All Forum Posts by: Mike Roy

@Sean Howell - It looks like a good analysis to me, other than repairs/capex might be a little low unless the house is completely turnkey from Day 1.  

You're absolutely right that 1% deals make less sense at lower price points, but especially so because of capex.  A roof on a $75k house that rents for $800 is going to cost roughly the same as a roof on a $250k house of similar size and type that rents for $1,800.

From my experience, cash flow on residential property starts to look better at the 1.5% Rule or better, and at price points of at least $150k.

Good for you for making a conservative analysis and prioritizing cash flow!  You're doing it right and will stand to benefit when you find that good deal.  

@John Smithe - This is going to come down to the following:

1) Your personal investment philosophy: your goals, your interests, your time horizon, your risk tolerance, and your interpretation of world events

2) Your unfair advantage: your skills, your expertise, your network, your resources

BiggerPockets tends to bring together like minds and similar experience, so this sampling bias might result in concluding that a large multifamily in the Midwest, for example, is the best use of your funds.

Ask the broad universe of investors the same question, however, and your answers will be quite different.

Real estate might well be your best investment, but so might be starting a business, or picking stocks, or buying precious metals.  

I suggest asking yourself what unique attributes resulted in having $100k to invest, and how the further application of those attributes can be used to grow your money.

@Shane Welch Definitely okay if you know what you're doing. Sounds like you do!

@Shane Welch - That sounds like great cash flow, atypical of a duplex with that kind of leverage unless you bought a screaming deal.  

Since you just bought your first multi last June, I'm not sure if you've experienced much vacancy yet or the associated turnover cost.  Losing 30 days of income, and spending $2,500 to turn a unit, will usually devastate cash flow on a duplex.  Realistically, it might take 10 years of ownership to average out the bumps before you can accurately assess average monthly cash flows.   Any rental property can look phenomenal in a one-year window, so the perspective that time allows is important.   

Again, I would just stress test your deals.  What's the worst that could happen that would still allow you to break even?  If you can withstand a whole lot of bad and not lose money, you probably have a good deal on your hands.

@Shane Welch - I'd be cautious about trying to build a durable portfolio on extreme leverage, especially given the maturity of this market cycle.  I would also spend time reflecting on the mistakes of the first property and consider whether extreme leverage, and correspondingly thin cash flows, was one of those mistakes.

Always buy for cash flow and stress-test your deals - even on a duplex.  Consider what would happen if your vacancy rate doubles, or rents decline by $100.  However unlikely, what would that do to your personal finances if it did?

There is no such thing as being too ambitious, but you want to employ responsible risk analysis along the way.

Okay, that's what I thought. If so, the refi scenario does not make sense unless you're putting more cash in. Generally, the strategy is to pull cash out by refinancing at the ARV.

You'll also want to include PMI on the front end for the 203k loan. I'm guessing the 9% management is actually going into your own pocket? You still want to account for it, but it obviously makes a difference.

If you're owner-occupying the building, I assume your gross rent of $2,750 is from two units and the garage. If so, it looks like a break-even deal, which is great on a house hack. It also looks like a nice cash flow play if you eventually rent all the units, assuming the incremental rent will be similar to what you get for the other units.

This is all, of course, assuming you are in a market with positive demand drivers and have a good team on the ground.  Those are things a spreadsheet cannot tell us, which makes all of our opinions about this deal limited in value.

@Chance Brookins - Thank you for your service!  Very good idea to save that BAH money.  My brother did that for four years, and that set him up for a nice post-military path.

The VA loan is a great option for those who intend to hold their house for a long time, as equity is build very slowly on zero-down. If you go in with zero-down on a $100k house, it needs to appreciate about 6%, or about $6k, just to break even on a sale. Definitely some risk there if this will be a shorter term hold.

If you're planning on having roommates anyway, why not just rent a 3-4 bedroom apartment with them?  I see plenty of 4BD houses for $1,600 on apartments.com, enabling you to save $1,100 of the $1,500 BAH if your share is $400.  

So you might pay a little more to do it this way, but it could be a good way to go if you want to guarantee that you will not be stuck with the headache of a potentially underwater starter home in Dover when you decide to move on. 

And if the lure of a zero net mortgage continues to pull you toward a purchase, just keep in mind that the $400 you pay on the rental scenario can become a $400 or more payment on a purchase when the roof, HVAC, foundation, etc. start to fail, which are all near-term possibilities at that price point..

@David Taylor - How are you financing this on the front end?  

You will also need to include any utilities that you're responsible for as the owner.  What about estimates for snow plowing or lawn care?

@Janet Horton - One thing I would keep in mind is that the agent with 27 years experience may be very busy with much larger transactions, and your duplex may not be very high on the priority list.  Also, that agent may only look at you as a transaction to close, and may not encourage you to take your time or perform proper due diligence.  It's quite possible that that agent could recommend a building inspector who is known for superficial work in order to increase the likelihood that you'll close on the transaction.  I'm not saying these things WILL happen, but they are certainly possibilities if you enter a relationship where trust is not certain. 

Conversely, your friend might work harder and be quicker to raise red flags in order to protect you and maintain the relationship.  The best agents will give you reasons NOT to buy.  Otherwise, a purchase of a duplex with conventional financing is a fairly straightforward process for an agent with 5 years of part time experience.  The biggest benefits here will be in increased transparency and integrity. 

The bottom line is that it is up to YOU to understand the math behind a viable house hack and to have thorough street-level knowledge of the neighborhood you intend to occupy.  It is up to you to know where that neighborhood has been and it's outlook going forward.  It's also up to you to vet inspectors, have a basic understanding of real estate contracts and know a little about negotiation.   Once you are in control of these things, you'll be much more empowered to prioritize working with people with particular character traits rather than specific levels of experience.

Best of luck!  

@Sean McKee - Banks use comps, investors look at cash flow. GRM is useless, as it tells you nothing about expenses, and hence, cash flow.