All Forum Posts by: Michael Davido

For me, it's wondering if I'm missing something.  It's easy to analyze properties that don't make the cut and toss them to the side with no regrets.  However, when finding one that is close, I question whether there is more to it.  It seems to recommend 1-2% for closing costs, but one bank I talked to who gave me ballpark numbers ended up being at nearly 5%.  

I find I talk myself out of it because I'm not sure if the numbers are all accurate and it seems "too easy" just to input all the numbers, use 5% for the repairs/vacancy/capex, 10% for property management, and have it spit out a good deal.  I always feel like there is a surprise waiting.

Brandon and David make it look so simple.  I guess I am afraid of making a major financial mistake on my first deal.

I have the same reservations while looking for my first deal. I think I found possibly two, one inexpensive with a 8.72% ROI, the other a little more expensive, with around a 15% ROI. I still need to line up a preapproval, set up an appointment to see the property, and possibly make my first offers.

There is a lot of talk about a crash coming "soon" or buy now - don't time the market, wait it out, make sure it's a good deal, cash flow, etc.  You talk to one person and they say there is likely to be a correction in 2021.  It starts in the bigger cities and then filters down to smaller markets.  Another says to look at the economic numbers and you'll see a crash occurs every 7 years and it has been 12 years since the last one.  And others say, keep buying as long as it's a good deal.

Could someone explain a little more about "just make sure it's a good deal that cashflows and you'll be fine?" Put our hearts at ease. What is the rationale behind it if a correction occurs next year? I think my biggest concern would be losing value in the property and tenants stop paying rent. In other words, how do we ignore the potential for a crash with the confidence that we find a deal that is cash flowing with a good ROI? I hope my question is clear. I'm having a difficult time expressing what I'm thinking.

Something to consider, or think about, is what we're actually doing when analyzing properties.  The calculator seems to mark it down to some scientific formula, but what we're really trying to do is put all the numbers involved in owning real estate down into a usable format.

For example, what goes into owning or buying a property?  You have the purchase price.  If you can't buy outright in cash or use seller financing, then you probably want to get a loan from the bank.  The bank will require a percentage of the purchase price as a down payment and then will give you the remaining amount of money.  They also charge you an interest rate for the risk they are taking to give you that loan.  From the loan they are giving you plus the interest rate, this is called the mortgage.  Also, real estate purchasing comes with title fees, appraisal fees, origination fees, or otherwise known as closing costs.

What happens after you have the property?  You owe the bank their money every month (the mortgage), you have to have insurance on the property, you'll be dealing with the local government in the form of property taxes whether it's real estate taxes and/or school taxes.  You are on the hook for any and all maintenance repairs if the property needs painted, new flooring, fixing holes in the wall, etc.  If a tenant moves out, you still have to pay the mortgage every month (vacancy) regardless of whether someone is living there or not.  Every once in awhile you may have to replace the roof or heater.  Consider also having landscaping done such as cutting the grass or shoveling snow.  And, consider whether you want to manage it yourself or have a property management company do it.

And what makes all of this work in our favor?  The money paid to you, the owner, for someone to live there (the rent).  The goal is that you get enough excess in rent to pay all of the expenses and leave you some leftover (the cash flow).  You also want to make sure that the amount of money you put into the deal upfront is worth the return you’re getting in the end (return on investment).  If you have to put in a ton of money and you’re only getting a 1% return, well, you could just take that money and put it into the stock market.  Remember, we are investing money so your return on that investment is very important.

The purpose of the BP calculator is to put it all in one place and make it easy to throw the numbers in, do all the math, and spit out figures in an easy to read format.  The art in all of it is knowing what those numbers will be.  Sometimes you know, sometimes you don't.  That is why it's good to be conservative and always err on the high side.  If a deal works with conservative numbers, it'll work even better if the numbers come in better than expected.

The 1% rule, 50% rule, etc. are just quick calculations to help you screen properties quickly.  You aren't going to want to spend a lot of time doing calculations on every property that obviously won't work.  Sometimes, that's just the way it is.  I was finding that there weren't many small multi-family properties on the market in my immediate area.  I had to go out over an hour away from where I live to find any.  The numbers on two that I found seem to work.  My head is telling me, "what am I missing?"  For me, having a hard time finding a deal, it almost seems too good to be true or as if someone else knows something that I don't.  I also have to find a bank with favorable terms so I can get preapproved.  I'm dragging my feet a little bit with that.  I'm also tossing the idea around whether I should ask a friend or family to go in on a deal with me so I don't have to put out a lot of my own capital to start.  I have an emergency fund in place, but the chunk of savings doing nothing in the bank feels like a wide safety net that keeps me afloat.  I am trying to come to terms with the fact that I may have to use all of it for this first purchase because ultimately, my goal is to build up enough cash flow to leave my job.  I won't get there if I just let it sit there gaining .1% in the bank.

Let me know if you have any other questions.

I go with what Brandon Turner teaches and go for minimum of $100/unit and around 8% ROI. For the first unit to get that momentum rolling, the 8% isn't set but I want to make it worth it at the same time. I start my analysis at full asking price but figure I'd probably offer a little lower hoping to get a counteroffer - or accepted.

$120,000 would probably mean lower closing costs. 50% expenses makes it a little sketchy using 13% instead of 5%. But, at 5% expenses (repair/vacancy/capex), gives me $375/month cashflow and a 12.73% ROI.

EDIT:  Going back to my previous post about the 3-unit I just found.  It was just listed about 4-5 hours ago.  What doesn't show on the listing is that it's right across the street from the brand new police headquarters building.  It seems to be priced a little higher than the surrounding properties.

@Nick Robinson Thanks.  I appreciate the help.  The hardest is probably the first one since there are so many unknowns to me - and a lack of confidence.  I still have to call a bank or two to figure out what kind of terms they require.  My local credit union was a little on the high side.

I just found a 3 unit for $210,000. It doesn't give me any numbers for rent so lowballing based on BP Insights, thinking around $3,000 total. Using the 50% rule, I have around $370/month cashflow and a 7.15% ROI. If I use my 5% numbers as taught by BP, cashflow is over $1,000 per month and ROI is over 20%. It might need a little work, but all units are rented out. Seller requiring proof of funds or to come pre-approved.

Even if rent is a little lower at $2,700, it's still $843/month cashflow and a 15% ROI. There seems to be a lot of wiggle room on this one even if I overestimate and stay conservative.

@Nick Robinson Living in it (house hacking) won't be an option.  Do you think it's an interesting enough case to consider it for an offer? I think it's been on the market for over a month now.  

There aren't a lot of multi-family homes in my immediate area other than larger apartment complexes. SFH are quite competitive and don't really cashflow. That's why I had to go out fairly far to find this duplex.

It seems that the added units pump up the rental income enough to help overall cashflow. It just so happens this one edges on the ROI as well.

To understand further what you were saying, is it better to look for 4 units or maybe start with this 2 unit and work up?  I might be able to partner on it to reduce my exposure as it would be a significant amount of my unused savings - meaning, savings minus my emergency fund and many other investments.  It's money not being used for anything.  I've owned my primary home for 4 years so my mortgage debt is still a little on the high side.

Thank you. So, you go a little more conservative up front. I'm just going off of what they say in the webinars and YouTube videos. I would hope that they aren't just giving out partial advice when it seems to be repeated in nearly every recent video that I've seen. They never say look for $100/month/unit and over 8% ROI and THEN see if it fits the 50% rule.

It seems it could be said to use the BP calculator, but instead of using 5%, we could use 13%.  Once a deal is found that works, then you can figure that you probably have a pretty good deal.

I had to look out over an hour away from where I live to find it. I'm really having a tough time finding a deal that makes sense. If I keep making the numbers more and more conservative, it feels nearly impossible to find anything. I'm thinking a rental for cash flow (so I can leave my full-time job) or a BRRRR to be able to possibly pull my money out at the end.

 The mortgage price is included in the difference between the Rental Income Total and Cash Flow.  For example, Rental Income would be $1,650.  Cash Flow is $300.  Expenses are $1,350.  Included in that $1,350 is $532 for the mortgage, $323 for taxes, $83 for insurance, and $412 for the variable expenses that comprises the set-asides for repairs, property management, etc.

The numbers provided above are conservative.  Rents, I believe, are on the low end.  With an expectation that, while the deal works now, it would be even better if I could increase them slightly down the road.

Based on your numbers, it would seem to assume that what is being taught in the webinars to use the BP calculators is wrong.  To quickly analyze a deal, I use repairs 5%, vacancy 5%, capex 5%, and property management 10%.  That gives me 25% of variable expenses deducted from the rent.  Realistically, the 50% rule would seem to infer that we should be using 13.33% for repairs, vacancy, capex, and leave 10% for property management.  This would give us the nearly 50% expenses rule.  In that case, then, we're getting negative cash flow and the deal is no good at the current asking price.

So, which one is right?  The BP calculator method taught in every single webinar or the 50% "rule?"

This is a deal that the BP calculator seems to make work.  It would be my first investment property.  It is about 1 hour and 15 minutes from where I live.

Purchase Price:  $139,900

Closing Costs:  $6,300 (I went with 4.5% here but I don't know the exact number)

Interest Rate:  4.5% (Estimating)

Term: 30 years

Loan Amount: $104,925 (25% - I checked my local bank and they told me they required 25%, but I will shop around)

Rental Income Total:  $1,650 (Based on BP Insights, rents are on the low end and could probably be increased)

Property Taxes:  $3,880

Insurance:  $1,000/yr (Overestimating.  I don't know.  Zillow says it is about $600 per year)

Repairs:  5%

Vacancy:  5%

CapEx: 5%

Property Management:  10% (I figured I'd go toward the high end)

No money set aside for things like electricity, garbage, etc.  I would need to look into that.  There is a picture showing two hot water tanks but that probably doesn't mean anything.

Total Cash Needed:  $41,275

Cashflow:  $299/month

CoC ROI: 8.72%

I think my estimates are on the high end.  If anything, I'd try to come down off the asking price.  Am I missing anything?  I'm going strictly off of what is taught in the webinars and other BP videos.

Thanks!

 Should I go to another bank until I find one that can offer a loan without points?  I started with my own credit union thinking they would have some favorable terms.  They usually have pretty good interest rates.  I wasn't expecting them to tell me they required 2.5 points for investment properties.

Is it even worth putting in a request for pre-approval?