern Colorado, there are cities that you would not expect to qualify for USDA loans like Windsor and Wellington that you can use the nothing down USDA loan in.

Beyond the VA loan to invest in multi-family you are probably looking at creative financing strategies like marketing to find sellers that are willing to do stuff like owner financing, wrap financing, subject to, lease-options/lease-purchases, installment land contracts or the like. As people have suggested above, these tend to require quite a bit of effort to find, negotiate and purchase.

It is possible that you might find a significantly under-valued property where a hard money lender would loan you 100% of the purchase price on a multi-family (for example if it was being sold for 65% of the ARV). Again, that would take finding the perfect deal which you'll likely need to do some marketing to find.

A more common scenario is you might be able to partner with someone who has the down payment (and/or maybe the ability to get the loan) and you have the time and expertise to track down, negotiate, manage the deal. In this scenario, it could look like no money down to you even though your partner is investing a regular down payment and there is traditional financing involved. What percentage ownership you'd get for that is up to you to negotiate with them and it can vary widely.

In my opinion, there are probably a few more opportunities for you to find little or nothing down deals with single family homes (there are four loans here in my market that are nothing down for well qualified owner occupants on single family homes: VA, USDA, Key Bank and Compass Bank). Heck, there may be even more that I am not aware of. There are also 3% down conventional financing loans for single family homes, 3.5% FHA loans and 5% conventional loans. There are also some down payment assistance programs that can get you closer to $1,000 down or 1% down in some situations.

Loan programs come and go. Up until this month, there was a 1% conventional loan program and HUD had a $100 down payment program awhile ago (but that was probably a decade ago).

I ran a few more scenarios with the same initial assumptions I posted above. This time I changed when the 10% per year decline started to see how much impact that had and also changed how long it lasted.

Here's a summary of the net worth from each scenario in year 40.

And, here's how cash flow changes at the end in year 40.

I just made these and have not really dug in to study them, but at first glance, it looks like the later a crash happens (which is when you have more properties impacted), the larger the impact on your net worth.

Cash flow was not impacted that significantly though by when it happens.

The longer a crash happens (like a crash that is 10% per year over 4 years), has a bigger impact than a crash that is 10% down per year over 2 years. That seems like common sense to me.

@Account Closed Thanks. I believe real estate tends to be more forgiving the longer you hold it. We could probably model some scenarios that make it look really ugly, but not sure how realistic or likely they are. It is software I wrote to do the real estate portfolio modeling for my portfolio and clients. If you want me to run another scenario, let me know.

I just finished listening to the audiobook version of Nate Silver's book "The Signal and the Noise: Why So Many Predictions Fail - but Some Don't". In that book, he does talk about the math and accuracy of people's ability to make accurate predictions about the future. Definitely an interesting chapter in there about the real estate market in 2008 era which would be appropriate to read if you're interested in that. He also talks about trying to predict future which I found very interesting.

There is an interesting article from Harvard about predicting housing bubbles:

https://www.extension.harvard.edu/inside-extension...

Economists are historically not great at predicting stuff like interest rates. Here's an image from a Wall Street Journal article that show what the economists predicted for interest rates and what actually happened:

This is where I got that chart from to give full credit and so you can read it from the source: https://obamawhitehouse.archives.gov/blog/2015/07/...

My belief is that if the smartest economists historically can't accurately predict interest rates, I suspect it will hard for them to predict crashes. Some will predict a crash and may ultimately be right and the some will predict a crash and may ultimately be wrong.

Personally, because my tendency is to be a worrier, I do think about possible market corrections and crashes. I wrote myself some software that allows me to model all sorts of what-if scenarios including market corrections and crashes.

For example, I just ran a quick comparison of buying $100K properties with just slightly positive cash flow ($25 per month at the time of purchase) one per year as a Nomad.

For the base scenario without a crash, I modeled appreciation to be the same as the historical Case-Shiller inflation rate of 3% per year.

For modeling the crash, I said what if we have 10% decline in property prices and rents per year for 3 years (starting in Jan 2021 and going through Dec 2023). After that, starting back up in Jan 2024, it resumes its 3% per year for both price and rent.

In both cases, I assumed you bought one house a year as Nomad (buy house as owner occupant, move in, live there for a year, then covert it to a rental and buy your next owner occupant). 3% down payment for the first 3 properties. 5% down payment for the remaining 8 properties.

So, in the "crash" scenario, you have 3 houses you already bought affected by the full crash. You buy 3 more houses as the crash is happening. The one you buy in Jan, 2021 goes down for 3 straight years 10% per year right after you buy it. The one you buy in Jan, 2022 goes down for 2 years and the one in Jan, 2023 goes down for a year. After that, you're buying the last 5 properties post-crash when the market is in recovery.

The big picture is the difference in terms of net worth is almost $2M OVER 40 YEARS with a market correction.

Almost $5,000 per month in True Cash Flow(TM) (which includes cash flow from depreciation and cap ex) in year 40.

And here's a breakdown of total equity between the two scenarios.

If you want me to change my assumptions and run the software again (or even change the setup) let me know.

I also have lots of clients doing this model. We typically only do FHA if it is a multi-family for their first one. Otherwise, we're doing conventional financing. If you do a search for Nomad podcast or Nomad classes in your favorite search engine, there about 100 webinars/podcasts on this exact topic and how to do it.

Thanks Jill. Will see you at the meetup in Fort Collins on Wednesday.

During our most recent episode of the Nomad Real Estate Investing Podcast we unveiled our proprietary software which allows for advanced real estate deal analysis. 

While there are many options out there for modeling portfolio performance for traditional investments there are not many (or any) options for modeling the performance of a real estate portfolio over time. That is why we created our very own software that allows us to do just that. We are calling it the Nomad Calculator 3 and in "The Most Advanced Real Estate Deal Analysis Software Ever Unveiled" you will get a glimpse of it's features and capabilities.

https://itunes.apple.com/us/podcast/ncreig-2018-your-third-nomad-property/id1338925560?i=1000410583706&mt=2