All Forum Posts by: Mike Roy

@Tiana Engstrom - I would consider the opportunity cost of holding the house in CA.  First, calculate the return you're earning on the $380k of equity.  Even if you net $1,500 per month, that's less than 5% ROE. 

Second, calculate the potential return you could earn by investing your tax free sale proceeds into cash flowing real estate in Indiana.  Let's say you net $340k after transaction costs on a $600k sale and can invest that for a 10% cash on cash return.  That's $2,800 per month in cash flow.  15% cash on cash is $4,250/month.  If you buy a value add property, you might end up growing your equity too.

Given how far prices have run up in CA, I would be more inclined to consider a sale and reinvestment into a market that offers better value.

@John Kwon - I would first make sure you understand all the regulations for Opportunity Zones.  Talk to a CPA who understands them.  From what I understand, one requirement is that you are substantially improving the property, which I THINK has been defined as investing at least as much into the improvement as into the acquisition of the property, so $100k purchase and $100k rehab.  I'm not 100% on this, so maybe some educated BP'ers can verify.

Also, I believe another requirement is that the funds used for the acquisition and rehab must be capital gains from another investment of any asset class (stocks, bonds, RE, crypto, etc.).  

I believe the purchase must also be made through an official opportunity zone fund.

Assuming you have all that in order, I would still be careful that you are not letting taxes drive your investment decision.  It is much more beneficial to by the right property in the right market at the right price.

Great advice from @Andrew Gingerich.  I would suggest that you should establish your investment criteria and stick with it.  If a market is trending up, and a property meets the criteria, it's a good time to invest.

With respect to refinancing, I agree with Andrew that now is historically a great time to lock in long-term fixed rate debt.  However, I tend to be a little more cautious on commercial debt - if rates are historically low, then where are they more likely to go.  With commercial debt, I would stress test what your cash flow will look like if rates increase 1%, 2%, 3%, or more.  And if rates do increase substantially, factor how that will impact cap rates and valuations.  Will you have the ability to refi when your rates reset?  What is your break-even?  Do you have enough cash on hand to ensure that you do not lose the property altogether?

I tend to think that BRRRR has been so popular over the last decade because prices have been increasing and rates have been decreasing, acting as a HUGE safety net against thin deals. If the market starts trending down or rates up, BRRRR (which is essentially a flip that you keep) becomes much more risky.

@Dan R. - Thank you for your service.  You're smart to come here as part of your internship preparation!  

I'm curious why you are doing this internship relative to your real estate goals.  Are you interested in becoming an agent after your military career?  If you've already bought a home, than you already know how that process works.  In fact, all of your stated objectives do not require an internship with an agent.  However, if you want to eventually become an agent yourself, then this two week introduction sounds like a very good idea.  

Two weeks is not a lot of time though, so I would not be concerned about trying to jamb in all the right questions quickly.  When you don't know what you don't know, it's hard to ask the right questions anyway.  More importantly, I would focus on building a relationship with this agent that sets you up to work with them in the future, assuming that is what you want to do.  Like any internship, that might mean doing the coffee run or carrying their yard signs.  Having done a couple of internships myself, I can tell you that your greatests asset will be humility and work ethic - that's how you'll sell yourself. 

Unless this agent either owns investment real estate or works heavily with investors, you may be disappointed about the quality of investment education you receive.  Unfortunately, most agents don't know much about real estate investing, and for that you're better off shadowing another investor and ramping up the RE books and podcasts.

Great to hear @Bob Langworthy!  I'm looking forward to connecting with you after tax season.

@Brian Mitchell - Also really looking forward to attending these events when we're in Maine this spring and summer!

@Michinori Kaneko - The primary purpose of the BRRRR strategy is to recycle your capital continually into more deals and create infinite returns on your initial investment. In order to achieve this, you need to identify deals that are priced well enough such that you can rehab to an ARV that enables you to refi out all of your initial investment and still generate enough cash flow to mitigate your holding costs and have a little left over for yourself. The great thing about BRRRR is that, if you do enough of them, the accumulating cash flow from each one will eventually add up to enough to cover your living expenses and let you retire.

It sounds like you have a deal that is close to BRRRR-worthy, but not quite. If you just buy deals that let you pull almost all of your money out and produce negligible cash flow, it wont be long before you are out of investment capital and have hardly any cash flow to show for it.

I would suggest that a "good" investment is one that pays you a reasonable return for putting your capital at risk.  If you're annual cash flow is $360 and you still have $10k left in the deal, that's a 3.6% cash on cash return.  Is that enough to compensate for the risks of ownership as well as the effort to rehab the property?  Also, with a margin that microscopically thin, what are the odds that you're down $30/month (or more) instead for a negative return?

@Joshua Brucher - It sounds like you know what you need to do.  If the general rule is to buy in the path of progress, I guess the opposite would also be true.  It sounds like using leverage would be the last thing you want to do, as it only adds risk on top of risk. 

I'm not sure why you would need to form an LLC just to hold cash though. That might be an unnecessary step.

 @Tom Knox - A mortgage broker can help.  Very generally speaking, if the 1-4 unit property is being sold by an individual person and is habitable with functioning utilities, it will qualify for conventional financing.  However, you also want to discuss whether you qualify for the loan, and to determine that a mortgage broker will analyze your income history, debt-to-income ratio and credit score.

Estimating rehab costs should be done carefully and is an area where new investors get into trouble.  That's why I suggest meeting with local investors who know what things cost and who the best people are to perform the work.  They will also have insight into which upgrades move the rent and which do not.

@Tom Knox - I would talk to a local bank about habitability requirements for a conventional loan.  I would also talk to a local insurance broker about their underwriting requirements.  A general property inspection will not tell you what improvements you need to make to satisfy mortgage and insurance underwriting.

Since you are new to real estate investing, I would make friends with a local investor or two and maybe even bring them with you on a walk through of the property.  You don't want to miss on the reno budget, as that is indeed a way to get behind very quickly.

@Don Ferniz Tyree - Why not start with a 2-4 unit property and house hack that? The process and FHA financing is exactly the same as a single family, but the benefit is more privacy, more stable tenants, and better cash flow. You could still rent out the bedrooms in your unit too if you really want to, assuming you have enough parking for everyone at that point.