All Forum Posts by: Robert Leonard

@Jerry E herron iii Welcome to BP! 

My initial thought on this property based on your report is that it doesn't seem like that intriguing of an opportunity. However, you're missing closing costs and down payment estimates, which could impact the analysis. The rest of what I'll say is based on your report, but could change if/when your closing costs and down payment information is changed.

How many units is this property? If it's more than one, the monthly cash flow per unit is a bit low for me, personally. The cash on cash ROI and cap rates are also both too low for me. The vacancy rate you used (5%) is on the lower end; I generally like to use 8% (one month per year) to be conservative. I'd rather be positively surprised by lower vacancy than estimated. Given where we are in the market cycle, you'll also want to plan for a worst-case-scenario, and I don't believe 5% vacancy does that (in most markets).

Good luck!

Robert Leonard

@Zachary Feldman Unfortunately I do not have any brokers I can recommend there, but I would like to hear more about your experience investing in PR. It seems like an interesting opportunity to me as well. Good luck!

Hi Tanya,

Based on what you've provided, this seems like an interesting deal. The cash on cash ROI and cap rate are both strong and satisfactory. What you're getting in return for the initial capital needed to buy this deal is good (thank you, leverage).

A few things I'd like to note: the monthly cash flow is a bit weak for me personally. It certainly is not bad, but for a 5-unit at just ~$127 per month per unit, I'd like to see more per unit. That being said, the ROI and cap rates are strong like I mentioned and $127 is not bad. Having 5 units also does give you some protection if 1-2 units have tenant issues, which is good.

The estimated closing costs of $3,000 seems a bit low to me, but that certainly varies widely from lender to lender and from area to area. If you're confident in that figure, great. If not, I'd revisit that as this seems a bit low to me.

Also, you have no estimated repair costs but expect that the ARV will be almost $30k higher after you buy it - why is that? This seems a bit unrealistic to me. It will likely go up slightly if you can improve the management of the property, but a nearly 30% increase seems a bit much.

I feel it is also important to note that your capital will likely be stuck in this deal. I do not see it being a BRRRR opportunity - meaning you won't be able to refinance and get your capital out anytime soon. If you're okay with that and are expecting to keep your capital in this deal, then that is fine, it is just an important idea to think about.

Since this is a 5-unit property you will likely need to get a commercial mortgage for the property. Keep in mind the characteristics of these types of loan products (balloon payments, etc.). 

Hope this helps - if you have any questions, feel free to reach out.

Robert Leonard

@Bryant G. Welcome to BP!

Based on what you've explained and your analysis, I wouldn't pursue this deal. Here's why:

Your COC (cash on cash return) is far too low. You're taking a lot of risk for only a 5.72% return.

I think your vacancy factor is a bit low for my liking. Given that the property is in "a rough area", I'd estimate 10% vacancy. That may be a bit high/conservative, but that's how I prefer to approach a deal.

However, your CAPEX is high. I usually budget 5% for CAPEX and 10% for Repairs and Maintenance. You know the property better than I do, but if your estimate for those expenses is high, you will increase your cash flow. Also, you have 10% for a property manager. Managing a SFR is relatively easy, and is likely something you could do yourself to increase your cash flow and return. If you're not local or have NO interest in doing that, then you're definitely right by including that cost. It's just something I would personally look at doing myself.

Below is an image of how I'd analyze the property based on what you've said:

Robert Leonard

Great post, and congrats on your success. I look forward to crossing paths on both our real estate investing journies in the future.

Unfortunately, our offer was not accepted and the seller accepted someone else's. I appreciate the input from everyone - on to the next property!

I completely agree with everything @Matt Hurley said above. Personal comments I'll add in addition to his:

Although managing 10 units may be daunting for your first property, that could free up $430 in monthly cash flow, which would significantly increase (almost double) your estimated cash flow in your analysis.

Also, given the numbers you have in your analysis, your capital is going to be stuck in this deal. With an ARV of only $235k, you're not going to be able to refinance and get your capital out. This may or may not be an issue - some are fine with this.

At this point in the market cycle, to me personally, this deal is not intriguing. I don't like that my capital would be tied up/locked up in this property, the cash on cash ROI and monthly cash flow are both too low. Given where we are in the cycle, I'd recommend running at least two analyses. One where everything goes right - you get strong rental income, the market remains steady, property value continuing increasing, financing costs remain relatively stable, etc. Then, I would run another analysis where it is a "worst-case scenario". Estimate your rents contracting by the maximum amount you could see them declining by in the event of a recession (i.e. 20% decline in rents). Do the same for the property value. Increase your interest rate to the highest rate you could possibly be required to rate (this is specifically important if you have a variable rate (ARM) or a commercial loan product (which are usually adjustable but not always)). I even include in my analysis how low my rents could fall before my cash flow went negative. Given where we are in the cycle, if the numbers make sense in today's market, but not in a worst-case scenario, I personally would not pursue the deal.

That being said, you shouldn't NOT buy properties just because of where we are in the cycle, you just have to run the numbers very well, be confident in them, and plan for the worst-case scenario.

Robert Leonard

@George Gao I am actually in the middle of purchasing a vacant 4-plex right now. Although this is in NH and not North Houston, you should be able to follow a similar process.

Determining the ARV is going to depend on the type of loan you obtain for it. For residential loans, it'll be valued based on comps in the area. For commercial, it'll be based on a cap rate. Most lenders in our area won't lend on 1-4 unit properties with residential conventional loans unless it is owner-occupied. They also won't lend to an LLC using a residential conventional loan product. So, that may bring you to a commercial loan product. If so, you would want to look at the value of the property when priced at a cap rate similar to others that have recently sold in the area. For us, that is 8-10% cap.

Robert Leonard

@Dan Henline I don't have specific forum recommendation, but I use/write for Seeking Alpha and it is somewhat similar to BiggerPockets but for stock investing. It's more like the BiggerPocket Blogs than the BP Forums, but it should be useful nonetheless.

You may have already come across it, but I hope it's helpful if you had not.

Robert Leonard on Seeking Alpha

Seeking Alpha

Robert Leonard

@Juan Jose Lopez Although I do believe very strongly in taking action, before taking action you must be well-educated on real estate and be confident in what you are doing.

I am happy to help with any questions you have, good luck!

Robert Leonard