All Forum Posts by: Michael Wentzel

I currently own one single-family and one multi-family. Both are conventional 30-year fixed mortgages. I'm now looking at properties at a lower purchase. I'm dealing with a regional bank and the mortgage banker encouraged me to look at portfolio loans. So I met with the branch president last week and he is willing to work with me. If the first deal works out, he is willing to do more. Here is what he sent me in an email today for the terms...

1. $24,000 loan amount (75% of purchase).

2. 5% fixed rate.

3. 15-year amortization and 5-year balloon/maturity.

4. $240 origination fee.

It all looks good, but as a newbie I don't completely understand "5-year balloon/ maturity". I assume it means that I either need to refinance or pay it off before that five year mark. Is that correct? I'm actually planning to refinance in 30-60 days after I do the rehab and get the tenants in property. So I think this is not a big deal.

I thought I would ask Bigger Pockets for clarity as I didn't want to ask the lender and reveal my ignorance..

Mike

I appreciate the diversity Bigger Pockets brings together. We have people on here who hope to purchase their first property next year and people who are hoping to buy 100.

As a new real estate investor myself, I have appreciated that i can type any topic under the sun into the Bigger Pockets search and find 20 blogs and forums pertaining to that topic.

Next year I'm setting a goal of purchasing 6 additional buy-and-hold rental properties. They will be a mix of sfh and mfh. I close on my first one on January 6th, so I should be off to a good start.

Mike

@Mark S. It is an interesting idea not to let the tenants know you're also the landlord, but my strategy is aiming for passive income. If I'm managing properties, it seems like I have created another job for myself. So I'm quite happy paying a good property manager 10% to handle this.

Mike

@Michael H. said, if you can get $750 per month for the property it would give you a bit more margin. Have you checked with a couple property managers in the area to see what they would rent the house for?

Also, is there any chance of getting a discount on the purchase price?

Finally, I'm relatively new to real estate investing. I've set my numbers for maintenance and vacancy to 10% each as you have. Some people have been telling me these percentages are too low. How did you decide to use 10% of gross rents on each of these lines?

Mike

@Matt R. All my rent estimates are coming from myself, my Realtor and my property manager. Usually we're pretty close on our estimates, but they know the community infinitely more than I do. As far as the "Superfund" house goes, both my Realtor and property manager were mainly concerned with liability issues. If tenants or visitors to house tested high for lead-poisoning, I could easily be exposed to lawsuits. So we pulled out of the deal.

I'm still under contract on the house and cottage. I close January 6th. I'm working with my lender to do a portfolio loan, pay for major rehab out-of-pocket and then refinance when it is rented out in a month or so. This should allow me to get my rehab money back as well as my down payment while still having a cash-flowing property. Then I'll take my money and move on to the next property. I know this is a pretty common in Real Estate investing, but it is the first try for me. There are possibilities for problems if I'm wrong on my rehab estimates or my after-repair value. But it is a small risk worth taking at this point. Any input on this process?

Mike

@Kyle Doney My impression of Pueblo from hearing people talk was that it was a "little rough" as you said. But I have actually enjoyed getting to know the community. It has good and bad areas and everything in between. I think you'll find that in most communities. The tenants will depend heavily on your property type, rent prices and tenant screening. I currently have one four-plex down there and inherited three tenants. I was really happy at the time to have the place almost fully occupied. But now I'm realizing that there is also a benefit of letting a good property manager fill an empty property with good tenants.

@Julie Sisnroy I terminated the first property because the neighborhood is now going to be "Superfund" listed for lead clean-up. I'm moving ahead with the second deal. It needs some major rehab, but we got another discount on the purchase price and are encouraged by the potential rent numbers.

I'm in low-income areas for a couple of reasons. One is obviously the purchase prices. I have a limited amount of cash to start with, so this allows me to get a bit of experience. They also project cash on cash returns which are 2 to 3 times better than nicer areas. So even if I hit 50% of my projected returns, I come out on top. Finally, my background is in development work in Africa. As my portfolio grows I want to look at ways to serve the community and offer people opportunities.

So it's not for everyone, but its my current strategy.

Did you find anything down there that might work for you?

Mike

We had our own home which turned into a rental when we moved overseas. But my first purchase with the plan to make it a rental was a 2 bed, 1 bath town home with no HOA. It was a foreclosure. Listed at $44,000. We got it for $40,000 and put 20% down ($8000). Then we put about $3500 into it to make it rent-ready. So it was $11,500 to get started for us. I'm guessing this wouldn't buy you a shed in southern California, but might be enough for most investors to get started with their first small property.

Mike

@Kevin R. The great lending terms might make the deal work. Is your family willing to do more loans for you on those terms? Otherwise, you might have a hard time building much of a portfolio with the numbers you're looking at.

If you don't want another career (job) I would factor in the 10% of monthly rents for property management. Maybe you don't want it now, but if you are looking to build a portfolio of properties, the management will eventually become a second job.

And if you're willing to us a property manager, it might open up other markets farther away with better numbers. Some people like to stay close to home. Others are willing to build a portfolio from distance if the numbers make sense. That's up to you.

Good luck. Rental properties as part of a your retirement strategy sounds like a good plan. I'm self-employed (not in real estate), so real estate is a big piece of my retirement plan.

Mike

@Steve Babiak Good point. I didn't think about just running the pipe in such a way that it is easy to install the meters later. Learning.

Mike