All Forum Posts by: Mike Roy

Agreed, but I think the best kind of appreciation is the kind you force by increasing NOI. This is the kind of appreciation you can manufacture, and is definitely where the real money is made in commercial real estate. But as you can see, it all comes back to cash flow. Where I think some people get the appreciation game wrong is when they buy and simply hope the price will go up.

To me it's much easier to force appreciation than it is to correctly time the market cycle.

Definitely not in Boston!  I invest in Maine, where I am from and hope to move to again someday, and outsource management.  Believe it or not, there are still areas of the country that have not rebounded from the housing crash.  We have nine townhouse units under contract right now for $355.5k with a gross rent of $7,110.  Small town, but I think we can keep vacancy under 10%.  

I think the markets that have run up the hardest will fall the farthest during the next down cycle.  If it were me, I'd sell my SF property, identify and build teams in cash flowing markets, and be patient for a good deal.  Selling a few years before a peak is potentially way better than selling even six months into a crash.  

I think this speaks to the importance of incorporating a repair/capex reserve when underwriting a deal.  I generally figure 10% of gross rents.  Not sure what you were renting the unit out for, but let's say it was $1,000/mo.  That means you would have saved $100/month toward reserves, or $8,400 over 7 years.  

When I look at a deal, I generally figure 10% management, 10% vacancy and 10% repairs/capex.  If it still cash flows at my target return, those are the ones I'm interested in.  In San Francisco, I suspect running these kinds of numbers would eliminate just about everything.

Have you considered selling your SF property and reinvesting in markets with strong cash flow?  Financial freedom might be closer than you think!

Given that Obamacare repeal, the border wall and a host of other Trump initiatives have fallen flat thus far, I wouldn't put a ton of stock in a "plan."  

For speculation's sake though, it would seem that a tax cut aimed at W2 wage earners would have the affect of diminishing the marginal tax benefit enjoyed by rental property owners.  Since rental property owners (who do it right) pay little to no taxes to begin with, reducing W2 taxes reduces the net advantage held by rental property owners.  

Tax advantages are one of the few rationalizations left for buying at today's low cap rates.  If you deminish this advantage, there really aren't any compelling reasons left to buy a property that breaks even every month, as many markets are priced today.

The plus side for property owners though is that if you put more money in people's pocket, and supply does not increase proportionally, there is a potential that rents and thus property values can increase further still.

It's very hard to know how tax policy will affect the economy.  Lots of moving parts.

Thanks @Ryan Murdock.  We tried to do the Radon, but tenants did not follow instructions to keep their windows shut.  For now, we're taking the seller's 2012 results and may retest this winter or next (after we transfer heat responsibility to tenants) so that they're less likely to have windows open.  Radon testing is valid for 10 years in Maine, I believe, but I'd feel better about having my own testing done.

We will see about the current tenants.  All of the units seems to be relatively well cared for, so that's a good sign.  I much rather rent at a small discount than take on turnover/vacancy costs.  If my vacancy was zero, that's almost as good as market rent with 10% vacancy.  

Hi BP!  I bought my first property in 2015, a fourplex in Midcoast Maine.  Paid $180k, 25% down with $15k repairs.  $60k all in with gross rent of $3,300 and cashflow of about $800 per month.  For me, this first deal was proof-of-concept, and I've been hungry to find my next good deal ever since.

Two years later, I think I may have finally found it!  This one is nine units (3 townhouse style triplexes), also in Midcoast Maine, built in 1993.  Each unit has 3 bedrooms, 1.5 baths.  Current gross rent is $7,110 and we put it under contract at $355,500 - exactly the 2% rule.  What I really like is that each building is on a separate tax lot, so I can do three conventional loans and sell individually when it's time to exit.  At $118,500 per building, I'm excited to see what the appraisal comes back at. 

Here are the projected monthly numbers:

Initial Investment Budget (Down Payment, Closing Costs and Repairs): $160,000*

Market Rent: $8,100 without heat/hot water**

P&I: $1,351.72

Tax: $700

Insurance: $313

Management: $810

Electric: $15

Heating Fuel: $0

Cold Water: $725

Trash Removal Contract: $128

Plowing/Lawn Contract: $292

Repairs/Capex Reserve: $810

Vacancy: $810

Projected Profit: $2,145.28

Cash on Cash: 16%

*Approximately $50k in repairs/capex to separate heat/hot water, install individual W/D hook ups, remove mold from attics, install gutters, and a few other small items.

**We anticipate gradually stepping up to market rents over a 12-24 month period.

Sometimes, a 2% deal means there is something very wrong with the property that either cannot be fixed or is very costly to fix.  In this case, the problems seem fairly straightforward and correctable.  I am cautiously optimistic that this is the Real Deal.   

What do you all think?

Hi Lisa - Portland has been red hot over the past few years, and prices have exploded. Even with your light estimates, you're under 5% cash on cash. For all the risks and headaches of real estate, I would demand a higher return. We target a 15% minimum CoC with assumptions of 10% vacancy, 10% repairs & capex (which I think is fine if you have enough units) and 10% property management - and we're still finding this in the Midcoast area.

To me, if you're looking for a nice place to live and are open to house hacking, then a duplex in Portland could be viable at today's prices.  However, you'll want to plan to hold a long time - potentially long enough to ride the real estate cycle down and back up again, if we happen to be at the top right now.  I would at least be prepared for the possibility that you might be under water for a while.

If you're looking to maximize cash flow and aren't afraid of getting your hands dirty, I'd look at Sanford, Biddeford, Brunswick, Augusta or Bangor.  You'll have to really do your due diligence and build a solid team, but I think value can still be extracted in these towns.

Good luck!

We saw a lot of this kind of rationalization in 2006/2007.  Those properties eventually went negative cash flow AND negative equity.

If you're not cash flowing, you're speculating.  At this point in the cycle, I'd rather have that $55k in the bank.  Better deals are coming!

Exactly @Ryan K..  $9,570 over 25 years, which will not cover the new roof, HVAC, appliances, plumbing & electrical repairs, and several carpet replacements and paint jobs.  If this is a true buy-and-hold, you want to set aside a reserve that covers repairs and capex indefinitely.  For my multis, we usually figure about 10% of gross income, but you might figure more with a single family since it doesn't benefit from the same economies of scale enjoyed by multis.

Also, if you're hiring third-party management, 4% for vacancy probably won't cut it.  The market vacancy might be 4%, but you must also factor the tenant placement fee into your vacancy cost.  Even if you're self-managing, 4% vacancy is just 14.6 days out of 365.  Single family tenants do tend to stay longer, but if you're underwriting the deal at 4%, you're not giving yourself much breathing room!

And not to pile on, but I don't see an expense item for landscaping.  You've done a great job with it, and I assume you'll want to keep it that way?  Not a huge cost, but a cost non-the-less.

I think that the longer you hold this property, the thinner you'll find your actual margins to be.  If you can get $178k for it, I think it's a nice flip.