All Forum Posts by: Nick Ferguson

@Craig Moore,  That is a question that only you can answer.  In my opinion, yes it is for several reasons:

1) The $200-$300 per month wont change my life, but the wealth generated by having someone else pay my mortgage, the leverage I can use to purchase future properties, and the $600 or so cash flow I'll have from just one SFR after the mortgage is paid off can all most definitely change my life in the long run. It's a retirement plan, not a job replacement plan. I think having the right expectations with buy and hold is key.

2) Being a landlord for 1 single family household is not that stressful.  I text my tenants once a month to remind them to pay the rent.  They text me when something is broken and I call to fix things when they go wrong.  I pay a realtor to screen and place tenants and it really isn't all that bad.  My rental is 4 hours away with no property management but if it were closer or fully managed there would be close to 0 headache.  Managing an apartment complex or lots of multi-families would be more stressful but would also bring in much more money.  And if numbers work, you can always pay others to deal with things.  

Again, I don't know your local market but I would be shocked if there is nothing in your market that is totally destroyed (meaning copper stripped, walls missing, etc. like mine was) that could not be purchased and fully rehabbed for cheap enough that 20k would not cover 3.5% down payment.  With 15K down, you could finance a property over $400,000 and if you're buying and rehabbing right, it should be worth much more than that.  You would then have 5K cash reserves in case you need them, but because everything in the house would be brand new and still under warranty, you likely wouldn't need that until long after the property is cash flowing.  The nice thing other than financing with 203k is that because the government requires you to do so many things, you really don't have to know everything to rehab it.  All you have to do is agree to the GC that they already have pre-approved to work on 203Ks and pick what you want done.  The GC will handle the rest. The bank writes the checks, inspects the work, etc.  You literally just sign A LOT of papers several different times, and wait until you can move in.  Then get some roommates or tenants and you're done. 

@Craig Moore,  I have to agree with @Cary F. and disagree mostly with @Jacob Pereira . While I don't know your local market, I can tell you that I went FHA with only 3.5% down for my first property and I was "all in" including closing costs for well under $5,000. I did a 203k loan which allows owner occupants to roll rehab costs into the cost of the mortgage so that was a big benefit to my out of pocket expenses. Now that property brings in $1150 per month in rent. After mortgage and expenses, it easily cash flows $200-$300 per month.

I do think @Jacob Pereira had it right that you really should be looking at FHA route as an owner occupant because $20k on a traditional financing will be tough but it's not impossible in some markets. Sounds like it may be in Boston though.

I can also say that the lender that @Cary F. will refer you to seems to be very professional and efficient.  I was referred to him as well and while I have not yet closed on a loan, I have begun the process of obtaining financing and all seems very above board and straight forward. 

@Mack Perez I'm no expert on FHA but did buy my first property (not a quad) through FHA and it was really pretty much the same as a traditional loan. Go to a bank and get pre-approved. Go find your house. Come back and apply for the loan, etc. Because FHA is for owner-occupants, they don't care about the deal (obviously, the house must appraise and pass inspections like with any loan) as long as you can qualify for the loan based on your income and credit report.

@Loren Clive Thank you for the response.  I absolutely agree that that rate was very high.  Like I said, they didn't run my credit or anything.  I think the guy on the phone was just telling me worst case scenario.  I'll definitely look into others if the actual rate is that high.  

The 50% rule is just a basic rule of thumb that states that 50% of your rent will go into non P&I expenses.  So rent-50% of rent-P&I payments=projected cash flow using the 50% rule.  It's essentially a way to "guarantee" that you're not going to be negative cash flowing over a long period of time.  As I said, my reality has cash flowed more than what the 50% rule projects.  However, when the major capital expenditures hit, it will bring me much closer back to the 50%. 

I actually would prefer a duplex but would take an SFR if the numbers were right. The duplex could certainly provide higher overall rents, which in turn would help cash flow. In my area, duplexes are harder to find in great B class neighbourhoods but they are readily available in the C class kind of areas.

I currently have 1 rental property and I'm looking to purchase a second in early 2017. I have contacted a broker who thinks that he will be able to qualify me for a conventionally financed home with between 10-20% down. I just purchased a new primary residence so therefore cash reserves are low and I'm planning on using a HELOC to obtain cash for the down-payment on the 2nd property. My investment goals are to purchase house that cash flow positive. I don't need the income as I have a full-time job but cash flow is my primary goal as a retirement strategy and wealth building tool. I want to repeatedly utilise cash-flow profits and equity to purchase more houses to grow my portfolio long term.

Could anyone who wants to, please look over these numbers and tell me a) what you think about the strategy overall, b) what you think about my leverage situation after execution? Should I be looking at higher or lower valued properties for house #2 to make the strategy work? 

House 1 (actual numbers but rounded off for ease of discussion)

Rent: $1150

Mortgage: $555

Cash flow using 50% rule = $20

Actual cash flow for 2017 = $215 (has been higher previous 3 years)

Mortgage payments remaing = 112 (9 years, 4 months)

Mortgage balance remaing = $35,500

2012 Appraisal = $66,000

current zestimate = $73,000

HELOC (numbers estimated... Assuming high interest rates and minimum payments)

HELOC for $18,000 based upon $73,000 value and complete utilization of the line of credit (worst case scenario) would result in the following payments. These payments assume an 8.24% interest rate which is what someone at Huntington quoted me over the phone without running my credit or any due diligence. I'd hope for a lower rate but plan for the worst.

10 year draw period interest only payments = $125 per month (additional principle payments made ideally)

20 year fixed payment assuming no principle reduction = $235 per month

$235 payments would begin approximately 8 months after the primary mortgage on house #1 is paid off.  

The financial side of the decision comes from whether the potential purchased house (house #2) covers the additional $125 per month payment on the HELOC of house #1.

House #2 hypothetical #1

Rent = 750

Mortgage payment = $325

cash flow using 50% rule = $50

This would be a theoretically bad decision as the cash flow is less than the HELOC interest only payments...

House #2 hypothetical #2

Rent = 750

Mortgage payment = $200

cash flow using 50% rule = $175

This would be a theoretically good decision as the cash flow is more than the HELOC payments.

I know that these margins are slim and I only provide them for illustrative purposes to show where the cutoff between net negative and net positive are. I also know that I need to run a full evaluation and figure in up-front costs to get my COC, actual proforma and other things like reserve cash for emergencies. I'm simply wanting advice on the general strategy in regards to my specific situation with house #1. I may not use the entire $18,000 and therefore have lower payments or I may use the whole HELOC but get a duplex or SFR with higher rents but the strategy would be the same. Obviously, I want some actual cash flow, not just offsetting the HELOC payments so that would be factored into the numbers for any "take home" cash flow.

@Ryan Arth Thank you for the clarifications!  I know that NEORSD services most of Cuyahoga County.  In your opinion, what areas of Cuyahoga and/or Summit County are least likely to be affected by this or have already taken steps in the past to address these sorts of issues?

Hi Amit, 

I live in Cleveland and work in Akron.  I'm also casually looking in the Akron area.  The water/sewer thing you mentioned is in regards to an issue the city of Akron had with their very antiquated sewage/storm drainage system.  I don't know all details but from what I know the systems were one in the same and when it would rain significantly, there would be back-ups in the sewage system in certain areas of town.  I have a friend who owns a laundromat and he stated that his water bill has nearly tripled over the last few years (I think they are raising prices to pay for the massive project underway to completely re-do the storm drainage system in the whole city.)  So the bad news is that water/sewage bills in the city are extremely high.  The good news is that they are doing a multi-million dollar project to fix the problem and the problem should be fixed.  Maybe(?) the prices will go down after it's all taken care of.  My take (from talking with people who have property there) is that that shouldn't be a huge issue if you are not talking about laundromats or car washes.  SFRs should be pretty stable and safe.  Don't expect appreciation in Akron though. 

Nick

David,  I am just doing the transition to "treating like a business" and am also in the process of buying a second property. I'm using a combination of a spreadsheet and a website called waveapps.com .  

Wave is completely free and will allow you to set up for real estate. It links to your bank account and automatically tracks transactions.  You just have to assign them appropriately and then it will build ledgers, P&L, etc.  I just started using it so I can't speak to long term effectiveness. I have had some difficulty setting up but it is promising and I'm hoping to switch to it entirely if the first few months go smoothly.  

Currently, I'm using a spreadsheet I found on some business website that someone on here recommended.  The spreadsheet is Great for tracking an individual property.  It's the best spreadsheet ever.  PM me and I'll send you the template if you like.   

Hey guys, thank you all for the excellent advice. You all have made some great points. I mentioned earlier not having the property owned by the LLC but I didn't really mention why I was using the LLC at all since, as pointed out, it really won't provide much if any liability coverage with the house being in my name. Obviously, the liability protection is a big draw if I can ever get the house into it and I do plan on purchasing future houses into it if possible but the 2 main current reasons for the LLC are below.

#1. The specific property is a high performing investment that I want to keep totally separate from my personal finances. For how my brain works, I feel I will be more successful at planning and budgeting if I treat the business like a business. The LLC is an easy way to begin that personal mindset transformation from a "side thing" to a "business". I know that may not make the most sense to everyone and serves no tangible benefit but it will help me personally with mindset which I believe is important to success.

#2. The tangible aspect... Some of the financing options I have looked into will require the existence of an LLC or other entity to consider lending. So I figured that since I want to get another property or 2 in 2017, I may as well at least have one in place now to show that experience prior to seeking a loan.

Again, thank you to everyone who has given advice.  This is great!

Also, I should have mentioned. I will be using the LLC to "operate the business" however the deed of the house is still in my personal name. The reason is that the lenders I have spoken to so far (I'm still researching other lenders) will only do a HELOC on a rental if the property is in my name, not if it is in the LLC. Also, I'm a little leery of the due on sale clause even though I know that is unlikely. The hope is that future purchases will be purchased into the LLC and at the very least, properties will go into the LLC once they are paid off.

Does the fact that the property is not "in the business" affect how I will operate the money in and out of the business?