All Forum Posts by: Mike Sattem

@Ed L.  You are absolutely spot on about comps, as in there hasn't been a four plex sold within 50 miles of me within two years! One great thing I have learned working with appraisers, is that typically their numbers for vacancy/capex/management are either very low, or none existent. The appraiser doesn't see me put away 25-30% of my net rent for these costs and thereby make this a negative cash flow property, they see me pocketing several hundred dollars, sneaky I know :).   Additionally, the equity increase was due partially to increasing the rents from the previous landlord since the place was a dump when i bought it.

@Marcus Johnson  Very True. Any property can cash flow if you put enough money down. The important part of this story is to remember that I bought this property with no money down, spent $10K on the rehab, and then refinanced the property allowing me to gain a cash flowing property and getting me my fix up money back so that I rinse and repeat the entire process over again in perpetuity. I financed all of my closing costs into the loans, and was refunded my earnest money because I had no expenses at closing. 

The way I see this comparison is below. I would choose option 1 every time.

1. $0 down for $300 a month

2. $20K down for $700 a month

@Sebastian Gast  I placed the equity in a property I already own down as collateral with a commercial lender. The lender placed a lien against this property, but there is no payment.

@Marcus Johnson  Negative equity is only an issue if you need to sell, and as a multi-family property the value is primarily derived from rents collected, not what a single family home buyer would be willing to spend. Additionally, as per my post, I am in the process of refinancing the property to now cash flow $300 per month, and will only have to make 1 loan payment on the commercial loan where I "lose money".

First off a few notes:

1. My area would be considered remote by most (the closest town with over 15,000 people is 80 miles).

2. My area is considered low income, as most folks work for less than $15 per hour at the Lumber Mill or Travel Trailer Manufacturing Plant.

3. The 1% rule is great if you can find it, and the 2% rule is impossible to attain.  Most 1 Bedroom Apartments in my area rent for $400.

So, with that in mind I will get started. I just finished rehabbing a four plex I bought for $150K (Yellow Letters do work, FYI). The building was vacant when I bought it, so doing a full on rehab was easy. 4 New water heaters, 19 New windows, 4 units worth of carpet and paint, and $2,000 worth of appliances.  I did almost all of this work myself, but still ended up spending close to $10,000.

I am now placing tenants and earning some money. Yay for me! I bought this property with $0 down (another yay for me!) however this means that my payment is pretty high; $1,052 monthly plus $150 in taxes and insurance. So, when it is all said and done I actually lose $50 per month once I take out 10% for vacancy and 10% for CapEx/Maintenance. What a mess!

Here is why this is a great problem to have: 

1. Because I bought this property with $0 down I only have my fix-up money invested.

2. Because all the money I normally would have used as a downpayment went into improvements, my property is sitting pretty with a value closer to $200K.

3. Because of my new found equity I can now refinance with a local credit union, saving 2% on the rate, and flipping my negative $50 cash flow to a positive $300 cash flow with a 30 year note.

In closing, when evaluating a property remember what your end goal is, and all the different ways you can get there. Most folks I have worked with would have rather found a $150K rent ready property and put $10K down, which is a great plan if you can find it. I chose to find a junker property and spend that same $10K improving the property, thereby making a cool $35K in equity for later on down the road. Even at this point most folks would have never done this deal because they would see the negative cash flow. But Real Estate is more like Chess than Checkers, so looking two steps ahead is a must. 

I bought a junker property that has negative cash flow, and it just might be my best deal to date.

USDA loans are terrible for a seller. Once the lender has done their underwriting, the loan goes to USDA for approval. Currently in Oregon the wait time for a USDA loan is 25 business days. I currently have three USDA deals at 70+ days total and another the seller refused to extend on, and was terminated at day 71. So frustrating!

Hey William, 

I was stuck in a similar situation last year (about $15K underwater) and I chose to refinance the property with a large principal paydown in order to make it work as a rental. I only cash flow about $50 per month, however the principal pay down by the tenants, and tax advantages make it slightly more appealing. I am sure someone (who won't be paying the $20K out of their pocket) will tell you to sell and move on and take the loss, but I worked way to hard to make that money just to lose it. You are doing the right thing, and hopefully in time the home will appreciate back to where you bought it years down the road, making this payment just a large principal pay down mid-loan.

Hey All,

I am getting ready to close on a fourplex that needs alot of love. I worked with the seller to get some of the work done, and paid for by him as part of our deal. However, the one thing he wouldn't budge on was windows, as the tenants pay for their own heat, so in his eyes, this was a waste of money. So now I am looking at paying for the windows myself after closing and getting them installed during the rehab before I put tenants in. No big deal, but the windows are $8K, which puts me past my available cash for my rehab. Am I crazy for wanting to dump this much money into windows when it won't save me any money in utilities, and it won't allow me to charge more in rent?

Every other rental I own already had new windows, or they were installed as part of the sale agreement, so this is a new world for me.

Hi Sheri, I always write "notice" in blue or red ink vertically along the side of the envelope for these type of properties. It essentially guarantees they open and read my letter. I have never had any seller complain about it either.

@Andrew Kniffin,

You are correct. Because I am only looking to purchase 3-4 properties at this time, I am only focusing on very motivated out of town owners. If they aren't motivated to respond, it isn't worth my time to try and dig any deeper into contacting them. I already have several SFR Rentals which I purchased at market prices (dumb, but I was 21 when I bought my first one so it's been a learning experience) so I am in no rush to get into a ton of properties in a short period of time.

@Andrew Kniffin,

Being in a small rural area, I only sent out 29 letters to out of area owners, as that is all there is. These owners represent approximately 100 properties. Of these, 4 have said "let's make a deal" with one being extremely motivated, and I have also received 2 Thanks, but no Thanks, and 1 never contact me again. The four who have said lets make a deal represent 8 Duplexes, 2 SFR, and 1 Fourplex. Currently I am pursuing the Fourplex and several of the Duplexes.