All Forum Posts by: Marc Jolicoeur

Welcome Twin Cities newbies.

I just acquired my second rental townhome in the south metro as a short sale.  I am closing on it in two weeks and I already have some renters interested in it.    Needs carpets, appliances, and some touch ups but it will be quick to rent.  The rental market is pretty good since the last 4-5 years or so.

I highly recommend the book "Millionaire Real Estate Investor" as well as the rest of the recommendations above.  The book recommends buying at least 20% below market value for buy and hold properties to virtually eliminate your risks.

I recommend buying buy/hold property that are in good shape, where you can rehab them, where you will have a really good predictable estimate of your long term capital costs.

Get a mortgage with 25% down. Make sure you can cash flow $400 per month after mortgage, taxes, 4% vacancy, HOA, repairs, property management and insurance. Save the cash flow in a savings account.

Take another $400 a month of your job paycheck or from your retirement savings and save it too in the savings account.  After 3 years of saving you will have almost enough downpayment to acquire a second good rental like the first.

Two more years of saving $400 a month from your paycheck and with two rentals, you will have enough downpayment again to acquire a third rental.

After that, you should be able to acquire a property every year or so.   10 years into it you will have 7 rentals.  15 years into it you will have 12 rentals at least.  Could you semi-retire in 15 years on a $57,000 in recurring and safe income?

If any of your properties get really good equity built up because you bought in an appreciating market or because you got an even better discount, then refinance after a few years and cash out to get back to 25% equity.  That cash will let you buy another property faster in the 15 year plan.

Coming up with the first downpayment is the toughest part. I had a whole life insurance policy with cash value that I was able to borrow from. I also borrowed some from a 401K loan. After three years of collecting rent I have paid all of these loans back and I refinanced to get my original cash out. Now my ROI on my first property is infinite!

I would be happy to meet for coffee or drink anytime with newbies as I feel I am a newbie still but have figured out a system that I like and I am happy to share ideas.

Marc

Your calculated mortgage payment of $525 looks like you used an interest rate around 3.75% over 30 years amortization.  

Did your lender amortize over 15 years because that would calculate out to about $850/month.

Another explanation is if the lender included estimated taxes + insurance + HOA + PMI.

Note: I feel as though your estimated costs for insurance are too high. I pay about $170 per year for my rental townhome with shared walls.

Calhoun Ventures is very actively doing turnkey properties in Milwaukee and in several other midwest cities where the numbers work out even better than Minneapolis.  I met these guys at their offices where they gave a presentation about investing in turnkey properties in Milwaukee and I was very impressed with them.  

I would do business with them especially in locations where they have set up in-house property management.

Isaac,

I do not own duplexes yet in Minneapolis but I know they get expensive in desirable areas.  Look at Uptown, Lyndale, Lynnhurst, Kingfield, Fulton, and around 48th & Chicago for examples.  They are all $150K to $200K more than what you are paying.  Are you actually in the city limits?

With that in mind your deal might be a great deal IF you are correct that your neighborhood will turn the corner from "B" to "A-" in the next 10 years.   

When you buy stocks you are betting on appreciation.  The dividend yield is under 2%.  The 8%+ expected returns from stocks include 2% dividends, 3% inflation, and another 3%+ appreciation.      

When comparing the investment to cash flowing real estate, I think it is ok to look for some amount of conservatively estimated appreciation.  Of course, betting on appreciation could be a disaster, but so could index fund investing during a major recession.

If I were to calculate an IRR I would add 2% for annual price appreciation due to inflation over the next 10 years. This depends on the building somewhat because an older rough looking building will start depreciating at some point in it's lifetime. However, land value in Minneapolis is probably appreciating at a faster pace than inflation.

If you feel like your B neighborhood will become another Kingfield or Lyndale in the next few years, then you could add another appreciation factor. Proximity to light rail, trails, or lakes would be almost a guarantee of the 'hood to become gentrified. So if you wanted to bet on another 2% appreciation due to gentrification you would have an IRR of closer to 10% which is about as good as parking your money in the S&P and hoping for the best.

PS. I think you should get price estimates for lawn and snow care.  That is a huge burden in most winters.

If the note holder is FHA(HUD) then the SS offer needs to be > than 84%-88% of the fair market value depending on how long it's been on the MLS. Other banks might have similar ratios. The seller and sellers agent may be in arrears on taxes or HOA so they may need 90% of fair market value to cover all costs and for the realtors and SS negotiators to get paid. So the magic number they need may he quite a bit higher than the mortgage balance. I have a SS I am waiting on right now where I'm at 84% of FMV plus realtors plus negotiator plus HOA balance. It's still a deal for me because the FMV is about 10% below ARV and I'm keeping this for a cash flow rental.

Fannie Mae and Freddie Mac based loans will not allow more than 40% or 50% of the HOA units to be rentals. Mortgage brokers can't set up the mortgage and then sell the note to the government.

Therefore , they have to find other bankers willing to buy the note. Most banks will not borrow on these.   Sometimes its more like a commercial loan with short 5 year term and higher interest rates. 

Lorenzo, 

I am buying rentals in the suburbs now. Most of the twin cities market is good, but I would not say it's a slam dunk anywhere.  

There are a few C and D areas in Mpls, StPaul, and some northern inner ring burbs I am avoiding because I have heard that the city rules make it tough on landlords, and there are many "professional" renters who could make your life hell. I have even heard that it may be tough to get a good property manager working in those same areas for you.

Before buying, take a look at city rules and fees and tax rates. These will affect your ROI and there is quite a difference depending on which cities you are looking at.

In the A and B areas, you should have no trouble at all getting low vacancies, few evictions, and good property management. HOWEVER, the cash flow and ROI will be much smaller because of the high price points.

Personally, I am finding the cap rates for SFH, small MF, and townhomes are all around 7% in A, B, and some C areas using realistic assumptions for long term hold. Getting a 20%-30% discount to ARV is impossible with MLS listings and even in REOs as there are a lot of investors competition in buying.

Since you are investing at a distance why don't you find the great property manger first and then ask him where is there a good area to invest in?  If they are happy to work for you in North MPLS, then my warning may be completely unfounded.

I like Zilpy.com.  Like rentometer, it will estimate a good rent amount, plus it pulls in a lot of information just like neighborhood scout and city-data.  I find it to be a great site to use BEFORE I make an offer on a property to confirm the rental amounts, school districts, and neighborhood trends.  It's worth $4.95 to me.

FindCompsNow.com is another one that is promising.   I think it just uses a Zillow Zestimate rathar than calculating a new comp price with the data it has access to.  But it really helps to get some ideas of what cash buyers are paying in the area.

I also use the Zillow Zestimate and Zillow Rent Zestimates. The rent estimates are pretty good, and I feel like the Zestimates have improved over the last couple of years.

I do not think Minneapolis is emerging. I think it emerged 3-5 years ago. Its a strong rental market and many properties will cash flow, but the cap rate yield for SFH is barely 6%-7% unless you go in D areas where you inherit more headaches and will have trouble hiring good prop. managers at a distance. Appreciation however should continue at a moderate pace for years to come in most areas since the employment situation is very strong.

Minneapolis is tough to find good deals these days. Rent of about 1% of purchase price is about the best you can do buying at retail prices. Once you add your property management and other costs to maintain the property I don't think your ROI will be as good as you'd like. Of course in some areas you can do better cashflow but it may be more costly to do business there, or to have higher vacancies, or deferred capital projects.

I think there are better areas in the midwest with closer to the 2% rule.

For multifamily, in desirable areas the properties are even more expensive, worse than the 1% ratio.  Also in those same areas, there is a lot of apartment development going on so it is now diluting the demand so be careful. 

I do think you should consider the long term exit strategy.  Are you planning to hold for 20 years and semi-retire there where you can provide the property management yourself or are you planning to always be hands-off.

I am looking into this myself and I have come to the conclusion that a typical Fannie Mae refi will have the following criteria:

- Need to own for 6 months to season the transaction before a new Appraisal will be used to determine loan amount.

- A period shorter than 6 months is possible but there is an upcharge on the interest rate.

- Max 70% LTV for a cash out refi. I do not believe a 75% LTV is available for a cash out refi on an investor property.

- You need to have good credit scores and debt to income ratios in order to get any cash out and if your scores are lower, they may not give you 70% LTV.

- For investor properties plan to have a higher APR than you would be quoted as an owner occupying the property.

For HOMESTYLE renovation loans you can borrow 75% of ARV so there is a big advantage if you want to end up with a smaller down payment overall. However, fees and interest rates are much higher! For the very long term, this may not be the best deal.

If you are not using a hard money loan or private money with a registered liens, and you are buying with your own cash, there is a better way.   That is called "Delayed Financing".  You can buy a house in cash today, fix it tomorrow, and get cash out refi the day after tomorrow.  Do not need to wait 6 months. And on this program you can take out 75% of after fixed appraised value.    

You have to prove you have the funds and they are your funds.  A 401K loan or a life insurance loan is treated as Cash so you can use your retirement plans to buy in cash, fix, then refi to get most of your money out.  Pay off your 401k loan or rinse and repeat.

There cannot be any existing mortgage or liens on the property that you are "refinancing". This works like a cash out refi loan but its really a purchase loan.

For all three options above :

- Buying in the name of an LLC adds an additional issue or risk (Its a new rule and not applicable to me so check into it with your broker)

- Condos and HOAs could prevent approvals if the health of the HOA is questionable or if there are several Rentals in the community already, existing lawsuits, budget concerns, or too many units owned by the same entity.

- Ask your mortgage broker to verify your refi plan before you go ahead and buy anything you plan to refi.  It could be the property does not qualify for the plan you intend to use to refi and get your cash out.