All Forum Posts by: Luke G.

@Sam Hopkins

Are his tenants still giving him a house if the furnace and roof need to be replaced in the first year? That’d be around 10k, which based on his cash flow numbers would take him 11 years to recoup. Are his tenants going to give him the cash for the necessary repairs?

It is not a matter of being greedy, it’s being smart, and not taking on excessive risk for absolutely no reason. The margins are too thin, it’s way too much work for something with those kind of returns.

You’re 42% return number is absolutely absurd. You’re not figuring in literally any expenses, cap ex, maintenance, property taxes, vacancy, mortgage, and insurance. Gross returns and NET returns are two very different things.

His cash on cash return on this deal if absolutely everything goes perfectly is 2.5%, total ROI is a bit higher with mortgage pay down but still very poor. If it's an appreciation play it's a different argument but to the OP, you can find something better. It just might not be in your current market. I find deals that cash on cash return around that 40% marker, not some made up number of using your gross rent (because nobody has expenses right)! I live 3 hours where most of my properties are and rarely ever see them.

If I was the seller on this property I'd sell it to you all day with numbers like that.  If this were my personal portfolio it'd be a hard pass.  The 1% rule is a starting point, and this one doesn't even sniff it.  The most I would consider paying for this property is around 105k.  I don't use the % rule per-say, but another modified version of it.  I use a gross rent multiplier (total purchase price/monthly rent).  That number has to be 85 or less at my expected market rent before I'll bother with it.

The numbers don't lie, don't jump into something with such thin margins, especially if this is your first one.  If this were a part of a portfolio of 15 other houses and the others cash flow higher than it's a different story.  You can't time the down-turn, you can only plan for it.  

@James Johnson

A traditional mortgage doesn't stack the interest up front, it's just simply your loan balance is higher in the beginning so the interest you're paying is more, that's the way an amortization schedule works. The "speed equity" or speed mortgage play is smoke and mirrors. If you get a 30 year amortization at a low interest rate instead of worrying about the risk of the HELOC (Which can be called as others have stated above, if you're using it for investment purposes for cash out refi's that's a completely different argument). You'll notice if you do a conventional mortgage and pay a much higher sum than the minimum, the amount of interest you're paying each month decreases as well. As other have pointed out, this gives you the option to scale back on some of your pre-payment if needed in case something happens in your life.

Don't overthink it, take the easy stable 30 year locked in rate and pay what you were planning on paying for your HELOC and your result is the same, but in all likelihood you payed significantly less in interest and it came with significantly less risk and a lower interest rate. It's an absolute no-brainer in my opinion.

@Robert Hainsworth Another option is approach the seller about seller financing. Before you run that route ask around to local lenders if they will consider doing 80% LTV with a 20% seller's note. 90% of them will be a no, but a few will consider it based on the deal. I've gotten into quite a few properties doing 20% seller's financing and the bank doing the rest. Seller financing helps both parties, it lower's my OOP expense and it delays some of the capital gains taxes if the seller is just looking to cash out. If their plan is to 1031 into something else they obviously won't even consider the seller financing. DTI ratio needs to be excellent, and you'd better have an exit strategy with a possible 5-year balloon.

I also can't imagine going through all that work with only a 50$/month margin for error on positive cash flow.  For a single family house I wouldn't even consider it for anything less than 300/month, small multi better be 100+/door after refi before I'd ever consider doing it.

@Jordan Moorhead, I agree, extremely difficult to make it work in the twin cities based on everything I've seen as well, but entirely possible if you get outside of that immediate market.  I invest a couple hours drive east of where you're living and it's certainly possible with excellent cash-flow following the refi, even more so if you get further to the east side of WI. 

Two recent examples:

Purchased a SFH student rental for 85k that was mis-labeled as a 3-br (it had 4) and was only getting 900/month in rent, appraisal came back well and instead of bank doing a construction loan they lowered my down payment to 10k and had me self-fund the rehab. I put 11k into it with a new kitchen/bathroom/flooring and got it on the following student cycle with decent management. Signed leases at 1500/month for the following student cycle, refi-d and it appraised for 130k. I walked away from the table with 30k at refi closing and it's also on a 10 year lock and cash flowing 350$/month.

A more recent example, I purchased a quad in June for 162.5k, seller took a 10% note and I had initially 8k into the deal (85% LTV), rents were sitting at 1600/month. I put around 7-8k into the property, got decent property management, and now rents are 2650/month. I refi'd in January and property appraised for 215k. I pulled 20k of equity out, payed off the seller's note, and now have a 10 year lock on a property that is cash-flowing north of 500$'s/month.

I understand the over-leveraged argument and agree with it, but I have had banks that will do longer-term lock's for a little higher interest rate, I just make sure it makes sense with my numbers and they need to not just cash flow after refi, but cash flow well (I don't consider 50$/s for a SFH cash-flowing well). I have capital to buy more properties, but I'd rather use other people's money and let the banks see the amount of reserves I have.

Also I’m talking a local lender where you plan on purchasing, not where you live. They generally have a relative distance from their offices they will lend to.

@Prash Sun

Talk to a few of the local lenders and you'd be surprised what they'd go for, use a local bank, not the big national ones. I have all of my loans through my LLC, with banks willing to go up to 80 or even 85% LTV if I'm putting my own cash into it, 5, 7,or even 10 year lock. That's with a personal guarantee of course, but it sounds like you're fine with that.

I wouldn't pay off the loan ASAP once you have one, especially with your personal income. Let your tenants do that for you and keep buying additional properties with your spare W2 income. If you get a loan for 5-6%, with you paying off that property it's only a ROI of the loan percentage, and you should be able to do better than that on your own buying more properties. If it coincides with your risk tolerance that's another conversation, but there's no way I'm paying off loans early if I don't have to. All cash flow and future W2 j come for me goes into buying more properties or improving what I already have.

@Omar Monsalvo

You’re doing exactly what you should be doing, reading, educating, interacting with a site like this, and going to school for a job that will have a respectable W2 income.

Keep saving, that combined with your potential W2 income is a giant help when you start seriously investing and underwriters for loans love seeing it. The loan approval process for someone like you will be a breeze. You'll be able to house-hack immediately once you graduate and that'll leap you into more aggressive REI opportunities as you grow your net worth and number of deals. Just the fact you're even thinking about this stuff yet puts you ahead of 99% of your peers.

Others above have said that sellers always want their money, that most certainly is not the case, especially in off market deals. I’ve closed on quite a few deals where the seller didn’t want the entire sum to avoid the capital gains. A lot of times these are tired older land lords that want a stable income and they don’t have to manage their investment anymore while still getting a monthly check but it takes zero effort.

I’ve gotten into properties with a 20-25% note from seller and bank financing the rest, but you need to keep in mind that you need to have an exit strategy when the agreed upon balloon comes due, but I’ve had sellers agree to a ten year balloon as well. They like the ease of the transaction, it lowers their tax liability, and keeps my out of pocket and payment to a minimum. Can be a win win for everyone. You may need to shop around some for local lenders that will agree to it, but I’ve got a couple where I know I can submit the deal and they compete over me at this point.

@Rahul Sunkavalli

I agree with others above. I still work a normal w-2 job as a physical therapist but work 4 10s so I get an additional day out of the week to work on my rental portfolio which is now north of 40 units in 2 years of investing. I have a solid property manager so it honestly takes very little of my free time. I try to spend an hour every night when my son goes to bed analyzing future deals and education but it is very doable. The W2 income helps significantly with the underwriting process during loan application. Banks like to see that consistent income.