All Forum Posts by: Nate Boda

Hey BiggerPockets friends! I have something that I desperately need advice on. I was driving around my neighborhood in the suburbs of Philly and came across a sign that read "Triplex For Sale By Owner". I called the number and after dispensing pleasantries asked if they had any interest in seller financing, to which they replied "sure". The seller said they would be willing to talk about seller financing but would need some sort of down money, and I told them that was fine as long as we could come up with some numbers that work for both of us. ANYWHO, after the rush of adrenaline began to subside from the possible first creative finance deal i've ever done, I realized I HAVE NO MONEY. lol. I have money saved but it is SAVED because I am, within the next two months, getting my real estate liscence, quitting my day job, and diving into being a full time Realtor, so point being I may need to live on that money for 6 months to possibly a year while I get my "sealegs" and possibly earn little to no income (amazingly long run-on sentence, sorry). So, after thinking things through I called up my two business partners who I run a side business flipping cars with, and ran the idea by them to use our business money to fund the down payment and closing costs. They were 100% on board HOWEVER, here comes the negotiations. I want to make sure that this would be a fair and profitable deal for each of us, and so if each of us are putting an equal amount of our business money we also then need to equally split the responsibilities of running a buy and hold business, or conversely, we need to compensate the person, or persons, who are doing more of the work. Of my two partners, one has alot of handyman skills and can pretty much do anything fix it up wise. The other has a bit of experience in that realm but not too much (could help paint and do cosmetic stuff but thats about it). Neither of the two has any real estate experience. I am also relatively new to the real estate world but am operating a successful duplex rental and have been studying real estate for 2-3 years. That being said, it makes the most sense (i think, please state your opinion) for me to run the business end of things (keeping the books, showing and selecting rentors, etc) and have the other two do the maintenance stuff. So, what do you think, is this is good 33/33/33 split? I guess my main concerns are these two things 1- the guy who has less experience in the maintenance department is getting paid the same as the guy who got the deal and is keeping the books (me), and as the guy who actually knows how to do the fix it stuff, and 2- I am concerned that when the rubber hits the road and a tenant moves out and the place needs to get painted, recarpeted, and all the other odds and ends to get it rent ready, that these guys what with their full time jobs and what not will not be able to do what is necessary. Like I said, I am willing to hustle and even do more than my fair share to an extent, and like @Brandon Turner always says "33% of a deal is better than 100% of no deal" HOWEVER I don't want to get myself into something that could turn sour down the line if our roles aren't clearly identified and taken seriously. So if it was YOU, how would you structure this deal?

@Ned Carey  do you depreciate literally everything in the house? Is there any resource that you use in order to know in general  how long an items life is?

@Aaron Montague why use a minimum? 

@Bill Jacobsen  where did you come up with that number?

Thank you guys so much!!!

hey guys so I'm thinking about putting in an offer on a duplex in my area but am a little stumped on how much to figure in for capital expenditures. I'm using a 10% of rent number for vacancies and a 5% of rent for maintenance, however when it comes to capex I can't find any info on what that percentage should be. I know that it must depend on how old your house is (age of the roof, heater, etc) but is there a general percentage or a range that anyone uses? 

There is a real estate group called DIG (Diversified Investor Group) that has really helped me learn a ton about real estate. They put together seminars that are really educational and are not all about buying in to the next bigger seminar. DIG meets in the holiday inn at Fort Washington PA on the last Thursday of every month. You can also visit their website; they are having sign ups for REAL ESTATE 101 classes which I have heard great things about, I am going to attend as many of them as I can.

Ok so here's the scoop:

I am a beginning investor looking for my first buy and hold investment so as to get my feet wet. I am headed in the direction of a multi unit; a four-plex would be great since that is the maximum amount of units you can get a non-commercial loan with (go big or go home) but triplexes and duplexes would work too. I had originally planned on taking advantage of an FHA loan. The advantages of FHA are that you only have to put 3.5% down, and you enjoy a lower interest rate (I have been quoted out at around 4.25%) As far as the down payment goes, I would end up spending somewhere in the $5,000 to $10,000 range in my relatively expensive Philadelphia suburb area where decent multi-units run anywhere from 150k to 270k (and higher but $270,000 is probably the highest I feel comfortable going). So point being, it helps a guy like me who only has $10,000 to $15,000 in the bank to land his first property.

I am still saving every penny I can (around $1000 a month) and could maybe get some funding through friends and family to get me that 20% downpayment, but then again, cash is king, and FHA allows me to leverage to the max and keep my cash on cash percentage sky high. So as you can tell, I am conflicted with whether to pull the trigger on FHA, or wait for a little, get my money in order, and swing a conventional loan.

Here are the cons of FHA

The FHA program is designed as an incentive program for first time homeowners and so I would have to live in one of the units for an unspecified period of time; I've been told anywhere from 3 months to a year but your guess is as good as mine. This will eliminate my cashflow while living there, especially when you consider right now I am living at home with my parents for $500 a month including utilities and all of mommas food I can eat (I know, im a 28 year old nerd, but my girlfriend is gorgeous so that makes up for it... right?)

Next is the dreaded PMI (private mortgage insurance). This little sucker is mandatory for all FHA loans and is 1.35% of your mortgage annually. Just to give you an idea of how much this sucks, at a mortgage balance of $150,000 you would be paying $108 a month and at $270,000 you would be paying $293!! All so that your bank can still sleep at night if you bail on the payment.

So, all that being said, here's where I need your help. Both FHA and conventional loans have their good and bad and to be honest I am having a hard time knowing which is better for me. From a cash on cash standpoint, you can't beat FHA because your shelling out only 17.5% of what you would have to for conventional so its not hard to get to that 20% cash on cash benchmark (20% is what I've heard is reasonable however I am interested in hearing others opinions).

BUT it is much harder to cashflow at all with PMI taking a bite out of you every month and the higher mortgage payment from only putting down 3.5%.

From the research I've done it seems that you should cashflow at least $100 per unit per month after ALL expenses (utilities, insurance, taxes, 5% of rent for maintenance, 10% of rent for vacancy, and capex)

HOWEVER,

and here's the question that made me write this post, should you still use that $100 number if you are putting down so little with FHA? Is it ok to make less with the idea that your cash on cash is still high? I don't know. I hope someone whos first rodeo this isn't can give me some advice. All I know is that ive been running numbers past ALOT of properties in my area and the only way I can get them to cashflow $100 per unit is to go conventional and put down the 20% down payment.

Thanks so much for taking the time to read and respond

NATE

thanks so much to everyone that responded to my question! this was my first post ever on the site and it was met with a plethura of very useful advice. THANK YOU! Just to let you know what ended up happening; I worked the numbers and put in a bid in which I felt comfortable. They turned down the offer but even so it was great because I learned a TON; this was the second offer i've ever put on a house so i'm learning something new every time. 

Another question for people: Would you ever buy a property that needs flood insurance? The 4-plex I was looking into was in a flood zone near a creek and I decided to go for it anyway because it has only ever flooded into the unfinished basement. I've heard alot of investors say they would never own a property that could flood however I know that some people are willing to take the gamble.

Hey guys so I've been looking to purchase a BUY and HOLD property. I want to buy a house that can be profitable enough to where the rental income can pay the mortgage as well as give me some cash flow. I am thinking of putting in an offer on a four unit property but am unsure of what I should be shooting for as far as cash flow is concerned. From the research I've been doing it seems that you want to shoot for around a 20% cash on cash return, but what this general rule of thumb doesn't go over is how much you should make per unit. I feel as though a four unit should cash flow more than a duplex or single because a four unit is more work (more tenants to manage, more sinks to unclog, etc.) Any advice on this subject would be most appreciated. Thanks.