All Forum Posts by: Luka Jozic

Purchase price is 68K value around 120K. 

Hi folks, I won a property at auction about a month ago and realized a minor mistake. As you might know, you cant access the inside of an auction property until after closing, meaning you cant do a full appraisal. I do have a few hard money lenders that can still lend with only an exterior appraisal. My issue is that when I won the property, I won it under my name, and all HM lenders I know require that I close in an LLC. I called the county today and they said if I want to switch the name to my LLC now, its will most likely delay it about 3 months. It's not the end of the world, but I am paying $12/day interest until I close. So, I thought I would post and see if anyone knows of any private or hard money lenders that can lend with only an exterior appraisal, and does not require an LLC? The property is in Cleveland Ohio.

Quote from @Timothy Moore:

@Luka Jozic I think it's good to be smart about your deal analysis even if it leaves some on the table. From the other investors I've talked to, the Cleveland market is similar to Detroit market where I work and I've done 5 BRRRs here personally and managed over 100 BRRR style rental projects for clients.

The current interest rates are certainly putting pressure on cash flow for financed deals, this is seen both on the hard money loan costs and on the back end for the long term financing. Given you're positioning yourself into cash flow deals not equity, then I don't think it makes sense to take a deal that's breakeven just for the appreciation and tax benefits because there are lots of challenges in rehab projects and with the market shifting and softening rental demand, you should always have some margin. Personally if I can't cash flow at least $200-300 per month on the back end of a BRRR, then it's not worth it for me.

Now there are a few different ways to look at BRRRs and sometimes it's not just about pulling out 100% cash back. In my opinion, if I get 75% of my cash back but I now have a fully renovated house with minimal future repair and capex expenses, then it's still better than buying a similar home and putting 25% down on the front end without all the improvements. Sometimes you don't want to pull 100% out because of the pressure on your cash flow. My average BRRR landed in the 85-90% cash out range but there's been a bunch that hit over 100% cash out and still had good cash flow.

It may be worth reviewing your operational strategies. On the revenue side, can you get more than 1% rule at similar price points? In our market, around 100-140K price point, we can often get a little higher than 1% rule. A few of our recent BRRRs were as such:

ARV 120K - initial rent 1250

ARV 80K - initial rent 1100

ARV 160K - initial rents 1900 (duplex)

ARV 150K - initial rent 1500

ARV 130K - initial rent 1500

Find ways to maximize the area rents, especially since you're typically improving the house to better than average standards. 

Also look at your expenses. Can you negotiate to keep taxes down given initial purchase condition? Can you self manage until you have more units? Did you math out your capex over the next 10 years? (this should be minimal in most BRRRs but will depend on project scope) Vacancy, bad debt, maintenance, and all costs should definitely be factored in.

Thank you for that response. I definitely agree with what you're saying and I think my mindset is very similar to your, which make sense as my understanding is also that Detroit is a very similar market numbers wise. And yeah the numbers you provided are very similar to what Im targeting, i.e. a little over the 1% rule. But, as I said that means Im missing out on deals. But I agree, not really worth to go through all the work with a BRRRR just to break even, especially in markets like ours where there isn't much appreciation. Later on when I might expand into a appreciation market, then I might be ok with breaking even as 5 years down the line, the appreciation might give me similar or even better returns than cash flow would in a cash flow market.

Im not able to really self manage as Im out of state. But I think I just need to learn how to find better deals. Im already exploring auctions but maybe instead of reaching out to wholesalers, I should do what they do and find off market deals myself. If I could remove the fee that wholesalers add, that would make a lot of the deals Im looking at a lot better!

Quote from @John Chong:

Based on your example I'm still seeing a DSCR of 1.25x+. You'll gain on the long term appreciation, rent appreciation, and can refi once rates come back down.

 So this is another thing I've been thinking about, rates coming down. Obviously no one know if, when, or how much they might go down but lets play a scenario. Take a 120K mortgage with 7% interest, thats $639/mo in principal and interest. I think its very unlikely but say rates go down to 5%, then the monthly cost is $515, so $124/mo difference. With a refi cost around $3500 that means it would take ~28 months or 2.35 years before it starts making sense. For interest rates at 6% its close to 5 years. So I guess if you're holding long term it makes sense to refi but the only question is will the rates actually go down, and if so, how much?

Quote from @Richard Elvin:

@Luka Jozic I think you make some great points, but I don't agree with "Lower price points = mistakes hurt less while learning.". What if that first "lower price" deal stops you from being able to move forward? I've seen "deals" in my local area that seem great ~$30k, rents for $650/month. The issue is that you will have first and last, and that's it. Now you are working on an eviction, plus the windows will all be broken, AC will be gone, etc. There's a reason these "deals" were for sale... (It's been a bit, maybe circa ~2015)

That's my longwinded way of saying, don't buy a bad deal just because it's cheap.

 Well I case its case by case. I guess what I mean was for me, if I make a 30K mistake it will sting of course but it doesn't mean Im out of the game for years to save up again. However, if I make a mistake in a more expensive market and its like a 70K+ mistake, then yeah its gonna hurt me a lot more. 

Yeah but it sounds like what you're describing is buying dirt cheap in war zones. What Im trying to do in Cleveland is to find areas that are still cheap, but also has a reasonably stable tenant base. And that should give me the knowledge needed to hopefully avoid big mistakes when going into a more expensive market. 

Quote from @Nathan Gesner:

Quote from @Luka Jozic:

David Greene has been talking about this a lot on the podcast. If you buy for cash flow, what are you really gaining over the long-term?

If you buy in a cash-flow market like Cleveland, rents may climb at the same rate as an appreciation market, or they could climb slower. One thing we can guess with strong certainty is that property values in Cleveland are unlikely to climb much. Look at prices 1980 - 2010 and you'll see prices were pretty stagnant. Would you rather have $200 a month cash flow for ten years or $200,000 in appreciation?

Absolutely a very solid point though I'd like to point out that Cleveland has appreciated quite nicely in the past few years according to zillows data. Most likely due to the flood of investors which may stagnate over time as it becomes more saturated.

My idea has been to start in a low entry market like Cleveland where I can do more deals and get more cashflow now. More deals = more learning and experience. Lower price points = mistakes hurt less while learning. Then once I gain more experience I would expand to a higher price point appreciating market. I'd appreciate any feedback on that plan. 

Quote from @Nathan Gesner:

Quote from @Luka Jozic:

Im seeing lots of obviously more successful investors swearing by the 1% rule and buying properties where I just don't see how the numbers make sense. 

If they are still finding 1% deals, they are probably finding them off-market through personal networks. Try spending time with other investors at network meetups and see how they're doing it.

Keep in mind a lot of them may be talking about 1% deals they closed 1-2 years back.

I mean in Cleveland you can still find above the 1% rule even on the MLS but I guess when you do a BRRRR in order to pull out as much money as possible you wanna refi as high as possible but then that of course hurts cash flow. But Im getting a sense that you and @Ryan Davies both seem to think that around 1% rule is about as good as it gets and we kind of need to think more long term? $0 cash flow today could be $200 a few years later as the loan is paid down and rents increase.

Im on my 3rd property now and just getting more comfortable with all of this and now wanting to scale faster with BRRRR using hard money loans. I've been pretty strict with my numbers which is good in one sense, but I feel like Im missing out on deals. Im seeing lots of obviously more successful investors swearing by the 1% rule and buying properties where I just don't see how the numbers make sense. So as an example, lets say I do a SFH BRRRR and after rehab is complete I refi at $120K and rent is $1200/mo, this would be exactly the 1% rule right. At 120K and 75% LTV and 7% interest, the typical PIMI in Cleveland would be around $900/mo (this would be higher in Heights suburbs with higher taxes). I usually want to set aside 25% of rent for capex, repairs, vacancy, and management. So with $1200 rent that leaves $900 left. That means we have $0 cash flow. I understand that the idea of BRRRR is to pull all your money out, but Im finding that pretty difficult to achieve if I want some cash flow. Even if I refi at $100K instead, the cashflow would be around $140 a month but then I would have to be all in (purchase price + rehab) at $75K, which I also find very difficult to achieve. And that is not even considering the cost of a hard money loan and then the refi, which is somewhere around $7-8K.

So my question is, how are you guys evaluating deals? Am I being too conservative with my numbers? I have the capability to buy more than I currently am strictly because I find it hard to find deals where the numbers make sense to me.

You can try: https://www.roofstock.com/get-neighborhood-rating

Im not sure how accurate this is, sometimes I cross reference it with the crime maps out there and generally they are in agreement. But yeah don't follow that blindly obviously. 

Quote from @Ned Carey:

@Luka Jozic

If I understand your reply it sounds like you are bidding at a tax auction not a foreclosure auction. That is a totally different animal.

You should talk to some local title companies to find out if they can insure title on tax auction properties. It is possible some will and some won’t. Some may say you need to wait a year or even three years to insure the title.

No its not tax auction its foreclosures.