All Forum Posts by: Michael D.

Todd Carel, What difference does it make for you how the properties align to the debt? Is any of it NOT personally guaranteed? Assuming not, then it shouldn't really matter. it's all debt tied to you, regardless of which house goes with which particular mortgage on paper. Even if you end up underwater on something, that's not necessarily bad, assuming that the equity ended up somewhere else.

That said, manage the debt to serve your goals, and talk to your wife to make sure you're both on the same page about what those are. I'm not saying that it's better one way or the other, just that you should worry about managing the debt to serve your other goals independently of which property the debt is tied to. In the end, it's all really just tied to you (unless it isn't, in which case this is all out the window).

Depending on your particular situation, you might just care about minimizing interest rates. Or maximizing cash flow. Or paying the debt off sooner. Or something else.

Michael

Indeed. And it doesn't sound like you lost much if any money on this miscalculation. I wish I could say that my lessons had been that cheap. I've still got some I'm paying for!

Joe Boggin - Also don't forget that the term "cap rate" has a very specific definition. If you're going to use that term, you have to abide by the fact that it includes ALL projected income and expenses, most definitely including management cost, vacancy and capital reserves. The only thing not included in cap rate is debt service.

You don't have to count property management if you don't want to, but then you're talking about a different figure, not cap rate.

Cap rate is a very important metric, but it's not the only one. Some people are okay with low cap rates, or don't even bother to calculate them at all, simply because they don't plan to make money from the property's income. They plan to flip it or do something else entirely.

Anyway, right on for what appears to have been a great investment. Here's to finding that $800 tenant sooner rather than later!

Michael

Junior Salters, please also clarify what you mean by "cash buyer" and "has $6k."

I think what you're trying to say is that they would plan to pay with cash, they just don't have it all sitting in a bank account at the moment. It's tied up in something else liquid, like stocks or something. Assuming this is true, then you need to find out where the rest of the money is coming from, and gauge the likelihood that it actually works out. Can they show you a screenshot of their brokerage account?

Michael

Andrew Brown,

You need to think about this in terms of what an investor buyer will want to pay for the property. This is predicated on two basic variables:

- What will it be worth in a fixed-up state? (After Repair Value, ARV)
Take an honest look at comps in the area of similar condition and age, recently sold. Just do your best, and keep it honest.

- How much money will it cost to get it to above fixed-up state. (Repair Costs)
This is likely your greatest opportunity for error, considering your lack of practice. Do your best, and try to get an opinion from some local contractors if you can.

Then subtract the Repair Costs from the ARV, and take 70% of that final number. That's what a flipper will pay for the property. If the rental numbers work out, as you suggest they do, you might also get a little more from a buy-and-holder who's not counting on a quick profit - but you still won't get more than market price.

Once you've figured out what your potential buyer might pay, then you can back into how much you can afford to pay with a little profit for yourself. If that's lower than what the seller will take, no deal.

Good luck!

Michael

Don't put the parents on the lease as tenants, add them as guarantors for the lease and insist the fill out an application. The boys go on the lease as tenants (if they are 18+), as they are the ones living there. All four are each responsible for the whole amount of the rent (joint and severally liable).

The point is, the parents don't have the right to occupy the property. Only the boys do.
http://ohmyapt.apartmentratings.com/what-is-a-lease-guarantor.html#b

Also, you may want to ask for the last 2 months rent in advance, in addition to a sizable security deposit.

Michael

Eligwe Tower!

I'll take the penthouse, please.

Ned Carey, you beat me to that comment. I think low interest rates are really at the root of it. It's cheap to get money to borrow, and if you already have money you need something with yield to put it in. 5% CoC might look good to some people right now. Cap rates in my neighborhood are 4%.

Unfortunately (or fortunately), many newcomers will soon realize how much more difficult RE is than they thought. That, combined with rate hikes over the next few years will probably reverse the trend.

Michael

Wendell De Guzman, I don't have any experience with RE options, but it doesn't make sense to me that a seller would allow you to take his property off the market for 6 months for $100. Can you help me understand that a little better?

Michael

Sam Eligwe, something else you might want to consider is political vision. Maybe you could speak with some folks at the city and see what their plan is in the direction of your land. That may have a large effect on your timing. You may also find that instead of 12 houses you can end up with 100 loft-style condos, retail, a park, and whatever else. Maybe "economic redevelopment" loans at subsidized rates. Could be a HUGE difference in the final outcome for your pocket. Or not. But you don't know unless you do some research in that direction.

Michael