All Forum Posts by: Richie Thomas

@Jonathan Polacek, I'd agree with the above advice to get a 30-year instead of a shorter term. The only reason I might advocate for paying off the loan more quickly than the minimum, is if your monthly payment included private mortgage insurance, AND paying off that PMI early would give you a much better rate of return than an index fund. The definition of "much better rate of return" is different for everyone of course, but that's really the only exception I can think of to paying the minimum on a 30-year note using the property's cash flow, and deploying the difference toward purchasing other properties and scaling your business.

Disclaimer: I'm still an aspiring investor.

Hi @Michael McDowell, I tend to be more interested in where the numbers come from and how reasonable they are, vs. the result of the cash-flow calculation (which is handled by the calculator anyway).  For example- how did you arrive at your monthly income assumption of $1,500?  That's a big component of the overall cash-flow picture, so it's important to know where it comes from.

On the other hand, looking closer at these numbers, I see the ARV is $25,000 less than the project cost. That by itself appears to sink this deal. Looking at the year-over-year projections on page 2, you can see that the 1-year internal rate of return is negative 40%. You have to wait 10 years to hit the maximum IRR, and even then it's only 9%, which is about what you'd get on the stock market anyway. Tying up your capital for 10 years just to get the same rate of return that you could get in an index fund does not seem like a smart decision, given the increased risk of a project like this as a new investor. My advice would be to keep looking.

Hope this helps.

Disclaimer: I'm still an aspiring investor, so bear that in mind.

Hey @Jason Lochinger, don't forget that the refi will cost money too.  There will be loan preparation fees, appraisal fees, etc.  If you were trying to refi out of a hard money loan, that's a case where it would make sense in my mind to pay those extra fees since your interest rate would be so much lower afterward and you'd be paying off principal every month.  But if it's a refi from one conventional loan to another, I'd probably be more inclined to pay the fees up-front and lock in the interest rate while it's at a historically low level, and just avoid the refi altogether.

Hey @Stephanie Mansfield, welcome to BiggerPockets!  If I were in your shoes, I'd start browsing BP's South Carolina forum and see who's commenting frequently.  Look for comments from realtors in particular.  If you find one or more folks who seem particularly helpful or knowledgeable, reach out to them directly and ask if they're taking on new out-of-state clients, whether they work with investors (they should if they're commenting on BP), and whether they also offer property management or construction project management services.  The newer the comments, the more likely they're currently active BP members.

@Vincent Harris if you're putting less than 20% down, don't forget to include private mortgage insurance (PMI). Unfortunately that will be a non-trivial expense.

How old is the property?  I'm guessing properties in your area tend to skew older, perhaps 90-100 years old or more.  If this is the case, it may make sense to budget something for repairs, even though you mentioned quite a few things are new.

If you're willing to get creative with income sources, you could consider using that repairs budget to finish the basement and attic, and turn them into short-term rentals.  I hear the regulatory environment for STRs in the Hudson Valley is up-in-the-air right now, but for the moment they appear to be legal.  I'm seeing listings in Carmel for $90-100/night, so if your contractor and decorator do good work and the listing photos are attractive, this in itself could close the cash-flow gap on this deal (especially if you're renting out both the attic and the basement).

According to the excerpt from the MLS listing you included, there are separate meters for each of the units, so you *should* be able to remove the $100/month electricity expense. It's not much but every little bit helps. :-)

You've budgeted $6/month for insurance.  Is this just renters' insurance?  I'd have to imagine homeowners' insurance is more expensive than that.

I feel like the keys to make this property work would be to a) short-term rental of the attic and/or basement (ideally both), and b) making sure the numbers work after you move out.  If you plan to scale your real estate business, you'll eventually want to include a budget for a property manager as well, so you can focus on sourcing new properties.  But for the house-hack phase of the plan, that shouldn't be necessary.

@Christian Walker is the property greater than 4 units?  That will affect the model which the appraiser uses in their valuation, i.e. if it has more than 4 units then they may treat it as a commercial property and use the local cap rate alongside its income.  If it's 4 units or less, they may use recently-sold properties as comps whose price-per-square-foot will be a bigger factor in valuing the property.  The fewer similar properties there are in the area, the more one appraiser's valuation will differ from another's.

Judging by your comment that the appraiser won't consider cash flow in their model, I'm guessing that it's a 4-unit-or-less multi-family, and that they're using comps.  Some lenders *might* be willing consider income from the property once it appears on your tax return, or perhaps once the property is stabilized, i.e. once it has tenants in place who have been paying a verifiable amount of rent for a certain # of years.

Disclaimer: I'm still an aspiring investor, so take what I say with a grain of salt.

Hi @Billy Jemial Miller, a couple of thoughts:

I don't see a budget for a property manager.  Even if you plan to manage the property yourself, it's still a good idea to budget for a PM.  The money will go back into your pocket anyway if you end up liking the management side of things.  But if you don't, you've got a built-in budget to extract yourself, so you can hire someone else to do so while you focus on scaling your business.  10% is the industry standard.  I doubt it would go lower than that for a quality PR, but depending on what kind of neighborhood this property is in, it could go higher.

I notice you budgeted $125 for gas.  Not sure what kind of climate the property is in, but paying for part or all of your tenants' utilities can get expensive, since they have no reason not to (for example) run the heat full-blast with the windows open in January.  Same goes for water and sewer.  Find out whether the property's utilities are already on separate meters.  If not, research how much it costs to have that set up in your area.  Here's an interesting BP forum thread with more info on splitting utility meters.  Splitting utilities and handing that expense off to the tenants is a great way to increase a property's cash-flowing potential, and therefore its overall value.

How old is the property?  What repairs do you have in mind to move it from a value of $158,500 to $210,000?

Importantly, where do you anticipate finding a non-owner-occupant loan for 95% of the purchase price? Also, I'm not sure if you're familiar with the concept of private mortgage insurance (aka "PMI"), but most lenders will want you to pay for that as a monthly expense if you put down less than a 20% down-payment.

Those are the things that jump out at me first.  With more info on the property (ideally an address, but if not then at least a zip code), it's possible to dive deeper into things like comps, market analysis, seasonal expenses (snow removal, utility expense fluctuations), etc.

Hope this helps.

Disclaimer: I'm still an aspiring investor, so take the following with a grain of salt.

Hi @Chris Padgett, when I analyze properties here in the forums, I'm usually much more interested in where a report's numbers come from, compared to what the numbers are.  So most of my questions will revolve around that.

A couple things in your report stood out to me.  First, what is the source of the purchase funds?  A 7% loan with zero points amortized over 5 years doesn't sound like a traditional hard-money lender, nor does it sound like a conventional, conforming loan that I've encountered yet.  If you've already been quoted this then great, but if not then I recommend getting pre-qualified with a few lenders and plugging in the numbers they give you, so your analysis is more realistic.

Similarly, where are you getting the $100,000 ARV figure from? I usually calculate my ARVs based on the square footage of the property after it's renovated, multiplied by the PPSQ of recently-sold properties in the area with a similar age, square footage, amenities, and BR/BA count. The $100k number in your estimate seems a little too round and even to be based on something like that, and increasing the property's value by a factor of 5 by investing only $30,000 sounds too good to be true. So I'm wondering if this is just a ballpark figure or if it's informed by the opinion of someone like a local realtor.

Same question applies to the monthly income figure.  Is that figure based on conversations you've had with a property manager, by calling up PMs of nearby properties and asking what rent they charge, or a similarly market-based approach?

It's good that you've budgeted 10% each for vacancy and repairs. Judging by the super-low purchase price, and the fact that the rehab budget is 50% higher than the purchase price, I'm guessing the property is pretty old and in a less-than-desirable area. You'll want to add a budget for CapEx and a property manager as well (I use 10% each). Even if your $30k worth of repairs will go toward major components like a roof or foundation repair, you'll still want to stash away money every month for CapEx, so that sudden, major expenses don't wreck your cash flow. And if this property is indeed in a less-than-desirable part of town, budgeting for a PM will mean that you can extract yourself from managing the property if it turns out to be too much of a headache for you.

Speaking of purchase price vs. rehab cost, some lenders won't lend on properties where the rehab cost exceeds the purchase price, so you'll need to watch out for that.  Additionally, the purchase price and amount of rehab proposed makes me wonder if the property is currently habitable according to city codes.  If it's not, you won't be able to use a conventional loan (i.e. one that gets re-sold to Fannie Mae), so an entire category of funding will be unavailable to you and you'll have to go with either hard-money, a loan from a friend or family member, seller financing, or some other kind of non-traditional source of funds.

Those are my biggest questions for now.  Hope this helps.

Richie

Disclaimer: I'm a new investor, so bear that in mind when you read the following.

Hey @Brian McMullen, I see from the Realtor.com listing that the asking price of this property is $49,900.  What's your plan for getting the seller down to the price you mentioned in the analysis?  If this property had been on the market for a long time (i.e. months) without selling, I could see making an offer below asking price.  But it's only been on the market for a day as of today, and my understanding is that Memphis is a pretty hot market right now.

I see your refi loan amount is $56k, or 80% of the ARV. That might be on the high end of the spectrum for cash-out refinance loans. 65-70% is probably safer unless you've already been quoted the 80% figure.

Looks like the property was built in 1960 and, according to the MLS listing, "needs a little TLC". If the listing agent uses phrases like "Calling all investors", there may be a chance that the property doesn't qualify for a conventional loan (i.e. one that must be habitable). Another clue that this is the case is that there are no photos of the property's interior. All this leads me to believe that the property may need more work than the $10k you've budgeted for in repairs. My guess is, probably a lot more.

I see 5% budgeted for vacancies and repairs, 4% for cap-ex, and 8% for property management.  All of these look low to me.  I'm pretty sure the going rate for a property manager is 10%, sometimes even higher (12%?) if the neighborhood is rough.  A quality PM can pick and choose both their clients and neighborhoods, and I'm not sure that I would want to work with a PM who is desperate enough to settle for 8%.  With a property in this condition and of this age, for repairs and cap-ex I'd want to see 10% each.  For vacancy, I have no clue whether 5% is accurate for this area, but any estimate below 8% would be risky IMHO.

You've budgeted for $800/month in income, but even Rentometer (which skews toward the high side in many cases) only budgets $785 in rent.  How did you arrive at your income estimate, and how confident are you in this number?  Are other landlords in the area fetching similar rates for single family homes of the same quality?

That's all I've got for now, hope this helps.

Richie

@Jon K., I can't speak to your specific financial situation obviously, but if it helps: I'm also currently shopping for loans, I have a 770 credit score and a six-figure day job, and I'm getting quotes of 4% with no points or 3.125% with 2 points (this was from Chase Bank today, for an investment property loan).  Your quotes may be totally different of course, but 3% with no points for a non-owner-occupant loan could be a tad ambitious.  Maybe shop around a bit and get pre-qualified with a few lenders, although FYI they will run a hard check on your credit so bear that in mind.

In general, the value of practicing deal analysis comes just as much from sourcing your data as it does from crunching the numbers.  It's the old "garbage-in, garbage-out" cliche.  I too started my analysis career by plugging numbers into NerdWallet, so don't think I'm any different haha.  One thing I learned was that there are so many gotchas and exceptions (especially as a new investor with zero deals under my belt) to the data I found on those one-size-fits-all calculator sites, that it was little better than guesswork.  In the end, it became easier to get real data straight from the horse's mouth.  Plus contacting real lenders is great practice in and of itself.

In terms of repairs, from what more experienced investors have told me, they have yet to find a property which needs *nothing* at all in terms of upgrades, even if it's just a few new GFCI outlets in the bathroom, new cabinet fixtures in the kitchen, new living room carpets, or a fresh coat of paint.  Additionally, there are some major property components which aren't visible from a walk-through of the property, like plumbing and electrical, and assuming they need work is safer than assuming they don't.  This is generally less necessary if the property is only a few decades old, but if it's much older than that, an analysis which assumes these repairs will be on a much stronger footing.