All Forum Posts by: Michael D.

Shirley Dufrenne, I'm really glad you took the plunge. You've got a wild ride ahead!

I hope it works out on this building, but please, please prepare your mind for not coming to terms. You have to mentally visualize yourself passing the deal. This will make it much easier for you in two ways:

1. You're exited and eager to succeed. This might make you more likely to pay a price that you shouldn't. By preparing yourself mentally to pass, it will make the right decision easier.

2. If you aren't able to get this house, it has to be water off your back. On to the next. It's easy at this stage to get wrapped up in a deal, and if it doesn't work out it might otherwise discourage you. Don't let that happen.

So in short: Hope it works out. Prepare that it won't. Keep going either way.

Looking forward to updates on this!

Michael

One other point: bad neighborhoods might get better. Good neighborhoods are already good and already fetch a premium.

I think it depends also on the type of property that you're looking at.

With single-family dwellings, most of the value and appreciation are largely outside your control and subject to the overall perception of the neighborhood (assuming property is already fixed up). If you buy a $100k ARV house, there's not much you can do to move that needle other than wait.

For multi-family > 5 units, the value is much more dependent on what the income is, regardless of the neighborhood, so therefore you have more control. In a 10% cap rate area, if you increase the income by $100 per year, you have added $1000 to the value of the property. Period (mostly). And there are a variety of ways you can go about doing this. I'm sure Al Williamson could tell you more (listen to the podcast), but raising rents, saving on vendor cost, and lowering vacancy are just few.

Michael

Steve Babiak - thanks! Checking that out now.

Wendell De Guzman, tenants give you the authority to write your own checks against their bank accounts? I've never heard of that before and almost can't believe it. Does this really happen?

Michael

Not necessarily, and I don't think anyone else said that. Actually, if the other numbers still work out you will likely have much higher cash-on-cash return with such a small down-payment - if you have any cash-flow at all.

As others have mentioned, you need to be looking at your long-run expenses even if you're only holding for the short run. Your roof is costing you $100/mo, regardless of whether you installed it yesterday or it's 20 years old. Your roof is still losing $100 of value every month.

Add in $25/mo for a water heater, $50/mo for a furnace and you're starting to get the picture. I'm making up numbers here, yours may be different, but the concept is the same. They're costing you money/value every month.

Trying to guess about when exactly these things will have to be replaced clouds the issue about your real cash-flow expectations.

I will concede though that imminent required repairs do affect your short-term CoC return.

Michael

When modeling opportunities in the past I've used a simple 10% of gross to cover repairs, lumping everything together: carpet cleaning, faucets and roofs all in one bucket.

Now I'm trying to get a little bit smarter about it and separate out some of the actual capital expenses that I know are coming and have a reasonably predictable useful life: Furnace, Roof, Water Heater, etc.

I want to account for both the cost and life.

So my first question is: What items do you account for in this way, what do they cost, and how long do they last?

The second question is: What should I do about the remainder? Use a smaller percentage of gross, flat-rate per unit, $/sqft, something else?

Thanks!

I got a Jabra Freeway which has been great, and now I listen to the podcast while driving. I started with episode 1 a week ago, and I'm just about caught up to current. Great stuff!

Michael

@Koel Gaylord,
I'm usually one for being up front with your lender and asking honest questions, but asking her about rent roll is probably not the best idea.

A good place to start is probably this book:
http://www.amazon.com/gp/product/0071603271/ref=as_li_qf_sp_asin_il_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0071603271&linkCode=as2&tag=biggerpockets-20

I haven't read it myself, but I've heard here on BP that it's a very good introduction to many of the terms that you need to know.

Good luck, and keep it up. This isn't rocket surgery, there's just a language that needs to be learned along the way.

Michael

What I've started to do is call around to a bunch of lenders, just to start learning who they are, what the requirements are, and build a relationship. Some are hard money 15% + 5 points guys, others are 5% guys. They all have a fit in particular situations. I try to exchange as much information as possible early on, so that I can get an idea if there's a fit for my next project (whatever that is). I know what my personal strengths and weaknesses are, and I make those clear up front so that if there are any deal breakers we don't waste too much time. (The big one for me is being out of state. That's a killer for many lenders).