All Forum Posts by: Joe Villeneuve

How does the equity build wealth over time?

@Matthew Becker Not over asking, over the appraised value* (which I received after the offer was submitted and I was lining up financing). I'm trying to build a portfolio that will generate cashflow for me. Financially, I'm not taking out a hard money loan.  My point in asking is how do I avoid this mistake in the first place going forward. 

Hey all, I am just getting started and in my first deal I offered more than the property appraised for.  What should I be looking at when trying to consider an appropriate offer (especially if I can't see the property since I'm investing out of state)?

Property #1 is a turnkey, fully rehabbed 2/1 1000sq ft house in a location that will rent for $1200. The turnkey company will sell this for 150k.

Property #2 is a 3/1 1200sq ft house in the same location that I would buy through a broker. I would buy it also for roughly the same price (it will be in good condition but may require some small fixes for a tenant), but it's bigger and has an extra bedroom so it will rent for $1400.

I could have also ran this model by assuming that I would get the same type of property as the turnkey, but for $125k and would rent for $1200 as the turnkey would. Same idea. 

With that in mind, do you feel that the rest of the numbers make sense?

I did try to create a "one size fits all" type of setup in order to compare the strategies. Obviously not all properties are going to be $150k -- some may be 125k and others may be 175k.. but they would average around there. And the rates will of course fluctuate over the years.. but if they go up or down then that would apply to all. Same with the other numbers. They would all be the same "type" of property. 

Some of these numbers are not going to be completely accurate - I understand. But if my "assumptions" make sense, then they should get fairly close, on average. 

This is not meant to be for 1 property - it's means to apply to scale. 

If not this, then what's a better way to accurately model a long term projection? 

I've been stashing up cash for a little while in a HYSA and I really want to make a move, but I want to do it gradually instead of going all in. So I'm trying to evaluate the best method to do this.. I feel like right now is one of the hardest times to find deals, but I still want to start asap and go slow and steady, with a long term plan. Thus the projections and the model. 

Another approach would be to just keep my eyes open for all sorts of deals of any type, and to try and go for it when a great one comes up.. I understand that this can make sense since every deal is different. But in this case I'm trying to zone in on a specific type of deal so that I can focus on that and try to specialize in it. 

You're one of the most experienced people on this forum, and maybe you've seen this one too many times... but if this is not the way then what is? Isn't focusing always better?

@Rafael Ro Why are your numbers different for options #1 and #2?

The only real difference is when you start collecting rent after purchase.

How have you weighed this against the probability of tenant nonperformance?

REALITY: not much of a difference.

That's fair. The reason behind the percentages was mainly in order to create a model that I could feed into ChatGPT, which helped me create these projections. 

It would be very difficult for me to keep track of dollar amounts but as %s I was able to have ChatGPT adjust those values as needed... particularly as it relates to items that were calculated based on rent.

I hear what you're saying though. My goal here is to get more feedback like this - especially as it relates to my assumptions. 

I also understand that everything ultimately depends on every individual situation. It's easy to create a model assuming that all is equal, but when done at scale I'm sure there will be winners and losers. So with this I'm just trying to create a decent average point of view really. 

Thank you Joe. The numbers are not really arbitrary, and they are based on a specific market - Memphis.

The reason I used percentages for most items was so that I would be able to do as close to an apples to apples calculation. For example, I used 5.9% of purchase price per year for mortgage, which looks random as a way to calculate a loan payment, but if you look at a 150k property with 25% down and a 6.85% interest rate, then your principal and interest would be $737 x 12 months = $8844, which is 5.9% of 150k. So it works out. 

I used arbitrary and small numbers for rent increases and appreciation because the same applies to each of those strategies so I didn't want it to affect things too much. 

And then I used maintenance, tenancy based on what I'm reading makes sense for long term, and a little bit of padding. 

That said, I can totally be off in any of those assumptions - that's what they ultimately are.. guesses.. but they are guesses based on reading a lot, researching, talking to people, and adding a padding that I thought would be "fair" for the items that are not actually factual (ie. insurance/loan/etc). 

This is the reason I made this post. I look at these numbers as somewhat pessimistic -- that's why I'm showing negative cashflow on the first strategy, which is obviously presented as a positive cashflow from several leading turnkey firms. Not saying that they're lying or anything. Just that this was my effort to get as close to realistic as I could. 

Please let me know what looks wrong - I would welcome that.