All Forum Posts by: Richie Thomas

@Jonathan Tran I’m using the term “farm area” to mean the place where you look for deals. I Can’t remember where I heard it from, probably somewhere on BP.

@Jonathan Tran I'm reading a great book right now called "What Every Investor Should Know About Cash Flow" (mentioned on several BP podcast episodes), and I learned something new about property taxes that you'll appreciate if you're a fellow real estate geek like I am. :-)

So in addition to the property tax rate that I mentioned earlier, you also want to care about how often property re-assessments are conducted.  Reassessments are a double-edged sword.  If it's been awhile since an assessment was conducted and values have gone up since then, it works in the homeowner's favor.  If values have gone down, then taxes will be higher than they should be and it works in the government's favor.  Frequent assessments have the reverse effect- they can save you money if values have gone down recently, and cost you money if values have gone up.  This varies by state, which is why I bring it up.  The data I linked to is 10 years old, but it's the most recent I could find.

Prior to reading this, I had just assumed that assessments were conducted whenever the property changes hands, since that's how it works here in California. Apparently that's not the way it works! . Now things like "Assessment Year" ( a common data point in some of the REI analytics tools I've used) make much more sense:

I'm looking forward to meeting these folks, in addition to yourself and many others who I see are attending. I'm excited to geek out about different investing strategies, deal structuring, war stories, and so on. And I'm expecting to be humbled by the volume of REI knowledge and experience under one roof. Let's do this!

 Hi Sergey, my goal is to analyze 100 properties using the BiggerPockets calculator (in at least 25 different farm areas), select a farm area, build my "Core 4" team members there (property manager, realtor, contractor, and lender), and purchase my first property by March 1st.  Ambitious, I realize.  But I've already checked off the first two goals and am actively networking here on BP to check off goal #3.  Taking daily actions to make sure I succeed!

Back over to you- what are your goals?

@Jonathan Tran after analyzing quite a few properties in this forum in quite a few states, I've seen a wide enough range of property taxes to believe that they play a significant part in whether a deal cash-flows or not.  Investing in a state with low property taxes strikes me as one less hurdle I have to clear in order to close my first deal.

In addition, I look at how landlord-friendly the tenant laws are (since I'm planning to BRRRR), and I get this info from a Google search.

I look at how much the city's population is growing over the past 20 years, what percentage of the population are renters vs. owners, what the crime rate is compared to the state average, and unemployment trends over the last 20 years (both in absolute terms and relative to the state average).  I get all that data from city-data.com, which I recommend familiarizing yourself with.  

I look at who the major employers are, and what percentage of the town's people they employ.  I've found some potential farm areas with smaller populations where the properties seem to cash flow quite nicely, but then I find out that the largest employer in the area employs 5-6 times the number of people as the next-largest employer.  I don't like it when the local economy has all its eggs in one basket like that.

I do a Google News search of the city and town I'm looking at.  If the headlines in the top 10 results are mostly local crime stories, I'll know it's probably a C- or D-class area.  If the headlines are mostly about bake sales and farmer's markets, it's probably a B- or A-class area.  You get the idea.

Then I'll look at school districts.  GreatSchools.org is a great search tool for assessing a school district's quality.

There's a lot more I look at, but those will get you started.  I feel your pain, I live in the Bay Area and while the tenant laws are great for me as a renter, they'd be terrible for me as an investor.  Even if the property prices were more reasonable, there's no way I'd park my money in this kind of regulatory environment.

P.S.- I don't want to give the impression that I'm dismissing Texas as an investment area.  Lots of people are investing lots of money there, including people way smarter and more experienced than I am.  I just think that I will stack the deck in my favor more if I invest in states where a) purchase prices are lower, and b) property taxes are too.  That said, any state can be a money-maker if you negotiate the right terms.

Hi @Dwight Porter, thank you for your service to our country!

I'm showing this is a 2-BR, 1-BA.  And you've budgeted $2,500 in monthly income.  Does that mean you're planning to occupy one room for free and rent the other bedroom for $2,500 per month?  I rent 1 bedroom in a 2-BR in San Francisco (one of the most expensive cities in the country) and I only pay $1,750 per month.  Make sure you can find a tenant who will pay what you're estimating.  And don't include the money you'll save on rent in your income estimates.  As far as you're concerned, that's just gravy.

Also, find out how much the current tenant is actually paying, and when their lease ends.  Also find out what their credit score is, monthly income, length of employment, etc.  You're essentially signing up to be a landlord, so your due diligence will be crucial.

If you're indeed using this as a house hack, then I agree that 2% for capex and repairs are totally fine since this property was built in 2016. According to your analysis PDF, the ideal time to sell is 5 years from now (your IRR at that point is 55%). Be careful if you plan to sell before then, since your profit might actually be negative:

If you're planning to do the "buy every year, move every year" house-hacking strategy, the above numbers could make that less-than-feasible.

Hey @Jonathan Tran, I'm just a rookie so take this with a grain of salt.

If property taxes are the biggest factor in your choice of farm area, there are better states to pick.  I personally love Texas as a place to both live and visit- it's "sexy" and Houston has a big pool of both buyers and renters.  But if I put on my "investor" hat, overlooked areas are often much more profitable.

Unless I'm missing some crucial details about path-of-progress or something, this appears to be an average purchase for an owner-occupant, but a poor purchase for an investor.  I see 2 sales in the immediate vicinity within the last 8 months, one at $118/sq ft and one at $164/sq ft:

Clearly, these are quite different.  If we assume the lower $/sq ft, we get $118 * your property's size of 874 sq ft = $103,132.  FWIW, your property is currently pending at $99,900.  That's not nearly enough margin to cover repair costs, closing costs, financing costs, realtor costs, your profit, margin of safety, etc.

I'm not familiar with the property's neighborhood, but your property management budget of 8% is on the low side.  That might work if you're already got a relationship with a PM who is managing multiple properties for you.  If not, you should budget between 10-12%.  Err on the high side if this is a C- or D-class neighborhood.

4.75% interest seems low for a non-owner-occupied property.  Have you been quoted that rate from a lender, and do they know you'll be renting to tenants instead of occupying the property yourself?

Never ever estimate $0 for up-front repairs, especially if you'll be showing your numbers to a lender.  Every property needs *something* fixed, even if it's just new paint or baseboards.

I'm surprised to see this property is part of a homeowners' association. That makes me want to suggest a higher reserve budget for assessments. You could include that in capex or repairs or misc monthly expenses, but definitely budget for it. HOA boards can be a fickle bunch, and unless you're running the show, you have no control over the fees they levy.

On the other hand, your capex budget is already 18%, so maybe you're good there.  Over-budgeting is always something to avoid, but I tend to err on the conservative side.  If you over-budget for expenses and your property still cash-flows, the money goes into your own pocket anyway.  But if you under-budget and you end up having surprise expenses, you've just shot your cash-flow in the foot for who knows how long.

And you're much more likely to encounter surprise expenses, compared to surprise income.  Keep that in mind.

Lastly, repairs and vacancy budgets of 10% are spot-on.  Nice job there.

You're beating the 2% rule by 50%?  That's... quite an achievement.

Where are you getting the $5,400 in monthly income estimates from?  Or the $1,881 in monthly expenses?  If I were an investor in this deal, I'd want to see sources and itemizations for both of those estimates.

Hi @John Parcha, I'm only a beginner so bear that in mind. If your post-refi ROI % is so much higher than your pre-refi, is there any way to refinance sooner than 12 months? I don't think it's unheard-of to get a seasoning period of 6 months (or even 4 if you're quite lucky). It'd be worse from a dollar amount standpoint, but better from an ROI standpoint, which seems like the bigger picture to me.

A total project cost of $101k and an ARV of $110k seems like a slim margin of safety, unless you're planning on holding for 3-4 years. If you are, it looks like your IRR is 17%, which isn't terrible at all:

Your refinance interest rate is 3.5%. Where are you getting that figure from? That's lower than many FHA (i.e. owner-occupant) loans. Maybe make a few phone calls and verify you can get that rate on a non-owner-occupant loan (unless you're planning to occupy part of the property after all?).

Your acquisition loan is for 3.88%, amortized over 30 years?  Who is your purchase lender?  If you're planning to sink $30,000 in rehab costs into the property up-front, I'm guessing it won't qualify for a conventional loan right away, and that you'll need to initially borrow from a hard-money / portfolio / private lender at a (much) higher interest rate, and then refinance once the property qualifies for a conventional loan.

Lastly, nice job being thorough in your expense itemizations. I get a smile on my face every time I see someone budgeting 10% for a property manager, because it happens so rarely. Looks like vacancy, repairs, and CapEx could be higher, but I don't know how old your property is, how much deferred maintenance there is, etc. So I'll defer to you on that. If you bumped each of those up to 10% as well, I wouldn't object.

I'm also curious whether you're sure about the electricity, water + sewer, garbage, etc.  If this is a multi-family, are the utilities on the units metered separately?  If they are, those expenses should be pass-through (i.e. the tenants will be responsible for those costs).

If the units aren't metered separately, find out how much it would cost to separate those per-unit.  Your combined budget for electricity + water + sewer is $200/month.  This doesn't include gas, because I don't see it included on your budget.  If separate metering costs $10,000 (a completely hypothetical number), this pays for itself in 5 years.

This is more time than what your IRR tells you is the peak time to sell, but that timeframe doesn't account for the new NOI you'd see. Tenants paying utilities means lower expenses, therefore a larger NOI, therefore a higher sale price (assuming no change in cap rate). Run the numbers and see what happens.

Hi @Ryan Fisher, I'd be curious how closing costs on a $460k property are $3,000, and how there are $0 in repair costs on a 4-plex (with what I'm guessing are varying degrees of tenant quality).

The seller likely views it as "great cash-on-cash return" because they bought it in 2011 for $175,000:

When they say "great cash-on-cash return", they're probably referring to their own ROI, i.e. how much they're earning compared to how much they invested back in 2011. They're probably renting each of the four 2-bedroom units for $800+ a pop (or more, since I see you've got a total monthly income of $3,700 all-in). That is indeed a "great cash-on-cash return" if you bought at $175k back in 2011. It's a crap return if you buy at $460k in 2020.

I'm guessing the property has appreciated to the point that the sellers are now sitting on a pretty low ROE, and are trying to cash out at the expense of unsuspecting buyer, so that they can deploy their capital more profitably.

Apples and oranges, I'm afraid.