Quote from @Lucas Anderson:
Quote from @Randall Alan:
@Lucas Anderson
So, your strategy is sound... but your timing is poor (in my opinion).
You aren't going to want to BRRRR a home when your cash-out refi interest rate is 7.x%. Over 50% of your profit is going to be sitting in your "interest owed to the bank" column on your spreadsheet. And if your solution for that is to re-fi the property when rates come back down... guess what - there goes another $3,000 - $5,000 to refi each property... that is 10-15 months worth of profit up in smoke!
Then, since you are going to be working exclusively out of state, you are pretty much necessarily going to be having a property management company look after these for you I would assume. This is (sort of) mistake # 2. Maybe not a mistake... but if you are financing your property - which you should be to make your $100,000 go the furthest - the 10% fee a property management charges each month is going to eat up about 1/3 of your profit. It's a huge give-away. If you have a W2 job right now... you probably already give away 1/3 of your income to taxes. Imagine if you had to give away another 1/3rd! That is what property management is going to do to you. And they often charge you a full month's rent to place a new tenant. That is like 3 months worth of net income on a typical financed property. If you have to go that way, so be it... but know that it comes at a high price.
As for financing versus not financing, I would encourage you to run the numbers on buying 1-$100,000 house, versus 4-$100,000 houses with 75% financing. I think you will quickly find out that having 4 properties makes you more money. So financing - once the rates come back down some - is the way to go. Be sure to look at being able to depreciate 3.3% of each property each year on your taxes, as well as writing off all the mortgage interest as well. Plus, you will be gaining appreciation on 4 properties versus 1.
Hope some of it is food for thought!
All the best!
Randy
@Randall Alan Thank you for the valuable insight. I completely agree the timing isn't great for BRRRR, but I also think the timing will rarely be as opportune as it has been the last 10 years for this strategy. I think rates will come down but I don't think we'll be seeing our 3%'s again for a very long time. So any deal I make, the numbers simply will have to work at the current rate. Finding these deals isn't easy but it is possible in certain markets it would appear.
I'm more interested in equity than I am cashflow at the moment so it's ok if my net is a bit lighter at the beginning. I of course would like a little something, but I would only expect $150-$200 net per door in the first few years.
The property management cut is a total bummer but something I'm on board with paying if it's a competent PM, it all just needs to pencil in on the calculation. I fortunately am not W2 so THANK GOD gov isn't taking 1/3 of my money but you make solid points.
4 properties vs 1 is the right move I agree, this is why I would like to BRRRR, I can't seem to find houses in good price to rent ratio markets that I could leverage 4 downpayents on 4 deals with my $100k. (unless the houses need work)
Thanks a ton for your response, its very helpful.
@Lucas Anderson
I agree with you on the 3% range... but the high 4 / low 5% range is well within reason in the not to distant future. I sort of disagree with the when to pull the trigger part there though. I think waiting 6 months for rates to settle (even just a little) likely makes more sense... Here's why: You are going to spend $5,000 getting into this house in closing costs to start making (let's say) $150 / month. Let's say 2 years later you are like, man I wish my loan was at 4.75% instead of the 7.8% I'm at... I would be making an extra $150/month (that's the actual difference in the rates on $75,000.) That is DOUBLING your monthly profit. BUT, since you decided to pull the trigger early at 7.8%, you will spend another $4,000 to refi that rate back down.
So if you look at how much money you grossed in 2 years ($150x24) = $3,600... but it's going to cost you $4,000 to refi to double your monthly earnings on the property... you have gone backwards from a cash-flow perspective... and any expenses along the way just added to that... turnover, etc.
There is definitely some merit to the equity play... but at the same time, the Fed is doing their dang best to bring housing prices down... but I don't see it having much effect, because their rates are also holding people in their homes because of the same rate increases, which in turn lowers supply of homes on the market. Such a catch 22! But short term, I think you are going to see limited equity - given how run up the market has been in the past 2 years.
I totally get wanting to be in the game. And I think it's hard to look at the broader picture sometimes. For myself, I wanted "optimal cash-flow"... because what you will quickly learn is that owned houses don't play by the rules - and appreciation doesn't pay the bills. For instance... no repair is the $100 you are budgeting a month. I just replaced the hot water heater. $450 for the heater, $400 to install. So $850. (8-9 months of 10% reserve on a $1,000/month income house). I'm having to put a roof on one of our units this week. It's $11,000. In the past year I have replaced 2 AC systems... $4,500 each. Hopefully in the short term all goes well for you... but with only 1-2 units, these types of expenses will totally turn your low cash-flow 'real estate boat' on its head. You have no choice but to replace a blown AC for your tenant. That is where accepting low cash flow will come back and bite you. One new AC and you are upside down cash-flow wise for 2 1/2 years! Equity only comes along once or twice - when you sell or cash-out refi. So be careful of the pure equity play... you have to own and maintain the house in between.
These are risks we are all running... but over time they are not risks... they are just "unexpected required maintenance". It's funny... some of it can hit you right after you buy your house too. More times than I can count on one hand, I have had my insurance company come back to me (right after closing!!!) and say, "Oh... you have to (pick your expense) - replace that electrical panel, replace the roof, etc. I'm like, "It would have been nice for your to tell me this BEFORE I bought the house!!!... but the way they work seems to be to approve the policy, then look at all the details in the 4-point inspection!
If you have the where-with-all to handle those types of expenses on top of your regular (anticipated) expenses you will be fine. So definitely plan on holding back some reserves to cover the unexpected.
Likewise with the property management. When I see people just gleefully factor that in, I shake my head... because that is 'just another $100 a month I have to pay". I think people lose sight of the additive differences here. Because now it's an extra $150 in interest you are paying, AND $100 a month to the property manager. That is now $250/month... $3,000/year you didn't make. So instead of making $4,800/year per property, you made $1,800. At the end of the day you are doing the real estate thing to make money. If you buy into a deal that is marginal on cash-flow, you can very quickly be upside down and questioning the reason you got into it in the first place. If you are writing checks out of your personal bank account to cover a property that isn't covering itself... trust me you will quickly take a different view on a pure equity play. Maintenance expenses through a property manager are ALWAYS going to be higher as well. They aren't shopping for great rates on repairs.
One last thing - be sure to keep in mind that your property taxes will reset AFTER you buy your property. So if you bought a $200,000 property, but your seller only paid $80,000 for it 15 years ago, you are using his $80,000 tax figure calculating your property taxes. You can realistically anticipate your property taxes doubling when the property appraiser reassess the value of your house for the following year's taxes. This can also be read as: "There goes another $100 / month!" So be sure to factor that into your buy calculations as well.
All the best!
Randy
