All Forum Posts by: Patrick McGowen

I am still a newbie myself (duplex a couple years ago and 4-plex this year). My rule of thumb is 3-6 months of expenses. That is, if I lose my job and have total vacancy, I can pay my bills (personal and real estate) and have at least three months to recover. Your rule also seems reasonable to me.

I have not looked at Great Falls market specifically, but am familiar with Montana (Bozeman mostly). Your numbers look good to me. Two numbers might be low:

I would guess insurance to be 1200-1500. You can lower this with a higher deductible if you have cash reserves.

Your utilities could be closer to $3,000. Find out what renters pay and what is your responsibility and you should be able lock numbers down for what you are responsible (water/sewer, garbage, electricity…)

To have positive cash flow with no money down is awesome. Looks like you have about 300/month. Your cash on cash return is infinity! Here are my recommendations to you:

Lock down all these numbers before you close (the previous property manager should be able to get you costs on utilities for example). I would also get verification on actual rents collected over the last year. The two numbers that are most difficult to estimate are vacancy and repairs.

Repairs: You have good number, but get a good inspection to make sure there is not a lot of deferred maintenance.

Vacancy rates: You should be able to get historic vacancy rates from property manager. Also you can look at census data for Great Falls area for 2010 rental vacancy rates. In my opinion, the best hedge against vacancy is cash flow. An urban area like Great Falls you never have to have vacancy with a good property manager and willingness to reduce rents. So the real risk is what happens when you reduce rents. In my opinion, the best hedge against vacancy is cash flow. Right now it looks like you could reduce rents by $75/month/unit and hold the property indefinitely. Could you survive a 20% reduction in rent? If you had to drop rents from $1000/unit to $800/unit to keep them occupied, that would shift your +$300/mo to -$500/mo. Inflation will eventually catch your rents up, but you need to be able to survive potential down turns. My main point is, this looks like a good deal, but HAVE CASH RESERVES

Good luck

Joshua,

Welcome to BP from a fellow newbie and fellow Montanan (just down the road from you in Bozeman). I would recommend you start with some strategic planning. What are your financial goals, what is you investor mentality, what are your resources. Those should drive your decisions.

For me some of these are

financial goal of investment cashflow bigger than expenses

mentality of being a little more conservative,

resource of ability to get financing and find deals currently that have 8% cap rates or better.

Mentality that I believe interest rates will rise as well as inflation

For this reason, as long as the property has positive cash flow, I would take as much 30 yr fixed debt as I could get as long as interest rate was below 8% and I would redeploy this debt into other investments (again as long as they have positive cash flow.

@Aaron Montague The current appraisal puts it at $220k. Appraisal is a little sketchy, some of comps are from a town 30 miles away. The only comp is a fourplex on the market for 199, but considered 20k less in value due to age and other adjustments. My hope is I can refi showing 75% ltv without putting any more money in. If I have to put any significant money in to refi (more than a few k) I will probably just hold it and have a bunch of exit strategies in place for year five. @Jerry W. good to interact with you on forums again, love the idea of coin op! These units have w/d. Bank owns vacant lot next door, I was considering a package offer and thinking of storage units on lot, but numbers didn't work out for me. I think I can squeeze some storage on this property. Love finding little ways to create cashflow.

Thanks all for the ideas and support.

I don't think seperate meters, but honestly I didn't pay attention. Current lease agreements owner pays water/sewer so I don't know that seperate meters will help.

A gap in knowledge is estimating repairs. I saw somewhere 5-15%. I never know. One of these days I am going to find or create a database calculator to factor in all major replacement costs like @Edward Burns details (sum for all items (cost / lifespan) = montly cost)).

terms of loan are 3.99% 25 yr amort. it is 5 yr arm. I asked for a max cap and they gave me 3%/yr and 5% total so it will adjust up 6.99 in yr 6 and 8.99 in yr 7. I may be able to show enough equity to refinance conforming loan in the next year. If not, will have to do something at year 5 (sell, lease options, etc.) to make it still cashflow.

I know I am not as aggressive as most people on bigger pockets. Actually my immediate reaction when my deal was accepted was “I asked too much, how much money did I leave on the table.” Still here is my latest deal.

4-plex in rural area. Not much economic growth, but stable. Bank owned, but listed on MLS. Built in 2008 and “like new” condition. Inspection found only minor issues. Historic vacancy has been around 7-8%, but I think with some minor landscaping can increase curb appeal and be more competitive with older apartments in the area. Total gross rent 2100/month. I offered $168k with requirement of seller financing 10% down (90%ltv). Following are monthly expenses:

Repairs: say 100

Vacancy 210 (10%)

Property management 168 (8%)

Tax 201

Insurance 89

Garbage 35-45

Water/sewer 156-170

Lawn care/snow 35

This is close to 50% expenses. Lawn care could be reduced/eliminated with some landscaping I have planned.

With closing costs and landscaping I will be in for about $20,000 (I may wait on landscaping until spring and use cashflow for some).

Best part of deal is with 10% down I can actually get a cash-flowing property without a huge time investment. Cap rate is 7-8%. My cashflow should be about 15-20% return. Not counting on appreciation, but amortization is maybe another 15% return.

Appreciate your thoughts / feedback.

p.s., to break even with no money down is ...zero divided by zero.. hmm my calculater says infinity roi, pretty good percentage.

@Jesse Holmes

Brand new to BP and not much more experienced than you so take for what is worth. Love that you pulled the trigger. If you run it for a couple years and decide to walk away only to have been putting in $80/month in and maybe end up with a couple grand from amortization, still worth the price of tuition. Be glad you closed the deal and are in the game. I think the 50% is just a conservative rule of thumb. The two properties I have are 32% and 51%. I have seen some (HOA dues, owner pays utilities etc.) that are way over 50%. Before you close you should have all expenses figured nearly to the dollar. These you can get from the last year's costs or quote from the actual company you will use:

taxes

property management

insurance

hoa dues

water / sewer / electricity (if owner pays)

yard maintenance (if not required in lease)

Repairs and vacancy are harder to get a good number. If you have no other rule of thumb 5% vacancy rate and 5-15% for repairs (depending on how old).

I am right about where you are, so maybe this is advice for myself. Continue to analyze deal after to see where you under/over estimated. Now that you know what you can get, figure out metrics (cap rate, roi, etc.) and set targets (higher than last deal) for analyzing next investment.

Keep it up!

@Paul Timmins

Advice is much appreciated. I have looked into REIA clubs before and closest to me is 2-hour drive. Part of living in rural Montana I guess. I will start a club in Bozeman at some point in the future. I will look into utility conservation programs.

@Jerry W.

and

@ Jenkins Ramon

Thanks all for the warm welcome.

A new friend in Bozeman mentioned Bigger Pockets and it looks like a great resource. I am currently in the middle of my second buy and hold multi-family. I have okay earned income as a transportation engineer, some passive income and occasionally some cash. Would like to connect and learn so as to increase passive income, but very limited on time and I am to cautious (i.e., chicken) to go outside of my local market or collaborate with people I don’t know personally. I am only looking for connections with people

-near Bozeman Montana

or

-not looking to collaborate, but would like to share ideas, emotional support, insights etc.