All Forum Posts by: Ken P.

Hi @Matthew Cole, good point, as HOA dues were also a concern of mine before we bought. I sat in on a board meeting before purchasing, and went through their financials. Most of the board members had been there a long time and were very familiar with the financial status of the Association and of the co-owners who lived there. They kept fees static during the recession, and we (I've been on the board of directors for the past 3 years) only began to raise them again two years ago with a 5% increase, and again are considering a 5% increase next year. The Association also has a couple of aces in hand, several units that were purchased during foreclosures in the depths of the recession that are now rented out, and could be sold to pay for capital improvements like new roofing. When the HOA fees go up we'll use the opportunity to increase rents on units that are now substantially below market.

Yes @Khaled Helmi, we are self-managing, so there is currently no property management fee.  Our plans are to eventually grow our portfolio via acquisition of a larger apartment building in the metro area, adding management of our current units to the responsibilities of the management company that is required to manage a larger property.  We've been laying the groundwork for a move to a larger property via running these 22 (soon to be 23) units successfully on our own, and by participating in syndications as passive investors where we learn at the feet of investors much more experienced in large multi-family projects.  Hopefully someday in the next few years we'll be able to post in the Success Stories forum about that type of venture.

Right here in Michigan, in a C class property. 

Last week we signed the purchase agreement for what will be our 25th unit over 4 1/2 years.  It's nothing glamorous, but with a bit of work should exceed what we could achieve in most other investments, and hopefully will put us that much closer to the goal of a comfortable retirement.  I share the details here to show what a series of small low-risk transactions can do over the medium and long term to build passive income for retirement.

The PA is for a 1 BR condominium unit in a 150 unit complex where we already have 22 units, bought in 3 earlier transactions.  The complex has a mix of 1, 2, and 3 BR condos, and the 1 BR units are in the sweet spot for us, in that their price is too low for conventional financing, leaving cash sales and owner financing as the primary options for incumbent owners of single units looking to dispose of their apartments.  The 1 BR apartments also have a good 'rent to rehab' ratio, a term I use that means they cost relatively little to update relative to the amount of rent they collect.  A 2 BR or 3 BR townhouse condo in the same complex easily costs 3x - 5x as much to rehab if it has been neglected since the 1960s, while only drawing 1.5 - 1.8 the rent.

The purchase price for the latest unit is $18,000, and closing costs including reimbursement of pre-paid property taxes will bring the total to $18,700.  While we've used owner financing in previous transactions, in this case we have a relative who wants to provide the financing.  We will be putting $3,700 down, and borrowing $15,000 over 4 years at 5%, which is 4x the interest rate our relatives make on their savings in a bank CD, making both them and us very happy with the terms of the transaction.

After closing, we anticipate ~$4000 in rehab costs to bring this very tired unit up to date, which will include refinishing the hardwood floors, complete repainting, new kitchen flooring, new counter top, new appliances, new lights, blinds, fans, toilet, etc.  Our total out-of-pocket costs will therefore be around $7,700 ($3,700 down + $4000 rehab).

The numbers look like this:

As the numbers show, there is virtually no cash flow during the 4 years the loan is being paid off, but the return on investment from principal pay down is almost 50% PER YEAR. After the loan is paid off we should be achieving over 50% cash on initial cash. If we want to look at return on capital, the rate is much lower, because at the end of 4 years we'll have an asset worth ~$35,000 (if sold in a package to an investor) returning ~$4300 annually, but that is still a 12% return on capital. A risk with this transaction is lower than anticipated rent ($650 is higher than any of our other units, but is being achieved by many other recently-listed units owned by others), but even at $600/mo cash flow is only slightly negative during the loan period and ROI and CoC are still 40% and 48%, respectively. Another risk is lost rent, but we have run at 100% occupancy for the past 3 years and achieve over 100% of theoretical rent due to late fees, so we view this risk as minimal.

Assuming we close as planned in the next few weeks, I'll post pictures as the work progresses.

BTW, the real estate success stories forum on BP is a good place to start, because you'll often find summaries of the steps used in the deals detailed there.

This is way too general a question. Keep reading the forums and you'll find countless posts that describe the processes used by various investors. Listen to past podcasts, which are by and large the stories of the processes used by the show guests.  Buy and read the books available from BiggerPockets and elsewhere. Then come back and ask some specific questions. 

A good place to start your education would be the BiggerPocket's book "The Book on Managing Rental Properties" by @Brandon Turner and his wife.  Ads for it are usually on the right hand side of my screen when I'm on the forums.  I've been managing 24 rental units for several years and still found a lot of useful info in the book.  

You can try offering to buy with seller financing. We've been successful offering 20% down with the balance amortized over 4 - 6 years with no prepayment penalty. 

We have used a HELOC, with several exit strategies. One is to simply use cash flow to pay off the HELOC, foregoing cash into your pocket for a paid off property just a few years down the road. Another is to use the HELOC in the short term and accumulate several properties and then refinance those with a portfolio lender.

@Steven Glowacki, a HELOC can make sense, depending on how it fits in your overall purchase andrehab plan. If it is the only source of funds that you have, then I would tend to say that you are likely undercapitalized. Also, how expensive is the property that you were looking at purchasing? It should have an after repair value significantly above $50,000 if you are going to refinance it using conventional financing. We buy properties that are less than $50,000 because it is difficult to get mortgage financing under $50k, leaving sellers relatively few options, which is an opportunity for us.

Regarding an LLC, as you will read over and over on these forums, that is not necessary when purchasing the first few single-family homes.

Detroit has some horrific areas that I wouldn't walk in during the middle of the day, and other areas that are decent.  The city has almost as many murders yearly as New York City despite having only 1/10 of the population.  If you're going to be a landlord here, be very careful.

http://detroit.cbslocal.com/2012/08/01/lotto-winne...