All Forum Posts by: Matthew Terry

Hello BP Mates,

I'm excited and nervous that after almost two months after putting these two properties under contract, we are days away from closing. I'm hoping to get your advice on something considering this is the first time I'm purchasing investment SFH and it is out of state.

We are in the appraisal negotiating phase.

House A is priced at $90K and appraised at $87K. House B is priced at $85K and it appraised at $88K. They are in the same neighborhood and are similarly sized houses and similar quality. The same REI investor seller is selling both houses. The seller agreed to drop house A to $87K but wants to raise house B to $88K, essentially not changing anything. These are both rental properties this seller needs to sell in order to clear his D\I ratio to get a loan for another type of business.

Keep in mind the seller had to spend $5-$6K on each property to fix major issues like new roof, hot water heater, and foundation and I waited to get appraisals until after the inspection items were negotiated. However, these are by no means "turn-key" as flooring, fixtures, and finishes are C grade at best. (It is a C+ neighborhood)

I'm conflicted:

1. Do I accept the counter because it is "fair" and end up with a deal: House A $900 rent $87K purchase, House B $875 rent and $88K purchase

2. Do I counter and request the lower price on House A and House B price doesn't change and end up with a better deal: House B $875 and $85K purchase

Part of me feels like I should be a savvy investor and be aggressive in getting the best price possible. The other part of me feels like saving the $600 down in cash and the pennies per month from $2400 amortization isn't worth potentially losing the property or both. I've already spent $2K between appraisals and inspections and almost two months of my time waiting. The relatively low numbers won't make or break my path to financial freedom. 

Do I risk losing both deals for $3K (3.5%) of equity? What would you do?

@Sameer A.

Why do you want to get into real estate if you are doing well with your business and with paper assets? 

How did you decide on your investing criteria of at least 6% CoC with at most 25% down and at least 2% appreciation per year?

Why did you choose multi-family in Phoenix?

I think explaining these things will help everyone here give you better guidance because there are many strategies to achieve and beat your criteria in several markets and different property types. Narrowing it down depends on your WHY. 

@Matthew Terry

You want to thoroughly research your local Section 8 market. How easy is it to deal with the local officials? What is the highest rent HUD will pay for the amount of bedrooms in the house?

Section 8 tenants probably dont experience nice homes very often and HUD inspections can be more expensive to pass compared to standard market rentals. Some feel a B+ class house is therefore a great option for Section 8, as long as the rents support it financially. Others feel Section 8 tenants will cause more wear and tear, so it doesnt make sense to offer a nice house to them.

@Joseph S.

Congratulations for starting your REI adventure!

I applaud your initiative of building wealth while addressing a major problem in this country; affordable housing.

Neither route is better in general, it is completely up to you as to how you want to approach it. Below is only a guideline, not exact science, and every market is different. Generally:

If you buy a nice turnkey house, you pay more upfront, but theoretically you can budget less for vacancy, maintenance, and repairs and charge top market rent. It's all fixed up and you should attract higher quality tenants that want to stay longer becauseits in a good neighborhood.

If you buy\hold a home that needs repairs and isnt as nice, you should be paying less upfront but you want to adjust your budgeting higher because you are choosing to repair over time, you won't achieve top market rents, and you might have higher vacancy because there is a nicer house down the street than yours.

You can choose a good neighborhood to begin with in order to mitigate vacancy. Or, you can choose an OK neighborhood to begin with and work towards making that neighborhood better by improving the house and theoretically the tenant and the neighborhood.

I reached out and asked him if he had 3 references. He replied "yes", and that was it. Thanks for your advice, I blocked him on Linkedin.  

@Celeste Nadal

I'm closing on two Section 8 C+ SFH 3 bed properties in Oklahoma City. The PM I'm using specializes in Section 8 and will help guide me through all the paperwork and inspections. When they did initial walk-throughs, they noticed the home was in good condition, average wear\tear, and the houses were clean. I wanted Section 8 because I want to secure the rent during this pandemic. Even if the tenant stops paying or loses their job, I'll still break even on the property. Both leases are up later this year and I can choose not to renew and put the homes on the normal market if I feel that the required fixes upon inspection unnecessarily eat into profits. Some investors love Section 8, some hate it. The common theme is that Section 8 requires a lot more work on the management side. Since I'm investing out of state and my PM specializes in Section 8, that isn't an issue for me.

Follow up with me in three months and I can update my experience after I close and have some experience with the property. 

@David Weymouth what are the specs of the property if you don't mind me asking? There are many opportunities for the $250K range in good Gilbert/Mesa areas but they are either Townhouses with HOAs and no backyard or they are smaller 1200 sqft 2/2 homes. I'm considering investing in one, but my gut tells me there is a higher chance of turnover risk if I'm not doing detached SFH at least 3/2 1,500 sqft. With all the apartments available, I feel like someone who only wants a small 2/2 would also rather have no maintenance and integrated amenities. I wonder if there is data out there to show history on 2/2 rent and turnover trends and who would have it?

I wish I had a capital pool for flipping. Wholesalers are dumping properties in minutes after they are emailed out. Many of them present great BRRRR opportunities, not to get 100% of capital back out, but at least only leaving in 5-10% as opposed to 20%+. Cash-out refi is still out there at reasonable rates.

Your cash flow numbers aren't great, but Maricopa has been all about appreciation. Cash flow is just a way not to go bankrupt while waiting for the property to build your net worth. I'm closing on a cash-out refi on a 3/2 SFH I bought in 2015 in Mesa. It will add about $250 a month to my mortgage. I will use this cash to invest in mid-west cash flow areas and gain about $400-450 in cash flow. In 2030, I will 1031 it. As long as rents grow as well, refi every 5-7 years might be a good strategy considering supply for "starter homes" in the east valley won't go up for quite a while, if ever.

Thanks Mitch, I thought of that, but I'm skeptical of that tactic because if this is a conman, he most likely has 3-5 "previous clients" lined up to tell more lies. I'll still look into it, since it "sort of" makes sense that this guy may just be a wealthy dude with nothing better to do with his money and one of his wealthy friends suggested he does this because lending is tightening and interested rates are down.

These are essentially risk classifications for many types of assets. Maybe this will help: I invest in consumer debt on Lending Tree. They also have A,B,C,D class debt products. A class are highly qualified people that present very low risk of default and only use a portion of available debt, but you only make 5-7%. D class are people who may have defaulted before, have a low credit, and are taking the max available credit line, high risk to default but you make 14-16%. 

RE is similar. A class are newer buildings with nice finishes in desirable neighborhoods with higher than average rents that attract quality tenants with higher incomes. There is minimal risk in both vacancy, property damage, and repairs\maintenance, but you will probably only make 8-10% CoC return. D class are older smaller buildings in bad neighborhoods that attract people with low credit and unstable or little income. The risk for vacancy\nonpayment and damage is high and general repairs and maintenance costs are high, but you can achieve 30-40% CoC returns.

It isn't an exact science. Just like the 50% expense rule or the 1% RtV rule, they are guidelines to make investment decisions on. 

@Eric Long

Listening to REI podcasts and reaching out to the guests who provide turnkey support in markets that made sense to me. After several conversations and research, I chose the market that had the team I felt most comfortable and confident in.

Some companies just didn't cater to the price point I was looking for. One company started selling to me before understanding my needs. One company I had a great introduction with, but their numbers were unreliable and inconsistent. One company that I was extremely interested in had terrible communication. As a sales professional, I'm always the vendor in transactions that involve 6 to 7 figures, so it was an enlightening exercise.